Oasis Midstream Partners LP
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good morning. My name is Debbie, I will be your conference operator today. At this time, I’d like to welcome everyone to the First Quarter 2018 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. You may begin your conference.

[Richard N. Robuck:]

Thanks Debbie and good morning everyone. Today we are reporting our first quarter 2018 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 including the 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 and conference call. Those risks include, among others, matters that we had described in our earnings release as well as our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and on the 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 the applicable measures that can be found in our earnings release and 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 L. Reid:]

Good morning everyone and thanks for joining our call. Oasis Midstream Partners has started the year off strong continuing to grow volumes in our respective DevCos which support strong coverage of our distribution and keeps us on track to meet our targeted 20% annual distribution per unit growth. In the quarter OMP continued to grow volumes above and beyond our initial forecast which allowed for higher distribution coverage of 1.11 times which exceeded our guidance provided in February. Our cash flow completely supports our distribution which we increased almost 5% since the last quarter. We grew our volumes quarter-over-quarter despite some tough operating conditions in North Dakota this winter. We spent a little more to keep volumes online during the quarter, some of which was seasonal in nature and some of which was actually in investments to mitigate the future impacts of those normally harsh winters. Furthermore we've made significant progress on our new Wild Basin gas plant with the capacity of 200 hundred million standard cubic feet per day. The plant is over 65% complete with all major equipment on site and placed progressing both on time and on budget. We still expect to begin operations in the fourth quarter of 2018. This addition to our tremendous asset base will enable our sponsor to exceed regulatory requirements for gas capture which become tighter at the end of the year. Our assets are critical to our sponsors operations and with activity in the Williston Basin increasing with more rigs going to work and more production coming online OMP is best positioned to capitalize on the opportunity that current market presents. We have identified several projects to obtain incremental volumes from our Bighorn and Bobcat DevCos for customers that are forecasted to encounter constraints due to rising associated gas production and higher gas capture regulations. We are in active dialogues regarding multiple opportunities to capture a significant amount of third party gas volumes once the new Wild Basin Gas Plant 2 is operational. Additionally OMP will continue to look for third party opportunities in all of our DevCos across all commodity streams to provide further volume growth supporting coverage of our distribution growth targets. With that I will now turn the call over to Michael.

[Michael H. Lou:]

Thanks Taylor. Over the last quarter OMP has completed several important milestones that sets up the partnership for continued growth. We completed a new NGL storage facility in March which has already improved plant run time by mitigating the impact of bottlenecks on Williston Basin NGL takeaway pipelines. We secured several third party contracts across our Beartooth DevCo for both produced water and fresh water services. We grew volumes in the first quarter of 2018 compared to previous quarters in each of our DevCos. Our strong execution to start the year allows us to remain confident in our full year guidance growing our distribution coverage from approximately 1.1 times coverage currently to 1.15 in the second quarter of 2018 to greater than 1.2 by the end of 2018 into 1.3 times in the first quarter of 2019. This coverage is calculated based on our growing distribution and not on our MQD. We still expect to realize EBITDA attributable to the partnership of $61 million to $65 million on the year. Our forecasted expansion CAPEX on the year remained unchanged and these investments are expected to have returns on the same level as the four to five times build multiples we've previously mentioned. In spite of peer leading distribution growth and strong equity price performance over the last few volatile months OMP still trades at a discounted valuation to peers that had similar project economics and drop down inventories. Our sponsor continues to direct a substantial portion of its drilling to OMP dedicated areas growing forecasted volumes this year and next. On the topic of growing volumes as you probably saw in our press release last night, we have provided guidance for volumes in the second quarter of 2018 and updated full year volumes guidance. Our forecast volumes and improved gross margins drive solid EBITDA growth through the remainder of the year. With that I'll hand the call over to Richard.

[Richard N. Robuck:]

Thanks Michael. The team delivered a robust quarter both operationally and financially 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 three DevCos added together delivered 38.2 million of gross EBITDA and 13.7 million of net EBITDA or net is just adjusting each DevCo EBITDA by the interest OMP owns. Distributable cash flow for OMP was $11.9 million. During the first quarter OMP invested about 81 million of gross CAPEX with a partnership share of the capital expenditures being approximately 50 million including net maintenance CAPEX of 800,000. This was in line with expectation with much of the capital for the second gas plant already invested by the end of the first quarter. We continue to expect to spend within our budget and for maintenance CAPEX to be about 7% to 10% of EBITDA over time. All three DevCos have grown volume on its respective systems quarter-over-quarter, our growth will continue to be supported by Oasis' Rig program as Oasis is now running four rigs in the Williston with most of the activity focused on Wild Basin which has dedications from each DevCo. As of March 31, 2018 the partnership had cash outstanding of just over 4 million and 117 million borrowed under $200 million revolver resulting in borrowing capacity of 83 million. We expect leverage for the partnership to remain under two times debt to next 12 months EBITDA for the remainder of the year. Our goal remains to deliver stable, fixed fee revenue under long-term acreage dedication and to minimize direct commodity price exposure. We have great structural alignment with Oasis who owns about 69% of OMP. The quality of our team and the strength of our assets position us to continue to exceed expectations and provide best in class operational and financial executions. I will now hand the call back over to Debbie for question.

