Noble Midstream Partners LP
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good day, and welcome to the Noble Midstream Partners’ First Quarter 2017 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 today’s event is being recorded. I would now like to turn the conference over to Chris Hickman, Vice President, Investor Relations. Please go ahead.

[Chris Hickman:]

Thank you, Rocco, and good afternoon. Thanks to everyone for joining us. We’re exciting to report on another strong quarter and discuss last week's announcement of additional dedications in the Delaware Basin. As a reminder our news releases in today's presentation can be found on the investor section of our website nblmidstream.com. Also later today we expect to file our 10-Q. On our call is Terry Gerhart, Chief Executive Officer; John Nicholson, Chief Operating Officer; and John Bookout, Chief Financial Officer. Following our prepared remarks, we will open the call to questions from analysts. Before I turn the call over to Terry though, I would like to remind you that 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 to GAAP measures. Terry.

[Terry Gerhart:]

Thanks, Chris, and thanks everyone for joining today. I'm pleased to report another great quarter highlighted whether second consecutive distribution increases and results exceeding our expectations. I'm also excited to discuss the enhancements we continue to make to our portfolio extending our top tier growth capabilities. Already in 2017 in conjunction with Noble Energy's acquisition of Clayton Williams we now have dedications for crude oil, produced water, and gas gathering across approximately 111,000 acres in the Southern Delaware Basin. These additional dedications will roughly double our exposure to Noble’s activity by the end of 2017. In early April we closed on the acquisition of the Advantage all pipeline system. Further expanding our service offerings in the Delaware Basin. This marks NBLX is first third-party acquisition and we are pleased with the growth potential in scale at brings to our portfolio. These additions in the Delaware are meaningful steps toward our long-term objective of generating approximately half of our net EBITDA from the Delaware Basin by 2020. In the DJ Basin we expanded our produced water capacity in April. So were 25,000 barrels per day on our Wells Ranch central gathering facility. And finally, during April we commenced fresh water delivery services for our major third-party customers in the DJ Basin. To give you a few of first quarter highlights; operationally oil and gas gathered volumes were 63,000 barrels equivalent per day, which landed just above the midpoint of our guidance. Further we continued to be encouraged by Noble Energy’s well results from enhanced completions which contributed to a new monthly record in March of over 66,000 barrels equivalent per day of gas and oil throughput. This momentum will curious into the second quarter as we expect oil and gas gathered volumes to increase 7% approximately above the first quarter average. The volume growth will be on existing infrastructure and does not include any impact from our project in Greeley Crescent or the Delaware Basin. Both of which are progressing on schedule. Looking ahead into the rest of 2017 and even into 2018 we remain focused on executing our growth plans well providing safe reliable service to your customers. I'll now turn the call over to John Nicholson for further details on our capital projects and operations. John?

[John Nicholson:]

Thanks Terry. I'll talk a little more about the acreage dedications that Terry mentioned. Upon Noble Energy's close of the Clayton Williams acquisition last week 64,000 acres in the Delaware Basin were dedicated to us for crude oil, produced water and natural gas gathering. Also gas gathering was added to our existing crude oil and produced water dedication on Noble Energy’s 47,000 legacy acres. Bringing our total Delaware Basin dedications to approximately 111,000 acres. The additional dedications and rig activity in the Delaware provide exciting new growth opportunities and further underpin our 2020 objectives. Along with the Clayton Williams infield gathering dedications we also secured a dedication for crude oil transmission services across the entire position. As a reminder, the legacy 47,000 acres were dedicated to the Advantage joint venture. We are excited to expand this service offering and we will continue to evaluate opportunities to make this segment even more dynamic. Our first central gathering facility in the Delaware is progressing on schedule for mid-June 2017 startup. The first facility will have an initial crude oil capacity of 10,000 barrels per day and we are already planning an expansion in the first half of 2018. The 15 mile connection from the first gathering facility to the Advantage Pipeline is also on schedule to be in service in mid-June. Volumes on the Advantage system will begin to grow during the second half of the year and we expect to exit 2017 with 40,000 to 50,000 barrels per day of throughput. As a result of Noble Energy’s activity on the new acreage, we will construct two additional central facilities and associated gathering infrastructure starting in the second half of 2017. Both of these facilities are expected to come online in the first half of 2018 and we will mirror the design of the facility already under construction. The additional dedications and activity have driven an increase to our 2017 net capital budget of $30 million. As Terry mentioned, we began delivering fresh water to SRC Energy in mid-April and our crude oil and produced water gathering and transportation system is on schedule for startup in late July. These are important milestones as we will continue to see third-party growth in volumes and contribution to the partnership throughout the remainder of the year. While much of the focus has been on our growth projects, it's worth mentioning how efficiently our existing infrastructure continues to operate. Since startup in 2013, our central facility and gathering infrastructure in the Colorado River Development Company has averaged over 99% of time. The combination of our system reliability and the strong performance of the enhanced completions contributed to a new monthly oil and gas volume record of over 66,000 barrels equivalent per day in March. We anticipate this momentum will continue into the second quarter with volumes on existing infrastructure estimated to grow 7% verse the first quarter. Produced water volumes came in below our guidance range averaging 9,000 barrels per day. Better than expected well results on a pad in Wells Ranch utilizing enhanced completions resulted in temporary produced water constraints impacting our first quarter volumes by approximately 2,000 barrels per day. The good news is that April volumes are back in line with expectations averaging over 11,000 barrels of water per day. Fresh water per well was down from the fourth quarter as Noble Energy began completing wells on East Pony on federal leases. These wells were permitted over a year ago using standard completion techniques. Excluding the federal lease wells, the fresh water per well in the quarter averaged approximately 250,000 barrels in line with the previous quarter. Fresh water per day increased quarter-over-quarter as we delivered a significant amount of water for enhanced completions in Wells Ranch. Eight of the wells, we delivered fresh water two during the first quarter are scheduled to finish completion by the second quarter and were not included in our fresh water per well calculation. In summary, our teams are doing a great job, progressing our growth projects while maintaining a focus on reliable operations. With added services and dedications, we have significantly grown our asset base since IPO and have extended our runway of meaningful growth projects. I’ll now turn the call over to John Bookout for a financial overview.

