Noble Midstream Partners LP
Q4 2019 Earnings Call Transcript

Published: 12 Feb 2020

[Operator:]

Good morning. Welcome to Noble Midstream Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.I would now like to turn the conference over to Park Carrere, Manager of Investor Relations. Please go ahead.

[Park Carrere:]

Thank you, Kate. Good morning, everyone, and welcome to the Noble Midstream Partners fourth quarter 2019 earnings call.With me today to review our results is Brent Smolik, CEO; Robin Fielder, President and COO; and Tom Christensen, CFO.Following our prepared remarks, we will hold a question-and-answer session. Here to participate in the question-and-answer session, we also have John Reuwer, Vice President of Corporate Development.This morning, we announced fourth quarter 2019 results as well as first quarter and full year 2020 guidance. The press release and supplemental slides are on the Investors section of our website, nblmidstream.com. Upon filing later today, our 10-K will be available in the same location. As a reminder, today’s discussion will contain forward-looking statements and certain non-GAAP financial measures. Please refer to our latest news releases for non-GAAP reconciliations 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 Brent.

[Brent Smolik:]

Thank you Park, and good morning, everyone.Before I get into prepared comments this morning, I'd like to welcome Robin Fielder to the team. I suspect that many of you know her from her previous roles and I suspect you understand why we're excited to have her on board. She has only been here for a few short weeks but she is already having a positive impact on our organization and on our midstream business. So, welcome Robin.I'll begin this morning with the fourth quarter results. I am pleased to report another strong quarter of performance from the Partnership to close out a successful year of operational execution, cost reductions, additions of new business and progress on our equity investments. As we announced back in November, Noble Energy concluded the strategic review, which highlighted the value and the synergies of aligned upstream and midstream businesses. And as a reminder, the outcome was the midstream acquisition of substantially all of Noble's remaining midstream DevCo interest, several wholly-owned midstream assets and the General Partner’s Incentive Distribution Rights for $1.6 billion in total. I'm pleased with this successful execution of the Simplification of Drop transaction and the positive support of the deal by the equity markets. We strengthened our core business and we put the Partnership on a path to deliver leading full service midstream solutions into the next decade.With the close of the transaction, Noble Midstream gained exposure to essentially all of Noble Energy's DJ and Delaware production in those two core areas, which supports a long-term organic growth runway and enables the Partnership to expand Noble and third-party customer throughput volumes.In addition to that transaction, we delivered top-tier project execution and capital expense savings in 2019. Due to the year-over-year capital efficiency gains, the Partnership was able to reduce capital guidance twice during the year on a similar number of well connections. Overall, we decreased connection cost per well by about 50% over the last two years in both the Delaware and the DJ Basins, and we believe that the efficiency gains are sustainable.During the year, the Partnership also leveraged its previous operational successes and added new third-party customers. In the gathering segment, midstream added two new customers during the year, including the fourth quarter addition of Verdad Resources in the DJ, which increased our acreage dedicated to Black Diamond by about 50%. Additionally, our equity ownership in all pipelines will provide some diversification to our gathering and processing business, and generate higher quality, more stable cash flows. In a few minutes, Tom will provide some additional details on our business development efforts.Turning to operational and financial results. First for the full year, in 2019, we gathered 322,000 barrels a day of oil and gas, and 189,000 barrels a day of produced water in the DJ and the Delaware Basin, both at the high-end of our original guidance, while gross capital was $90 million below guidance. We grew throughput volumes four quarters in a row and we delivered record oil & gas throughput of 355,000 barrels of oil equivalent per day for the DJ and the Delaware Basins in Q4. We had record produced water as Permian third-party connections picked up in the back half of the year, while executing the capital program below the low end of guidance for Q4.In our wholly-owned DJ Basin assets, overall gross oil & gas gathering volumes were up modestly from the third quarter of ‘19, driven primarily by Noble Upstream activities in East Pony and Wells Ranch. Black Diamond volumes increased to about 12% to 103,000 barrels of oil equivalent per day. The Mustang IDP area did not any new connections during the fourth quarter, but Noble was completing wells in Mustang, and we expect to see connections trim backup in early 2020.In the Delaware Basin, we had another record quarter for gross oil & gas gathering volumes, which grew by 13%, compared to the third quarter. Produced water was also set a record going more than 25% sequentially, primarily driven by Noble Energy activity. Additionally, the Partnership connected the first two wells from a new third-party customer in Q4 and then benefited from 9 third-party wells that came on line in literally the last day of the third quarter. Looking ahead, we expect this momentum to continue into 2020 also.Before I hand off to Robin to talk about our 2020 outlook, I want to leave you with a few comments. We're not resting on our 2019 cost and execution successes, and we're focused on additional savings in 2020, because improved capital and efficiency brings multiyear benefits and it strengthens our opportunity to enhance returns to our unitholders. We remain focused on leveraging our existing infrastructure and expanding our core business for both G&P and pipelines. And then, this year will be an important inflection point in our capital and cash flow plan. We expect equity investments to be largely complete in the first half of 2020, and then expect growing contributions from our equity investments throughout the year, including the recently announced Saddlehorn investment.And then, finally, we’ll remain hyper-focused on customer service to ensure that we execute on our plans.I'll now turn the call over to Robin.

