Resources Connection, Inc.
Q2 2009 Earnings Call Transcript

Published: 11 Aug 2009

[Operator:]

Welcome to the second quarter 2009 Regency Energy Partners conference call. My name is Geri and I will be your coordinator today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. [Elizabeth Huber] Manager of Investor Relations.

[[Elizabeth Huber]:]

Welcome to our second quarter conference call. Today you will hear from Byron Kelley, our Chairman, President and CEO and from Stephen Arata, our Executive Vice President and Chief Financial Officer. Following our prepared remarks this morning we will turn the call over for your questions. Distribution of the release and the slides that we will use today are available on our website at www.RegencyEnergy.com. The first slide of the presentation describes our use of forward-looking statements and list some of the risk factors that may affect actual results so please read this slide. Also, including in the presentation today are various non-GAAP measures that have been reconciled back to GAAP or generally accepted accounting principles. These schedules are at the end of the presentation starting on Slide 32. With that, I will turn the call over to Byron Kelley.

[Byron R. Kelley:]

As always, we look forward to providing you with a detailed update on the company’s performance and also having a chance to share with you our thoughts about the market in general. Before I get in to the presentation, I’d like to say a few words about Shannon Ming. You noticed that Liz did the introduction today rather than Shannon who many of you know. Shannon, as I think most of you may know or be aware of, she had and gave birth to a baby girl last Thursday. Shannon was determined to work through our board meeting which we held last Thursday as well as make sure that we were prepared for today’s meeting. We actually had board committee meetings all day on Wednesday which she attended but that night at our board dinner, about half way through Shannon admitted finally that she had actually been in labor all day. So, a few of our executives immediately called her husband Tom and then whisked Shannon away to the hospital. Shannon, if you’re listening and I would be sure that you are, we all send you our appreciation for getting us ready for this meeting and our congratulations to you and Tom on the birth of your new baby girl. Not to put pressure on you but, hurry back. Well, we are glad to have Liz who is with us to step in and help us through today as well. Back to the business, I am pleased to report to you this morning that our second quarter performance was right in line with our expectations, right in line with our internal budget for the quarter. I’d like to begin really on Slide Three of the presentation and begin with some highlights, year-to-date highlights. We had solid second quarter results and that’s despite the continued low rig count and soft commodity prices that the industry is seeing industry wide. Our second quarter EBITDA of $56 million represents a $1 million quarter-over-quarter increase compared to the first quarter of this year. Cost saving initiatives in our compression business which resulted in consistent quarter-over-quarter performance in that business despite some horsepower usage declines that we’ll talk about later. From a financing standpoint, in the first half of the year we had some very important events, we raised over $900 million in capital during the first half and we formed the partnership with Alinda and GE Energy Financial Services to co-develop the Haynesville project. You are all aware of that and in that process we raised $653 million to fund the joint venture. Additionally, we priced $250 million worth of 9 3/8% senior unsecured notes that term out through 2016. Everyone has been focused on the Haynesville project, it’s an important project to us and an important project not just currently but in the future of this company. I am pleased to report to you that that project is on budget, that project is on schedule and we fully anticipate being in service by the end of this year. I’ll hedge a little bit and say maybe even a little early. That project is doing quite well. Construction on the 36 inch pipe is more than half complete, construction on the 42 inch pipe commenced in June and this project is well positioned for additional growth projects. This project is located in the right place and the timing of our in service date certainly puts us in good position