Noble Midstream Partners LP
Q2 2019 Earnings Call Transcript

Published: 2 Aug 2019

[Operator:]

Good morning and welcome to Noble Midstream Second Quarter 2019 Earnings Conference Call. All participants will in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask question. [Operator Instructions] Please also note, today's event is being recorded.At this time, I'd like to turn the conference call over to Ms. Megan Repine. Please go ahead.

[Megan Repine:]

Thank you, Jamie. Good morning and thank you for joining the Noble Midstream Partners second quarter 2019 earnings call. With me today to review our results is Terry Gerhart, CEO; John Nicholson, COO; and Tom Christensen, who serves our CFO. Following our prepared remarks, we will open the call to questions from analysts.This morning, we announced second quarter 2019 results as well as third quarter and updated full year guidance. The press release and supplemental slides are on the Investor section of our website noblemidstream.com. Upon filing later today our 10-Q will be available in the same location. As a reminder today's discussion will contain forward looking statements and certain non-cash financial measures.Please refer to our latest news releases for non-GAAP reconciliation as well as our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward looking statements.At this time, I'll turn the call over to Terry.

[Terry Gerhart:]

Thanks, Megan, and thank you everyone for joining. I'm glad to report on another results that largely fell in line are ahead of our expectations. We achieve several significant milestones so far in 2019 both operationally and financially.We entered the year with a focus on driving significant capital efficiency in our base business, and successfully progressing our Permian equity investment opportunities which will deliver sustainable long-term earnings and cash contributions to the partnership.The progress is evident, for the second quarter in a row, we delivered throughput and adjusted EBITDA according to plan and this was on capital spending that was well below expectations.With a consistent cost focus, our teams have done a great job driving sustainable capital reductions, positioning us to lower year 2019 net organic capital guidance this morning by 23%.As we moved to the second half of the year, a number of catalysts give me confidence in the business outlook beyond better capital efficiency. We're anticipating oil & gas gathering throughput up 9% and produced water up 22% in the second half of the year compared to the first.We have significant visibility into this growth with the second and third quarters representing the periods with the most well connections for the partnership this year. In addition, these well connections are more heavily weighted to the Wells Ranch in East Pony, relative to earlier in the year.Given the partnerships, 100% ownership in the Colorado River Development Company, this provides a meaningful mix tailwind. And finally, we are another quarter closer to significant long-term contribution from our new Permian equity investments.Construction of EPIC Crude, EPIC Y-Grade and Delaware Crossing projects is well underway and we've funded nearly two-thirds of our anticipated equity investments for 2019. These investments will grow our platform and scale diversity in cash generation strength.The EPIC and Delaware Crossing joint ventures put us closer to our ultimate goal of 50% net adjusted EBITDA contribution from the Permian basin by the end of 2020. NBLX is now positioned to realize value across the crude oil value chain from wellhead to water which is very differentiated for small-cap sponsored MLP. Given the accelerating capital efficiency in our base business and with growing contributions from our new equity investments we are well on track for multiyear double-digit cash flow growth.With that, I'll turn it over to John.

[John Nicholson:]