[Operator:]

[Operator Instructions]. The first question comes from Jeremy Tonet with J.P. Morgan. Please go ahead.

[Jeremy Tonet:]

Good morning. Just wanted to touch on O&M and SG&A it seemed like you noted you spent a bit more for the winter issues as you noted, just wondering how we should think about kind of a normalized run rate, what was kind of the step up this quarter that might not repeat going forward?

[Taylor L. Reid:]

Yeah, the things that we highlighted were just some seasonal things. I mean you can think of things like some excess snow removal that we did and then on the plant side had a little -- did some extra work to further winterize the plant and then also areas outside of the plant. And so I think if you look at where EBITDA margins were for the first quarter we think that should tick up by a couple points into the second quarter and then into the rest year as well.

[Jeremy Tonet:]

Got you, that's helpful, thanks. And then it looks like the volumes at Bobcat seem a bit flat in kind of 2Q what you're showing there after kind of a big step up in the first quarter and then similar with Beartooth, the water looks flat for the remainder of the year, is this kind of timing related or anything else you can provide color wise as far as what's happening there?

[Taylor L. Reid:]

Yes, so on the Bobcat side we had doing a great growth in the first quarter, a lot of that driven by incremental gasless volumes coming on and then also just gathering more volumes on behalf of the parent inside the Wild Basin. Just as we -- we're kind of curbing some of that growth as we get to kind of the full capacity on what's available to be processed until we are kind of tailoring our completion program and kind of the projected gas volumes off of that program to fit into the way we're kind of thinking about growing that business. And that should -- you'll see growth more towards the end of the year when that gas plant comes online. And then on the Beartooth side it's just a function of I think we'll have a little bit more fresh water sales as Michael was relating to earlier about some third party contracts in Beartooth and that helps the second quarter. And as we get more visibility into the third and fourth quarter I think we will be able to update you on incremental contracts that we get on that side to support incremental volumes.

[Jeremy Tonet:]

Got you, thanks for that and then kind of thinking later date for the basin as a whole it seems like processing constraints have really flared up again if you will and just wondering how -- what opportunities that might present for the partnership I guess?

[Taylor L. Reid:]

Yes, so clearly processing constraints have been an issue for operators in the basin and what we're seeing is that especially in the core part of the basin with activity picking up and drilling in the core starts with higher GOR's already that production levels are actually at the same level as processing capacity. So a lot of people are starting to hit constraint points. Now the good thing for the partnership is that the 200 million a day plant will become online. Once again we're working on time and on budget with that, that will be coming on later this year. And we think that not only will it have the opportunity to keep our -- keep the parent at a very good gas capture level in Wild Basin it also has additional capacity to handle third party volumes. And what we're seeing is that that capacity is going to be a pretty strong asset, coveted asset that others certainly want to be a part of.

[Jeremy Tonet:]

Great, thanks and then just one last one if I could, with regards to the parents Permian acreage, are there any updated thoughts as far as where OMP stands with regard to the potential to serve that production going forward?

[Taylor L. Reid:]

Yes, so the parent is taking a look at it and we talked about it on the other call. And essentially there's a lot of opportunities out there on the gathering and marketing side. They're looking at opportunities not only from a third party perspective but also we think there are significant opportunities for OMP to be involved as well. We don't have any of that detail yet in terms of exactly what OMP will or won't be doing but there's -- we think there's certainly a large window of opportunities for OMP going forward in that basin.

[Jeremy Tonet:]

Got you, that's all helpful, that's it for me, thank you.

[Taylor L. Reid:]

Thank you.

[Operator:]

The next question comes from Deanna Zhang with Tudor, Pickering, Holt. Please go ahead.

[Deanna Zhang:]

Good morning. So, I just want to touch on the NGL storage facility that you guys mentioned, just wanted to clarify whether that was in OMP or OAS or just specifically where that is in the structure and if you guys are thinking about branching further downstream on the NGL side?

