Enable Midstream Partners, LP
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good day, everyone, and welcome to the Enable Midstream Partners' First Quarter 2019 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time, I’d like to turn the conference call over to Enable's Senior Director of Investor Relations, Mr. Matt Beasley. Mr. Beasley, please go ahead.

[Matt Beasley:]

Thank you and good morning, everyone. Presenting on this morning's call are Rod Sailor, our President and CEO; and John Laws, our Chief Financial Officer. We also have other members of the management team in the room today to answer your questions. Earlier this morning, we issued our earnings press release and filed our Form 10-Q with the SEC. Our earnings press release, Form 10-Q filing and the presentation that accompanies this call are all available in the Investor Relations section of our Web site. We will also be posting a replay of today's call to the Web site. Today's discussion will include forward-looking statements within the meaning of the securities laws. Actual results could differ materially from our projections and a discussion of factors that could cause actual results to differ from projections can be found in our SEC filings. We will also be referencing non-GAAP financial measures on today's call, which we have reconciled to the nearest GAAP measures in the appendix of today's presentation. We invite you to review the disclaimers in this presentation for both forward-looking statements and non-GAAP financial measures. With that, we'll get started, and I will turn the call over to Rod Sailor.

[Rod Sailor:]

Thanks, Matt. Good morning and thank you for joining us on today's call. Enable had a great start to 2019 with another quarter of strong financial and operational performance. Compared to the first quarter of 2018, Enable saw gains in key financial measures including net income, adjusted EBITDA and DCF as well as gains in key operational measures including natural gas gathered, natural gas processed, crude oil and condensate gathered and natural gas transported volumes. Our strong financial results and declared distributions contributed to a distribution coverage ratio of 1.51x, which funded nearly 60% of our expansion capital spending in the quarter. Turning to our commercial updates on the next slide, Enable’s gathering and processing segment continues to serve significant producer activity driven by high quality natural gas and crude oil plays across our footprint. And we are well positioned for growth across our natural gas gathering and recently expanded crude oil gathering systems. Continued focus of producer activity on more crude-directed drilling in the SCOOP continues to affirm our acquisition of Velocity’s crude oil midstream business last year and we expect to gather crude oil or condensate from wells drilled by almost half of the total active rigs on our footprint. Our transportation and storage segment contracted or extended over 1 million dekatherms per day of transportation capacity during the quarter, including recontracting capacity with MRT’s largest customer Spire. We received notice from the FERC in the first quarter that all 501-G proceedings for EGT have concluded, and EGT’s current rates will remain in effect unchanged. With the resolution of SESH’s 501-G process late last year and MRT’s current rate case, all outstanding 501-G proceedings for naval pipelines have been resolved. We achieved an important milestone for our Gulf Run project last month when we received FERC approval to start the pre-filing process for the project. Public open houses with stakeholders are starting this month and we continue to look for opportunities to increase the size of the project. I hope to provide you with an update later this year on the project’s final scope. Turning to the next slide, I want to highlight why Enable is the clear market leader in the Anadarko Basin. As you can see from the map, Enable has significant producer acreage dedications for both natural gas and crude oil gathering across the major plays in the basin with over 5 million total gross acres dedicated. Our system boasts the highest processing capacity in the SCOOP and STACK plays and our crude gathering system gathers through the most active areas of the SCOOP. We serve many top-tier customers including those we have highlighted on this slide. Our customers continue to make significant investments in the basin with 42 rigs currently drilling wells expected to be connected to Enable’s Anadarko gathering systems. This is the highest level we have seen in the basin since early 2015. We expect to gather crude oil or condensate from wells drilled by half of these rigs, further building on our strategy of expanding our service offerings across the midstream value chain. As I close my remarks, I want to reiterate that Enable has strived to be a best-in-class partner to our customers and has taken great pride in binding market leading solutions to fit our customers’ needs. With the continued growth across our footprint, I believe Enable is strategically positioned to continue to meet those needs in the future. With that, I will now turn the call over to John to further discuss our first quarter 2019 operational and financial results.