[Robin Fielder:]

Thanks, Brent, and good morning, everyone. I'm happy to be part of the Noble Midstream team and look forward to continuing the strong operational momentum that Brent just highlighted.As he mentioned, we ended the year on a high note with record results in gathering business across all product streams. Combined oil, gas and produced water and gathering and sales throughput was up 10% on an annual basis with significant contributions from both the DJ and Permian Basins.The Partnership enjoyed significant success reducing its cost structure in 2019, and we will remain focused on efforts to further drive down costs throughout 2020. And we're already off to a great start. With the release this morning we reduced our 2020 organic capital expectations by 25% or $70 million from the midpoint of our November outlook. This decrease comes from continued improvement in our equipment design and contracting strategy, a reduction in pipeline installation costs and the utilization of existing infrastructure. These efficiencies along with capital project deferral has allowed us to significantly reduced our organic capital budget, all while connecting approximately the same number of wells year-on-year.As Noble Energy focuses on road development in both basins in 2020, the Partnership expects roughly three quarters of the new well connect activity in the DJ Basin to be on adjacent sessions, and 75% of Permian laterals to be less than a mile in length as we leverage the infrastructure backbone already in place. This enables us to connect wells at minimal cost, improve returns, and reduce per unit operating expense.Our 2020 organic capital program is largely comprised of well connections in both basins as well as facility expansions. We plan to allocate a larger percentage of capital investments to the DJ Basin throughout the year while both the DJ and Delaware Basin will continue to contribute to absolute gathering volume growth. In total, oil and gas gathering volumes are expected to grow more than 10% year-over-year.In the DJ Basin, we anticipate two to three completion crews on average across our dedicated acres. Noble Energy has increased activity at its Mustang development and now expects 80 to 90 new wells in the area in 2020, as well as 20 to 30 well connections in Wells Ranch. Third-party activity and volumes in the DJ Basin are forecasted to be slightly higher in 2020, led by the Black Diamond joint venture and the addition of Verdad crude volumes onto the gathering system. Our commanding presence in the basin and top tier execution make us a strong partner of choice, and we will continue to evaluate new backyard opportunities like this recent example.In the fresh water segment, we anticipate growth volumes to increase 20% annually with delivery to two DJ Basin completion crews on average during the year for Noble and a third-party customer. Also in 2020, we will see a positive impact from an increase at our Wells Ranch minimum volume commitment, which transitions to 60,000 barrels a day this year.In the Permian Basin, we expect Noble energy to operate on average two to three completion crews and turn in line 50 to 60 wells in 2020. Our third-party business has continued to expand, and we anticipate at least one third-party crew on average and 10 to 15 well connects this year. Our 2020 Delaware Basin gathering volumes will benefit from a full year of operations from all five central gathering facilities. Our three northern CGFs are connected via supersystem, which enables us to swing volumes and efficiently manage peak production from new wells.Finally, before I pass to Tom, I want to address the cadence of activity in 2020. We anticipate operator activity to trend similar to last year with front end weighted investments that generate second half volume growth. Noble Midstream will continue to allocate capital with a focus on returns, leverage the opportunity to reduce further -- to further reduce our costs, basically optimize performance and enhance transparency around our environmental stewardship efforts.I will now turn it over to Tom.

