Oasis Midstream Partners LP
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good morning. My name is Laura and I will be your conference operator today. At this time, I’d like to welcome everyone to the Fourth Quarter 2017 Earnings Release and Operations Update for Oasis Midstream Partners. 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 will now turn the call over to Richard Robuck, Oasis Midstream’s CFO to begin the conference. Thank you. Mr. Robuck, you may begin your conference.

[Richard Robuck:]

[Technical Difficulty] fourth quarter 2017 and full-year financial and operational results. We’re delighted to have you on our call. I’m joined today by Taylor Reid and Michael Lou, as well as other members of the team. Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners include answer to your – including answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release in conference call. Those risks include, among others, matters that we’ve described in our earnings release as well as our filings with the Security and Exchange Commission, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and on Oasis Midstream Partners Form S-1. We disclaim any obligation to update these forward-looking statements. During this conference call, we will also make references to certain non-GAAP financial measures and reconciliations to these applicable measures can be found in our earnings release on our website. We will also reference our current Investor Presentation, which you can find on our website. With that, I’ll turn the call over to Taylor.

[Taylor Reid:]

Good morning, everyone, and thanks for joining our call. It has been an exciting five months since we successfully launched our initial public offering. In the short period of time, we have added a ton of value to OMP. We’re seeing the impacts of our efforts flow through to growing our coverage, while continuing to support our 20% distribution growth expectations. Some of our recent accomplishments include

[Michael Lou:]

Thanks, Taylor. As we noted on our press release, the team has identified additional projects that increased the projected cash flow of OMP. We optimized the Johnson’s Corner line, which is our FERC-regulated crude pipeline, which interconnects into Dakota Access Pipeline, improving the oil throughput forecast by 15%. We have put in place a new NGL storage facility, which is expected to come online shortly in March, which will improve plant run time and mitigate the impact of bottlenecks on Williston Basin NGL pipelines. Lastly, we have some early wins with third-party contracts across our Beartooth DevCo for both produced water and freshwater services. All taking together, we feel very confident with our targeted annual distribution per unit growth of 20%. This year alone, we are now projecting growing our distribution coverage from approximately 1.1 times coverage in the first quarter of 2018 to greater than 1.2 times at the end of 2018. This is calculated based on our growing distribution and not on our MQD. As a reminder, there is a large backlog of sponsored droppable EBITDA available to OMP, as the partnership currently owns 10% of Bobcat DevCo, which provides crude gas and produced water gathering and other services in Wild Basin and 40% of Beartooth DevCo, which provides produced in freshwater services to most of our sponsors acreage. We expect to pursue accretive dropdown acquisitions in the future supported by the ROFO we put in place with Oasis. We believe that the midstream vehicle is an attractive way for Oasis to investment midstream capital and is a great way for midstream investors to get pure leading distribution growth through a partnership with one of top – one of the top North American E&P companies. OMP currently trades at a discounted valuation to peers, despite having a dropdown inventory with similar economics to others and peer-leading distribution growth. You can see this highlighted on Slide 14 of our presentation. Our sponsor has nearly two decades of economic drilling inventory with very low break-even prices. Oasis plans to grow volumes 15% to 20% through 2018 and 2019, with a considerable portion of capital directed to OMP dedicated areas. We have a great team that has the tools needed to execute a strong 2018 operational plan. Our sponsor has already started the year off strong and we expect OMP to do the same. With that, I’ll hand the call over to Richard.

[Richard Robuck:]