[Taylor L. Reid:]

Yeah, that's in Bighorn DevCo and what it really allows you to do is not only are you seeing processing capacity, it's a good point. There also is some constraints on longer NGL takeaway capacity. We think that becomes resolved in a big way in a couple of years but certainly have some additional things that are coming on even as early as the end of this year. So with that NGL constraint obviously there's going to be some hiccups on those lines at times. So you want the storage to be able to withstand any of those hiccups. And what we've seen is that just in the short time that it's been on its helped us manage those kind of downstream constraints from our perspective and allowed the plant to have better run time. So we've been really pleased with putting that facility in place.

[Deanna Zhang:]

Got you and so any sense for I guess or any color you can provide on the amount of contribution with NGL storage facility as giving Bighorn?

[Taylor L. Reid:]

You know it's going to be really around -- primarily it is going to be around the higher run times and so what you'll see is that our plant will be running at more fulsome and full capacity kind of on a ongoing basis going forward. So that's going to be the main contribution from the NGL storage side.

[Deanna Zhang:]

Got it, makes sense. Can you also talk a little bit more about the gas lift opportunities that you've identified, whether that's currently in the CAPEX budget and what the timing on those will be?

[Taylor L. Reid:]

Yeah, the gas lift is all in the budget. Right now it's throughout all of Wild Basin so it's in the Bobcat DevCo. And so the way to think about that is that in Bobcat you have water handling on the produced water side, you have crude gathering, and you have gas compression -- gathering compression along with gas lift. All of those are being done for the parent and some of those we're looking to also do it for third parties as well in those areas. And so the budget is around the capital activity for the sponsor. Certainly if we see significant third party opportunities those will be kind of additional growth CAPEX that we will have to add. So what's included is that gas lift as well as all those other services in the Bobcat DevCo CAPEX line for the parents work and then as we get third party we will continue to add to that.

[Deanna Zhang:]

Got you, it makes sense. That's it for me. Thank you.

[Operator:]

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

[Georg Venturatos:]

Hey, good afternoon guys. Just with what we've seen in the last few quarters in terms of the positive commentary related to third party incremental activity across the DevCo, just wanted to get a sense if you could frame up kind of where we maybe exit 2018 or where we could be in 2019 relative to percentage of volume throughput that you're going to see from third parties?

[Taylor L. Reid:]

Yeah, so that's obviously speculation. We think that there is certainly a large opportunity on that side. Right now we do have -- we have been able to complete some smaller third party deals and we think those will continue to roll in. We'll be able to give a more fulsome update on our next call we believe. But what we're looking at is you're already starting to see that coverage grow and we're trying to signal that to you guys by not only talking about a year-end coverage. And remember when we talk about coverage it's on -- its off of our expected 20% distribution growth rate. And that coverage is going to expand from call that 1.11 times first quarter to 1.2 plus by the end of the year and then 1.3 by the first quarter of next year. So what we're trying to show you is that we're not only doing really well with the parent but we're actually starting to get some of those third party then. We certainly think of more significant portion can come in over the coming months but we'll continue to update you as those come along.

[Georg Venturatos:]

Got it, that's helpful. And then just on gas plant 2 obviously good to hear the update here this quarter, maintain that startup late this year. You did mention 65% complete and you made a point to say the large dollars have been spent. Just wanted to see if you could just share any detail on what largely remains just from a construction standpoint to get to the finish line here before startup?

[Taylor L. Reid:]

Most of the big equipment is set so there's obviously smaller connections that we needed to make and getting there to the finish line. We did want to make sure that people understood though that we also have kind of our contractors out there and progress payments have been made. So from a capital standpoint what you'll see in Bighorn is $42 million spent in Bighorn. It's probably going to be closer to the top end of that CAPEX range, closer to 51 when we are all said and done now. But we're on time, on budget with that project. We expect that to come online at the end of the year and everything's progressing really well on that front. So we're very pleased. Even though there was a difficult winter up in the Balkan we were able to get as much work done and maybe even a little bit more than what we expected over that winter timeline. Obviously we knew that winter is likely to come during that timeframe. So I'm very pleased with the progress so far and we stay kind of at or ahead of schedule on that project.

[Georg Venturatos:]

Got it, great to hear. Thanks for the answers.

[Taylor L. Reid:]

Thank you.

[Operator:]

The next question comes from Kyle May with Capital One Securities. Please go ahead.

[Kyle May:]

First question for me, I just wanted to follow up and clarify on a comment from the Oasis call, I believe you were talking about the outspend on infrastructure later this year I just wanted to really clarify were you talking about a potential drop later this year or another means of funding for that?