to consider some additional expansions as well. On Slide Four we have some highlights related to the second quarter. Our second quarter performance was in line with expectations and we are reiterating our previous guidance of $220 million to $240 million for the year. That is an [inaudible] number and you can see on the chart that the adjusted number for the joint venture, the guidance would be $200 to $214 million of EBTIDA post JV. Also, as you are aware, our second quarter 2009 distribution was in line with our expectations at $0.445 or $1.78 on an annual basis were in line with our expectations. We plan to maintain our current $0.445 distribution through the construction of the Haynesville project but as always, distributions are set by our board of directors and are driven by the board’s view of long term sustainability of the business so they are revisited on a quarterly basis. At this point, we fully anticipate to be holding those steady throughout the year. I’d like to now move in to the business review and invite you to turn to Slide Six. Here we have some industry trends regarding drilling activity and obviously this activity impacts our business across our transportation and our gathering business, processing business and in our compression business. In the past 12 months the total US land rig count declined by approximately 56% down to 932 rigs at the end of the second quarter. The land rig count for areas in which Regency operates declined by close to the same amount, about 58% down to 599 rigs at the end of the second quarter. During the quarter at looking at fundamentals of natural gas, they traded in a tight range primarily between $3.50 to $4 per MMbtu. Right now we don’t think pricing looks to improve before the winter withdrawal season begins essentially driven by the forecasted storage levels right now are going to reach capacity prior to the winter time frames. But, there are a few positive signs on the horizon for us, over the quarter Regency saw rig counts begin to stabilize in the counties in which we operate with rigs increasing slightly in South Texas by two and West Texas by two and then a slight decline in North Louisiana a negative two, midcon a negative two and East Texas a negative one. So, we basically held flat in total rig count. Before you can see an uptick you need to see some stabilizations and we were very pleased to see the rig counts seemed to stabilize on our system during the quarter. The forward curves right now point to a rebound in natural gas prices with the 2010 forward strip trading nearly $6 per MMbtu. On a broader basis, we believe that drilling levels are not sufficient today for the industry to meet ongoing demand post 2009 and higher prices should be reflected as deliverability declines from the lower rig counts begin to work their way in to the market. As a result of these dynamics we do expect to see some stronger pricing begin to take place in the first half of 2010. On Slide Seven we’ve got some trend data related to commodity prices. Over the first half of 2009, gas and NGL prices seemed to have stabilized somewhat and we think we are beginning to see a rebound in West Texas and immediate. The forward curves in addition to the $6 price indicated earlier for natural gas are also indicating that crude will rebound to approximately $75 a barrel for the full year in 2010. Moving to Slide Eight, I’d like to spend a minute on some quarter-over-quarter results comparing second quarter of 2009 to the first quarter of 2009. Despite the headwinds in the broader market we continue to deliver results in line with our expectations. Comparing the first quarter of ’09 to the second quarter of ’09 to the second quarter of ’09 our combined adjusted EBITDA increased by $1 million from $55 to $56 million. The increase was principally driven by an increase in the second quarter. Combined adjusted total segment margin of a couple of hundred thousand more than we had in the first quarter and then by aggressive expense management which added another $800,000 in the second quarter. The adjusted EBITDA assuming prorate portion of the Haynesville joint venture decreased by $3 million from $54 million in Q1 to $51 million in Q2 and this was principally related to the contribution of the 60% interest in to the joint venture. There we saw approximately a $4 million increase in the amount of allocated EBITDA to our partners. The actual financial results reported for the first quarter are as follows