Thanks, Michael. We delivered a solid quarter, which you can see in our press release under the header Operational and Financial Update. In that table, you can add depreciation to operating income to get EBITDA by DevCo. For the entire quarter, the three DevCos added together delivered about $38 million of gross EBITDA and $13 million of net EBITDA, where the net is just adding each DevCos EBITDA by the interest OMP owns. Distributable cash flow to OMP was $11.5 million, resulting in distribution coverage of 1.12 times. During the fourth quarter, OMP invested $129 million of gross CapEx with the partnership share and capital expenditures being $105 million. Including net maintenance CapEx of $1.1 million, $67 million of OMP’s fourth quarter capital represents the assignment of the Gas Plant II to Bighorn DevCo, with a total 2017 amount spent on the gas plant being about $95 million. The remainder of the $140 million for the plant is expected to be spent in 2018. We continue to expect maintenance CapEx to be about 7% to 10% of EBITDA over time. All three DevCos have grown volumes on its respective systems quarter-over-quarter. Our growth will continue to be supported by Oasis’ growing rig program as Oasis is now running five rigs in the Williston, two of which were in Wild Basin, two in Alger, and one in Indian Hills. As of year-end, the partnership had cash outstanding of just under $1 million and $78 million borrowed under its $200 million revolving credit facility, resulting in a borrowing capacity remaining of $122 million. We expect leverage for the partnership to remain under two times debt to next 12 months EBITDA in 2018. We’ve also updated our 2018 outlook, which we presented in the press release as well. We highlighted volume target in the first quarter of 2018 for the full-year of 2018 as well. Volumes are basically up across the Board, which can be seen on Slide 16 of our presentation, driving forecasted EBITDA attributable to the partnership between $61 million and $65 million in 20108. We expect to invest a total gross amount of capital between $230 million to $270 million, of which $72 million to $90 million we’ve borne by the partnership. I’ll close by reiterating our focus on strategic growth and efficient capital spending to drive our goal of peer-leading annual distribution growth for our unitholders. We aim to deliver stable fixed fee revenue under our long-term acreage dedication, minimizing direct commodity price exposure. Due to our strategic investments, volume forecast for 2018 have greatly increased from our IPO outlook. We continue to have a large inventory of droppable EBITDA to further support our long-term growth forecasts. We have great structural alignment with Oasis with our sponsor owning over 68% of OMP and IDR interests. The quality of our team and the strength of our assets position us to deliver strong operational and financial results in 2018. I’ll now hand the call over to Laura for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Jeremy Tonet of JPMorgan.

[Jeremy Tonet:]

Good morning. I want to start off with the Oasis acquisition of Permian. And I was just wondering if you could expand a bit more as far as the impact on OMP here, if – there’s a lot of undedicated acreage there. How should we think about OMP opportunity to service?

[Taylor Reid:]

Sure. I’d say two things Jeremy. One just to note, obviously, all the assets currently are in the Williston. And what you’ll see from the sponsors that they’re continuing to grow in the Williston. Great economics in the Williston. It’s driving a larger program this year over last year, 88 wells last year going to 100 to 110 well this year. And you can see that the sponsor – at the sponsor level increased core inventory as well. So things are going really well in the Williston and that’s what’s driving that growth opportunity there. In the Delaware, as you mentioned, there’s also opportunities on that asset as well. Pretty, pretty small footprint in terms of a surface area, but a lot of core inventory overall and that drives a big opportunity on oil gas and water assets in the basin. What the sponsor has to decide is OMP the right vehicle for that, or are there other third parties that it might find more favorable. So it will be a competitive process, but I think in a good position to help the sponsor. We’ve shown that in the Williston and I think that could be a good partnership in the Delaware as well.

[Jeremy Tonet:]

Thanks. And talking about the growth that you see in the Bakken this year. I’m just wondering if you could give us a bit more flavor of the cadence of that growth and how that will – could ramp up across the year?

[Taylor Reid:]

Yes. As you look at our investor presentation that we put out on the website on Slide 16, you can see, yes, really the first quarter volumes and then you can see the kind of the full-year volumes as well. And so I think, that’s probably a good way to think about timing over time over the year. The one thing that I would note is that, when the plant comes on in the fourth quarter, you’ll see a step up in volumes, particularly in the kind of the Bighorn area and that also helps throughput a little bit on Bobcat as well. But that’s probably like the one – on the gas side, that’s probably the one nuance I would point you to.

[Jeremy Tonet:]

Thanks for that. And then turning to distribution growth, you talked about the 20% rate there. I was just wondering, is that starting next quarter? Is that – how we should think about the uptick there? And can you just walk us through, I guess, your thoughts as far as growing coverage over time versus running at a very high growth rate? It seems like the market is tilting more towards higher coverage, more internally self-funding and maybe the ability to fund more dropdowns to retain cash. So how you think about the balance between those factors in the 20% growth rate?

