Noble Midstream Partners LP
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Operator:]

Good day, and welcome to the Noble Midstream First Quarter 2018 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. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Megan Repine, VP of Investor Relations. Please go ahead.

[Megan Repine:]

Thank you, Chan. Good afternoon, and thank you for joining the Noble Midstream Partners first quarter 2018 earnings call. With me today to review our results is Terry Gerhart, CEO; John Nicholson, COO; and John Bookout, CFO. Following our prepared remarks, we will open the call to questions from analysts. This morning we announced first quarter 2018 results as well as second quarter and updated full-year guidance. The press releases and supplemental slides are on the Investors Section of our website noblemidstream.com. Upon filing later today, our 10-Q will be available on the same location. As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial measures. Please see our earnings release for our full disclosure on forward-looking statements and reconciliations or to GAAP measures. At this time, I'll turn the call over to Terry.

[Terry Gerhart:]

Thanks, Megan, and thank you everyone for joining. I am pleased to report another great quarter for Noble Midstream. Already in 2018, we closed and integrated the acquisition of the Saddle Butte oil gathering system. This materially expands our third-party exposure in the DJ Basin. We've more than doubled our credit facility and extended the maturity by 1.5 years. And we've set several quarterly records, including oil and gas gathering volumes as well as Advantage pipeline throughput. This is before material contribution from our key growth projects that are coming online through the middle of the year. Execution of our 2018 growth projects is well under way, with key milestones occurring according to plan. I am very excited about how the remainder of 2018 is shaping up for Noble Midstream. We've seen growing contribution from our third-party acquisitions completed over the past year. First quarter provided even further confidence in our ability to drive the EBITDA multiple compression at Advantage and Black Diamond laid out in February. At the same time, I’ll remind everyone that organic growth is a backbone of the NBLX story and underpins the value proposition for our investors. We have significant embedded organic growth that exists in our assets and additional potential to expand around the Noble equity barrel. This robust organic outlook is currently being overlooked in the market. I am confident that there are few, if any, MLPs with a five-year commitment to 20% annual distribution growth on an organic basis. This is complemented by equally strong coverage and leverage metrics. While our unit price has performed well since IPO, we are frustrated by the recent decoupling of our unit price performance from our strong underlying performance fundamentals, including an enhanced long-term outlook. This began with regulatory and political noise around steel tariffs and the recent FERC ruling on income tax allowance for cost of service tariffs. Both changes are immaterial to our business. We largely procured our 2018 steel needs late last year and early this year before the tariff announcement. A worst-case sensitivity analysis on any longer-term impact indicates just about a 3% to 5% increase in overall project cost. On the FERC ruling, we do not have any cost of service rate structures. In addition, our development kind of these systems are either state regulated or operate under FERC waivers. More recently, we received questions around our drop-down strategy and structure. I’ll take a brief moment to address the topic and let John Bookout provide more details later in the call. Since inception, IDRs and drop-downs have been a part of our structure and strategy. I can assure you both items are top of mind for us at Noble Midstream. On drop-downs, there are several benefits to us; including the ability to realign our business with Noble’s focused areas through time. However, given our organic growth story we do not have to execute drop-downs to achieve our distribution growth targets for several years. And as our sponsor indicated this morning, we would not expect to execute a drop-down transaction until we see a more constructive MLP market conditions. As for IDRs, the costs to capital and dropdown challenges for maturing MLP are not new. We certainly appreciate the recent trend of simplification and elimination of IDRs; however, Noble Midstream is still a young MLP. In the first quarter, IDR distributions represented $800,000. We believe we had a strong story at IPO and we have and we will continue to strengthen our story in strategic and new ways. In the meantime, we will focus on what we can control, what makes us unique, and where we have competitive advantages, including scale in two leading oil basins, differentiated execution, a discipline financial approach with strong leveraging coverage and a supportive strategic sponsor that provides competitive advantages. I'll now turn the call over to John Nicholson for more details on our capital projects that we expect to keep our momentum going as we move through the year.

