Western Midstream Partners, LP
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Gas Fourth Quarter and Full Year Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today, Benjamin Fink, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

[Benjamin Fink:]

Thank you. I am glad you could join us today to discuss Western Gas’ fourth quarter and full year 2014 results. Before we get started, I want to make sure you have on your calendars, our conference call scheduled for March 4, where we will provide 2015 guidance. Please note that on this call we will be referring to Western Gas Partners as WES and Western Gas Equity Partners as WGP. I would also like to remind you that today’s presentation includes forward-looking statements and certain non-GAAP financial measures. A number of factors could cause results to differ materially from what we discuss today. We encourage you to read our full disclosure on forward-looking statements and the GAAP reconciliations on our website and attached to yesterday’s earnings release. For those of you who are unitholders of WES in 2014, I am pleased to inform you that your K-1 will be available on our website next week with paper copy to be mailed to you later in March. For those of you who are unitholders of WGP in 2014, your K-1 will be made available on our website in mid-March with paper copy to be mailed to you towards the end of the month. With that, I will turn the call over to Don Sinclair. And following his remarks, we will open it up for Q&A with Don and the rest of our executive team. Don?

[Don Sinclair:]

Thanks, Ben. Good morning, everyone and thank you for joining us today. WES’ fourth quarter and full year results for 2014 were excellent. For the full year, WES adjusted EBITDA was near the high-end of the guidance range we announced in November. WES’ full year capital expenditures were slightly above the high-end of the guidance range and maintenance capital as a percentage of adjusted EBITDA was at the low end of our announced range. The strong performance of WES led to another year of substantial growth at WGP as this 2014 full year distribution was 37% higher than 2013. Looking specifically at WES’ fourth quarter, adjusted EBITDA was $170.4 million and distributable cash flow was $138.1 million. WES’ fourth quarter coverage ratio of 1.1 times includes all the common units that issued in conjunction with its November equity offering, with only 37 days of distributable cash flow from the Nuevo assets. The drivers behind WES’ fourth quarter results were sequential natural gas throughput growth in the DJ Basin and the Nuevo acquisition tempered by declines at Chipeta and the Granger Straddle plant. Crude and NGL throughput was down slightly in both our gross margin per MCF and our gross margin per barrel of where we expected them to be. I am also pleased to report that Lancaster Train II in the DJ Basin complex remains on schedule for second quarter startup. Our integration of Nuevo Midstream, which we have now renamed Delaware Basin Midstream is progressing as planned. The recent drop in commodity prices has impacted producer drilling plants across the Lower 48. As such, we do not believe that additional processing capacity in the Delaware Basin will be required as quickly as we had anticipated in October. Our current schedule is to add the Ramsey IV plant, which has capacity of 200 million cubic feet per day in the first quarter of 2016. Ramsey V will add another 200 million cubic feet per day of capacity and is currently scheduled to be placed in service in mid 2016. We have already purchased all the long lead time items for Ramsey V and have the ability to accelerate the in-service date if market conditions warrant. While these capacity additions will be later than we originally anticipated, our strategic rationale for the acquisition has not changed. We still believe that Delaware Basin has some of the best undeveloped resources in North America and with our established midstream footprint we will provide quality service for our producers, while creating significant unitholder value, similar to what we are doing in the DJ Basin. We are aware that many of you have questions about our 2015 outlook given the current commodity price environment. We will answer those questions on our call on March 4, which is the morning after Anadarko’s investor call. We continue to expect grow distributions at WES by now less than 15% in 2015 and look forward to sharing the details of our execution plan with you on March 4. With that operator, I would like to open up the line for questions about the quarter.

[Operator:]

Thank you. [Operator Instructions] You have a question from Jerren Holder [Goldman Sachs]. Your line is open.

[Jerren Holder:]

Good afternoon, just wanted to maybe touch on the dropdown strategy here, obviously the big acquisition last quarter third-party, w did that change things especially I guess in - like this commodity environment, obviously you guys are growing at least 15% this year, so you don’t really need one, how should we think about dropdowns I guess 2015 and going forward?