[John Laws:]

Thank you, Rod, and good morning, everyone. I will now cover a few of our key operational and financial metrics for the quarter. As always, you can find a more detailed and comprehensive overview of our financial and operational results in our first quarter earnings release and in our 10-Q, both of which were filed earlier this morning. Turning to Slide 8, customer activity and well results in the Anadarko and Ark-La-Tex basins drove volume growth in our gathering and processing segment compared to the first quarter of 2018. As you can see, we had a 6% increase in total natural gas gathered volumes and a 14% increase in total natural gas processed volumes in the first quarter of 2019 compared to the prior year. The substantial increase in our crude oil and condensate gathered volumes for the first quarter compared to the same period a year ago was primarily driven by our recent Anadarko Basin acquisition as well as growth from our Williston Basin crude gathering systems. As I mentioned on the last call, we continue to see the potential for deferred production growth in the Williston Basin as a result of third party natural gas infrastructure constraints that we expect to be resolved later this year. In our transportation and storage segment, a 15% increase in our transported volumes over the prior year was a result of new contracted capacity on EGT, including volumes from EGT’s case project while volume growth in the Anadarko Basin helped to drive an increase in transported volumes on our Oklahoma Intrastate system, EOIT. Moving to our financial results on the next slide, our adjusted EBITDA increased by 16% for the first quarter of 2019 when compared to 2018. The higher adjusted EBITDA was driven by higher gross margin after adjusting for non-cash items due to higher natural gas gathered and processed volumes and higher crude oil and condensate volumes as discussed on the previous slide, the effects of which were partially offset by higher O&M and G&A due to maintenance on treating plants in the Ark-La-Tex Basin, an increase in compressor rental expenses and an increase in payroll related costs. Distributable cash flow when compared to prior year increased by 6% for the first quarter of 2019. The increase was primarily driven by higher adjusted EBITDA, partially offset by higher maintenance capital expenditures and higher adjusted interest expense associated with higher outstanding debt balances and higher interest rates. The increase in our net income measures for the first quarter of 2019 compared to 2018 were driven by higher gross margin, which includes the effect of realized and unrealized gains and losses on our derivative activity. The increase in gross margin was partially offset by higher O&M expenses, higher depreciation and amortization expense, and higher interest expense. The higher depreciation and amortization expense was primarily associated with the Velocity acquisition, additional assets placed in service and the results of a new depreciation study. After considering the distributions declared, Enable generated substantial distribution coverage of 1.51x for the quarter, which financed more than half of our first quarter expansion capital, while maintaining our strong balance sheet with significant liquidity and a debt to EBITDA metric of approximately 4x. With the Q1 results and our latest expectations for 2019 performance, Enable is affirming our 2019 financial outlook including our expansion capital outlook. Turning to the next slide, I want to highlight what I believe are a few metrics that illustrate the compelling value opportunity that Enable offers to investors. Enable has continued to deliver strong financial and operational results with a focus on cost discipline and capital efficiency, a metric on which all employees are focused through our 2019 short-term incentive program. Further, we remain financially strong with solid distribution coverage and an investment grade balance sheet and no equity requirements to meet our 2019 business plan. As we illustrate, we believe this record of success, financial strength and management and employee alignment with investors is not reflected in our current unit price. Our evaluation on an enterprise value to EBITDA basis is significantly lower than our peers, while our yield is significantly higher. These two factors imply a unique value opportunity. We expect that the recent sale of ArcLight’s entire position in Enable will reduce the perceived overhang on our units, increase liquidity and allow our units to trade on a more fundamental basis over time. As we look to the balance of the year, we remain focused on funding a substantial portion of our expansion capital program with retained cash flow driving increased returns on invested capital and maintaining our strong balance sheet. We believe our execution will continue to differentiate Enable from our competitors and drive value for our unitholders. That concludes my remarks, and we will now open the call up for your questions.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Mirek Zak from Citigroup. Please go ahead with your question.

[Mirek Zak:]

Hi. Good morning, everyone.

[Rod Sailor:]

Good morning.

[Mirek Zak:]

Your Anadarko volumes seemed to have dipped a bit since the last quarter but not materially considering what we’ve been hearing from other players around the STACK play at least. So I was curious, a good diversification obviously helps here but can you give us an idea of the dynamics we’re talking about here such as how much of the quarter’s gas volumes were impacted due to rig activity shifting to oilier regions versus perhaps increased productivity or activity on existing acreage? And then sort of expectations for gas volumes going forward given any new information from producers you might have gotten recently. Could we expect to see further weakness or would this be a turning point and expect to see volume growth next quarter?

[Rod Sailor:]

Thanks for your question. Look, we’re very, very pleased with the results that we’re seeing in the Anadarko, specifically in the SCOOP. I think this story is very consistent with what we started talking about late in 2018 that we were seeing a shift of rig activity out of the STACK down into the SCOOP. The areas of the SCOOP that our customers were targeting were in more liquid rich areas. It was part of the premise behind our acquisition of Velocity Midstream and that’s playing out exactly as we anticipated. On your question around volumes, look, we continue to see producers targeting areas with higher oil content in the production stream. We’re now capturing that with the Velocity acquisition. We think that will continue. It’s consistent with the guidance that we have put out. And I would just point out that we’ve got some very strong operators on our system. They understand the formation that they’re drilling in and in fact we’re seeing many of the production coming out of the SCOOP wells that are a little higher than our internal type curves. Again, we have a resource group – reservoir group that looks at type curves. It’s how we model our business. And we’ve been very pleased with what we’ve seen frankly both in the STACK and the SCOOP.