[John Nicholson:]

Thanks Terry. It's been a busy start to 2018 with our teams achieving several significant milestones on a full slate of growth projects in the DJ and Delaware Basins. In the Delaware, we are on track to reach 115,000 barrels of oil equivalent per day in gathering capacity, and 240,000 barrels of water gathering capacity per day from five central gathering facilities by the middle of the year. Total oil and gas gathering capacity is expandable to 160,000 barrels of oil equivalent per day, and 300,000 barrels of water per day with modest additional capital investment. The third central gathering facility Coronado was completed on March 30 with production throughput commencing in early April. The Billy Miner II CGF commenced operations on April 20. Construction on the fifth CGF should be completed in May. This is a tremendous accomplishment by our team. We had over 1,000 employees and contractors working to finish the three facility start-ups in a safe manner over a very short period of time. These facilities provide a long runway for Noble Energy’s plan volume growth. Capacity utilization is anticipated to increase throughout the year and assuming historical margins we are confident this will drive competitive build multiples. In addition, learnings from construction of the first facilities in 2017 drove operational and capital per barrel of oil equivalent efficiencies in 2018. In fact, our cost per unit of throughput between our 2017 facilities and the most recent start ups declined over 25%. At Trinity River DevCo performance at Advantage continues to surpass our expectations, as other systems experienced growing constraints in the Delaware Basin, Advantage has been our reliable outlet for these barrels. Volumes have more than tripled since acquisition and May nominations were 120,000 barrels of oil per day. Given strong demand, we now expect volumes to average at least 100,000 barrels of oil per day for the year. We will also expand pipeline capacity by over 30% to 200,000 barrels of oil per day by the end of the third quarter to accommodate future growth. This is a very capital efficient project requiring under $10 million in gross capital to complete. Also at Trinity, we commenced compression services, which will add operating leverage to our Delaware program moving through the year, while also resulting in cost savings for our sponsor. Compression started at Coronado and Billy Miner II and installation at Collier is nearly complete. In the DJ Basin, we commenced fresh water delivery for Noble Energy in the Mustang area through our Green River development company. Construction of the spec oil, gas and produce water system will be operational at midyear. Moving over to Laramie River, results reflect two months contribution from Black Diamond Gathering. The integration is progressing well with operations successfully transitioned to Noble Midstream during the quarter. Alongside our JV partner, several commercial opportunities are being pursued, all representing upside to our initial acquisition case. We are optimistic on sourcing additional customers as the system now connects to all four crew takeaway outlets in the basin, and there is a substantial amount of undedicated acreage in the catchment area. Also at Laramie, our system supporting SRC was connected to the Black Diamond Gathering storage terminal as planned and there are more operational synergies and capital savings to come. As previously indicated, we expect material increases in the second half activity levels on third-party acreage as gas processing capacity in the basin is expected to expand significantly over the next 18 months. As we continue to progress our growth projects, we have tightened our full-year gross and net capital budget ranges. We continue to expect a significant reduction in second half capital expenditures once our growth projects in the DJ Basin and Delaware Basins are on line. This positions us for meaningful growth in second half volumes and financial performance. With that, I’ll turn the call over to John Bookout.

[John Bookout:]