[Stephen L. Arata:]

On page 19 you see our consolidated operating results comparing the first quarter of this year to the second quarter of this year. Our net income for the three months ended June was $6 million compared to $148 million in the first quarter. As Byron mentioned, the primary driver there was the $133 million gain we achieved in the first quarter when we contributed our rigs system to the Haynesville joint venture. There is also an additional $1.3 million of net income allocated to our joint venture partners compared to the amount we allocated in the first quarter. Our revenues overall quarter-over-quarter were down by 12.6% but as Byron mentioned, we’ve had some very good cost management efforts so we’ve been able to hold our expenses down as well and excluding the gains and losses on asset sales line items our expenses are down 11.7% quarter-over-quarter and that is a cost decrease in all of the cost categories from O&M to G&A to cost of sales to depreciation. Our interest expense was up by about $5 million quarter-over-quarter driven in large part by additional interest from our new bond issuance where we termed out some of our revolver and in part from higher interest rates from the remaining amount held on the revolver. Page 20 we have our results for our gathering and processing segment. As Byron mentioned, the quarter-over-quarter decline in throughput which was primarily driven by a 15,000 MMbtu a day decline associated with the maintenance at our Tilden plant and then about 35,000 MMbtu per day of lower volumes across our North Louisiana gathering assets. However our NGL production has remained flat quarter-over-quarter at about 22,000 barrels per day as the volume declines had minimal impact in our liquid recoveries. Our adjusted segment margin per MMbtu increased from $0.59 in the first quarter to $0.62 in the second quarter so we have been able to partially offset the lower volumes with higher margins. On page 21, our transport segment results are included. As Byron mentioned we did have a quarter-over-quarter volume decline. About 10,000 MMbtu per day of lower volumes came from lower volumes we flowed to our Union power plant. Then, we did have significantly lower basis differentials in the second quarter than in the first quarter due to the hotter temperatures in Texas and the lower temperatures in the end markets and the Midwest and the Northeast. If you look at our combined transportation segment margin which includes 100% contribution from rigs for the entire quarter, our segment margin decreased by just under $1 million and our segment margin per MMbtu remained flat at about $0.19 per MMbtu quarter-over-quarter. On page 22 we have some contract compression details. Byron has gone over a lot of this detail so I’ll just give you a couple of additional pieces of information. Compared to the first quarter, our segment margin was down just about $1 million from $37 million to $36 million and that was primarily attributable to a decline of 22,000 revenue generating horsepower. We have anticipated slower than anticipated growth. As Byron mentioned, we responded to this development by aggressively managing costs and we expect the net impact of the environment and our response to it to continue to enable us to meet our budget for this year. Quarter-over-quarter our average horsepower per revenue generating compression unit decreased about 1.4% from 858 horsepower to 846 horsepower but again, this is still a significantly higher ratio than any of the other peers in our industry. On page 23 we have a liquidity update for this year. At the end of July we had $285 million available on our revolver. We also had at that same date $65 million available under our Caterpillar operating lease facility for a total of $350 million of potential available liquidity. We have spent $81 million so far of our $107 million growth capital budget for 2009 which leaves about $26 million remaining in growth capital expenditures remaining this year. We feel very good about our liquidity position and our ability to meet all of our growth capital plans for this year as well as in to next year without having to access the capital markets. Any capital markets we do complete would be in order to further strengthen our financial position or to finance currently unidentified attractive growth projects. Page 24, we have our commodity price risk management summary. You can see our quarterly NGL equity position in barrels per day compared to our hedge positions. For the balance of this year we have hedged 97% of our NGL equity production through product specific swaps. Our overall 2010 NGL hedges are now 56% of our forecasted equity production as we have put on additional swaps in the last three months. For 2010, a little more detail, we have hedged approximately 70% of our non ethane equity exposure and we’ve hedged 75% of our ethane for the first half of 2010 and we expect shortly to put on additional hedges for the second half 2010 ethane exposure. For 2009 and 2010 on the WTI side, we have hedged approximately 75% of our equity production on condensate and then for 2011 we have entered in to swap contracts for 18% of our forecasted equity production of both NGLs and condensate. On the natural gas side we have hedged approximately 85% of our exposure for the balance of this year and about 44% of our exposure for 2010. We do anticipate entering in to additional hedges to hedge approximately 85% of our total equity exposure across all products in 2010 and 50% in 2011. As I mentioned last quarter, we are doing this on a rolling basis. Our risk management committee had determined that a rolling hedge strategy would be better than putting trades all in at once to reduce our overall risk so that’s the strategy that we’re pursuing at this time. On page 25 we’ve put a sensitivity analysis of our distributable cash flow to commodities. You can see from that page that we’re relatively insensitive to commodities. I’ll reiterate we do have length in natural gas because of our conservative effort to minimize our keep-whole exposure and the way to read the chart is a $10 per barrel movement in crude along with the same percentage change in NGL pricing will result in a $200,000 increase or decrease in our full year DCF and a $1 per MMbtu movement in natural gas will result in a $300,000 change in our full year distributable cash flow. On a final note, sulfur prices as I’ve mentioned before cannot be effectively hedged. So, we’ve assumed $30 loss per long ton for our 2009 forecast. A $10 move up or down in sulfur prices will change our segment margin by about $200,000. With that, I’d like to open it up for Q&A.

[Operator:]

(Operator Instructions) Your first question comes from Michael Blum – Wells Fargo.

[Michael Blum:]

I just had really one quick question on the hedging strategy, in terms of going to more of a rolling strategy are you doing that in a formulaic way so that you’re doing it once a quarter or is it still sort of opportunistic but rolling throughout the year?

[Stephen L. Arata:]

We’re trying to do it once a quarter, it’s not on a specific date but we are trying to be more intentional about doing it on a quarterly basis than doing it in large buckets.

[Michael Blum:]

Then just curious in terms of ethane your decision to hedge is that a function of your view that prices are not going to recover much so you’re just going to take the price that the market gives you right now or is it more sticking to that discipline.