[John Laws:]

Yes, I’ll just tag along to that a little bit. Some of the results that we’re still seeing in the STACK are quite strong. We had a number of wells that we brought online this quarter that had 24-hour IPs over 10 million a day. So while we’ve got good consistent and growing activity in the SCOOP, we still have stable activity in the STACK that is generating strong results as well.

[Mirek Zak:]

Okay, great. And on Gulf Run, can you provide – was there an update to the capital requirement for moving forward with this project? It just seems that there have been recently announced project at similar scope at much higher capital cost. So just curious if your capital aspect has changed and/or how you keep those cost fairly low for that size of project?

[Rod Sailor:]

No, there has been no change in our capital scope that we’ve talked about. Again, the only other reason we see that capital would increase as we expand the size of the pipeline. And remember right now, we have a foundation customer at 1.1 of DCF. We did – we went to an open season for 2.75 DCF pipeline. So we could see the pipe expand. But that would be the only reason that we would increase, as we sit here today that we would expect a capital increase would be around increasing the size of that pipeline. I talked about I believe on the last call that we would hopefully be able to update you on our second quarter call around the final scope of that project. We continue to talk to potential customers about growing that above the 1.1 DCF size that could well go even past our second quarter call. But again, we’re seeing a lot of activity in that area. Some of the recontracting that we did in our transportation and storage segment was around our Line CP. So it’s a very active area and I think it continues to bode well for that pipeline and our assets and our systems in general in that area.

[Mirek Zak:]

Okay. Thank you. And just one final one. Can you give an update on to the Spire contract extension, sort of the timeframe and if rates remain the same?

[Rod Sailor:]

As you know, we did some recontracting around – with Spire that contract will go into effect later this summer. We haven’t disclosed what the size of that contract is, but it will be public when the contract goes in, as I said in the service. It was consistent with what we expected and is consistent with what we’ve included in our 2019 guidance.

[Mirek Zak:]

Okay, great. Thank you. That’s all from me.

[Operator:]

Our next question comes from Jeremy Tonet from JPMorgan. Please go ahead with your question.

[Rahul Krotthapalli:]

Good morning, guys. This is Rahul on for Jeremy. I just have couple of quick questions. First one, how should we think about the growth trajectory for the crude gathering? When you say, like, the wells drilled by half the rigs on Enable’s Anadarko’s footprint, like, is this something what you expect to see beyond 2019 as well?

[Rod Sailor:]

As you know, when we made that acquisition we thought it would come down to a much more recent multiple that when we made the acquisition. We continue to believe that over the next period of time that we’ll continue to see producers targeting more oilier regions of the SCOOP play which only bodes well for the Velocity acquisition. I think it was probably maybe the third quarter but don’t quote me on that that CVR was talking about potentially wanting to expand their facilities. So again, we think that they are going to be a continuing growth story around our crude assets in the Anadarko Basin.

[John Laws:]

Yes. And you follow our customers as well. We did disclose at the time of the acquisition that Continental and Marathon were two of the customers that were on that system. And you follow some of their disclosures that they’ve made here recently around the area and continue to have great success in the area gaining efficiencies and increasing their expectations for these areas. So we believe that tends to bode well to your question specifically for the future of the asset and additional contributions over time.

[Rahul Krotthapalli:]

Got you. That’s helpful. And then one housekeeping question. On the equity distribution realizations from the Southeast header, like, is there a difference between the distributions and equity earnings more timing-related in 1Q, or is this a good run rate for the remainder of the year?

[John Laws:]

In the adjusted EBITDA buildup, what you see there is the difference between the distributions and the equity and earnings from the affiliates. What we would encourage you to do is look at both of those together which you’ll find as fairly stable Q1 of '19 over Q1 of '18.

[Rahul Krotthapalli:]

Got you. That’s helpful. That’s it from me guys. Thank you.

[Rod Sailor:]

Thank you.

[Operator:]

Our next question comes from Dennis Coleman from Bank of America Merrill Lynch. Please go ahead with your question.

[Unidentified Analyst:]

Good morning. This is Jason Prior [ph] on for Dennis Coleman.

[Rod Sailor:]

Good morning.

[Unidentified Analyst:]

Congratulations on a great quarter. I wanted to touch a little bit more on the MRT extension. I know you guys mentioned that it’s expected to go into effect later this summer. And there are some things that might be disclosed a little bit later. But can you maybe talk a little bit more about the terms of the extension in terms of the timeline, is it one year? And then could you also talk, maybe speak about the dynamics as it relates to the STL pipeline, is it sort of dependent on the build of Spire’s projects?