[Taylor Reid:]

Yes. I think, Michael highlighted on the Slide 14 just where we sit from our distribution growth versus our peers for one. And we – so to answer the first question, we’re going to start it in the first quarter of 2018 growing from the original MQD. So we’ll start that on an annualized basis, so just in that kind of 4.5% growth quarter-over-quarter. But, yes, as you look at that, we think – we’re not necessarily getting paid for the growth. But I think we agree with you that in the near-term, we’ll look to increase coverage over time and that’s why we kind of highlighted in our guidance that kind of first quarter think about it 1.1 time that increased coverage for the first – the increased distribution for the first quarter. And then as that continues to grow at a similar quarter-over-quarter as we exit the year, coverage will be above that fourth quarter of 2018 number of $0.45 a unit, kind of in the 1.2 times neighborhood. And I think there’s obviously great news here in terms of volume growth. We’ve talked about looking at third-party opportunities as well. And I think, what you said is aligned with what we’re thinking, which is kind of increasing coverage and self-funding the opportunities for drops in the future, or for capital spend internally to manage leverage conservatively like we’ve been talking about.

[Jeremy Tonet:]

That’s it for me. Thanks for taking my questions.

[Taylor Reid:]

Thanks, Jeremy.

[Richard Robuck:]

Thanks.

[Operator:]

And our next question comes from Deanna Zhang of TPH.

[Deanna Zhang:]

Good morning.

[Taylor Reid:]

Good morning.

[Deanna Zhang:]

So I was wondering, if you could provide some more detail around the 2018 CapEx items. So for Bobcat specifically, what infrastructure are you guys currently building out that won’t be recurring? And so it’s – in other words, should we be expecting a large drop off starting in 2019? And then on Beartooth I also note the CapEx was higher. Just wondering if you could provide more color on what’s driving that?

[Taylor Reid:]

Yes. So on Bobcat, so we announced late last year the increasing performance nature and what you’ll see at the sponsor levels is a lot of early time increased performance on those wells. And so what’s coming off of that is a lot of additional oil, gas and water quite frankly, and then with a bit of a rising GOR even more on the gas side in that area. So we talked about in the fourth quarter the need for an additional gas plant. So we’re in the process of building that. What you’ll notice is that, that 200 million a day plant along with our current 80 million a day plant will get you a significant amount of gas processing capacity, or our gathering lines are only up to 140 million a day. And so we clearly need to expand that a bit. So add some compressors in there, you have some expansion in those lines, as well as on the water and crude side. The throughput capacity we mentioned on the FERC-regulated line, we’re going to start moving more crude on that line and part of that’s because of that increased productivity across Wild Basin. So Bobcat overall, there’s a bit of a spend. You’re right that some of that spend is kind of pulled forward from years further out and there is a good drop off next year as you think about that spend. And then Beartooth, we’ve got a great system kind of across the basin. As you go back into some of these areas that have had a little bit less activity over the last few years, there is some capital be spent, it is incremental capital. But there’s some capital be spent to increase capacity, because those areas are coming on much higher as well with these higher intense completion wells. You’ll see the water volumes we lay out in Page 13 in the presentation that those volumes in Beartooth are going up considerably as well 16 or high-teen percentage.

[Deanna Zhang:]

Got it. So the capacity that you guys highlighted that you are adding to accommodate third-party volumes, is that mostly in Beartooth, that’s also in – I guess, that’s also in Bighorn as well?

[Taylor Reid:]

Yes. The capacity is actually in all three DevCos. There’s significant opportunity in all three we think to add to third-party volumes. So if you want to kind of step through each of them on the water capacity side in Beartooth both freshwater and produced water large system, we think we can incrementally add relatively cheap – cheaply third-party growth on that system. In Bighorn, both in the FERC-regulated pipeline as well as in the gas plants, especially when that second gas plant comes on, you’ll have quite a bit of capacity on that side. And we think we’re a bit in front of some of the other midstream guys in the Bakken. So we think there’s quite a bit of producers that will need that capacity. So we think there’s quite a bit of opportunity there and we’re seeing that. And then in our gathering lines as well, there’s a lot of activity in that Wild Basin area. So we think that we can tie into a number of those systems other third parties once again, and leverage our whole system, whether it’s oil gas or water from the gathering side.