[Stephen L. Arata:]

It’s not really a view on pricing it’s more just trying to reduce volatility of future results. I will add Michael that our expectation is that with our hedged portfolio for 2010 so far plus if you just use the forward curve for prices of the unhedged products, we expect our full year 2010 commodity results to be almost exactly on top of 2009’s numbers. Our hedged positions for 2010 are above our 2009 hedges but if you factor in the market prices for the rest of the unhedge products it brings it right in line and we will be increasingly taking that risk off the table as the year moves on. We’re not anticipating a big impact ’09 to ’10 from commodity prices.

[Operator:]

Your next question comes from [Yves Segal] – Credit Suisse.

[[Yves Segal]:]

Could you just reconcile for me on the compression cap ex budget how does the decline in utilization fit with the budget right now and when you look at 2010 what are you thinking about in budgeting cap ex for the compression segment?

[Byron R. Kelley:]

I’ll talk a little bit at the macro level, you backed up in to last year the compression business was very active and you traditionally required long lead times. So much of the purchases that we’re doing this year are a result of commitments that were made last year so we’re seeing some purchases this year that are going not all of that is being placed at this point some of that is going in to inventory. But, we’re not making commitments for purchases for next year so we will utilize this excess equipment this year that we may end up with. We’re going to place some of it but what we don’t place we will then utilize this next year for our business and so you could expect to see capital requirements in 2010 for this business will be in terms of cash outlays much less than they were this year. That’s on a macro basis, if you want some specific numbers we can delve in to that a bit.

[[Yves Segal]:]

Sure if you have them.

[Stephen L. Arata:]

We probably have approximately 100,000 horsepower currently unutilized. Some of that we had in the inventory last year, some of it relates to additional compression purchased this year that hasn’t yet been utilized. We’ve also been looking for opportunities to sell excess compression. We’ve had some success in that arena but one of the interesting things this does and we’ve never really been in this situation before is it gives us a bit of an opportunity to pursue large scale growth opportunities which we never really had compression on hand to do before. So, we are looking at larger opportunities to take over compression from customers. One of the areas we’re looking at now, David Mars and his team are looking at moving in to the Marcellus shale with some of our customers who have been requesting us to look at that opportunity. We’ve made some field trips up there to try and see what kind of opportunities that could play for us. There is a positive side to having a little excess compression but it is going to reduce our cash commitments for next year but we’ll continue growing this business.

[[Yves Segal]:]

When you look at the budget for next year if compression is coming down, it sounds like it will come down next year, where do you see spending the balance of that budget? Is it primarily to hook up more wells? How do you think of that?

[Byron R. Kelley:]

When I look at next year and actually the things that we are working on now that could get started a little bit this year but have most of the expenditures in to next year is in two areas. Obviously the pipeline we believe has some good growth opportunities but they’ll fund that on their own but looking at our gathering business I mentioned earlier down around Logansport area where our Nexus system is there’s some gathering opportunity there. There are gathering in the Haynesville region up in the [Vistano] region that we are expecting and are hopeful that we’re going to be able to put together some opportunities there. Then, there’s some things around the Eagle Ford shale play. Most of those dollars essentially that we’re hopefully going to have an opportunity to spend are going to be in the gathering. It’s going to be a fee based business which is obviously a focus of ours is to continue to grow that. So, we’ve got right now a long list of potential opportunities that would far exceed $100 million if we were to get all of them. Obviously, that’s the way you work, you build up a long list of opportunities and if you get your share you’re going to have some good growth. That’s where the focus is going to be, it’s going to be in the gathering sector.

[Operator:]

Your next question comes from John Edwards – Morgan, Keegan & Company, Inc.

[John Edwards:]

I missed on your 2011 hedges, did you say you had about 45% or so at this point or maybe you could repeat that?

[Stephen L. Arata:]

Actually, at this point we have 18% of our NGL and condensate hedged. We’re anticipating moving that to 50% by the end of this year.

[John Edwards:]

In terms of your G&A and O&M came down quite a bit, what’s your expectation I guess for quarterly run rates on those?

[Stephen L. Arata:]

We expect those to continue to remain flat or decline for the balance of this year.

[John Edwards:]

On the compression, there was a little bit of a decline here this quarter so as far as where you expect the horsepower, are you expecting it to be relatively flat to this quarter or coming down a little bit further?

[Stephen L. Arata:]

I think Byron mentioned that we expect it to be somewhere between flat to slightly down to the balance of the year?

[Operator:]

Your next question comes from Lenny Brecken – Brecken Capital.