[Tom Christensen:]

Thanks, Robin. Starting with fourth quarter financials. Adjusted EBITDA was $73 million, up 22% sequentially, driven by the acquisition of Noble Energy's remaining DevCo interest in the DJ and Delaware basins. Our results reflect full ownership of these DevCos for half the quarter. EPIC’s interim crude service impacted the Partnership’s Q4 results with a larger-than-expected loss of $10 million. Excluding this impact, our business performed as expected. EPIC is positioned to begin full service late in the first quarter of 2020. We will still experience some softness during Q1 from interim service, but expect results to be significantly improved over the fourth quarter. With the recent acquisitions digested, we are focused on maintaining healthy liquidity. We recently exercised the $350 million accordion feature in our revolver to bring the borrowing capacity up to $1.15 billion.We ended the year with $568 million in liquidity. As we move into 2020, we will focus on maintaining prudent leverage, while pursuing longer term financing to enhance liquidity and extend near-term maturities.2019 was a strong year for the Partnership on the business development front. Our Delaware Crossing asset, a JV between NBLX and Salt Creek Midstream is nearing completion of the mainline and has already begun transporting volumes. This asset further enhances our position in the Southern Delaware Basin by expanding the gathering footprint to the Wink Hub. This investment provides the Partnership with exposure to 8 new third-party customers spanning 165,000 dedicated acres. We also made significant steps towards diversifying our cash flow profile in 2019 by exercising the 30% option in the EPIC Crude pipeline and the 15% option on the EPIC Y-Grade pipeline.We also recently announced the exercise of our 20% option in the Saddlehorn pipeline through our Black Diamond subsidiary. Saddlehorn is an operational pipeline backed by minimum volume commitments from investment-grade producers. Black Diamond acquired Saddlehorn for $155 million or $84 million net to NBLX. This attractive valuation allowed us to utilize our revolving credit facility, while remaining leverage-neutral for 2020. As we continue to grow our business, these types of high-return investments will not only enhance the quality of our cash flows, but also allow the Partnership to participate further down the midstream value chain.NBLX can now offer services from wellhead to water in the Permian as well as provide our DJ customers highly competitive transportation to Cushing. These capabilities differentiate us from many of our peers. We are proud of the team for their recent accomplishments and are excited about how the Partnership is positioned for continued success.Now, onto 2020 guidance. 2020 net EBITDA is anticipated to be between $500 million and $540 million, slightly below the prior guidance midpoint due to the better line of sight on operator activity. We continue to see producers taking a more measured approach to developing their assets. This slowdown has been largely offset by additional customers added to the portfolio during 2019. The EPIC Crude pipeline is nearing completion and line fill has begun. Once the Crude line is in full service, the Y-Grade line will undergo cleaning and pigging before transitioning back to NGL service. We expect this transition to take about a month to accomplish.With the addition of our recent Saddlehorn acquisition, we anticipate approximately 15% to 20% of our 2020 EBITDA to come from our investments. We currently are not forecasting any distributions from EPIC in our 2020 DCF guidance.We have also updated our 2020 investment capital guidance. We are now anticipating equity investment of $220 million to $260 million, an increase of $100 million from the midpoint of our previous guidance. This increase was driven by three factors

[Phil Stuart:]

Good morning, everyone. Robin, congrats on your new role.

[Robin Fielder:]

Thank you.

