Noble Midstream Partners LP
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good afternoon, and welcome to the Noble Midstream Second 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. Please go ahead, sir.

[Chris Hickman:]

Thanks Rocco, and good afternoon. Thank you for joining Noble Midstream second quarter earnings call. Here with me is Terry Gerhart, CEO; John Nicholson, COO; and John Bookout, CFO. Following our prepared remarks, we'll open the call to questions from analysts. This morning we reported second quarter results, including record volumes and records in many key financial results. I'd like to point out that second quarter results attributable to the partnership only include five days of current DevCo interest from the previously announced acquisition which Terry and John will further discuss. All results prior to the closing date reflect three dropdown DevCo interest, while results and projection is subsequent to the closing date reflect the current DevCo interest. As an important 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 to GAAP measures. Our earnings release and today supporting presentation materials can be found on the investor section of our website. And later today, we expect to file our 10-Q. At this time, I'll turn the call over to Terry.

[Terry Gerhart:]

Thanks, Chris. We established new records in the second quarter in both our Gathering and Fresh Water segments, translating to record financial results, before any contribution from key growth projects that are coming online in the third quarter. Oil and gas gathering throughput were 18% and produced water volumes grew 39% from the first quarter, driven by exceptional well performance from Noble Energy's enhance completions in the DJ Basin. As activity levels have remained relatively consistent over the last two and half years, this growth highlights results from Noble Energy's focus on Wells Ranch and East Pony, and performance from enhanced completions. With our strong volume growth, DCF coverage for the quarter was 1.9 times on an 8.5% distribution per unit increase. The 8.5% increase was a one-time step up from a 4.7 plan that coincided with our inaugural drop down. The momentum in our Gathering segment will continue in the second half of 2017 with the recent startup of our gathering system in the Permian and our third party gathering system in the DJ, which is expected to be operational by the end of this month. As we near our one year anniversary since our IPO, we spent a lot of time over the last year talking about the benefits and enhanced completions to both the gathering and fresh water segments in the growth trajectory from the depth of our dedications in both the Delaware and DJ Basins. But equally as important, is the great team we've assembled at Noble Midstream. Our operations and project teams are proving our ability to deliver a meaningful growth program in multiple basins by executing on approximately $385 million from a gross capital budget. This compares to just $33 million in 2016. And our corporate development team has proven themselves quickly by closing two accretive transactions in the second quarter. Back in February, we provided an outlook for 2020, which reaffirmed our DPU growth of 20% before dropdowns in coverage in all years about 1.3 times. With well performance driving record results and the portfolio enhancements we have made to-date, our partnership has evolved quite a bit in less than a year. These enhancements and our performance add significant durability to our distribution and gives me great confidence in our long term outlook. I'll now turn the call over to John Nicholson for more details on our record second quarter volumes and the capital projects that we expect to keep our record setting momentum going.

[John Nicholson:]

Thanks Terry. Our second quarter volumes came in near the high end or above volume guidance establishing new quarterly records. Oil and gas gathering daily throughput average nearly 75,000 barrels of oil equivalent in the quarter, with 48 equivalent wells being connected to our gathering system, over half of which were in Wells Ranch. Produced water volumes averaged 13,000 barrels of water per day, 39% above the first quarter. We recently completed a produced water debottlenecking project at our Wells Ranch CGF, bringing capacity up to 30,000 barrels of water per day, in anticipation of continued growth on our system. Fresh water delivery volumes also set another record, averaging 184,000 barrels of water per day in the second quarter. Nearly two thirds of Noble Energy's completions were in Wells Ranch where per well averages were 265,000 barrels of water per equivalent well. Also contributing to the growth was the startup of our fresh water system for SRC Energy in April. Initial volumes exceeded our assumptions and per well averages have remained consistent throughout the quarter. Our oil and produced water gathering systems for SRC remain on schedule and are expected to be operational next week with first oil and water to follow shortly thereafter. Also in the DJ Basin, our gathering system in the Green River DevCo for Noble Energy's Mustang area is expected to begin construction in September. The startup date is now late first quarter 2018 to align with shifts in Noble Energy's development plan. We expect our Mustang fresh water system expansion to be complete in November in advance of completion activity, which is scheduled to begin toward the end of the year. In the Delaware Basin, our first CGF reached mechanical completion in late June and the facility recently came online in late July. The facility has an initial processing capacity of 10,000 barrels of oil and 15,000 barrels of water per day, along with 20 million cubic feet per day of gas compression. We are already working on debottlenecking with CGF in anticipation that volumes will ramps to north of 75% facility utilization by the end of the third quarter. Construction is underway on our second Delaware Basin facility, which shares a consistent design with the first. The facility and associated gathering infrastructure is expected to be online by the end of the year. Our teams continue to look at cost efficiencies by optimizing the CGF and overall system design, while maintaining alignment with Noble Energy's development plans. We will be building two additional facilities in the first half of 2018. These facilities will have a larger initial capacity, but will still retain a modular design with expandability, which we believe is the most capital efficient build out approach. By the middle of 2018, we expect to have four CGFs online with processing capacity of approximately 90,000 barrels of oil a day and 210,000 barrels of water per day. On the Advantage Pipeline, second quarter oil throughput averaged 35,000 barrels per day, which is 35% above our acquisition case. So far in the third quarter, volumes have remained above expectations with July throughput averaging 40,000 barrels per day. We anticipate volumes will continue to grow as we near completion on our 15 mile connection from the first CGF to advantage. As we continue to progress our growth projects, our full year gross and net capital budget remains unchanged as we still have a significant amount of activity planned for the second half of this year and into 2018. We have adjusted the allocation of our capital between the development companies slightly, primarily due to the timing in Green River. To summarize, we've achieved another significant milestone with the startup of our first Delaware CGF and we remain focused on the full slate of projects ahead of us. Our teams are committed to delivering new facilities and systems on schedule and on budget, and I am confident in our ability to do so. We have an exciting second half ahead of us as our growth projects start to contribute meaningfully to the partnership. With that, I'll turn it over John Bookout.