[Lenny Brecken:]

I just wanted to ask in terms of the Haynesville expansion opportunity if you look out a ways, can you just help me understand how that potentially is going to be structured? Is Regency going to take a bulk of the investment in terms of expansion or will it be shared among the joint venture? Just give me an idea how you’re thinking albeit it’s a bit early. On another note, the shale plays in Texas which you sort of touched upon but didn’t quantify can you help us understand what the volume opportunities are there? I know you mentioned compression as well in Marcellus but just some understanding of what the volume impacts will be out 12 or 18 months from now if any?

[Byron R. Kelley:]

I’ll first touch on the Haynesville expansion opportunities and we’re talking about the pipeline opportunities there through the joint venture. As you are aware, the joint venture other than the $25 million working capital facility I mentioned really has no debt. It’s an entity that by the end of this year is going to have assets of just to call it a round number $1.1 billion of assets. So, it’s going to be a well rated entity so the plans at the joint venture are to raise the debt at the joint venture level is to as we look out in the foreseeable future to at least fund the first $300 or $400 million of opportunities that we have on that pipeline at the joint venture level. So, there will not be an equity requirement or an equity call from Regency for its 38% share to do it. It’s a self funding entity, that’s one of the good things about the joint venture. As of now, they can raise debt and with their rating they’re likely to get debt at very good costs. So, that’s a positive on the joint venture as we look to grow that. Of course, we’ll get 38% of the benefit of the returns out of that without having to push in the cash. Looking at the Texas shale plays, we’ll start first with the Eagle Ford shale area, by the end of this year we will probably add about $30 million a day of volume coming out of the Eagle Ford shale area. Then obviously if that trend continues down there or accelerates there will be additional volumes that can be picked up down there. We’re looking at how to do expansions down there. We’re really looking at gathering expansions there and I mean it’s not going to be a Haynesville shale but it looks like it’s going to be nice and the good news is where a lot of the activity is, is right on top of our assets. We’ll see a good volume pick up this year and if the drilling keeps going we should see some nice pick up in 2010 as well and a chance to invest some capital down there in 2010. The other Texas shale plays we do do a lot of compression in the Barnett shale play. That has been a big growth area for us in the past, it’s basically not growing at the current time. What I would anticipate is I mentioned that when you look long term we’re expecting cash prices next year to get back up in to a run rate of $6 at least. If we get to that range you may see some drilling activity pick up back in the Barnett shale area which will be good for our business. The Fayetteville shale, the primary producer there and a large customer of ours has continued to drill and we have added there and we would expect that to continue as well. Then getting out of Texas we mentioned earlier that we’re very interested in the Marcellus shale. When you look at what’s happening there right now it’s not a lot of production at this point, they’re spacing the wells pretty far apart to prove up the activity but now we’re looking for the producers pretty soon to start coming back in and filing in the gaps. I think the producer is expecting that they’re going to start bringing volumes on there sometime next year. So, we’re looking to move in with some people that we’ve got good relationships to take us in there and hopefully be an anchor for us to move in with something let’s say 18,000 to 20,000 horsepower. We’re not going to go up there with one unit but our goal is if we can aggregate and go in with a nice package then it would make sense to move in to that market.

[Lenny Brecken:]

Just one follow up, in terms of the Haynesville will you be adding any gathering and processing assets there in conjunction with the expansion?

[Byron R. Kelley:]

What we’re pursuing and expecting, if we’re successful, we’ll be adding some gathering and treating but not any processing. Both of those are fee based, the treating will be a fee based structure just like the gathering.

[Stephen L. Arata:]

I would add those will be at the Regency level not at the joint venture.

[Lenny Brecken:]

Is there any sense of how big with the corresponding investment in transportation what kind of increments? I think you already quantified that in the past but in terms of the volume upside there over the coming years?

[Byron R. Kelley:]

If I were to tell you what my opportunity looks like up there it’s well north of $200 million. We haven’t won them yet so we’ve got to go work it but that’s the opportunity list is somewhere really if you look at it is probably $250 to $275 million of opportunities that we’re looking at in the gathering sector for that area.

[Operator:]

This concludes the question and answer session of the conference. I would now like to turn the conference over to Ms. [Elizabeth Huber] for closing remarks.

[[Elizabeth Huber]:]

Ladies and gentlemen thank you for taking the time to join us today. If you have any additional questions please give me a call.

[Operator:]

We appreciate your participation in today’s conference. This concludes your presentation you may now disconnect and have a great day.