[Rod Sailor:]

Well, what we’ve said publicly is again we expect turn back on the MRT system once the REX Lateral comes into service. We don’t have clarity long term about what that turn back would be. We anticipate recovering that cost through rate filings. And we’ve always pointed to we expect that our contribution in MRT to be flat. So we again anticipate being able to recover any turn back from the REX Lateral that the Spire is building. Other than that, that’s really all – we’re in the process of a rate case right now. We anticipate that that will go to trial on – excuse me, the judge on November of 2019 –

[John Laws:]

And if we don’t reach a settlement, ultimately it would bleed into early 2020, this decision.

[Unidentified Analyst:]

Okay, great. Thanks again for the color. My last question was on hedging and commodity exposure. It seems like there’s a little bit of movement going around in the quarter. Is there any sort of number or a way to think about how much earnings were affected by commodity price impact?

[John Laws:]

Yes, but I can focus you in on our disclosures for the quarter. We also in our deck include some detail on that, on Slide 15 in the appendix. But the way to look at it in total is for the quarter there was about $10 million loss in total on derivative activity. 2 million of that was a realized gain and there was $12 million of loss in earnings associated with the change in the fair value of derivatives. So we mark-to-market every quarter our derivative book for periods that extend beyond the period on which we’re reporting. And that is the change in the fair value of those derivatives from the fourth quarter in 2018 where you might recall with the commodity slides, we had a fairly significant gain on those unrealized positions. It was $55 million if I’m remembering correctly. And so we saw some of that turnaround with the price increases that we’ve seen in crude through the first quarter.

[Unidentified Analyst:]

Okay, great. Thank you. And actually one more, if I could, on Oklahoma. We’ve heard from a number of producers that a few of them are in sort of a transitory state and some of them are looking at cutting wells off maybe a little bit sooner. Great rig activity right now. Is there any sort of expectation in terms of how you see that playing out moving forward?

[Rod Sailor:]

Yes, look, I think we don’t really forecast rig activity per se in our guidance but we put guidance in there with what our expectations are. We really don’t have any change to that. We continue to see strong activity and we speak to that both in the presentation and in our remarks during the presentation. Again, we continue to believe that we’ll see strong activity along our footprint. Very excited about the opportunities that we’re seeing. The results that we’re seeing out of the SCOOP and as John mentioned in some of his commentary. We still have activity in the STACK and those results are very strong. We continue to believe that the customers that we have that are directing hydrocarbons to our system are performing very well, and in most cases above our expectations. And so again, we’re very bullish on the outlook for the SCOOP and very comfortable with the guidance that we’ve put out.

[Unidentified Analyst:]

Okay, great. Thank you, again. I’ll step off.

[Operator:]

[Operator Instructions]. Our next question comes from Chris Tillett from Barclays. Please go ahead with your question.

[Chris Tillett:]

Hi, guys. Good morning. Just a quick one from me, if you could, sort of alluded to in your press release. But could you give us an update on what you’re seeing kind of across your system in terms of ethane rejection, just maybe the level you’re at today, what’s built into guidance? And then if you could, if you’re seeing any material difference on the level of projection based on maybe where some of your contracts are priced?

[John Laws:]

We’ve been in and out of rejection and recovery generally. What we find today is across certain of our – certain of our facilities, certainly those that are within the Mid-Con where basis continues to be wide until we see mid-shift coming on the price, the net price of gas in basin is leading to some rejection across certain of our facilities. But again, it tends to be a mixed bag. It’s one that we optimize around on a regular basis, daily if not weekly. So the answer on any given day can be different, but generally we’ve seen a mixed bag of more rejection than recovery.

[Rod Sailor:]

And I would also say, I think that’s consistent with what we anticipated seeing throughout 2019.

[Chris Tillett:]

Okay, that’s helpful. Thank you.

[Operator:]

And ladies and gentlemen, at this time we’ll conclude today’s question-and-answer session. I’d like to turn the conference call back over to Mr. Sailor for any closing remarks.

[Rod Sailor:]

Thank you. Thank you everybody on the call. We appreciate your interest in the company. I want to reiterate, we had I think a very strong and exceptional quarter; very pleased with the results of the direction that we’re heading in 2019. I also want to recognize all of our employees for their hard work and dedication. Again, I thank you all in your interest. Please, everybody, have a safe day.

[Operator:]

Ladies and gentlemen, that will conclude today’s conference call. We thank you for attending today’s presentation. You may now disconnect your lines.