Noble Midstream Partners LP
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Good afternoon, and welcome to the Noble Midstream Fourth Quarter 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, Vice President of Investor Relations. Please go ahead.

[Megan Repine:]

Thank you, Phil. Good afternoon and thank you for joining the Noble Midstream Partners fourth quarter and full year 2017 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 our fourth quarter and year-end 2017 results as well as 2018 guidance. We also extended and enhanced our long-term outlook period by two years to 2022. The press releases and supplemental slides are on the Investors Section of our website noblemidstream.com. Upon filing later today, our 10-K will be available on the same location. As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial measures. At this time, I'll turn the call over to Terry.

[Terry Gerhart:]

Thanks, Megan, and good afternoon, everyone. 2017 was an incredible year for Noble Midstream with success showing up in our operational execution and record financial results. This translated into leading stock performance with NBLX up 39% compared to the AMZ, which was down 13% in 2017. Among some of the key accomplishments, we reported consecutive quarters for solid distribution per unit growth. The fourth quarter of 2017 DPU represented 24% growth over the prior year quarter. We executed our growth projects on-time and on-budget successfully delivering a program that was close to 10 times the size of our 2016 budget. We grew gathering volumes 100% year-over-year in the fourth quarter and announced our, first, accretive dropdown; and, two, compelling third-party acquisitions. Importantly, we achieved all of these while maintaining best-in-class financial strength. I want to take a moment to expand on the combined impact of our business development activities over the last year, which were likely underappreciated. As shown on Slide 5, the collective efforts over the last year have been transformational. We've added significant scale captured more the value chain and materially increased customer diversification. In 2018, we anticipate around 50% of our throughout will come from third-parties compared to serve in a single customer just a year ago. We now have over 550,000 dedicated acres across the DJ and Delaware Basins. Our USO rig count exposure should grow more than three times this year to 17, and our total customer accounts expected to increase to more than 15. The business is performing extremely well across the board and with the portfolio enhancements we've made our partnership is involved quite a bit in less than a year. The result is an enhanced long-term outlook, which we are excited to share with you today. John Bookout will cover that in a moment. Looking ahead, we entered 2018 with strong momentum. I will highlight a few goals for the year on Slide 7. First and foremost, we are focused on providing safe, reliable service to Noble Energy and our third-party customers. This is at the core of everything we do. Next, Black Diamond integration is a major focus. In the few weeks since close, we've already made a lot of progress. Integration teams are in place and we've held our initial meetings with existing customers in early February and joint commercial efforts with our partner are underway. Execution will be a key part of 2018 as we target bringing online three central gathering facilities in the Delaware Basin as well as our growth project in the Green River DevCo for Noble Energy's Mustang development. We've spent significant time ensuring that we have the right resources, capabilities and people in place to cover our plan for the year. Finally, we will continue our annual DPU growth of 20% and maintain prudent leverage and coverage. I am looking forward to reporting progress on these objectives and company milestones as we move through the year. With that, I'll turn the call over to John Bookout, to review our long-term outlook and acquisition update.

[John Bookout:]