Thanks John. We have strong financial results for the first quarter of 2018, as oil and gas gathered volumes were in line with our estimates and freshwater delivery volumes exceeded expectations. This was highlighted by a 13% increase in net EBITDA, compared to the fourth quarter, a 4.7% distribution per unit increase, distribution coverage of 2.3 times and annualized Q1 leverage of two times. I would like to highlight that our Core Gathering segment continues to perform well. EBITDA excluding freshwater represented 74% of total EBITDA and covered the distribution by 1.6 times, gathering EBITDA net to the partnership for the quarter total $40 million, an 8% increase over the fourth quarter. We ended the quarter with $25 million of cash on hand and $365 million undrawn under our $800 million unsecured revolving credit facility. For the second quarter, we expect EBITDA attributable to the partnerships of $46 million to $51 million with coverage expected to be 1.7 times to 1.9 times. As previously indicated, we anticipate a decline in net EBITDA during the second quarter. While enhanced completion technique continue to drive strong per well freshwater usage, our net operating and financial metrics declined due to a mix shift as noble energy shifts activity from Colorado River, which is 100% owned by NBLX to Green River, which is 25% owned. We currently do not anticipate freshwater delivery volumes in Colorado River during the second quarter. A more balanced mix between Green River and Colorado River is anticipated in the second half of the year. Shifting to the 2018 full-year outlook, our estimates for EBITDA attributable to the partnership of $215 million to $235 million with distributable cash flow forecasted between $180 million to $195 million remain unchanged. Executing on our first half weighted major projects will dictate revisiting our full-year expectations later this year. The Core Gathering business should experience sequential quarterly growth in every remaining quarter of the year. Growth acceleration in the second half of the year is driven by activity increases by our customers and contributions from new projects that have recently or soon to be placed into service. Through three months of ownership, we have further confidence in our Black Diamond acquisition and oil throughput is now expected to exit the year above our acquisition case, building momentum into 2019 and driving expected EBITDA multiple comparison. Though early days, we believe our M&A philosophy of acquiring assets in which returns compete with our organic opportunity set is playing out and we look forward to highlighting progress in the coming quarters. Before turning the call over to questions, I'll expand more on Terry’s comments. First on drop-downs, there are no pre-determined transactions. We have historically discussed the target of one per year as well as a 50/50 debt-to-equity mix, not for each transaction, but through time. As Terry indicated we will continue monitoring the MLP market outlook and work with Noble on optimal timing for any future dropdowns. Two things to highlight on this subject, we have been disciplined with our use of equity state with the first dropdown and third-party M&A transactions all structured to support the partnership strategic objectives while also being accretive. Since IPO, we have funded $1.2 billion of net capital through our organic program and three acquisitions, one dropdown and two, third-party in nature. Over 70% of this spend was funded with cash in debt, including all of the organic capital program. While prudently funding, we believe this capital program has provided significant per unit in metric accretion and it has significantly enhanced the durability and duration of our financial goals and objectives. We’ve recognized the equity markets are currently very challenging, particularly given current unit price levels. We have plenty of flexibility to evolve our financing strategy with the market. I would also like to highlight that our differentiated five-year plan does not rely on dropdowns or third-party transactions. Additionally, our recently upsize credit facility provides more flexibility and we have and we will continue to evaluate whether other financing tools make sense. Currently, our balance sheet and financial flexibility positions us well as we continue to look for ways to deliver on our objectives. I'm very pleased with our performance the growth trajectory ahead of us, the resiliency of our distribution and the opportunities we see to improve and expand the business. With that, I'll turn the call over for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Jeremy Tonet with JPMorgan. Please go ahead.

[Jeremy Tonet:]

Good afternoon.

[Terry Gerhart:]

Good afternoon, Jeremy.

[Jeremy Tonet:]

Thank you. I want to touch on your guidance here and it seems like versus what you had said before, there's a bit more emphasis on the second half of the year versus the first half. And I think you noted the 2Q step down here being kind of a mix shift of the DevCos and also some conservatism on water. So I'm just wondering if there's anything else at play with the guidance here. Are there any processing kind of constraints in the basin that kind of play into how you expect volumes to materialize over the course of the year or any other color that you can share there?

[John Nicholson:]

Jeremy, good question. This is John Nicholson. So you’re going to hit the nail on the head. The primary driver of 2Q guidance is activity shift primarily related to freshwater, and the frac crews moving from Wells Ranch in the Colorado River DevCo to Mustang and the Green River DevCo. In addition to that, our guidance and activity assumptions in 2Q and the back half of the year take into account plant timing. We've assumed a midyear start up and we're incrementally positive as each month goes by that that will occur.

[Jeremy Tonet:]

That's helpful. Thanks. And as far as some of your acquisitions here, it seems like Black Diamond, Advantage seem to be tracking nicely or even ahead of kind of your expectations at time of acquisition. I was wondering if you could kind of update us maybe a little bit more there as far as how they're tracking. What the ultimate possibility of volumes or how bigger these systems, or maybe a better way to think about is what other opportunities downstream could these projects lead to as you kind of think about the growth trajectory longer-term?