[Benjamin Fink:]

Hi Jerren this is Ben. I guess to sum it up, word is unchanged. We move assets from Anadarko to West over time when we believe they are appropriate for our portfolio. And we are viewing it in the same way now as we have before.

[Jerren Holder:]

And it’s more West driven versus Anadarko needs financing or?

[Don Sinclair:]

Historically that process is always originated at West and we expect that to be the case.

[Jerren Holder:]

Okay. And I guess a housekeeping item for WGP, you noticed the SG&A expense and the DCF calculation there was a bit of an uptick there usually it’s less than $1 million that was like $2.4 million, $2.5 million, any particular reason for that is that a run rate we should expect towards that probably related to the acquisition in the fourth quarter?

[Don Sinclair:]

Full year of D&O insurance hit in the fourth.

[Jerren Holder:]

So we should not expect that to be a run rate going forward?

[Don Sinclair:]

No that run rate of $3 million a year that we have been averaging is still pretty good.

[Jerren Holder:]

Okay, alright, that’s it for me. Thanks.

[Operator:]

[Operator Instructions] Your next question comes from Brad Olsen [Tudor Pickering Holt]. Your line is open.

[Brad Olsen:]

Hi guys. Good morning, I apologize if you covered this as I just got on the call a couple of minutes late, I just wanted to check and see if the longer term target of 7.5 times EBITDA on the Nuevo deal is still impacting this new rig count environment we find ourselves in?

[Don Sinclair:]

Hi Brad. I think you are referring to the 8.5 times 16 multiple that we announced….

[Brad Olsen:]

Yes. I apologize 8.5 times.

[Don Sinclair:]

Yes, that’s okay. I guess the way we are looking at it is everything is being pushed out about a year. So I think that multiple is probably more appropriate for ‘17 at this point than ‘16.

[Brad Olsen:]

Okay, great, that was all for me. Thanks guys.

[Operator:]

[Operator Instructions] Your next question comes from Sharon Lu [Wells Fargo Securities]. Your line is open.

[Sharon Lu:]

Hi, good morning. Maybe if you could just provide a little bit more color on the sequential decrease in the crude and NGL volume, specifically which regions are experiencing the most weakness?

[Don Sinclair:]

Sure Sharon and keep in mind we are talking about 7 barrel a day sequential throughput that’s spread over five different systems. So really it’s just minor decreases at places like Texas Express, Front Range, Texas Express Gathering is just nothing meaningful in any system.

[Sharon Lu:]

Okay. But I guess looking at you footprint is there – has there been I guess a larger shift in activity level in one region versus another?

[Don Sinclair:]

Not exactly, I mean in terms of our footprint the growth in the DJ Basin is still there. And as you know that’s a higher margin asset, which affects our gross margin per MCF assets. In terms of the gross margin per barrel, those are mostly pipelines, alright. That’s the White Cliffs Pipeline, that’s Texas Express Pipeline, Front Range Pipeline, our NGL Pipeline which connects Chipeta to MAPL and then of course our interest in fractionators 7 and 8.

[Sharon Lu:]

Okay, alright. Thank you.

[Operator:]

Your next question comes from Elvira Scotto [RBC Capital Markets]. Your line is open.

[Elvira Scotto:]

Hi, good afternoon. Just one really quick follow-up question for me, the 15% or no less than 15% distribution growth, have you stated whether that is inclusive of drop-downs or is that just based on your base business?

[Benjamin Fink:]

We have not and we will give a lot of color around that on the fourth.

[Elvira Scotto:]

Okay, great. That’s all I have. Thanks a lot.

[Operator:]

Your next question comes from Faisel Khan [Citigroup]. Your line is open.

[Faisel Khan:]

Yes, just going back to some of your previous comments on pushing back some of the need for processing capacity in the Delaware Basin. So, I just want to make sure that relates to Nuevo assets. So, I am just kind of understanding how you guys are thinking about accretion dilution in that transaction given the pushback in those processing plants?

[Benjamin Fink:]

Sure. This is Ben again. Remember that this was going to be marginally accretive in ‘15 and we are able to generate the accretion through the flexible financing structure we have put in place of the $750 million of Class A units, excuse me. So, if you think about ‘15, that was basically the year of the large build-out. So, instead of two plants coming online in the beginning and the end of the fourth order ‘15, now it’s the beginning of ‘16 and mid ‘16. So, one plant being delayed one quarter, another plant being delayed two quarters is the way to think about it. Does that answer your question?