[Phil Stuart:]

Brent, I think this question is probably for you, and you obviously touched on it in the prepared remarks. But, given that you all are kind of currently projecting to hit your target leverage ratio in 2020, just kind of curious how you're thinking about the distribution growth now with the stock yielding close to 13%. It doesn't seem like you all are getting paid for that future growth. I'm just kind of curious if you could maybe discuss a little bit in more detail how you all are thinking about the different options, whether it be distribution growth longer term or potentially repaying additional debt below the leverage target or as you all mentioned in the prepared remarks, unit repurchase program?

[Brent Smolik:]

Yes. There's a lot in there, Phil. At a high level, as we roll through the investment phase on these equity investments and our capital program being front loaded and then growing EBITDA, through the year, we're going to naturally delever, first of all. And so, I don't think we'll be in a position we'll have -- we'll be compelled to have to pay down debt.So, then, the second part of your question, I think on the distribution growth rate is, we set that rate as Tom mentioned on the call, when we did the job simplification because we thought the business supported it and we still do. I mean, we've got -- we're pretty close to the plan we rolled out at that time. And so, we still think the business supports that growth rate. But, if over time if we hear from the market and the market doesn’t want to support it, then we will look at a different path. Right now, we're sticking to it though. We're staying with the growth rate.

[Phil Stuart:]

Okay, great. I appreciate the color there. And then, I guess, quickly, have you all given any more thought to potential conversion to an UP-C corporate structure or a full-on C-corp conversion?

[Brent Smolik:]

Yes. We said at the time of the drop that we haven't closed out that possibility. By doing the transaction, we still left that open as an option down the road. I think, we need to continue to analyze it and make sure we understand the full merits of it. It's not completely obvious to me that there's an advantage for unitholders. And so, we'll keep looking at it over time. But, I think we've made the right call in the near-term to stick with the current structure.

[Phil Stuart:]

All right, Brent. I appreciate the time. That's it for me.

[Brent Smolik:]

Okay.

[Operator:]

Our next question is from Pearce Hammond from Simmons Energy. Go ahead.

[Pearce Hammond:]

Good morning and thanks for taking my questions. And Robin, welcome aboard, good to have you there.

[Robin Fielder:]

Thanks.

[Pearce Hammond:]

My first question, and you touched on this in the prepared remarks and in the press release, but if you could provide a bit more color on what happened to EPIC in Q4 and is that resolved for Q1?

[John Reuwer:]

Sure. This is John Reuwer here. There were kind of -- there were basically two items that caused us to have a difference to what we had previously guided to around the EPIC project. One is, it's currently in what we call interim service. And under interim service, there's no obligation of any shippers to bring barrels under a traditional commercial arrangement. However, when we switch to fully-commissioned service in March, all of the commercial agreements that sit at the EPIC level, come into effect, and the shippers are required to bring the barrels that they're required to bring. So, there was some volatility in the volumes over interim service that we didn't anticipate that kind of flowed through to our financials. And then, the other item would be, we typically see EPIC reporting on a monthly lag. And so, those two items kind of caught up to us here in Q4.

[Pearce Hammond:]

Okay. That makes a ton of sense. Thank you. And then, as a follow-up, can you provide some color as to the specific drivers accounting for the record cost per well connections in the DJ and Delaware Basin in 2020?

[Brent Smolik:]

Yes. There's a couple of big things in there at a high level, then I'll let Robin give you some more color. We fundamentally shifted how we manage our contractors and how we manage those projects in 2019 and we saw real benefits that will carry over. And then, we're really close to existing infrastructure in both basins. So, we're going to significantly reduce the distances. I mean, do you want to add anything Robin?

[Robin Fielder:]

I think, it's just a complete scrubbing of our processes and procedures out in the field and even some of the design changes and where we've made them optimizations. And as, as Brent pointed out, the good news is, we see the sustainability of those cost savings, and that's what we were able to roll that through and reduced our organic capital outlook for this year.

[Pearce Hammond:]

Great. And then, last one for me, Brent, if you could just provide some background on the strategic rationale as to why you exercised the Saddlehorn option and then the strategic benefit, and ownership on that pipeline accurse NBLX?