Thanks, Terry. I'll start my comments on Slide 11. Given further confidence in business fundamentals, we have enhanced and extended our long-term outlook this morning compared to the plan rolled out a year ago. Driving this, we see consistent strong well performance from our customers, specifically with the application of enhanced completions. In fact, just this morning, our sponsor updated his long-term outlook, providing even more visibility into our near and long-term growth capabilities. This includes type of increases, a 2018 to 2020 U.S. onshore production growth CAGR of 25% and $1.5 billion in excess cash flow at a $50 per barrel oil price over the same period. Our plan remains conservative to these updated assumptions. The other positive change is outperformance on acquired assets relative to additional assumptions, which I will cover in a moment. At the core of our strategy, we continue to target annual growth of 20% organically with no drop-downs. We believe 20% annual distribution growth strikes the right balance between growth and financial strength over the long-term. We expanded this 20% annual distribution growth target by two years through 2020 to this morning. We are now comfortable committing to coverage above 1.3 times for five years including 2022. We have always used the booking of less than 2.5 times for leverage, however the strength of our portfolio has given us confidence to lower this to 2 times in the out years on an organic growth program. Should opportunities arise and we prudently pursue them, we remain committed to come inside of 2.5 times over the long-term. As we evaluate our business and investment opportunities, returns and funding are really crucial to the decision making process. I am confident we are uniquely positioned and we certainly recognize the importance of laying out a clear path to self funding. Our project backlog is extremely high quality and we expect to generate a long-term corporate return of 13% to 16%. In addition, the portfolio is positioned for self-funding with the potential for distributable cash flow to cover approximately 90% of distributions and capital cumulatively from 2019 to 2022 in the base organic plan with the potential to generate free cash flow beginning in 2020. Outside of our enhanced long-term outlook, our structure and portfolio continues to indicate a significant amount of optionality and upside through our base forecast. This includes commodity prices with our current activity assumptions based on $50 a barrel and $3 an mcf, higher asset utilization from organic business development success, our previously announced Permian crude and wide range projects and our drop-down inventory. Our target remains one drop per year. Before turning the call over to John Nicholson to provide an operational update and review 2018 capital budget, I will provide an update on the acquisitions announced last year. We've been highly selective in evaluating transactions and as you know our distribution growth is not dependent on M&A activity. Both Advantage and Saddle Butte fit our acquisition criteria and provide a unique value proposition. I am confident we can do more of these assets than others leveraging our sponsor relationship. In addition, returns are competitive with our organic growth opportunities and we see a clear path to organic build like multiples. On Advantage, we acquired an operational cash flow-in asset at new build cost and have driven substantial value through strong commercial success in just a little over a year. Additional upside opportunities are currently been negotiated, which leverage our asset footprint. Our acquisition case reflected in NTM EBITDA multiple of approximately 14 times. With volume growth exceeding expectations, that multiple improves to nine times and we've already expected those life multiple of sub 5.5 times for 2018. Volumes in the fourth quarter are up 2x since the deal closed in April at 60,000 barrels of oil per day and nominations in January were 19,000 barrels of oil per day, driving this to significant Delaware Basin volume growth as well as volume diversions to advantage due to pipeline constraints on other systems. Our forecast assumes constraints on other systems mitigate in 2018, but the growth in the Noble Delaware Basin volumes throughout the year support our full year throughput estimate over 90,000 barrels of oil per day. As we evaluated Saddle Butte, we took a similar approach when we see several opportunities for further acceleration of multiple compression through future commercial success. Our acquisition forecast reflected a 13.5 times acquisition multiple compressing to eight times or better by 2020, which is a minimum case. Upside beyond the acquisition phase includes an additional dedication of approximately 24,000 net acres from a large anchored customer, which began effective at close, throughput potential lever in existing Noble dedications and sponsored throughput through time, new customer dedications and potential additional of complementary services including storage. With that, I will now turn the call over to John Nicholson.

[John Nicholson:]

Thanks, John. Quickly on the fourth quarter before diving into guidance, we ended the year on a high note. We posted records for all gathering segments and key financial figures. Relative to guidance, all items were in line or exceeded expectations. In the Permian, the Billy Miner I facility was online for the full quarter and the Jesse James CGF contributed volumes for one month. Noble Midstream saw strong gathering volume growth in the DJ, driven by our third party Laramie system, which was operational for a full quarter. Fresh water delivery volumes of 135,000 barrels of water per day were down 23% versus the third quarter, but were above the midpoint of guidance. We saw more pronounced slowdown in completion activity at year end but activity has normalized so far in 2018. We forecast significant growth in 2018 with consistent catalysts throughout the year, approximately 60% of anticipated equivalent well completions and well connections are anticipated to occur in the second half of the year. This combined with the timing of our growth projects, results in somewhat second half weighted growth. This is similar to the growth trajectory experienced in 2017. The core gathering business should experience sequential quarterly growth in every quarter. Third party volumes at Laramie River are the primary growth driver of DJ Basin gathering volumes during 2018, particularly in the second half of the year. Colorado River volumes are anticipated to be roughly flat, while we expect the second half gathering ramp at Green River as Noble activity transitions to Mustang. In the Delaware Basin, volumes benefit from a full-year of The Billy Miner I and Jesse James with growth accelerating in the second half of the year once all five CGFs are online. In the fresh water segment, overall we expect growth volumes to be up approximately 3% for the year with volumes anticipated to be up approximately 45% in the second half of the year from the first half of the year. This is despite of water per equivalent well assumption below historical results of 200,000 barrels of water as well as some risk in the customer activity ramp assumptions for the second half of the year. As Noble Energy activity ships to Mustang, net volumes will be impacted from the 25% Green River DevCo interest. We currently do not assume any Noble Energy completion activity at East Pony in 2018. Given the volatility and shopping as that we see from time to time we continue to manage this business prudently. We're targeting adjusted EBITDA of $215 million to $235 million net to the partnership with second half 2018 annualized EBITDA net to the partnership of $240 million at the midpoint. For 2018, we are guiding into $180 million to $195 million in distributable cash flow with distribution coverage of between 1.9 to 2.1 times. The coverage figures we have provided, assume the continuation of the 4.7% quarterly distribution increase that translates to our 20% annual DPU growth objective. We have also provided first quarter guidance forecasting $52 million to $58 million in adjusted net EBITDA, which is above fourth quarter results primarily due to two months contribution from Black Diamond gathering and a full quarter's impact of the Jesse James facility. We anticipate spending between $485 million and $535 million in capital or $255 million $285 million net to the partnership supporting ramping activity across both the Delaware and the DJ Basins. 46% of our gross capital budget will be spent in Blanco River. We remain on schedule to bring online 3 CGFs by mid-2018 at a pace of approximately one per month beginning in mid-March. Among these of the [Indiscernible] CGFs which will be on Noble Energy's Clayton Williams acreage. The five facilities will bring our total Delaware Basin oil and gas gathering and compression capacity to 115,000 barrels of oil equivalent per day and 240,000 barrels of water per day respectively. 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. In the DJ Basin backbone infrastructure construction is underway for Noble Energy's activity in the Mustang area. This will be a spec system similar to the one constructed in 2017 for our third-party customer in Laramie River. Compared to our central gathering systems in low branch and in the Delaware Basin, this requires smaller capital dollars with the similar targeted return. We will begin fresh water deliveries late in the first quarter and expect the oil and produce water gathering systems to be operational in mid-2018. At Trinity River, 2018 capital reflects initial funding of the compression segment. The Compression segment aligns with our strategic and operational objectives adding additional operating leverage to Noble Energy's Delaware Program, which also results in cost savings for our sponsor. Also in the Trinity River DevCo, given the commercial success just discussed at advantage. We believe capacity expansion is warranted this year, which is 10 million gross capital or three additional pumps, we will expand pipeline throughput by over 30% to 200,000 barrels of oil per day to accommodate future growth. The remaining 33% of our capital budget in Colorado River and Laramie River is primarily related to capital efficient well connects. As previously discussed, our mature infrastructure in these two areas continued to drive efficient capital deployment. We are already seeing significant capital efficiency improvements in 2018 versus 2017 where backbone infrastructure is already in place. 2019 further benefits from capital efficiency in Blanco River and Green River DevCos, and by 2020, we expect to spend 60% less capital to turn online 15% more wells. In summary, we've accomplished a lot in a short period of time and I'd like to acknowledge our employees for their contributions to the company over the last year. Our strategy remains disciplined and focused and we are committed to delivering best-in-class growth in value now and in the future. With that, I'll turn the call over for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Jeremy Tonet with JP Morgan. Please go ahead.