[John Bookout:]

Sure. Jeremy, this is John Bookout, I think I'll go in order of when it was acquired. On Advantage, we're just coming up or we just passed actually our first-year anniversary of the closing date. We're thrilled with the performance. The volumes have roughly tripled since when we bought the asset. I think that's really due to two things. We've been successful commercially with Reeves County, and I think the second is really the asset positioning, and that is in the southern portion of Reeves and it’s, as many are aware, the most active county for shale drilling in the country. I think there are some in-basin dynamics going on with other service providers where they can’t meet producer needs and we've been opportunistic with converting that into commercial success for Advantage. I think you asked about – looking forward we're being proactive, expanding that pipeline to 200,000 barrels of daily capacity in the third quarter of this year, which positions us nicely for growth runway going into next year. On Black Diamond, closed that at the end of January. It's a couple months in. I don't want to get ahead of ourselves, but incrementally positive in what we’ve seen. We have now seen a couple iterations where we get activity sets from the customers on that system, and we built confidence that we've been conservative of how we forecasted that business in our acquisition phase, and it's looking like the exit rate for this year is tracking ahead of our expectations. So should provide good momentum going to the next year. In terms of opportunities on that system, I think we laid it out when we announced the acquisition. It’s uniquely positioned where it has connections to all four takeaway outlets. It's got good strategic storage in two locations. It's well positioned to play the re-contracting game for the takeaway pipelines out of the basin over the next several years. And I think just due to ease in terms of producer appetite, I think there's opportunities in terms of joint tariff structures where you can offer a solution from the wellhead all the way to Cushing. So we will continue to work on that and provide an update in the coming quarters.

[Jeremy Tonet:]

That's all. Very helpful. Thanks for taking my question.

[Operator:]

Our next question comes from Ethan Bellamy of Baird. Please go ahead.

[Ethan Bellamy:]

Hey, guys. You’ve got miles of visibility ahead. Your metrics are stellar. Growth is on track. I mean you shack out extremely well relative to your peers. What is it if anything that you guys can do to improve your cost of equity to get back to where drop-down would makes sense, and is there some magic number on yield where we could see that accelerate again?

[John Bookout:]

Ethan, this is John Bookout. Good question. I think we will try to address part of it in our prepared remarks. Yes, I want to be clear that the comments around dropdown timing and constructive market is not related to our cost of capital today, which is very healthy competitive. I think Terry mentioned that IDR payment was $100,000 for the last quarter. I think we still see opportunity sets across our portfolio well in excess of our cost of capital. We've made it a priority to highlight externally that corporate returns are very important to us through time. We've laid out what we're trying to hit for this year and going into the future. I think that should illustrate that we have thresholds for investments that are far and above our cost of capital. I think in terms of the commentary around dropdowns and potentially waiting for constructive, I guess criteria is more related to the state of the MLP market as well as our current unit trading performance.

[Ethan Bellamy:]

Okay. So what is the unit trading performance mean if anything for potential additional M&A here? I mean even though your units are down, like you said you're still in a relatively advantaged position relative to a lot of your peers. Have you seen things hit your desk that maybe have come loose because of this environment and lack of capital availability for some of your peers?

[John Bookout:]

I think it's a good question. I think when it comes to M&A, our philosophy is unchanged. We've done two transactions from a third-party perspective. We've talked a lot about those transactions over the last several quarters. We're highly selective and the criteria really is – we know what those assets are identified to us in terms of where our footprint currently is in both basins. And I think keep it very simple, we've always said we will be interested in assets in which we can do more with than anyone and that we can bid on without leaning into our relationship with our sponsor and we'll continue to take that approach. Things that we look out in the future, obviously where our unit prices is going to be a factor in terms of how you bid in ultimately the financing, but we're certainly not going to look – we're not going to refuse to look at things that make sense just because of where the unit price is today.

[Ethan Bellamy:]

Okay. And then on the large diameter pipes coming out of the Permian, is there a – well first off, can you talk about how if it all those changes the differentials of impact to the upstream activity there if at all and then how if at all it's changed your thinking about what you might want to participate in or potentially change the date by which you want to make a decision on EPIC?