[John Bookout:]

Thanks John. Due to our volume performance across the board, we had another strong quarter and set new quarterly records for almost every key financial metric. Gross and net EBITDA set records even when removing the $425,000 attributable to the five days of contribution from the acquired interests in our dropdown transactions. EBITDA net to the partnership was $34 million for the quarter, a 28% increase above the first quarter. After maintenance capital and interest, the partnership recorded $30 million of distributable cash flow, resulting in coverage of 1.9 times on an increased distribution of 8.5% above the first quarter on a higher unit's count as a result of our private placement and use issuance to Noble to partially funds the dropdown transactions. The distribution increase reflects our continued confidence in outperformance of the business, while passing through some of the accretion from this transaction to reward our investors. The distribution increase was determined at a level in which there is no near or long term deterioration to coverage and growth. Pro forma for the full quarter of contributions from the acquired interest, coverage would come in at 2.3 times. We ended the quarter with $20 million in cash on hand and $160 million undrawn our $350 million revolving credit facility. Looking into the second half of this year, we expect our new projects and the additional DevCo interest acquired to drive significant growth in our Gathering segment. When compared to the first half of this year, oil and gas gathering volumes are expected to grow 36% in the second half of this year. Well produced water is expected to nearly triple, translating the gathering segment EBITDA growth of approximately 68% in the second half as compared to the first half. Moving to Fresh Water delivery. This segment has been and will continue to be an important part of our business and one that has performed very well. We have consistently been conservative with this segment and our thought process remains unchanged in regards to the expectations we have laid out for the second half of this year. Fresh Water per well in the first half of this year was significantly above our assumptions and we see no indications this time for that to change. However, we believe it is prudent to remain conservative with this segment, so we have kept our pro well assumptions admittedly low compared to first half results. Additionally, as commodity prices were volatile during the second quarter and E&P companies are remain flexible with drilling and completion activity for the second half of this year, we have now forecasted completion activity levels below what we have seen over the last few quarters. It's important to note though that activity level seen through the first month of the third quarter were consistent with the second quarter, so we believe our results for this segment will likely exceed our stated expectation. On the corporate and business development front, we clearly had an active second quarter, as we closed two strategic acquisitions, the Advantage Pipeline JV and our Inaugural Dropdown Transaction. Importantly, both acquisitions are immediately accretive and we believe the 2018 EBITDA contributions from the Advantage assets and the acquired dropdown interest to reflect a 6.8 to 7.8 times acquisition multiple and compressed through time towards multiple similar to organic new build projects. We have consistently said we target one drop per year and that objective remains unchanged. Though we had an active quarter for these acquisitions and our organic capital program, we maintain a healthy balance sheet with 1.4 times leverage ratio or 1.2 times assuming the full quarter impact of the dropdown, with ample liquidity to fund future organic projects and remain opportunistic. Our strong balance sheet and financial flexibility positions us well as we continuously look for ways to further enhance our portfolio. In closing, I am 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. We look forward to a busy but exciting second half of the year. Rocco, at this time, we'd like to open the call for questions.

[Operator:]

Thank you. [Operator Instruction] Today's first question comes from Jeremy Tonet of JPMorgan. Please go ahead.

[Jeremy Tonet:]

Good afternoon.

[Terry Gerhart:]

Hi, Jeremy.

