Oasis Midstream Partners LP
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Good morning. My name is Kate and I will be your conference operator today. At this time I'd like to welcome everyone to the Second 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 Roebuck, Oasis Midstream's CFO to begin the conference. Thank you. You may begin your conference.

[Richard Robuck:]

Thank you Kate. Hello everyone. Thanks for joining our call today. We will be reporting our second quarter 2018 financial and operational results. We're delighted to have you on our call and I'm joined today by Taylor Reid and Michael Lou as well as other members from the team. Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners including the answers to your questions includes 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 have 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 our Oasis Midstream Partners form S-1. We just claimed 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 applicable GAAP measures that can be found on 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 Reid:]

Good morning everyone and thanks for joining our call. We thought we would start out our call highlighting a couple of key points. First Oasis Midstream Partners had an exceptional quarter with volumes meeting or exceeding guidance for every DevCos and commodity stream. Additionally, we were able to assign multiple third-party deals which significantly increase our financial outlook. Third, OMP's financial position is compelling with coverage increasing over the next two years and we now have visibility into growing our distribution per unit at 20% past the end of 2021. We do not plan to increase our distribution growth rate to greater than 20% but we are improving our coverage. Excess cash flow can be used to fund growth CapEx and even pay down debt in 2019 as we rapidly grow coverage. In the second quarter distribution covers is 1.28 significantly exceeding our guidance of 1.1 to 1.15. Our cash flow comfortably supports our distribution which we increased another 5% since the last quarter which keeps us on our targeted 20% annualized distribution growth rate. We achieve solid volume growth in the quarter driven by growth of our parent Oasis Petroleum in a growing contribution from third parties. All three DevCos grew volumes quarter-over-quarter. Our growth will continue to be supported by our sponsors 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 an example of the types of opportunities we are seeing in the impact Beartooth DevCo increased water volumes about 28% relative to the first quarter which included robust growth from third parties as well as organic increase in sponsor volumes. As we look out into 2019 we also see that Oasis plans to add one to two rigs in the Williston focused on Beartooth assets. This activity will help support further growth especially in 2020. EBITDA for our Bobcat DevCo grew 8% quarter-over-quarter as we continue growth with this asset tied to the capital that we're spending. We're putting the gathering portions of the new third party gas contract into Bobcat. All in estimated returns on sponsor volumes and third-party gas agreements are fantastic. We anticipate to build multiples flow four times on the Bobcat investments that we were making this year. We're seeing a steady increase in EBITDA each quarter driven by both Oasis and third party volumes. In the Bighorn DevCo we continue to make significant progress on our new Wild Basin gas plant with the capacity of 200 million standard cubic feet per day. The plant is progressing both on-time and on-budget. We still expect to begin operations in November 2018 and as a result our 4Q ‘18 guidance reflects approximately two months of volumes through the new plan. This addition to our tremendous asset base will enable our sponsor to continue 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 well-positioned to capture additional market opportunities. During the quarter we announced multiple third party deals in the Williston Basin across all three development companies and commence capital investments to fulfill these opportunities. We are in active dialogues regarding additional opportunities to capture incremental third-party gas volumes once the new Wild Basin gas plan 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 in supporting coverage of our distribution growth targets. The deals we sign year-to-date in combination with continued growth in our parent in a lower cost structure led us to increase 2018 EBITDA guidance to $64 million to $68 million. OMP is also increasing 2019 EBITDA estimates to $102 million to $108 million and distribution coverage is now expected to enter 2019 around 1.4 times and quickly increase to 1.5 to 1.7 times for the remainder of 2019. As you can see OMP's financial position is compelling and our attractive asset base and top-notch team put us in a position to capitalize on incremental market opportunities. With that I will now turn the call over to Michael.