[John Bookout:]

Sure. Ethan, John Bookout again. I think Noble discussed this on their call this morning. Also I had a few questions about it. They remain very well positioned with a kind of a long-term approach to strategy to move product in the Delaware. I will say that when we're out there talking to existing customers or traditional customers, we have seen a change and focus on this given trending over the last couple of months with both on the gas and oil side. I think when comes to EPIC, I want to caveat that we are still finalizing those agreements, but that change in thinking is only incrementally positive to those that are progressing takeaway lines out of the basin.

[Ethan Bellamy:]

Okay. And then specifically with respect to EPIC, I don’t know, but I doubt they've bought steel for that pipeline yet and I'm guessing that a pipeline of that length is going to be impacted by these steel price movements. How if at all that change the agreement or the tariff or the – I don’t know just the project economics, how are those changed by steel prices and does that gum up the process for bringing that to a conclusion?

[Terry Gerhart:]

Yes, Ethan, I think it's a good question. I think we look forward to talking about this and a number of other items pertaining to the EPIC project, but I don't think that's one we can get into given we're still in finalization mode in terms of the agreements.

[Operator:]

The next question will come from Georg Venturatos with Johnson Rice. Please go ahead.

[Georg Venturatos:]

Hey, good morning.

[Terry Gerhart:]

Good morning, Georg.

[John Bookout:]

Hi, Georg.

[Georg Venturatos:]

Just while we're on the EPIC side, I just had a question on that as well. In relation to the timing, could you just remind us, I believe we had kind of that 12-month period maybe got you into early 2019 before we had to make a final investment decision. Just wanted to make sure that timeline was correct and then also equity options been up to 30% in a crude line and 15% on a Y-Grade. Is that the right way to think about it?

[John Bookout:]

Georg, this is John Bookout that it’s all consistent today.

[Georg Venturatos:]

Okay, great. On the freshwater side just in relation to guidance and you guys hit on it earlier in the call, but I wanted to get a sense of obviously 2Q hit with the NBL shift in the Mustang, but given that full-year guidance is maintained on the freshwater side from a volume perspective? Any commentary on how we should think about 3Q and 4Q kind of progression from 2Q levels just – so we don't get in a situation where maybe where expecting too much too soon here on a forward quarter basis?

[John Nicholson:]

Georg, good question. This is John Nicholson again. There's really nothing new in kind of our philosophy around freshwater guidance. We've generally been conservative and will continue that. We've laid out on one of the slides in the pack, how we view completion activity kind of as we move throughout the year. Obviously, 2Q is focused solely on the Green River and Mustang and then it's a pretty equal split in 3Q and 4Q. This is really the second quarter and these completions in Mustang is the first time, we've used our expanded infrastructure on enhanced completions in Mustang and so there's some inherent conservatism there in the numbers. But over the course of the year we fully expect Noble to utilize on average about 1,800 pounds per foot, so fairly consistent with what we've been seeing over the last several quarters.

[Georg Venturatos:]

Got it, makes sense. Thanks guys.

[John Nicholson:]

Thanks.

[Operator:]

The next question will be from Richard Roberts of Scotia Howard Weil. Please go ahead.

[Richard Roberts:]

Hey, good afternoon, folks. Maybe just want to start on kind of the cadence of capital spending here so, a lot of background infrastructure going in place this year to kind of set up for a ramp in volumes later in the year. Should we be thinking about a pretty material step down in organic spending for 2019? I guess primarily just on well connects?

[Terry Gerhart:]

I think that's the safe assumption Richard. You've seen kind of – activity and spending pick up in 2Q of last year and it's been somewhat consistent at a higher level through that period of time. And then obviously it will trend down starting in the third quarter and fourth quarter, a good reference is kind of Colorado River and the capital efficiency of that DevCo over the last couple of years that backbone infrastructure was installed prior to our IPO. And so if you look at the annual cadence of capital for the four services we provide and that DevCo you can kind of get a sense for how capital efficient, some of the stuff becomes once we get our backbone infrastructure in place.

