Oasis Midstream Partners LP
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good morning, everyone. My name is William, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Third Quarter 2018 Earnings Release and Operations Update for Oasis Midstream Partners [Operator Instructions]. And please note that this event is being recorded. I would now like to turn the call over to Richard Robuck, Oasis Midstream's CFO, to begin the conference. Thank you. You may now begin.

[Richard Robuck:]

Thank you, William. Good morning, everyone. This is Richard Robuck. Today, we're reporting our third 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 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 in 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 applicable GAAP measures that can be found in our earnings release and on our website. We will also reference our current presentation that 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'd start our call highlighting a couple of key points. First, Oasis Midstream's financial outlook remains exceptional. Our new 200 million cubic foot per day gas plant provides a strong financial tailwind into 2019. Following the startup of the plant, Oasis Midstream Partners will have the second largest natural gas processing capacity in North Dakota. Additionally, we signed incremental third-party agreements and are increasing our 2019 EBITDA guidance by $4 million and increasing 2019 coverage expectations as well. Turning to the quarter, Oasis Midstream Partners delivered strong water volumes across the Beartooth development company and Bobcat as well. Natural gas volumes were suppressed due to a temporary outage at our 80 million cubic foot per day gas plant. Adjusting for this impact, natural gas volumes generally would have been at or above guidance as well. Crude volumes fell modestly short of expectations as we work these plant issues. Finally, strong volume growth from both our parent and third parties puts OMP in a strong financial position. We currently have visibility into growing distributions per unit at 20% past year-end 2021. The combination of pure leading distribution growth and improving coverage puts us in a great position going forward. In the third quarter, distribution coverage was 1.22 times, just shy of the midpoint of our 1.2 to 1.3 times guidance. Adjusting for the impact of Gas Plant I down time, coverage would have approximated 1.3 times during the third quarter. Our cash flow comfortably supports our distribution, which we increased another 5% since the last quarter. This keeps us on track with our targeted 20% annualized distribution growth rate. At the Bighorn DevCo in October, Oasis Midstream Partners successfully began commissioning its new 200 million cubic foot per day gas plant. The plant is mechanically complete and will start producing commercial product later this month before ramping into year-end and over 2019. We expect utilization to approximate 60% in January 2019, consisting largely of Oasis volumes before increasing to above 80% by yearend 2019 as third-party volumes become more significant and volumes from our sponsors grow. The ramp up of this second Gas Plant is a major driver to our 2019 financial projections, which now calls for coverage of 1.6 times to 1.7 times in the second through fourth quarters of 2019 with 20% LP distribution growth. Additionally, this investment will enable our sponsor to continue to exceed regulatory requirements for gas capture, which increased to 88% this month. For the basin as a whole, captures turned at approximately 82% for the past five months. This tightness in gas processing has enabled us to secure third-party contracts, which we'll discuss later in more depth. Turning to our first gas plant. During August, we experienced down time lasting 12 days due to a compressor failure. The downtime affected August volumes, while July and September were not affected. On average, loss volumes associated with the downtime were approximately 10 million cubic feet per day at Bighorn and Bobcat. Design changes were implemented during the 12 days of downtime to prevent future outages and the gas plant has been running smoothly for two months since and in October, had record efficiency. With our second gas plant coming online later this month, Oasis stands to benefit from operational efficiency and flexibility provided by our two gas plants and mechanical refrigeration units. As I mentioned earlier, we announced additional third-party deals in the Williston Basin largely related to gas gathering and processing. The team put us in a strong position on this front. Has a combination of subsurface knowledge and strategic plan gave us the first mover advantage in building processing to accommodate rising GORs across the core of the Williston Basin. We remain in active dialogue with multiple parties regarding additional opportunities in gas processing and across other commodity streams as well. Looking to 2019, OMP's growth will continue to be supported by our sponsor's rig program as Oasis is now running four rigs in the Williston and is adding a fifth by yearend. The 2019 program will continue to be Wild Basin-heavy, but we expect a growing contribution from other core areas as well. In addition, to sponsor growth, we have third-party agreements we signed this year that are expected to fill volumes during the second quarter providing additional tailwind to growth and coverage. As we look to the fourth quarter of 2018, we expect coverage of about 1.2 times as our second gas plant is now expected to come online at month end rather than early November. We're excited about the future at OMP as the team has done a great job this year executing multiple projects and diversifying our customer base. Looking to 2019 and beyond, our financial outlook is fantastic and we continue to see additional growth opportunities across commodity streams. With that, I'll now turn the call over to Michael.