[Jeremy Tonet:]

Just want to start off with the guidance through 2020 here, 2022 and 20% growth through that period. Just wondering if you could expand a bit more on the thoughts before that, and it seems like, you guys are pretty closed for largely self-funding at that point. Was it more of like getting to self funding priority is kind of the driver there and the distribution growth was the output? Or can you expand a bit more on that and how leverage factors that as well?

[John Bookout:]

Yes. Jeremy, its John Bookout. Good question. I think we spend a lot of time going to the year end with updates from our sponsor no water deep, but also looking at fresh new in terms of development plans from customers both by Blank Diamond, but also at the third-party customer in the DJ. And looking at the additions to the portfolio of the last year, I think there has been improvements in terms of durability kind of the spring of the growth that sits on our asset today. We have confidence in our organic growth outlook for 5 years really through 2022. I don't think it makes a lot of sense to look beyond that in today's environment, but through taking that exercise, we're able to extend that out couple of years while also, I think, we're maybe focused on the improvement from a financial strength perspective, which is we would like to all these key distribution coverage above 1.3 times and we think that kind of leverage profile for this business 2 to 2.5 over the long-term that's been really unchanged since the IPO.

[Jeremy Tonet:]

And we're also seeing you guys are in an unique and strong position having apparent with a lot of growing production there. Apparent like potentially turn those volumes into equity interest and takeaway pipelines and it seems like there is a lot of growth in the Permian and there is a lot of projects announced out there as far as solving for that. And I'm just wondering if you could expand a bit more as far as any potential for NBLX to capitalize on this situation?

[John Bookout:]

Well, I think, we've announced our options on Permian solution both on the crude and water grade side. I think we are in the process of finalizing agreements there, so some unlimited in terms of what we can say, I think, that's probably kind of a good solution for upstream and midstream out of the Permian, we had not prioritized looking at opportunities selectively is the Noble family and the DJ in terms of equity participation, but as we work through Black Diamond and also the epic concept, those essentially move up on the priority list.

[Jeremy Tonet:]

Great, that's it for me. Thanks for taking my questions.

[Operator:]

[Operator instructions] Okay, we have a question from Matt Black with Hite. Please go ahead.

[Unidentified Analyst:]

Hi, thanks for taking the question, so some clarification on the 2018 guidance. You mentioned earlier in the call that might have been conservative relative to Noble's new tight curve. Could you maybe give more clarity on what you mean by that?