[Michael Lou:]

Thanks Taylor. OMP continues to add incremental value for its shareholders. We updated 2018 and 2019 EBITDA guidance with the 2019 update representing a 25% increase relative to our original expectations. As a reminder the implied build multiples from our June update are below 2 times. This is outstanding capital efficiency and reflects an ability to leverage our scale, capture the value of our excess capacity in the second plant and drive returns. Our sponsor continues to direct a substantial portion of its drilling to OMP dedicated areas growing forecasted volume this year and next. We provided guidance for volumes in the third and fourth quarter of 2018 last night. Our forecast volumes and improved gross margins drive solid EBITDA growth through the remainder of the year supporting the EBITDA guidance we outlined. We also thought it might be helpful to provide incremental color on how we build up to 2019 guidance. Starting with Bighorn which is owned 100% by OMP, it is clear that it will be the material driver to growth next year with the plant being online for the full year. When we ramped up plant two in November of 2018 the volumes that were being processed by the MRUs will transition to the new plant. So we can grow EBITDA initially because the cost structure is better on plant two and we also capture more gas overall when the plant comes online. We also expect to bring on some third party volumes in the middle of the fourth quarter. We plan on entering 2019 with the plant over 50% filled and exit over 75% filled including volumes from Oasis and third parties. Another important thing to remember about our second gas plant is that we invested in a highly efficient plant. We're expecting it to run at pretty high gross margins better than our first plant. With strong operating margins and volume growth the second gas plant is expected to drive EBITDA growth in the neighborhood of a 100% year-over-year. Bobcat is also expected to deliver impressive growth year-over-year but the current ownership of 10% makes the growth less impactful for to OMP. The spending this year for Bobcat translates into very attractive build multiples as we leverage existing infrastructure for growth. Bobcat volumes are comprised of oil gathering, produced water gathering, gas gathering and gas lift. Each one of those streams behaves a little different. With gas gathering growing the most due to Oasis volumes in third party lines. On a blended basis Bobcat EBITDA could grow over 35% next year. Lastly, we are modeling relatively flat EBITDA in Beartooth year-over-year for a few reasons. One, we do not assume any third party fresh water or produced water which remains as upside to our 2019 forecasts since we have already successfully landed business in 2018. Two, when rigs are added to new areas throughout the year we will be doing full development, full fuel development drilling. This tends to translate into production later in the year or really shows up the following year. And then three, as we gear it up for the second plant in November we focus more completions activities in Wild Basin which helps drive the growth already described. Overall, as we look at our EBITDA forecast next year we are obviously providing a range that includes variability for each DevCo. It might be helpful to think about EBITDA contribution as a percent of the total before public company expenses. If we think plus or minus a couple of points it's probably fair to say that Bighorn could be about 68%, Bobcat 12% and Beartooth about 20% of the EBITDA for next year. With that I'll turn the call over to Richard.

[Richard Robuck:]

Thanks Michael. OMP is benefiting from strong sponsor volume growth coupled with new and highly accretive third party volumes compared to our original forecast of four to five times billed multiples economics at the sponsor and third party growth now yield sub 4 times build multiples. We remain on track this quarter with our 20% annualized distribution growth target with the second quarter distribution being $0.41 a unit. In spite of peer leading distribution growth and greater distribution coverage OMP still trades at a discounted valuation to peers that have similar or even less impressive growth and distribution metrics. Still the team continues to outperform all expectations set out at our IPO last year and we delivered another robust quarter financially. For the quarter the three DevCos added together delivered $44.4 million of gross EBITDA and $16.4 million of net EBITDA where net is just adjusting each DevCos EBITDA up by the interest that OMP owns. Distributed cash flow to OMP was $14.5 million. During the second quarter OMP invested about $70 million of gross CapEx with the partnership share of the capital expenditures being approximately $19 million including net maintenance CapEx of about $0.5 million. Maintenance CapEx was below our expectations during the quarter but we continue to expect maintenance CapEx to average about 7% to 10% of EBITDA over time especially as we planned to do a little bit more maintenance and preventative work during the third quarter when the weather is good up in North Dakota. As of June 30, 2018 the partnership had cash outstanding of $2.7 million and $165 million of borrowings under its $200 million revolving credit facility resulting in borrowing capacity $35 million. This level of borrowing makes sense given our investment in the second gas plant and associated gathering system in Wild Basin. Our goal remains to deliver stable fixed fee based revenue under long-term acreage dedication minimizing direct commodity exposure. We have great structural alignment with Oasis with our sponsor owning 69% of OMP. The quality of our team and the strength of our asset position us to continue to exceed expectations and provide best-in-class operational and financial execution. With that I'll hand the call over to the operator for questions.

[Operator:]

[Operator Instructions]. The first question comes from Kyle May of Capital One Securities. Please go ahead.

[Kyle May:]

Hey good morning guys. Thanks for the additional color today. I wanted to start out and see if you could give us your current thoughts around the potential for a drop down transaction later this year?