[Richard Roberts:]

Plus, we're in a moving and a cash harvesting mode next year. Great.

[Terry Gerhart:]

Correct.

[Richard Roberts:]

And then another one you mentioned potential joint tariff structures going into Cushing, I’m wondering and maybe it’s a little bit too early, but can you talk about maybe some of the opportunities to do joint tariffs in Delaware just going from gathering on to Advantage and then maybe on the long haul if you exercise that option that put you in a better position on winning third-party business there?

[John Bookout:]

It’s John Bookout, good question. I think our opportunity size are set in the DJ’s probably a bit bigger given I think that's a uniquely positioned asset with connections to all four takeaway lines and a little bit different on re-contracting setting over the next several years. Delaware obviously is very competitive. We've got a good footprint, but there are others that have similar services whether it be the Crane or Midland and Wink. We obviously benefit from our partner in Planes and their vast network so it's certainly something that we use to our advantage when we're looking at having potential business is to provide a little bit more of a simple commercial structure with our partner that makes sense.

[Richard Roberts:]

Yes, it does. And then there's one little clarification item, I saw G&A tick up quite a bit quarter-over-quarter, there's a $10 million figure include the $6 million of transaction costs from Saddle Butte?

[John Bookout:]

It does.

[Richard Roberts:]

Okay, perfect. Thanks guys.

[Operator:]

The next question will be from Barrett Blaschke with MUFG Securities.

[Barrett Blaschke:]

Hey, guys. As we see the water volume sort of shifts location, how should we be thinking of those in terms of changes and in terms of freshwater and the produce water as we go out maybe the next few quarters?

[Terry Gerhart:]

Yes, Barrett, we've provided on one of the slides kind of the cadence of completion crews throughout 2018. So that gives you a feel for where the activity will be and should help you with kind of looking at DevCo ownership and how that impacts the partnership. As far as water delivery volumes, we expect those to be consistent with what we've been seeing for almost 18 months now. The average completion size, we believe will be 1,800 pounds per foot from a proper perspective. Produce water will also be consistent in Mustang just as it – Mustang will be consistent with Wells Ranch. We don't see – and expect to see any difference there after you get kind of through that flow back period, produced water volumes will kind of mere the hydrocarbon type curve over time.

[Barrett Blaschke:]

Okay. That’s what I was wondering. All right. Thank you.

[Operator:]

Our next question comes from Bernie Colson of Seaport.

[Bernie Colson:]

Hi, everyone.

[Terry Gerhart:]

Hey, Bernie.

[Bernie Colson:]

Hi. So just quickly. This is a little bit of a follow-up on Ethan's question. Just there would seem to be little bit slight difference in the commentary between two comments at the beginning on the five-year growth outlook. I think I heard you can keep up the growth for “several years,” and then I also heard 20% growth target can be kept up for five years without assuming any drop-downs? I just wanted to clarify what that statement was?

[John Bookout:]

Sure. This is John Bookout. The guidance that we have out there since post long-term guidance, which we rolled out last quarter and have put in our materials again. This quarter is for five years through – for key metrics, and organically we can support the 20% growth for five years.

[Bernie Colson:]

Okay. And does that – did you have to – so the coverage without the water businesses and that kind of 1

[Terry Gerhart:]

Generally speaking, we don't base distribution policy off of freshwater cash flows. There is a base level of activity when it comes to freshwater just because it's so critical to the upstream business in terms of shale. That, we have some confidence after looking at activity for 10 years in the DJ, we feel comfortable with certain points that you can rely on that. But the move to enhance completions, that access we don't count on that or are lean into it in terms of hitting those five-year targets. I think that's what you're asking.

[Bernie Colson:]

Yes, no. And then I had just a question about it. Did you have to kind of shift to relying on some water cash flow? So that's good, that's really helpful. Okay, that was all I have. Thanks. End of Q&A

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Megan Repine for any closing remarks.

[Megan Repine:]

Thanks for your interest and participation today. I will be available this afternoon for any follow-up questions that you may have. Thank you.

[Operator:]

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