[Michael Lou:]

Thank you, Taylor. As 2018 winds down, I wanted to highlight just a handful of OMP's major accomplishments during the year. We signed numerous third-party agreements across the DevCos, diversifying our customer base and extending our runway of peer leading distribution growth. We constructed Gas Plant II and are expecting volumes to flow through it at the end of this month. And finally, our execution this year allowed us to deliver robust volume growth across the DevCos, leading OMP to increase its financial outlook across 2019 and beyond. In 2019, Bighorn remains the single largest driver of growth, following the completion of Gas Plant II. A combination of higher volume growth and improving margins is expected to drive Bighorn EBITDA to more than double versus 2018 levels. At the Bobcat DevCo, crude volumes grew 1% sequentially while natural gas fell 2% and water grew 17%. Natural gas volume growth would have been in the neighborhood of 3%, adjusting for curtailed gathering volumes related to the Gas Plant I downtime. Looking forward, we expect Bobcat EBITDA to grow by over 50%, driven by a steady development program at Oasis and growing third-party contributions in 2019. At the Beartooth DevCo, water volumes were at an all-time high in the third quarter. During the quarter, we increased water volumes to 151,000 barrels per day, a 54% increase from year-ago levels. Approximately 75% of the increase was related to Oasis-produced water growth, with roughly 25% associate with increased freshwater volumes. A substantial portion of the growth came from third-party freshwater volume sales and OMP continues to have discussion with third parties on potential opportunities for 2019. Altogether, as we look at our EBITDA forecast next year, net to OMP, it is 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, Bighorn could be about 68%; Bobcat, 12%; and Beartooth, 20% of EBITDA next year. On the capital side, we continue to work through the many opportunities available to us. As it stands, steady state CapEx attributable to OMP would drop significantly year-over-year roughly 40%, reflecting the completion of Gas Plant II and associated gathering. There are many growth opportunities we're currently evaluating, including third-party agreements. We're working with Oasis to think through options in the Delaware infrastructure plant and we expect to update on this in coming months. With that, I'll hand the call over to Richard.

[Richard Robuck:]

Thanks, Michael. Growth at OMP continues to be driven by strong sponsor activity and an increasing contribution from third parties. We remain on track this quarter with our 20% annualized distribution growth target with third quarter distribution being at $0.43 a unit. In spite of peer-leading distribution growth and great distribution coverage, OMP still trades at a discounted valuation to our peers that have similar or even less impressive growth and distribution metrics. The team continues to focus on execution and surpass expectations. For 2019, EBITDA is expected to be up almost -- about 65% from 2018 levels with rapidly improving coverage even with 20% year-on-year distribution growth. During the third quarter, the 3 DevCos added together, delivered $46.3 million of gross EBITDA and $15.6 million of net EBITDA. Distributable cash flow to OMP was $14.4 million. Downtime at the plant led volumes to be modestly short of expectations. Going forward, we will benefit from operational flexibility provided by our two gas plants and the mechanical refrigeration units. We continue to be on track to meet our capital plan and while maintenance CapEx was below expectations during the quarter, we continue to expect maintenance CapEx to average about 7% to 10% of EBITDA over time, especially as we plan to do a little bit more maintenance improvement and work during the fourth quarter. As of September 30, 2018, the partnership had cash outstanding of $5 million and $166 million of borrowing under its $250 million revolving credit facility. Going forward, we retain the financial flexibility appropriate to our growth trajectory and opportunity set. In closing, it's been just over one year since our IPO and we're proud of OMP's achievements. We're looking forward to a strong 2019 as well. Our focus on capital efficient growth, coupled with a strong sponsor with exceptional subsurface expertise, puts OMP in a great competitive position. Our goal remains to deliver a stable, fixed fee-based revenue growth and our long-term acreage dedication, which minimizes direct to commodity price 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 now hand the call back over to William for questions.

[Operator:]

[Operator Instructions] And our first question for today will be Colton Bean with Tudor, Pickering, Holt & Co.

[Colton Bean:]

Just to kick it off on the Delaware acquisition. So for the 1,600 acres, are there any Midstream commitments associated with that? And then just as you evaluate additional bolt-ons from the Delaware, do Midstream dedications factor into that -- those considerations at all? Or how do you guys think about that?