[Michael Lou:]

Hey Kyle. Thanks for the question. I don't think we have really any updates from the last call that we had which is given all the success that we're seeing at the midstream company what you can see is that we are building coverage, EBITDA has grown significantly next year. We don't need to drop anytime from a midstream perspective to continue to grow at 20% and have great visibility into that. That being said at the parent we have talked about that Oasis wants to be EMP cash flow positive and part of that strategy would be to take infrastructure projects in and drop it down over time to OMP and talked about even doing that potentially as early as by the end of the year.

[Kyle May:]

Okay. Great. Thanks for that. And can you provide any additional color or breakout on the third-party contracts that you've signed and maybe talk about the different volumes or contributions by DevCo?

[Michael Lou:]

So we can't talk specifically about any of the specific contracts but I can tell you that they are longer-term dedicated contracts primarily in the Bighorn DevCo and you can see that impact as I broke that out by DevCo and impact into '19. So a lot of the larger third-party deals that affect '19 are going to be around the gas plant. We mentioned that we had quite a bit of capacity for third party volumes there. Those are in line with what we charge at the parent level fixed fee kind of deals that are long-term. We also have a number of third party deals across water both on the fresh and produced side. Once again in line with kind of the other deals that we've seen kind of in the basin but we can't go in any specifics on any of those deals. So that affected Beartooth and Taylor mentioned that 28% increase on the Beartooth side. So you're going to see that hopefully that continued benefit with more third-party deals coming in over the next few quarters. None of that taken into their numbers zone.

[Kyle May:]

Okay got it. Thanks guys. I'll jump back in queue.

[Michael Lou:]

Thanks.

[Operator:]

The next question is from George Wang of Citigroup. Please go ahead.

[George Wang:]

Hey guys, congrats on the strong quarter.

[Taylor Reid:]

Thanks.

[George Wang:]

Yes. Just a couple of quick questions. On the drop-down obviously timing sounds like by the year end or the next year just in terms of the economics and the criteria for the drop-down valuation I wonder if you guys can elaborate on if you guys have any benchmarks just in terms of accretion of OMP.

[Taylor Reid:]

Yes. The way that the parent is thinking about it is they want to make sure that OMP continues to be successful over the long term and so we're going to look at all the market multiples that you guys look at not just on kind of multiples but also accretion, dilution per unit and so I think what you'll see as we look through they will be very thoughtful around what that valuation looks like and try to make sure that the both parties Oasis and OMP are winners in the ultimate transaction that occurs.

[George Wang:]

Got you. And the secondly just in terms of full gas processing constraint in the basin I think there could be potential upside for OMP. Do you guys have any update on that GOR mixing in the bottom in also in the Wild Basin just given some more data from last few quarters. So I just wonder if you can give more color on the GOR?

[Taylor Reid:]

So like we talked about with the GOR it's generally higher in the central portion deeper part of the basin and it's where Wild Basin is located and we've got GORs in that Wild Basin area that are 2,500 to 3,000 and up and so as we continue to capture more of that gas bringing on more volumes in our plant you're seeing the trend for the company of the gas cut going up on our overall production mix. So it's very consistent with what we're seeing from other operators in that core part of the basin. So you're getting this concentrated drilling in a high GOR area that's leading to a lot of opportunities to capture third-party gas. So we're excited about being able to tap into that and then sign up more of these guys that are looking for homes for the gas.\

[George Wang:]

Got you. And just lastly quick questions just on the Permian Basin do you guys have any latest thoughts on OMP's future upside in terms of weather for Oasis or for third party volumes in Permian?

[Taylor Reid:]

Sure. We're still in early time in terms of the Permian position and as we've talked about at the parent we're going to take a metered approach to the asset. We're really working on understanding the subsurface and then also making sure that as we put together our development plan which we've talked about being kind of 2020 timeframe to really go into development not only we want to understand the subsurface but we want to have all the infrastructure kind of lined out and in place at that time. So we've got a fair amount of lead time here. We're looking at the opportunities across all the products for OMP. We're also obviously going to look at third parties who are providing services. It's clearly a competitive basin but we do think there's going to be some opportunities for us. It's just early time to talk specifically about what those are and then the last thing I would say is it's not unlike what we've done up in the Williston; when you think about it from the parent perspective, there's some really strategic places in the midstream that it's important to make sure you've got that midstream in place or you can't move your product. So there's both component from a market standpoint but there's also a strategic consideration for the parent. So a little early to tell you where exactly we're going to end up but we're excited about the opportunities.