[John Bookout:]

Yeah, this is John Bookout. I think there is a couple of areas in which we are conservative. That's one of them I would say it's not one of the bigger ones. We typically been conservative with forecasting basins acreage in general. I think the bigger items here really are fresh water delivery for us and that's how we chosen to treat that business in terms of guiding to it and going back to going public, so there is no change there in terms of – and then I think 2018 really is shaped up to be another year of execution in nature. As John Nicholson mentioned, we are bringing online three CGFs over the next couple of months, we're integrating Black Diamond and we're commissioning the infrastructure for Noble in the Mustang area, which is in our Green River development company. So I think those are the bigger items, but yes, tight curves is one of the areas where we see some upside at least from the Noble Midstream perspective.

[Unidentified Analyst:]

Great. And so in terms of the fresh water delivery numbers than you're projecting at the same way you always have historically based on a lower per well water load the one that we've been using recently?

[John Bookout:]

That's correct. In our numbers for 2018 and it's consistent with how we rolled out short-term or kind of prompt quarter guidance last year is around 200,000 barrels of water per equivalent well. And, obviously, if you look at the materials, the actual results over last couple of quarters had been little bit higher than that.

[Unidentified Analyst:]

Right. And then last question. So no completions in East Pony this year, is there a chance that could change or is that a pretty walked development program and then whatever insight you can provide on the future trajectory of East Pony?

[John Bookout:]

Yes, Matt, I encourage you to look at Noble's call this morning where I think Garry talked a little bit about East Pony activity. I think there is a chance where you could see some activity very late in 2018 or early 2019, but nothing of significant that continues for a while, but they are focused on getting some additional permits on federal acreage and that's based of the really great well performances that they have seen over the last 12 months there, so I do expect will go back to East Pony pretty close at some point over the next 18 to 24 months.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

The next question comes from David Amoss with Heikkinen Energy. Please go ahead.

[David Amoss:]

Hey guys, I wanted to stay there with fresh water business for a second increase you guys can go into just high level detail by each region that you're supplying freshwater to, in terms of, I was seeing more or less on a per lateral foot basis. And what should we expect versus that guidance you delivered? And then just a follow-up to Matt's question on East Pony, if Noble is filing a permit is there a potential that they could file permits for a higher proper water usage on as well?

[John Bookout:]

Yes, John Bookout, I'll take the first part and then John Nicholson can speak to the permits, but I don't think there's been much of a change in terms of what we've seen on a per equivalent basis, in terms of what Noble Energy is using it for water up there on -- per global well basis. I think as you alluded to, there's obviously some no-ways from quarter-to-quarter when you move up to East Pony and dependent upon the permitting situation for those completions. We think we've just lived through that the last four quarters. I think in the wells range in Mustang area, there's nothing that we've seen, especially the wells ranch the last couple of quarters that we've indicated that those numbers are coming down. We've chosen to guide that this segment being slightly conservative and that's really nothing that's new.

[John Nicholson:]

Yes, David, on your question about East Pony and the permits, I would fully expect Noble to file those permits with water usage consistent with enhanced completions.

[Unidentified Analyst:]

Okay, great. That's helpful. Thank you guys, that's all I had.

[Operator:]

The next question comes from Chris Tillett with Barclays. Please go ahead.

[Chris Tillett:]

Hi, guys, good afternoon.

[John Bookout:]

Good afternoon Chris.

[Chris Tillett:]

Just I guess would like to hear an update on -- you guys have previously talked about your goal of reach -- a long term goal of reaching -- having 20% of your EBITDA come from the Permian, We just curious to hear an update on whether or not that is still an objective. And how sort of your updated guidance fits into that picture? And then as well how or whether drop-downs in M&A would contribute to that goal as well?

[John Bookout:]

It's John Bookout, good question, I think, with the Black Diamond addition to the portfolio, obviously, that kind of take safety back stepped in terms of Permian contribution, all things kept consistent. We looked at the scalability of the Blanco development companies, so our existing Permian business with Noble today, you've got three stream gathering there, we've just added a compression segment, I think, Advantage is a much bigger asset than what we saw this nine months ago when we had this acquisition closed. We've also highlighted that we've got a dedication on the Clayton piece, and we'd like to figure out what's the best things to do is in terms of expanding our intermediate gathering footprint there being more -- as competitive who could be for feature business. It's certainly become a little bit more challenging with the addition of Black Diamond, but it's the right goal for us, and we'll just have to work little harder to get to it. And I think it was included in the materials that we wanted to reaffirm by the end of 2020, we're targeting 50% of the partnership EBITDA to come from Permian.

[Operator:]

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 you may have. Thank you.

[Operator:]

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