[Michael Lou:]

Well, that's really an upstream question, but I think at the parent level, they're not going to necessarily look directly at Midstream commitments, but we, as a company, as the parent, they're going to think about that we've been able to deliver better kind of quality of service in areas like Wild Basin and we think if we would've gone with all third parties and so it's always going to be a part of what we look at. But it's not going to be a, for sure, necessity that it has to come free of any marketing or Midstream commitments going forward.

[Colton Bean:]

And just on the Pan Woods results as well. I think, you guys noted results are pretty encouraging there, but no specifics. From a Midstream standpoint, is there anything on the water side of that that we should be watching for? Any kind of preliminary indications, or were the results kind of in line with what you've seen in the past?

[Taylor Reid:]

Over all, the ratios are probably fairly in line, but making bigger wells. So you're going to expect more -- a lot of volumes than you would've historically had on a per well basis. But we'll keep an eye on those cuts as those wells continue to produce. And as we've talked about that area, it's undedicated, so an opportunity for OMP.

[Colton Bean:]

And just a final one for me here. So as you think about Delaware participation, I think in the past, you noted that you may be biased towards produced water and potentially crude oil gathering. As that still the case? And I guess, are there any changes that we should be on the watch for that might include gas E&P in that mix as well?

[Michael Lou:]

No real changes. I mean, we talked at the parent level as well, but I think OMP is going to be -- we'd love to do all parts of the business if we can and just making sure that it can do the same things that it does in other areas for either the sponsor or for other third parties. And that's -- provide a level of kind of quality of service and certainty of service at the right cost to make it kind of a win-win for both parties. So to the extent that they can do it on any of those commodities, we'll try to do that. And so we think that all the more opportunities, water gas and oil.

[Operator:]

And the next questioner today will be Jeremy Tonet with JP Morgan. Please go ahead.

[Rahul Krotthapalli:]

This is Rahul on for Jeremy. Just starting off here of what drives the confidence behind the revised coverage of 1.6 to 1.7 to '19 and exiting about 1.17 here? Is this completely backstopped by the Oasis well completions, which you noted earlier? And how much of this is third-party driven?

[Taylor Reid:]

Yes. So that's a great question. The route is the planning effort and the volume forecasting effort here at Oasis and OMP are intricately linked. And so when we think about what we promised to do on the IPO, we -- so that you'd have great, underlying volumes, underpinned by Oasis, our sponsor, and then we go look to drive upside from third-party. And so all we are including in our forecast for 2019 is Oasis' volumes that are part of its overall program tied with the sponsor outline in its call a little bit earlier and then also the third-party deals that we have lined up already. So our business development team here has done a great job just from the get-go, going out and trying to identify folks that we could work with. And we've only added the business that we've signed up-to-date into our forecast. So that gives us a lot of coverage for our ability to hit numbers as we get into 2019. And hopefully, the team, with all their efforts and their backlog we already had in place for incremental opportunities can expand that number even more.

[Rahul Krotthapalli:]

Got it. That's helpful. And then since you'll be the second largest Bakken purchaser once the Gas Plant II comes online. Would you be willing to leverage this position into equity interest and downstream infrastructure going forward?

[Taylor Reid:]

At this point in time, we have -- Oasis has worked on the downstream side and secured opportunities to make sure that the gas and NGLs move. And today, with the position we have, we have some great contracts to ensure that we flow the volumes. But over time, if it makes sense, we'll look in to it but for right now, I think, OMP is focused on gathering processing for the commodity streams it's got inside the basin.

[Rahul Krotthapalli:]

And then one final one. On the Beartooth guidance sequentially, how sensitive is this with respect to the third-party freshwater volumes?

[Taylor Reid:]

Yes, so that's what it really is driven for. The team, again, had lined up a contract arrangement with a third party that drove a substantial amount of volumes in the second and third quarter. So we just guided the fourth quarter down because those fracs had ceased and that had wound up. The good news is we have guys that we're talking to about getting that up and running again for 2019, again, which could be upside to our volumes forecast and our thought process on EBITDA.

[Operator:]

And the next questioner today will be Spiro Dounis with Crédit Suisse. Please go ahead.

[Spiro Dounis:]

Just wanted to start off on the drop-down. I think, I heard it come up a few times on the OAS call earlier, just around the timing. So I was wondering if you can give us some more color there. It sounds like timing is still in flux, but just curious what some of the factors are that's going in to drive the drop-down timing and size.

[Taylor Reid:]

Yes, I would just echo what Michael said a little bit earlier today on that. There's really no update in terms of timing and sizing. It's just up in the -- we just continue to evaluate internally and it really has to be something that's mutually agreeable to both the upstream business and the Midstream business. So I think that's probably kind of the most color I can give you on that front.