[George Wang:]

Okay. Thanks a lot. I would jump back into the queue.

[Operator:]

The next question is from George Venturatos of Johnson Rice. Please go ahead.

[Georg Venturatos:]

Hey good afternoon guys.

[Taylor Reid:]

Hey.

[Georg Venturatos:]

I just wanted to touch on gas plant too. You guys had mentioned there at least guidance was for north of 75% by exit ‘19. I just wanted to clarify and those are spoken for agreements Oasis volumes as well as third-party and then on top of that I guess it made it sound like there were active dialogue going on now in terms of operators maybe waiting for the plant to be operational to kind of fill some additional capacity there. Is that the right way to think about it?

[Michael Lou:]

Yes. That's all fair. The 75 -- 50% going to 75% in the next year is all on contracts. Our expectations of producers volumes both Oasis and third parties and yes we do have some excess room and we're having additional conversations to continue to fill the rest of the plant.

[Georg Venturatos:]

Got it. On the cost side you guys mentioned some cost structure benefits and Michael you mentioned improved margins at gas plant two but any other kind of big levers that you guys can just shed a little more light on with relation to that comment?

[Michael Lou:]

Yes. We don't breakout just because for competitive reasons the exact margins but I think the way that you can get to what we're talking about is they kind of take the growth that we've talked about this year into the -- in the year end and in the fourth quarter and then look at the allocation by DevCo to see the overall call it EBITDA margins of Bighorn increase as you look into next year and so that's how we try to set up the guidance just to give you guys more color than frankly we ever have in the past so you can understand our ability to get to those numbers and hopefully exceed them.

[Georg Venturatos:]

Got it. Okay. That makes sense and then last one for me just balance sheet was you guys mentioned and have in the past easy expansion or accordion feature on the revolver to 400 at your request at this point. Any reason why that doesn't occur kind of near-term or any thoughts on kind of holding back on that right now?

[Michael Lou:]

Yes. We mentioned in the call we had 35 million in capacity. I think going to the bank group but asking for incremental capacity just to give us a little more liquidity overall without a drop is not going to be difficult at all and then secondly as we talked about on the potential for a drop if that was to occur we don't see any issues being able to go up and use that incremental capacity depending on how much we need. So I think the bank group is solid and stands ready to provide capital and those guys have had a small initial commitment in the facility to begin with because most of the guys that were in the Oasis facility participated in the OMP facility and so they stand ready to provide more capital for the midstream business.

[Georg Venturatos:]

Make sense. Thanks for the answers guys. Congrats in a quarter.

[Michael Lou:]

Thanks.

[Operator:]

The next question is from Deanna Zhang of Tudor, Pickering, Holt. Please go ahead.

[Deanna Zhang:]

Good morning.

[Taylor Reid:]

Morning.

[Deanna Zhang:]

I just wanted to ask about the non-core sales that were recently announced by Oasis. Are the drilling programs from the new operators being still baked into the guidance right now and if not when will you see the upside from those sales?

[Michael Lou:]

Yes. So the non-core sales in the Williston one of the large areas was the [foreman Butte] on the operated side and that was a non-dedicated area for OMP and so it won't have an impact on OMP's kind of futures going forward. And then primarily the rest of the sale large portion of it was on non-Op which obviously is not dedicated either. So we don't think those asset sales really impact OMP in any large way.

[Deanna Zhang:]

Got it. Okay. Makes sense. And also wanted to ask on the guidance for Beartooth in Q3 and Q4. Volumes seem to be a little bit down versus in Q2. I am just wondering if you just give color on why that is? Is it a timing thing between commitments or is it something else?

[Michael Lou:]

Yes. We highlighted in the press release is that revenue in Beartooth was up quarter-over-quarter driven by the volume growth and just under half of that was a function of some fresh water sales with third parties and so what we're doing is we're just trying to be conservative in terms of modeling the impact of those volumes into the third quarter. Good news is we are tracking for both Oasis and that same third party right now we're providing water for them and so that helps us get comfortable with those numbers that we provided. So I think we just think about it as a range and hopefully we can do what we did this quarter and not just meat but also exceed those forecasts but we just want to make sure that we don't get ahead of ourselves in terms of other folks frac timing and when that comes online.