[Taylor L. Reid:]

Yeah, that's what we're talking about at the parent level in our call was that there isn't an outspend that's just infrastructure related at the parent level. And so what they've been talking about is that they would like to fund that outspend through the Midstream Company through the MLP. And so talking about the timing from that perspective of maybe later this year of having a drop, a first drop down.

[Kyle May:]

Okay, great, thanks for that. And maybe one more as we're looking about gas plant 2 later this year and the potential for third party volumes, can you maybe talk about or give us a sense of kind of the distance or range where you can capture third party volumes as we look at the infrastructure map that you provide, is it just centralized around Wild Basin or is there kind of a larger area that you can target?

[Michael H. Lou:]

Yeah, there's clearly a much larger area that you can target. Obviously it just relies on how much pipe you need to put in the ground to go gather some of that gas and so what you'll likely focus on is something in a call that 10 mile radius from the assets that you have, that's where you can get some really good synergies, the good thing is that there's a lot of rigs running in that radius around our assets. And then as we start bringing in more third parties as the system four that we're building for Oasis continues to grow, obviously we have visibility to continue to broaden that system and gather outside of that 10 mile radius. The radius just continues to grow as well as the asset grows.

[Taylor L. Reid:]

I think the good news is that in that 10 mile radius that Michael's talking about we think there's ample opportunities to really fill the additional capacity of the plant that we don't need for the parents volume. So we're excited about that.

[Kyle May:]

Okay, great. That's all for me. Thanks guys.

[Operator:]

The next question comes from TJ Schultz with RBC Capital. Please go ahead.

[TJ Schultz:]

Great, thanks. The two forward debt leverage that you referenced does that remain a long term goal on leverage or is there any view that you would take that higher if needed just to take advantage of certain opportunities or to execute drops if equity markets are not as accessible as you would like and if you could just generally discuss financing expectations for the next drop down? Thanks.

[Michael H. Lou:]

Yeah, I think that is our long-term goal. I think obviously we think about it from a forward perspective because you're bringing in incremental EBITDA from whatever your drop. So you got to consider it from that perspective. Additionally once that second gas plant comes online you're going to get a ton of cash flow from that as well which will help you delever over time. And so I think as we look at it we will be pretty balanced on how we look at kind of next 12 months versus maybe 2019 frankly because of the cash flow that's going to rapidly be contributed by the second gas plant. So that's something we will evaluate as we work through the process if the parents offer something to us. And then the way to finance it obviously we have a -- we have talked about having 83 million undrawn on the $200 million revolver. In addition to that there's a accordion feature on that revolver, they can scale up to $400 million. And so that isn't too hard to go capture, we are just working with the banks if you have the cash flow to support it. So over time if you like it is not well then why 200 million, we have a lot of access to incremental leverage but leverage at the levels that we've been talking about where we will continue to have a conservative balance sheet. You're right in terms of access to equity markets, so I don't think that that's probably something -- I don't think that's something that we're targeting at all as we look out into the future for the first drop. And I think we'll just have to continue to monitor what the other options are. Obviously there are things like Oasis taking back shares which are -- it's not opposed to doing and we actually love the stock and think it's a good security to own. And we see the value -- the inherent value in it and the strength it brings. Oasis as well is just from a yield perspective is extremely attractive. And then there's other private sources of capital that are obviously out there that we investigate overtime and if that makes sense over time then that would be an interesting way to also raise capital. But in the near term really I think the revolvers is really ample for us.

[TJ Schultz:]

Okay, great, thank you. That's all I had.

[Operator:]

The next question comes from Lynn Shen with Height [ph]. Please go ahead.

[Unidentified Analyst:]

Thanks for taking my question. I just want to follow up further on dropdown you mentioned probably end of this year. How should we think about the [indiscernible] dropdown so that can be accretive post MLP of parent?

[Taylor L. Reid:]

Yeah, I think that's a great question. Obviously we're just talking about it for the first time, I haven't actually scoped anything out but we definitely understand that it's important for OMP shareholders to get accretive acquisitions. It is important for Oasis to have accretive drops. And I think that that balances is something that will be hyper focused on as we look at any kind of drop opportunity. Because it is extremely important over time for OMP to work and have incremental access to capital and to see that that stock work. And I think you saw the management team buy in heavily at the IPO. As you might remember the management team didn't have any equity ownership in OMP LP units and had to write their own checks to participate alongside with the LP holders. And so you'll see us as a management team focused on and trying to make sure that that entity is successful through the accretive drops when they are coming our way.

[Unidentified Analyst:]

Great, thank you very much.

[Operator:]

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

[Taylor L. Reid:]

Thanks again for joining the call today. We will 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.