[Faisel Khan:]

Yes. Basically, it will be accretive in all this year, but you should see the cash flows kick-in in ‘16 is what you are saying?

[Benjamin Fink:]

If it is accretive in ‘15 it will be marginal.

[Faisel Khan:]

Okay, okay understood. Alright, thanks.

[Operator:]

We have another question from Josh Golden [JPMorgan Asset Management]. Your line is open.

[Josh Golden:]

Hi, this is Josh Golden from JPMorgan Asset Management. I just want to see how you are thinking as the partnership grows, how you think about your balance sheet and your overall general approach again as you grow to the credit ratings of the partnership? Thank you.

[Benjamin Fink:]

Sure. This is Ben again. Maintaining our investment grade ratings are something that we worked very hard work for and now that we are great investment grade by all three agencies, it’s not something we ever intend to put at risk. I think you know when the MLP market bifurcates it tends to bifurcate across the investment grade lines. So, what that means to us is really keeping debt to EBITDA kind of below 4x which we have done historically. Over time, as we grow and develop more size and scope, I’d love to migrate to BBB. And I think that’s very achievable over time. Does that answer your question?

[Josh Golden:]

It certainly does. And just as a follow-up to that, can you touch a little bit upon your approach to fee-based income, minimum volume commitments in conjunction with the credit ratings?

[Benjamin Fink:]

That isn’t a number that we manage. That is a number that you can say we inherit as we move assets from Anadarko to WES. If you think about where we are today and this is a bit rough, but approximately third of our throughput is coming under demand charge. Another third on top of that is covered under cost of service agreements in our dry gas areas. And what we always try to do is mitigate the commodity risk impact at WES. I think that’s very important component of our credit rating. So, what that means is have as much fee-based business as possible to the extent we have POP or Keep-Whole contracts, have Anadarko retain that through the fixed price commodity swap agreements that we have in place.

[Josh Golden:]

Okay, excellent. I appreciate that color.

[Benjamin Fink:]

Sure.

[Operator:]

The next question comes from Helen Rayu [Barclays Capital]. Your line is open.

[Helen Rayu:]

Thank you. Ben, so just to follow up on the plant, the push out of the plant timing, is there a potential for that timing to get adjusted further based on the key producers’ plans or at this point do you have enough visibility to make those timing very solid and would that be affected at all by what Anadarko ends up coming up with early March?

[Don Sinclair:]

Helen, this is Don. How we look at it today is what we are trying to do is make sure we have plenty of flexibility around the infrastructure that we are going to build. We are no different than anyone else as far as seeing what producers are going to do relative to capital development. We still feel very good about the Delaware Basin and how we are seeing capital allocated across the different producers’ balance sheets so far. Obviously, Anadarko’s development plans will be a driver. What we have tried to do is make sure with Ramsey V that we have – we have all the long lead items purchased and our ability to put it in service is basically 6 months from when we hit the start button. So we have flexibility to move that plant if commodity and capital dictates that the development tells us that we need to do that, we will look at that as well. But as far as predicting what’s going to happen in ‘16, ‘17, I am not sure I am good at second quarter right now.

[Helen Rayu:]

Okay, that’s very helpful. And then just in terms of the timing of the PIK unit conversion, I guess could you remind us where that stand, is it the case that you could convert, is there a hard date where that – those units need to convert and you have the option to do it earlier if you want or where is the point of when it has convert to common?

[Benjamin Fink:]

That’s right. At the end of ‘17 is when it converts to common.

[Helen Rayu:]

Okay.

[Benjamin Fink:]

WES has the unilateral option to convert early and Anadarko has the unilateral option to delay conversion.

[Helen Rayu:]

Okay, got it. Alright, thank you very much.

[Operator:]

At this time, I have no further questions in queue. I turn the call back over to Mr. Fink for closing remarks.

[Benjamin Fink:]

Thank you for your interest everyone. And we will talk to you in two weeks.

[Operator:]

Thank you everyone. This concludes today’s conference call. You may now disconnect.