[Deanna Zhang:]

Okay got it. Thank you. And then on the new storage facility that you guys brought online last quarter, could you give an update on whether or not you're seeing higher utilization versus last quarter? And if that's due to increased tightness and NGL take away?

[Taylor Reid:]

What that NGL storage really did for us was provide just operational consistency. So if there was any sort of kind of temporary blip downstream and just terms of somebody the downstream operations we were able to basically build up storage and then flow it later on and what that actually does is allows us your gas processing plant to have better overall runtimes. So it's not actually having to slow down to accommodate from downstream impacts to the business. So that fluctuates really day-to-day and month-to-month and so the way I would just think about that asset is you see improve just throughput through our gas processing plants and the NGL storage is the enabler partly of that uptick.

[Deanna Zhang:]

Got that. So are you guys seeing any general trends when it comes to take away tightness from that position or just outside of the storage facility utilization I guess.

[Taylor Reid:]

So we really haven't had problems moving our NGLs and one of the things that we point towards and excited about as we get closer to yearend is the deal that we have with endeavor and so they're going to be moving NGLs by rail and will be a pipe connected and so when that is in place it will really help to increase reliability and we think pricing as well. So it's really a double benefit going forward for us that as Richard talked about the current storage gives us flexibility and it's allowed us to keep our volumes moving but we had not had problems moving it.

[Deanna Zhang:]

Okay. That's helpful. Yes. Okay. That's it for me. Thank you.

[Taylor Reid:]

Great. Thanks.

[Operator:]

The next question is from Jeremy Tonet of J.P. Morgan. Please go ahead.

[Unidentified Analyst:]

Good afternoon guys. This is Rahul on for Jeremy. Just couple of quick questions for me. How much of the volume ramp in the guidance is predicated on a third party growth versus Oasis? Can you provide some color from the overall or DevCo perspective here?

[Michael Lou:]

Yes. I think -- well we're talking about that just a minute ago that we aren't going into the specifics of it just because those are confidential contracts. I think just at a high level we talked about having a quite bit of capacity remaining in that second gas plant throughout 2019. So you've seen one based on the EBITDA uptick that we announced and two just based on our overall announcement on volume is going from 50% up to 75% filled in that plant. You're seeing a great contribution from third party volumes.

[Unidentified Analyst:]

Got you. And then on the Beartooth side for the water mixed would you be able to provide some color on a breakdown between produced under freshwater side of the businesses?

[Taylor Reid:]

I think back to comment earlier on how we think about the rate structure from a competitive standpoint we actually are going to keep those two separate, excuse me, combined together and not separate them just so that we can have the flexibility to grow and have a competitive discussion with folks in the basin. So but I think what we'll do and as you saw in this quarter is make -- give you clarity around where some of that growth is coming from and I think that was pretty well articulated in the press release yesterday.

[Unidentified Analyst:]

Got you. That's helpful guys. Thanks. That's it for me.

[Taylor Reid:]

Great. Thank you.

[Operator:]

The next question is from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Thanks for taking the call. For the new gas plant can you talk a little bit about their contract profile? Do you have a lot of like a POP or [indiscernible] contract so that you have some commodity exposures?

[Taylor Reid:]

Yes. There's no commodity exposure. It's all to see no POP.

[Unidentified Analyst:]

Got it. And also for Beartooth I noted that your guidance for first quarter versus third quarter volume is also lower. Is that due to seasonality or what kind of guidance expectation there?

[Taylor Reid:]

Yes. From the previous question I don't know if you're distinguishing between that or not but what we were trying to highlight was that some of that growth quarter-over-quarter from first to second quarter was driven by fresh water third-party contract. And as we move into the third quarter we just put in a little bit of conservatism in terms of timing and volume needed from that third party and so hopefully we can be in that same range that we were in the second quarter as we move into the third quarter but we just wanted to not put all of our expectations into that to that third quarter number. So we know that it's going to continue their fracking or were providing wells for their fracks right now and we have good visibility that's going to continue as we work through the quarter.

[Unidentified Analyst:]

Okay. Got it. Thank you.

[Taylor Reid:]

Thank you.

[Operator:]

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

[Taylor Reid:]

Thanks again for joining the call today. As always 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.