[Deanna Zhang:]

Okay. Got it. And so on the Bighorn front, how quickly do you see those volumes catching up to Bobcat volumes?

[Taylor Reid:]

Yes. The Bobcat volumes are a combination of gathering on the produced gas, as well as gas system. And so it’s not going to naturally translate perfectly to what you can capture in Bighorn. But on the growth side of that, you will see those grow pretty in line once that second gas plant is in place. And so in the back-half of this year, when that gas plant comes online, there’ll be a big bump in, in gas processing in Bighorn. And what you’ll see is Bobcat will go up similarly, because you have more access to that capacity. So all of it will grow together, but it will – there’ll be a little bit more in line once that gas – that second gas plant is online.

[Deanna Zhang:]

Okay, that’s helpful. And then a final question. So do you have any updated thoughts on drop size? Are you guys thinking about, I guess, the percentage of ownership dropped in 2019 being smaller, given that the Bobcat DevCo has outperformed expectations, or are you guys still thinking, or are you guys thinking about making the drop bigger in size, given how large the EBITDA is now?

[Taylor Reid:]

Yes, I’d say a couple of things. One, the performance has been across the Board and all the DevCo is better than we expected at the IPO. So with that the need for drops outside of organic growth is, when we said we needed kind of drops in 2019, that gets pushed out in terms of ability to keep a 20% annual distribution growth within organic growth is more achievable, especially as we started thinking about some of these third-party opportunities and with that the assignment of the second gas plant as well. All opportunities that have bode well for the unit holders here, and we think our great transactions for the mid – the partnership. That being said, the sponsor has additional projects that it wants to fund. So if there is a win-win situation where we can get access to accretive acquisitions, whether it’s from the sponsor or third-party deals, we’ll clearly look at those at the time those become available and make a decision at that time. But it’s not something – the good news for the partnership is that, there’s less of a need just given the performance of the basin, the assets compared to where we were at the IPO.

[Deanna Zhang:]

Got it. Great. Well, that’s it for me. Thank you.

[Taylor Reid:]

Thanks.

[Operator:]

And our next question will come from David Amoss of Heikkinen Energy.

[David Amoss:]

Hey, guys. Good morning. I wanted to dig in a little bit on the Delaware Basin water opportunity and see if you guys had an early start about how many barrels of water you could be getting per barrel of oil? And then I guess, the follow-up question, that’s a typically a low-capital intensity high or a fast payback business, which seems like, it would fit your OMP profile really well. And I guess, my question then is like, why would the sponsor go with the third-party for that business? Is it that OMP couldn’t get it built in time, or wouldn’t feel comfortable funding that business? I’m just trying to understand the decision process there?

[Taylor Reid:]

I’d expect a couple of comments around how we’re thinking about it. The sponsor level was, we’re going to evaluate and take our time to understand what the production characteristics will be longer-term, and then what spacing is going to be like and what intervals will develop. And so when doing that, we’ve got the time to really evaluate the midstream opportunity and do RFPs with third parties that also look at doing it for OMP. And – but all I mean if it’s an attractive investment opportunity, we want to have the opportunity to go down that road. You talked about or asked what the ratio was generally in the Delaware, as you know, certainly compared to Williston Basin, you’ve got higher water cuts and per water per barrel of oil kind of three to four times the volume dependent on where you are which formation.

[David Amoss:]

Okay, thanks. And then just trying to get a better understanding of the regional geography there. If you think about it relative to gas gathering trunkline and processing capacity from third parties. Can you just kind of give us a big picture of what that region looks like in terms of available capacity from third parties to process your gas – to process the sponsors gas?

[Michael Lou:]

Yes. We – I’d say at this point is that, the good news is there’s a lot of competition in the basin. And there’s no lack of parties that are talking to us and interested in gathering and then processing and transporting gas. And there’s actually a number of ways to look at and think about it. We could do none all or part of the business and both on the gas and the oil side. And so there’s – it’s mainline transportation options, where you can partner with somebody and you do believe this field gathering or they can do the whole thing. So there’s – many other things that we’re going to try to understand what’s the best value proposition for OMP.