[Brent Smolik:]

Yes. I think, to start with the benefit to the customers, I mean, we're able to offer them significantly reduced versus -- at least versus historical rates, with significantly lower transportation rates to get down to Cushing. And so, I think that's our main motivation is figuring out ways to be able to expand, the service that we’ve provide to our customers, and that's a really good option. And one of them frankly is Noble. Noble took some space themselves and then we'll be able to, because of the working collaboratively with them, we're able to get the option to own equity in the pipeline.

[Robin Fielder:]

This is Robin. I'll just add, as I think Tom pointed out, we really like the nature of the minimum volume commitment on this and what these long-haul opportunities add to our portfolio and help sustain the cash flows of our business.

[Operator:]

[Operator Instructions] Our next question is from Jeremy Tonet from JP Morgan. Go ahead.

[Unidentified Analyst:]

Hey. Good morning. This is James on for Jeremy. I just want to touch more EPIC here in terms of the trajectory that you guys see for 2020 for that pipe. And then, especially after kind of 4Q ‘19 and 3Q ‘19, and I believe the CapEx increased, if you could just talk to kind of the why it went up?

[John Reuwer:]

Two items there, I'll answer both, James. This is John. On the EPIC side, I've kind of mentioned before, we haven't really changed our long-run view of the EPIC project, post fully commission. So, it's pretty much exactly where we expected it to be when we underwrote the project. The volatility that we've seen in Q4 was primarily due to the interim service volume changes, given that there was no commercial agreements on the pipeline. So, we fully expect and we've seen roughly that trend will change and we'll kind of get into a fully commission type cash flow profile for them.On the CapEx side, there was some -- two buckets of items. There was a couple of things that were kind of out of scope that were brought into scope. But, as an example, acquiring the interstate grain terminal relative to a build project, if you would kind of recall that they had done that last year and the scope that increased. And then secondly, they had seen some higher costs on some pipeline deal due to tariffs. And those came reported to us from them on a one month lag that hit in this quarter.

[Unidentified Analyst:]

Great. Thanks. And then, I don’t how much work you have done here. But, in terms of just how much CapEx is needed to keep EBITDA flat in 2020, any color there you would share?

[Tom Christensen:]

Sure. So, when we report our maintenance capital figure in our guidance, so that's actually an estimate that we use to keep volumes flat. So, we don't do like an implied EBITDA amount, we actually do a full calculation of what we think the capital will be required to keep volumes flat. I will say that we typically do those only for our G&P assets. And then, our joint ventures, the maintenance capital is implied via that -- at the bottom of that project, and we only report DCF via cash distributions from those investments. So, there's kind of two parts to how we calculate maintenance capital, but the number that we report for guidance is typically what we think would be required to keep our G&P business flat.

[Operator:]

Our next question is from David Amoss from Heikkinen Energy Advisors. Go ahead.

[Michael Cusimano:]

Good morning. This is Michael on for David. Thanks for taking me.

[Brent Smolik:]

Good morning, Michael.

[Michael Cusimano:]

Can you give more detail around the fresh water volume outlook in 2020?

[Robin Fielder:]

Yes. Hey, this is Robin. As I alluded to that we're going to see some annual growth there, we're expecting on the order of 20% year-on-year, but it is pretty volatile.

[Michael Cusimano:]

Okay. Would you say the range that you all previously provided is still intact or you just can't speak on it?

[Brent Smolik:]

Yes. It's largely still intact. You'll see that we -- we expect it to be a little front-weighted. We have shifted guidance to be just one quarter ahead just due to the lack of predictability of that cash flow stream. But, our initial impression of that business is still similar to what it's been historically.

[Michael Cusimano:]

All right. Thank you.

[Brent Smolik:]

Thanks, Michael.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Park Carrere for any closing remarks.

[Park Carrere:]

Thank you all for joining the Noble Midstream fourth quarter call today. I'll be around all day to answer any questions. Please reach out. Thank you all.

[Brent Smolik:]

Thank you, everyone.

[Robin Fielder:]

Thank you.

[John Reuwer:]

Thanks.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.