[John Bookout:]

Thanks John. We had strong financial results for our second full quarter with oil and gas gathered volumes in line with our estimates and fresh water delivery volumes exceeding expectations, driving financial outperformance in EBITDA and distributable cash flow. We continue our 20% annual growth objective with another 4.7% increase in our quarterly distribution, while maintaining excellent coverage of 1.8 times. With this announced increase, our distribution level sets approximately 10% above the minimum quarterly distribution. First quarter revenue totaled $50 million and operating expenses came in at $17 million resulting in operating income of $34 million over a 50% increase to prior year. Please note that the prior year period contains financial impacts prior to our IPO. Growth in net EBITDA exceeded our guidance range and totaled $37 million or $26 million attributable to the partnership. The partnership incurred $2.1 million in maintenance capital and distributable cash flow totaled $24 million for the quarter. I would like to highlight our base gathering segment, continues to perform well. EBITDA excluding fresh water totaled $17 million covering the distribution by 1.15 times. We have historically provided business performance normalized for fresh water volumes to pre-enhanced completion levels. After this adjustment, we would have covered the distribution by 1.5 times. However, we are very pleased with the performance of the fresh water segment and continue to see outsized contributions to our overall business performance. We ended the quarter with $39 million of cash on hand and our $350 million credit facility undrawn. Subsequent to the end of the first quarter, we currently have $60 million outstanding on our credit facility with $50 million attributable to the closing of the Advantage acquisition. For the second quarter, we expect EBITDA attributable to the partnership of $25 million to $28 million with coverage expected to be between 1.6 and 1.8 times. Shifting to our 2017 full-year outlook, our strong performance in execution on growth projects underway has resulted in increased full-year expectations. We now expect full-year EBITDA attributable to the partnership of $110 million to $122 million with distributable cash flow forecasted between $96 million and $107 million. We are pleased with our early results and have increased our confidence in the full-year outlook. Our dropdown optionality continues to be enhanced with last week's announcement that was issued Delaware Basin dedication. As a reminder, NBLX owns a 25% controlling interest in the Blanco River development company, which holds our Delaware dedications from Noble for oil, gas and produced water. The additional exposure we have to Noble's drilling program in the Delaware should meaningfully enhance our dropdown portfolio heading into 2018. This inception we have guided to a dropdown for a year and at some point 2017, we anticipated dropdown will occur. While there are no pre-determined transactions, we think transparency and visibility is important for our first dropdown. We anticipate the first dropdown transaction will consist of additional interest in select development companies. The development company formats provide significant flexibility and execution advantages and allows us to structure transactions that fit well with our strategic and growth objectives. I'd like to conclude with a few thoughts on the performance to-date and what lies ahead. We have had a busy seven months falling in our IPO and the team continues to be focused on providing safe and reliable service to our customers, leveraging our existing asset footprint and capitalizing on opportunities through portfolio expansion. We continue to focus on what makes us unique and where we have competitive advantages, including scale in two leading oil basin, a disciplined financial approach with strong leverage in coverage and a supportive strategic sponsor that provides competitive advantage when accessing projects, assets and additional services. We believe we had a strong story at our IPO and we have and we will continue to strengthen our story as strategic in new ways. Rocco, we'd like to open the call for questions.