[John Nicholson:]

Hi, Jeremy.

[Jeremy Tonet:]

Just want to touch base on the Advantage Pipeline, seems like things are going quite well there, but any update or thoughts on how quickly that could expand in kind of a more opportunities there on the transmission side?

[John Bookout:]

Yeah, Jeremy, this is John Bookout. I think the first expansion will obviously be through the connections to our CGF Billy Miner for the Noble barrels and then through the plains match construct, so that should ramp in the second half of this year. We continue to be active on the third party front and are encouraged with those discussions. I think we'll be successful with that through time. And then we've highlighted in terms of transmission. The Clayton Williams acreage is dedicated to us, but it's has not and decided whether that would be to optimize the Advantage asset. And if we do something different with that to improve our overall footprint and how we compete in the basin, we look to make that decision in terms of that dedication going into the back half of this year.

[Jeremy Tonet:]

Great. Thanks for that. And I think it was reference in the slides, but just want to see if you had any other thoughts so you could share with us as far as your out work of growing Permian to a greater share of EBITDA and maybe getting to more of a 50-50 split over time. If that's kind of your expectation at this point overall, what that's timeframe?

[John Bookout:]

Yeah. I think the timeframe for the 50% EBITDA contribution is stated 2020. I think that's the right objective for us. We made progress towards that during the second quarter with the Advantage acquisition as well as acquired interests of Bronco. Organically, you look out couple years. You can't get there just through the drill program. So we'll continue to look at our opportunities complementary assets, and asset that relate to our sponsor. So we'll have to be active there, but we made a good progress during the quarter.

[Jeremy Tonet:]

That's it for me. Thank you very much.

[John Bookout:]

Thanks Jeremy.

[Operator:]

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

[George Wang:]

Hey guys, congrats on the quarter. I just want to sort of ask about the commentary from Noble Energy, just in DJ Basin, kind of highline pressure and deferral to some local programs. Can you give some color on whether there was a potential impact to Noble Midstream's gathering volumes or not?

[John Nicholson:]

That's a good question, George. I'll give you a little color around kind of how our system works. Keep in mind that we are only really gathering Noble's production from really 2013 and beyond, so it's more new production. In East Pony, that entire system is kind of off of the third-party gas processing, system in the basin so it's well protected. In Wells Ranch, we have a gathering system that goes through our CGF, and then downstream with that CGF we have some strategic compression that that only Noble and then Noble Midstream have access too. So we are very well protected in Wells Ranch. We plan to implement a very similar solution in Mustang, so that should protect us well for many highline pressure events. And then with SRC, we are not gathering any production to-date, we should be wait next week or the following, and given the kind of newer wells in that system, we don't think that line pressures will impact that at all. So we feel pretty well protected and don't expect to see any impacts.

[George Wang:]

And also in Delaware Basin, do you guys have any commentary on if you guys have seen some potentially higher kind of GLR ratio, kind of just based on commentary from some gas producers?

[John Nicholson:]

No, we are not saying any of that. We are only a couple of weeks in to seeing some production, but certainly looking at the well results from Noble Energy over the last really year, we are certainly not seeing any degradation in oil cut if you will.

[George Wang:]

Got you. And my last question is just on the Fresh Water guidance, you know – and you mentioned I believe this segment remains to be volatile, but just based off a strong volumes in the first half kind of you know you guys are still guiding on pre-conservative for the second half. I mean, should we see any sort of new trend, kind of you guys kind of seeing just from the parts few months of new drilling and noticing the conservative guidance for the second half. Besides, you know sort of a more conservatism – any additional factors kind of caused you guys through guide kind of a lower sequential kind of gathering volumes on Fresh Water side?

[John Bookout:]

George, this is John Bookout. I think it's a good question. In terms of have we seen it, different trend, I think the results that we put out there for fresh water on a daily basis, but also for different well for first quarter and second quarter, we really haven't seen anything come off that. We've added a new elements into our fresh water and overall portfolio and that's for SRC Energy, obviously different company and different completion techniques, but we're encouraged with those results and on the Noble we've just chosen or opted to be conservative given. How we think about business and also given the volatility and choppiness that we saw during the second quarter, we think it's a prudent thing to do and we've really been guiding this segment like that since our IPO.

[George Wang:]

Okay, Thanks. That's it for me.

[Operator:]

And ladies and gentlemen, this concludes the question and answer. I'd like to turn it back over to Chris Hickman for any closing remarks.

[Chris Hickman:]

Well thank, you for interest and participation today, I'll be available all afternoon and tomorrow for any follow up questions that you may have. We recognize it's a busy day of earnings. So, I'll make myself available. Thank you very much.

[Operator:]

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.