Thanks, Terry. Our team is doing a great job, progressing our growth project while maintaining a focus on efficient and reliable operations. In the first half of the year we began realizing the benefits of our backbone infrastructure which is largely in place for the base gathering business.About two-thirds of our capital this year is on efficient well connections. And our per well connection cost in 2019 is anticipated to be 20% lower compared to 2018. I expect this trend continue through time as our customer focus on multiwell pad and sister section development.Organic capital expenditures came in well below guidance on both the gross and net basis for the second quarter in a row. While we have seen a few changes to customer activity timing, the lower capital is largely driven by sustainable cost savings from reduction efforts.I'm extremely proud of what we have delivered so far this year, and these efficiency gains and commitment to continuous improvement will benefit us well into the future. Some of the changes include optimizing infrastructure designs in our construction process as well as enhancing our contracting strategy.In addition, our equity investment in the Delaware Crossing, EPIC crude oil pipeline and EPIC Y-Grade project are still anticipated to total between $570 million and $615 million in 2019. $408 million was contributed year to-date with the bulk of the remaining spend coming third quarter of 2019.Our second quarter gathering volumes were in line with guidance while fresh water delivery volumes were ahead of expectations. Oil & gas gathering daily throughput average 295,000 barrels of oil equivalent per day, up over 3% versus first quarter 2019 volumes.Produced water volumes were consistent with guidance and 16% higher than the first quarter. Fresh water delivery volumes of 179,000 barrels of water per day were down 19% from the first quarter, but were ahead of guidance.The partnership delivered water to 2.3 crews during the quarter compared to approximately 4 crews during the first quarter. In the Delaware basin, gross oil and gas gathering volumes grew 16% compared to the first quarter, ahead of the plan ramp and customer activity in the second half of the year.We had another very strong quarter of CGF performance with our team achieving inlet availability of 98%. During the quarter the team completed the trunk line connecting the two Billy Miner CGFs with the Jesse James facility.The infill connection will support peak production for road development, mitigate downtime and increase operating efficiency across our northern acreage footprint. Looking at the second half of the year, Blanco River oil and gas gathering throughput is anticipated to grow more than 30% over the first half.Third quarter gathering activity is accelerating. Third-party gathering activities accelerating with 10 to 15 well connections plan for the back half of the year. In addition, the third quarter will be another busy quarter for Noble in the Permian which is supported by additional take away capacity coming in line.In fact, EPIC interim crude service is anticipated to commence in mid August with multiple connections in Corpus Christi nearly complete. In the DJ basin record gathering volumes in the Green River DevCo were offset by the planed decline in Colorado River and Laramie River.We gathered 20 new wells for Noble Energy in road two of their Mustang development, which drove an impressive 41% increase in oil and gas gathering throughput sequentially. Development drilling in road development in Mustang has driven very efficient capital deployment from the start.We expected this efficiency to accelerate in future years as activity is increasingly focused on sister sections of existing roads. In Laramie River, our third-party customer DJ Basin DevCo gathering and sales volumes declined quarter over quarter with fewer well connections in the first half of the year and some unplanned third-party downtime.Fundamentals remain strong and with full-year Black Diamond volumes anticipated to exceed 90,000 barrels per day. As expected the Colorado River DevCo oil and gas gathering throughput declined during the second quarter with an increase in East Pony volumes offset by a decline in Wells Ranch due to fewer well connections and plan central gathering facility maintenance.Our second gas offload in Wells Ranch came online during the quarter, which should help maximize performance the ranch as connection activity accelerates in the back half of the year.As Terry mentioned, our recent Permian equity investments are critical pieces to building a leading Permian platform. Milestone for EPIC Crude permanent service in January continue to be met with construction of the 30-inch mainline now 50% complete.Permanent Y-Grade service is on track for startup in 1Q 2020 following a turnaround once interim crude service ends. The Delaware Crossing terminal work is going well with the Wink station about 75% complete and we recently broke ground on the Liberty Station. Completion of the main trunk line to Wink is still anticipated by year end.With that, I'll turn the call over to Tom.

[Tom Christensen:]

Thanks, John. The business performed well in the second quarter relative to plan consistent with guidance and similar to 2018. The second quarter 2019 will mark the lowest quarter of the year for both volumes and EBITDA.The sequential decline in net EBITDA was driven by a $4 million credit issued to Noble related to the Wells Ranch fresh water MVC, and a decline in gathering volumes in the Colorado River DevCo due to lower activity levels during the first half of the year.Our financial strategy continues to be focused on maintaining healthy liquidity and prudent leverage through the construction period for the EPIC and Delaware Crossing investments. With that in mind, we ended the second quarter with $439 million in liquidity including $430 million of borrowing capacity on our revolver.Additionally, we have access to $350 million accordion feature within our revolver and optionality to draw the remaining $100 million preferred equity commitment for the EPIC Crude pipeline. Our Q2 annualized leverage ratio increased to 3.9 times as expected.While our leverage is ticking up this year, we believe year-end leverage of 3.9 to 4.2 times is manageable especially in light of the strong district -- of our strong distribution coverage. In addition, our long-haul crude and Y-Grade joint ventures will be online early next year and will require minimal follow-on capital investment.And as mentioned, we are in the early stages of achieving meaningful capital efficiencies in our base business and as the business stands today we expect to be self-funding by the end of 2020 as the EPIC and Delaware Crossing projects begin to contribute meaningfully to the partnership.Long term, we continue to believe that three times leverage is the appropriate level for the partnership through business cycles. Looking ahead to the full year, our gathering volume guidance remains largely unchanged with sequential growth anticipated in both the third and fourth quarters.For oil and gas gathering we've seen good performance year to-date and the second half ramp is materializing as planned so far in the third quarter. July throughput is already up compared to the second quarter average and planning and construction is well underway for more than 100 wells that are anticipated to come online in the third quarter.Water to oil ratios have also been very close to forecast providing a predictable and high quality stream of gathering cash flows. Full year fresh water delivery volumes are anticipated to be 145 to 170,000 barrels of water per day.Although, we've outperformed forecasts in the first half of the year, we've been prudent on our assumptions around activity levels and completion intensity especially as we move towards year end.Based on our year to-date performance and our updated outlook for third-party gathering volumes in the DJ as well as our equity investment and fresh water expectations, we are tightening our net EBITDA range for the year to 245 million to 245 million to 255 million from 245 million to 270 million.As we move through the third quarter and into the fourth we will be able to provide more insight into EPIC's interim service performance as the timing and magnitude of -- and the timing of magnitude and line pressure relief in the DJ basin as well as customer activity plans into year end.We have attempted to capture these items in the guidance we just published, but they could create a bit of noise and variability in the second half of the year relative to historical periods.Our updated guidance reflects net EBITDA growth of approximately 11% second half over first half. We are also lowering the high end of our DCF guidance with an updated range of 190 million to 195 million. This results in a very healthy DCF coverage of 1.5 times to 1.6 times which is within original guidance.To conclude, we expect to have robust growth in the second half of this year as capital efficiencies in our base business continue to improve and as our joint venture investment requirements wind down. This provides a lot of visibility into our differentiated long term outlook which includes significant multi-year cash flow growth and value creation.With that I'll turn the call over for questions.