[Operator:]

Absolutely, sir. We will now begin the question-and-answer session. [Operator Instructions] Our next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

[Jeremy Tonet:]

Good afternoon.

[Terry Gerhart:]

Hello, Jeremy.

[Jeremy Tonet:]

Hi, I just want to touch based on a Clayton Williams acreage that you guys had dedicated to I'm just trying to get a sense for how big could the production growth be there? How big could be infrastructure opportunity, can you help us kind of frame what that means for NBLX?

[Terry Gerhart:]

John, you want to cover that?

[John Nicholson:]

Sure. So you can look at Noble Energy's guidance on the acreage, but it's – the production growth through 2020 is roughly equivalent to what we will – what we were planning to do on the legacy acreage. We will build two facilities that both will start up in the first half of 2018 and I expect over the life of the field, we'll probably have anywhere from three to five facilities, just to give you a scale of infrastructure.

[Jeremy Tonet:]

Great, thanks. And then as you guys discussed getting to kind of 50/50 Permian exposure by 2020, can you help me think through how the process develops as far as would be dropdowns are going to be more Permian oriented in the beginning and that kind of drives that growth that way or are there other acquisitions envision there. Could you help me think through that?

[Terry Gerhart:]

Yes, it's a good question. I think we set a target that we wanted to drive focus and drive the team towards even with Clayton Williams dedications we can get to 50% EBITDA contribution by 2020 just through dropdowns and through you know organic growth. So it will continue to be opportunistic in terms of expanding it portfolio and looking into kind of third-party opportunities.

[Jeremy Tonet:]

Great. And I think I know the answer this question, but figure just want to ask anyway. This far is a sponsor NBL divesting, Marcellus acreage but still retaining the midstream assets. That still stay separate from your story or is there any chance that could get dropdown to NBLX or anything else to discuss their?

[Terry Gerhart:]

That stays with Noble, that’s not part of NBLX that separate.

[Jeremy Tonet:]

Got it. And there is no plans to drop that down any point in the future.

[Terry Gerhart:]

No.

[Jeremy Tonet:]

Great. Thanks. That’s it for me.

[Terry Gerhart:]

Okay.

[Operator:]

And our next question today comes from George Wang of Citigroup. Please go ahead.

[George Wang:]

Hey, guys, just a couple questions. Firstly, you with enhance the well completions at Noble Energy? Can you just talk briefly on the impact to gathering volumes whether it's oil and gas all freshwater to NBLX and how would you think about tweaking guidance just based on the increase well productivity. If you look at initial wells for Noble Energy as being beating the base type curve. So any though behind and potentially tweaking the guidance?

[Terry Gerhart:]

There it’s a twofold you know there's an increase in the volumes of freshwater that go to the well during the stimulation process. And then also on the production side but defer to John Nicholson to talk maybe about some more of the specifics we're seeing.

[John Nicholson:]

Yes, as I mentioned and I believe Terry mentioned as well in the call notes we expect volume growth on our existing infrastructure which is essentially Colorado River development company. To grow quarter-over-quarter about 7% and that's largely driven or entirely driven by enhance completions. I think that's a pretty good growth clip quarter-over-quarter. So we're comfortable with where our guidance sits on the 2Q guidance does not include much contribution from any other development companies.

[George Wang:]

Okay. Thanks. Just also on further party opportunities you guys just mentioned following the Advantage pipeline deal in the Permian. I just wonder how the deal environment yes right now in the DJ in the Permian whether just for the ministry and also downstream and did you think similarly attractive deals is do exist on the easy to come by or it will be a different story just with increased competition?

[Terry Gerhart:]

Well, I think we've seen a number of transactions come to market and have been announced, and I think that wave likely continues in Delaware specifically, I think in terms of the Advantage acquisition. I think that was a unique circumstance in which we’re really able to capitalize on our competitive advantages and in our relationship with our sponsor Noble. I think in terms of just generally your question on third-party opportunities, I think in the DJ, we've been encouraged through discussions, we've got a pretty robust footprint in terms of our asset base where it makes most sense for us to go out and provide service to third parties. We continue to have those discussions and remain focused optimistic that something comes from it. And then in the Delaware, we've consistently said through these discussions that we see opportunities why we've been aggressive to expand our portfolio. And we still see that in terms of adjacent operators once our services – or assets come online, I think those discussions can progress even further. In regards to the Advantage pipeline, we're very encouraged early on in terms of the appetite that producers have shown for this service.