[Spiro Dounis:]

And then just on third-party business. I believe you guys have talked about it being 10% to 15% of gross debt for EBITDA by the end of 2019. Curious, where is that today as it stands? And then when you think about upside to that, I think you mentioned a few third-party opportunities that you're evaluating. Would that be upside to that 10% to 15%?

[Taylor Reid:]

Yes. So right now, third-party is very low and so we've got some third parties that are in and specifically, on the water side, as Richard mentioned, but think about it as kind of 5% or less. It will grow pretty significantly next year and you're seeing a lot of that third party in growth in both Bighorn as well as Bobcat. And then we just talked about Beartooth and how you can see some of that grow potentially in the future as well. Those tend to be shorter-term contracts so they won't be as kind of long term as maybe some of the other third-party deals that we're doing on the gas side. So all that together, you can see that we're continuing to grow third-party. We still have room to continue to grow across all of our DevCos. So we're aggressively pursuing kind of additional third-party business.

[Spiro Dounis:]

Last one. Just on the Midstream opportunities in Delaware. I think, I heard on the OAS call, maybe not sure how you're going to fund it yet, whether it be at the Midstream level or down at OMP, but just curious just around the timing. Maybe you can give us any sort of -- maybe when that potentially come online? And then in terms of the size and the magnitude of the spend, is that something that the Midstream company or OMP could actually take on by itself?

[Taylor Reid:]

Yes. I mean, that's something that we're scoping with the Parent and I think they mentioned it that we're going to try to come out with something end of the year on kind of the fourth quarter call in February with a little bit more detail. Obviously, the size of the capital spend will depend on a number of things. Just how extensive the system gets and how broad we make it, along with how many of the commodities we actually end up touching, whether it's water, gas, oil, all three or some of those individually. And so it's certainly something that we think, depending on the scope of the project, certainly something that could be funded at OMP. But we'll just have to see where the parent wants to go on that and what the ultimate size of the whole project is.

[Operator:]

And the next questioner today will be Eli Kantor with IFS Securities. Please go ahead.

[Eli Kantor:]

Following up on the third-party growth opportunity, and fully appreciating there are a lot of moving parts to this question, but given your visibility, your expectations for third-party EBITDA as a percentage of gross EBITDA beyond '19?

[Taylor Reid:]

Right now, we don't have that. I'd say, to think about it in that same neighborhood that we've got it for '19, in that 10% to 15% neighborhood. Obviously, it could go up from there. But right now, we're being pretty conservative as we're still early in capturing these third-party deals. We're still early in kind of in that lifespan, if you will. So the important thing is we're continuing to look for, call it, the fixed fee type contracts we're trying to lock in term where we can. And similar to Oasis as a sponsor, we're looking for strong producers that will look for that same level, kind of quality, certainty and cost of service that we provide to the parent. We think that, that customer service will be seen over time. So we think there's opportunities. Right now, we don't have a lot of that built in though other than what we've currently signed up, as Richard mentioned before.

[Eli Kantor:]

Fair enough. Understanding that most of your growth CapEx is going to be sponsored, financed, can you give an update on what OMP's annual growth CapEx requirements will be following the start up of Gas Plant II? And how growth capital related to incremental third-party volumes will be finite?

[Taylor Reid:]

Yes. So right now, on what we laid out in the capital program, talking about being kind of 40% down year-over-year, that's kind of call it in the -- if we're at 100 to 108 right now and you're in the 60-ish plus to $1 million neighborhood, then you'd your 7% to 10% of EBITDA maintenance CapEx. So the balance is growth CapEx for the three DevCos. And that's, again, just like supporting incremental connections and a little bit of incremental gathering spend across Bobcat and Beartooth. In terms of incremental third-party deals that are not in the EBITDA forecast right now and the capital associated with it, we think about that as incremental opportunity. And so if we sign up anything between now and when we talk to you next quarter, we'll update our view on capital and then we'll tend to just update capital for those incremental projects as we think about -- as we get them lined up so there's certainty around the build multiple, the returns and the growth trajectory of the business.

[Operator:]

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

[Taylor Reid:]

Thanks, William. In closing, it's been a year of progress and outperformance for OMP since our IPO in September of last year. We've greatly exceeded our original guidance and look forward to continuing -- to continue delivering for shareholders. Thanks, again, for joining the call today. And 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.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.