[Operator:]

Ladies and gentlemen at this time we'll begin the question and answer session. [Operator Instructions] And our first question today comes from Spiro Dounis from Credit Suisse. Please go ahead with your question.

[Spiro Dounis:]

Hey, good morning, guys. May be just starting off with CapEx, pretty healthy decline. Sp suggests maybe efficiencies are better than expected when you guys guided lower -- to the low end last quarter. So, just two questions around that. First, [Indiscernible] you said you're in the early stages of the efficiency gains and so there's potential for maybe another downward revision. And then second, how much of this current CapEx reduction is due to slower customer activity versus efficiencies?

[John Nicholson:]

Yes, good question. This is John Nicholson. So your first question, I do think we're in the early stages of it. Some of it is, as I mentioned on the call, around just our strategy of execution and a good bit of it as well as also in just utilizing the infrastructure we have, right? If you look at something like Mustang, that's a very well thought out infrastructure development alongside our sponsor. And so we're certainly seeing the benefits of the forethought there, right? I think we'll continue to do that. Some of it in addition, as you saw in the Permian is utilizing the facility infrastructure that we have. Connecting those central facilities will allow us to use the capacity that we've installed to-date to the best of our ability. What was the second question?

[Spiro Dounis:]

Just in terms of how much, I guess, the current CapEx reduction is maybe a portion to slow down customer activity versus efficiency gains?

[John Nicholson:]

Sure. Some of it is certainly due to changes in timing. I don't want to characterize it as a slowdown, more of a shift of timing of when things are occurring. But the good portion of it, I would say 60% to 70% is efficiency gains that we expect to continue into 2020.

[Spiro Dounis:]

Okay. That's helpful. On the $4 million credit issue to Noble, was that anticipated in your guidance, and should we expect that to continue throughout the year? Or was it really just 2Q impact?

[Tom Christensen:]

Yes, effectively, you'll end up seeing that MVC with Noble smooth out a good deal of how we all recognize revenue and build Noble over those, Upanishads effectively decoupling it from the field level activity.

[Spiro Dounis:]

Okay. And so that was anticipated, I guess?

[Tom Christensen:]

Yes, it was, and included in guidance.

[Spiro Dounis:]

Okay, perfect. Last one, just on the advantage system. Can you walk through the nature of why the key contract or key customer is utilizing those volume credits? And are you or your JV partners, it will utilize that spare capacity in some way or just have to sort of sit empty for now. And then just as a follow on to that, is there any sort of cash flow impact or just really just volumetric?

[John Nicholson:]

Yes. So, this is John Nicholson, again. We have a match -- our third-party partner has a match. They have to kind of match the Noble volumes off of the Rosetta acreage to a certain degree. Late last year and early this year as the infrastructure got tighten in the basin, they over delivered relative to that match and built up a bank. In the back half of this year, starting kind of in the second quarter, they had some additional pipe come on line and we are able move those volumes off of our system onto other systems and thus they're under delivering and we expect that match to kick back in kind of November, December of this year.That capacity is unused, so to speak. We could use it if we so choose, if we had a customer that wanted to walk up and use that space. It does have and did have an impact to our back half of the year guidance. We did not anticipate in our original 2019 guidance, the decline in our partners volumes.