[George Wang:]

Okay, thanks. I’ll jump back to the queue.

[Operator:]

[Operator Instructions] Today’s next question comes from Georg Venturatos of Johnson Rice. Please go ahead.

[Georg Venturatos:]

Good afternoon, guys.

[Terry Gerhart:]

Good afternoon, Georg.

[Georg Venturatos:]

I had a question within Greeley Crescent and obviously we saw SRC Energy’s production numbers at least pre-announced for one Q1 look really nice, obviously putting a lot of CapEx in that region. Could you just remind us want to guess how much potential spare capacity we could have on that infrastructure for potential third-party opportunities as well as what those might be whether it would be small operators in the region?

[John Nicholson:]

Yes. That's a good question. So the capacity has about 60,000 barrels of oil capacity initially and it's expandable up to just shy of 100 by adding some additional pumps. Certainly synergy we believe it’s going to take a good portion of that as they deliver on their growth objectives over the next three or four years, but there will be a decent amount of spare capacity for third parties. We're certainly active in talking with a number of producers in the area some large, some small. We're focused on kind of the backyard opportunities that are nearby which we certainly think we'll be able to deliver on in 2017.

[Georg Venturatos:]

Appreciate that John. And then second one for me just on a fresh water side, I think the details you all provided were helpful just in terms of East Pony federal leases and now that shifted you down from a mix shift perspective based on guidance for full-year, which remains intact at least on for equipment well average basis. How should we maybe think about that mix being impacted in the near-term quarters just as a result of what we kind of saw in the first quarter?

[Terry Gerhart:]

Yes, we’ve assume for the rest of the year that about 35% to 40% of the wells are – those East Pony federal wells. That will be pretty consistent through the next three quarters.

[John Nicholson:]

Yes, this is John. We’ve got additionally something you’ll see over the next couple of quarters and as Terry and John alluded to as we brought online and of the fresh water segments for synergy for SRC in reported daily volume figures. You'll start to see that business contributes and it's still early days and we're trying to get a fill in terms of the water intensity in terms of completions.

[Georg Venturatos:]

Understood, appreciate the answers guys.

[Operator:]

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

[Ethan Bellamy:]

Hey guys, I'm sorry if this is redundant, I got a little late. On the caller earlier, Stover mentioned that a dropdowns likely for 2017. Can you elaborate on which property is most likely and most ready to be dropped?

[John Bookout:]

Hi, Ethan, it’s John Bookout. In our prepared remarks we touched on this a little bit. I think there's still no pre-determined transaction. There's still a lot of discussion that would need to occur when you sponsor and conflicts committee and I will say that we're growing increasingly confident that kind of the transaction will likely be portions of select development companies versus fully retained assets that hold the level?

[Ethan Bellamy:]

Okay, and any thoughts on timing and would you guys most likely finance off the balance sheet rather than equity?

[John Bookout:]

Yes, I think it's going to determine where we land in terms of size and size transaction how far we get into the year with our capital program. I think we continuously review this. I think you could see one is early as the end of the second quarter, but most likely the second half of this year. I think in terms of any of the mix, I think one of the big concerns that we hear from investor spaces is liquidity, we never do a transaction to address that, but if he could get once done and also address that concern, I don't think that's the worst thing.

[Ethan Bellamy:]

Got it, and then secondarily there's obviously some much higher growth rate in MLP or MLP like entity down in the market now. Is that influencing at all the sort of long-term 20% distribution growth target? If you guys thought about potentially accelerating that I mean you have the ammo to do it if you want it?

[Terry Gerhart:]

We really haven't – we looked at grow potential of this business through a number of different cycles, tested it. We feel very confident and long-term durable of 20%. I think in conjunction with transactions or dropdowns, potential dropdowns you always have discussions like we do every quarter on distribution policy with our quarter, but 20% with the right organic growth rate for us over the long-term.

[Ethan Bellamy:]

All right, thanks much. Good quarter.

[Terry Gerhart:]

Thanks. End of Q&A

[Operator:]

This concludes our question-and-answer session. I'd like to turn the conference back over to Chris Hickman for any closing remarks.

[Chris Hickman:]

Well, thanks again Rocco and thanks for everybody’s interest. I'll be available all afternoon and the rest of this week, if you have any follow-up questions and thank you very much.

[Operator:]

Then thank you sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines. Have a wonderful day.