Q3 2019 Earnings Call

Good day and welcome to the CNX Midstreams third quarter 2019 earnings conference call and webcast.

Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press star one on attach telephone to withdraw your question. Please press star to please note. This.

That is being recorded I would now like to turn the conference over to Tyler Louis Vice President of Investor Relations. Please go ahead Sir.

Thank you and good morning, everybody.

Welcome to see nice Midstreams third quarter conference call.

Kevin the room today, Nicky alias our CEO tried Griffith, president and COO and Don Rush, our Chief Financial Officer.

Today, we'll be discussing our third quarter results and we have posted an updated dated slide presentation to our web site.

As a reminder, any forward looking statements, we make or comments about future expectations are subject to visit stress, which we've laid out for you in our press release today as well as in our previous Securities Exchange Commission filings.

We will begin our call today with prepared remarks by Nick followed by Chad and then we'll open the call up for Q anyway, We're dawn will participate as well with that let me turn the call already you know.

Thanks, Tyler I good morning, everybody I'm going to be brief and then I'll turn it over to Chad I did want to hit on a few key points first CNS midstream continues to smoothly and efficiently execute our business plan day in day out and we do it in a safe compliant manner that ability is the prerequisite it.

It's up the strong financial performance that we've been posting quarter after quarter end. It we expect continue into the future so hats off to the entire midstream team.

Second you can see this ability to execute manifests itself in the financial numbers other than the results for the quarter as well as in 2019 and 2020 updated guidance.

Cash flows and throughput are being raised for 29 team, reflecting midstream smooth execution and coupled with upstream producers CNX being able to improve its performance for the year.

Cash flow guidance for 2020 and coverage ratio are unchanged from the last update despite upstream activity from CNX being streamlined and reduced as it adjusts with gas prices and by the way that streamlining of 2020 activity by CNX only built inventory and runway for CNX midstream into the future beyond 2020.

Third point, our build out and capital spend associated with it. The comments are successful conclusion as we speak that is going to allows double down on even more intense day to day operation a generate free cash flow and reduce leverage ratio all things to look to and forward four in 2020 and beyond and then.

Sorry, 15% distribution growth for.

And 18 consecutive quarters of delivering on 15% distribution growth in the past those things do not happen by accident. They are the results up business philosophy of a state capital allocation and a focus team on execution on executing that philosophy in action, so with that and I'm going to turn things over over to chat.

Thanks, Nick the company posted another strong quarter results highlighted on slide three.

Average daily throughput excluding volumes under high pressure short haul agreements was 1754 BBT use per day in the quarter up around 1.4% when compared to the second quarter of 2019.

We also posted the 18th consecutive quarterly cash distribution increase our target of 15% annual growth rate.

We have continued to focus on costs, which have helped drive up our adjusted EBITDA, which in the quarter was $56.5 million or $12 million higher than the third quarter of last year.

Despite our leverage ratio remaining well within our targets and below the industry average it did tick up slightly that 2.9 times compared to 2.8 times last quarter. As we've previously stated we continue to expect that our leverage ratio will peak in the fourth quarter of 2019 at around three times, and then quickly come back down to around 2.7.

Times by yearend 2020.

Moving on to slide four.

We have provided updated guidance for 2019, and 2020 2019, we're taking up our throughput volumes for the year as CNX accelerate some volumes from 2020 into 2019.

We are adjusting adjusted EBITDA and distributable cash flows as a result, which were up 15 million each based on the midpoints of the guidance ranges.

For 2018, we are reaffirming the previous guidance.

In 2020, we are reducing throughput volumes, mostly by 50 BB to use per day.

However, despite a lower volume range compared to the previous guidance adjusted EBITDA and DCF remain unchanged due primarily to offsetting general and administrative cost reductions.

For capital, we are reaffirming the previous range of $80 million to $100 million as we continue to expect capital due to decline substantially as we returned to a more run rate construction program and 2020 after completing the handful projects and system expansions that I will touch on shortly.

The reduce capital and 2020 is helping to drive expect your free cash flow and the year between $120 million to $140 million.

Lastly, we are reaffirming our 15% annual distribution growth as the target through 2023.

As already stated third quarter with our 18th consecutive quarterly cash distribution increase at the target of 15% annual growth rate.

Slide five as an update of our major capital projects on the facility side, we've reached major milestones on two large scale projects, starting the new dry Red station and the service and completing the more station expansion is resulting in the commissioning of seven new compressors in the quarter.

And the fourth quarter of 2019, we will install the bucklin station discharge lines and see first volumes flow soon after.

We expect our major 2019 projects to reach mechanical completion in the fourth quarter with some level of project closeouts or on the first half of 2020.

Slide six is one that we've showed in the past a quick summary, partly a minute gas gathering agreements.

We have a total of 192 total walk amendments of which 180 are seeing an excess responsibility with the remaining 12 coming from HKG. The easiest way to think of these commitments is that there are approximately 40 wells per year.

We also have a minimum volume commitment from CNX and there surely pembro area of operation for approximately 130 BBT use per day, this year, which amount, which that amount increases slightly over the next couple of years, but the commitment amount to roughly one pad per year.

See you next is currently producing above that minimum commitment.

And with that I'm going to turn it back over to Tyler.

Thanks, Chad operator, if you can open the lineup even at this time please.

Absolutely we will now begin the question and answer session to ask a question you May press Star one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pricing any Keith.

At any time your questions have been answered any would like to withdraw your question. Please press star too.

This time, we will pause momentarily to assemble our roster.

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Our first question comes from Jeremy Tonet with JP Morgan. Please go ahead.

Good morning.

Right.

Given that CNX, Sam it's been yielding more than 10% for the past several quarters here in CNX is lowering their targeted 2020 production.