[Spiro Dounis:]

Okay. That's helpful. Appreciate all the color. Thanks, guys.

[Operator:]

Our next question comes from Barrett Blaschke from MUFG Securities. Please go ahead with your question.

[Barrett Blaschke:]

Hi, guys. Just a housekeeping question. I feel like we sort of have to ask these days on any considerations on IDRs and removing and now that you're in the top tiers list?

[Terry Gerhart:]

Yes, Barrett, good morning. I'll go ahead and cover that one. I think that's part of the consideration that Noble is going through on their strategic review. I'm not really able to comment any further on it at this point.

[Barrett Blaschke:]

Well, you actually set me up for my next question, which was, any additional clarity you can give us. The Reuters piece I think put bit of a ceiling on the stock price for the last quarter, which is the uncertainty around that strategic review and Noble's intent for the Midstream entity. Any additional clarity you can give us there on sort of what the plan is or should we just be reading this as you guys are constantly reviewing and it's just a normal process? Or is this a special review?

[Terry Gerhart:]

No. It's not an ongoing process. It's a process that they're working through and it remains a priority for Noble. I don't think they're going to talk any more about the details until that process is complete. I think what's driving it is that the Noble ex franchise is very valuable and they're not seeing the value reflected neither in the Noble stock or we recognize it's certainly not being reflected in the Noble ex unit price as well. But it does remain a priority for Noble, they're it hard and in due course and when the time is appropriate, they will come forward with their findings and how they're going to proceed.

[Barrett Blaschke:]

Okay. I mean, it’s part of the reason we're not realizing value on the stock price, though, ironically related to the lack of clarity around this review process?

[Terry Gerhart:]

Well, I wouldn't get into answering what's driving the unit price. You'll probably know that better than I do. But I'll leave it at there.

[Barrett Blaschke:]

Thank you.

[Terry Gerhart:]

Thanks, Barrett.

[Operator:]

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

[Dennis Coleman:]

Thank you, and good morning, everyone. I guess, if I could just start with the cost reductions on the well connects. We pivot little bit on this, but how much -- is this sort of -- does the benefit accrues just to Noble Midstream. Is there are any cost sharing that would accrue to the customer. And maybe, if you can just remind me what kind of contracts? Are these costs of service contracts? I don't think they are, but if you could just remind me?

[John Nicholson:]

Yes, Dennis. This is John Nicholson, again. No, we have fixed fee contracts. So, in theory if the cost savings do not impact the customer or benefit the customer, if you will, I mean, obviously, if we can reduce our costs, that should make us more competitive as we pursue things, which is always a benefit, right? Because want to earn good returns, and so they improve our returns and should make us more competitive as we pursue business -- organic business.

[Dennis Coleman:]

Got it. And John, you mentioned in your comments a kind of enhancing contracting strategy. Can you expand on that a little bit?

[John Nicholson:]

Yes. I'm not going to get into too much of the details of our contract, but it's really partnering with some of our big service providers, specifically on the construction side. And you can certainly, when you have visibility into level loading work which we do, given our sponsors activities set in some of our third-party customers and the DJ, we're able to commit to longer cycles of work and more continuous work, which gives us kind of preferred pricing. In addition to that, we've made a few changes that share risks differently through the contract, which benefit us as well.

[Dennis Coleman:]

Okay. Okay. That's helpful. And then, Terry, if I could, I know it's difficult to comment on the outcomes of the parent process. But is it possible that at some point -- is one of the outcomes that they just come out and say, we're done with the process, and because valuations that you just discussed, we're just going to leave things the way they are is there no action -- one of the options?

[Terry Gerhart:]

I'd say that would be one of the options. It could be.

[Dennis Coleman:]

Okay. All right. Very good. That's all I have. Thank you.

[Operator:]

And ladies and gentlemen, at this time I'm showing no additional questions. I would like to turn the conference call back over to Ms. Repine, for any closing remarks.

[Megan Repine:]

Thanks everybody for joining us today and for your participation. I'll be available this afternoon for any follow-up questions you might have. Have a good day.

[Operator:]

And ladies and gentlemen, with that we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.