[David Amoss:]

Okay. And then last – go ahead, sorry.

[Taylor Reid:]

Maybe one thing I’d add to that is, from a sponsor perspective, Oasis Petroleum has gone through development of the Bakken over the last few years. And what it’s found is one really important thing is, as you’re moving in development mode and you’re drilling multi-well pads and putting a lot of dollars into the ground, one thing you have to make certain of is that you have the takeaway capacity on all your products, whether that’s water or freshwater delivery for your fracs or it’s water, oil, gas takeaway for – on the back-end, or large pipes going downstream to ultimately sell your oil and gas, you have to make sure that you have access to all of it. From a sponsor standpoint, once again, we think that the Delaware assets set up really well to have large takeaway capacity downstream. But it does need to make sure that the density here on development mode is going to be very intense. You need to make sure that your third-party providers whether it’s OMP or somebody else is there for you and will show that consistency. The good thing for the partnership is, there’s a huge connection to that sponsor. And we’ve shown over the years that we can make sure that they can flow all their volumes in a very consistent manner and quality of service is very, very high obviously. So that’s obviously one big positive for the partnership.

[David Amoss:]

That’s helpful. Thanks. And then last one, just anything you can give us on what you expect for the timeframe of those RFPs going out and the bidding process is starting and potentially coming to a conclusions?

[Taylor Reid:]

Yes, the sponsor has not talked about timing there. But I don’t know that there’s a huge rush to get it done next quarter or so. We’ll obviously watch and take the key from the sponsor level and reacted at the appropriate time.

[David Amoss:]

Okay, that’s helpful. Thank you, guys.

[Taylor Reid:]

Thanks.

[Operator:]

[Operator Instructions] Our next question will come from Georg Venturatos of Johnson Rice.

[Georg Venturatos:]

Hey, good afternoon, guys.

[Taylor Reid:]

Hello.

[Georg Venturatos:]

Hey, good afternoon, guys.

[Taylor Reid:]

Good afternoon.

[Georg Venturatos:]

It was nice to hear the progress update on Gas Plant II and certainly nice piece to the 2019 growth story. Just wanted to get a sense or clarify in relation to EBITDA guidance for 2018, the timing associated with that startup, I know you said late 2018 and did mention a 4Q kind of gauge during the call. But just wanted to clarify what was embedded within EBITDA guidance for the year?

[Richard Robuck:]

Yes. So along those lines it’s similar to the volumes discussion when you think about EBITDA, so they’re definitely growing throughout the year. But you get a lot and I slug from a Midstream perspective – from the MLP perspective, because you own 100% of Bighorn. So that definitely comes. For now, let’s call it, in the middle of the fourth quarter and we’ll kind of update you as we continue to construct the plant.

[Georg Venturatos:]

Okay, makes sense. And then you touched on this as well. But as it relates to Gas Plant II, any additional color on just kind of discussions with third-party opportunities certainly, strategically well located, but also you hit on it as well from a timing perspective might be opportune in relation to operator needs. Could you say more commentary that would be great? I appreciate it.

[Taylor Reid:]

Yes. On the third-party side, we’re obviously start incorporating that into guidance. There’s not much in there at this point. Actually, there’s very little in there at this point. We’ll start incorporating that as we get things nail down. What we’ll say is that there’s a significant amount of of demand for that, as you can imagine, with gas processing capacity basically at the same level of gas production in the basin and obviously, not every MCF can flow to every plant. So there definitely are constraints and there’s definitely some flaring going on in the basin. Regulations are getting tighter by the end of the year, too. So the requirements for flaring are getting a little bit tighter for all producers. So the need for everybody on the processing side is large. So we think there’s a big opportunity on that side, and we’re seeing that in terms of our conversation.

[Georg Venturatos:]

Great. Thanks a lot, guys.

[Taylor Reid:]

Thanks.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Taylor Reid for any closing remarks.

[Taylor Reid:]

Thanks again for joining the call today. We will definitely make ourselves available for any follow-up questions you might have, and we look forward to working with you in the future. Thank you.

[Operator:]

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