Does it makes sense to still grow the distribution at 15% here instead of a do some level buybacks. It seems like distribution growth seems to only really benefit that the GP IDR is at this juncture as opposed to the LP unit price.

Yeah, as we've stated whenever we did kinda consolidate or.

The other half the GP up on a reconfigure the gathering agreements and put into welcome to the that's in place we like to take the long approach on how we manage.

Capital structure of the company in the policies going forward. So we will spend a lot of time energy and effort built building a business that is suited for this plan I think a you know your it's appropriately acknowledge that the MLP market has been challenging.

For everybody really frankly, not not just us seen CNX midstream that net we've.

<unk> done well versus a lot of different peers and such overtime. So I. We're trying to take long you on air trying to be disciplined trying to be prudent in thoughtful as we continue to run the company.

Got you I mean was just curious with see X.M., yielding over 10% for almost all the year.

What point would buyback start to make sense I guess.

Yeah. We've you know this is part of the they've I wish we run obviously on the CNX upstream cited as part of the playbook.

When we did some of the amendments and pieces in place we've provided some optionality in regards to thinking about those things obviously, there's complexities involved with how that mechanically would work versus other uses of cash versus how the ours are situated so it is something that is part of the capital allocation playbook that we look at.

See you next midstream and you know no no particulars on exactly what thresholds matter or not it's just it's just one of the areas that you look to add to put cash flow to work that yet at this stage and at this point in time.

15% distribution growth is what you should we assume it.

Okay. That's all for me thanks.

Once again, if you have a question. Please press star one our next question comes from David Ammo with Heikkinen Energy. Please go ahead.

Good morning, guys.

I just wanted to clarify whether or not your 15% distribution growth guidance through 2023 included any assumption of dropdowns during that period.

It. It does not include any assumption of drops are our plan and the structure the that we've we've put into place.

We believe gets us back through 2023, with outperforming any drops or really raising any additional capital.

Okay. Thanks, and then I just wanted to.

Get you All's view as as management about you know just generally how you're thinking about the IDR structure, which is clearly an overhang for every small cap MLP at this point that continues to have it and then more specifically.

If you wouldn't mind, just kind of talking about.

You know how you view the has deal that was recently announced which seems to have worked for both the upstream sponsor and the midstream company.

Yeah.

Yeah, something we've talked to in the past around recognizing and reinforcing that hey, the bit business works with them in place, but recognizing that my idea hours or something that.

MLP investors aren't interested and companies having at this juncture so similar to how how things change if it's continuing to change and the thought around there is really the same as it's been is looking for these types of a win win type of a situation between the two I think in in the has transaction without getting into some.

Assist fix it was a nice way to a couple a couple of things together and officially get that get that pass situated so I'm as we've shown in the past with all the things we've done with the GJ and Utica dedication and surely pens fair or drop and you know the well while commitments that we've put in place we do look at these things.

Can't create when when scenarios and I understand that the ours.

Our going do you need to be addressed and we have time to sort them out but that doesn't mean that we are not trying to test figure out something sooner rather than later, so I understand a sentiment and you know we're working hard on thinking about the right approach.

I really appreciate that answered thank you.

Our next question comes from Chris Telit with Barclays. Please go ahead.

Hi, guys. Good morning, just a quick one for me here. There was a there was a I mentioned actually in the CNX press release. This morning that scenic saw some increased transportation gathering.

Fees in the in the quarter due to higher Phoenix and fees just sort of curious if you could maybe expound on that a little bit was that just sort of routine contractual increases or is there something else going on there and then how should we think about that going forward.

Yes, so Chris that that is in relation to the Q3 2018 comparison, so that would adjust for the two and half percent annual escalation that we see those contracts.

Got it okay. That's it for me then thank you.

Our next question comes from Ethan Bellamy with Baird. Please go ahead.

Hi, gentlemen, good morning would definitely be better off the C Corp. The partnership format best way to go for the business.

Yeah again, the the looking at what are what the appropriate capital structure is and how to have that work as something that you know is just as things that you look at and consider I do think that.

Right now, especially with CNX being there, but you know the biggest and largest customer for the business and how those two are interrelated and some of the synergies and things we talked about flattening the organization and combining teams, there's a lot of benefits and and how we have it but structured right now that we're always looking at.

Different things and how folks.

Address thanks.

Okay look obviously low <unk> pain in your contiguous footprint of your assets from some of your peers are there any third party opportunities out there right now or are you focused on repair.

Well, it's a it's it's a it's a mix we of course, you know our continued to increase the integration between CNX upstream and CX midstream as we noted on both the upstream call and just noted in my prepared commentary you know we've integrated the operating teams and so those guys are totally and saying I'm really focused on.

Maximizing the value from from the CNX opportunity, but that doesn't mean with aware ignoring third party opportunity right. So so your points valid are the the other operators in the space are sort of slowing down a little bit of announcing slowdown, but we're continuing to talk to them or continue to have discussions we're continuing to look ways to position ourselves.

To take advantage of when those guys get back to the drill bit.

I think that that opportunity really presents itself and SCPA.

And like the Westmoreland, Indiana Armstrong County area as the Pennsylvania, a lot of a lot of those volumes around spoken for and that's really a jump ball for a midstream operator get out there and grab that and add that to our portfolio.

Swept was a little bit more challenge because theres a lot of existing dedications already but to the extent that you know every dollar is becoming more and more critical more and more of the we're all going to have to sort of work together to find ways of of share capital projects and Keybanc capital, especially as possible and that's where some of the third party opportunity and flip it can come from.

Okay, and then just to carry on that theme are there any specific.

Third party.

Capital projects, whether it be pipes GP.

Factors et cetera that could.

Catalyze, let's say pre hedge realization that that's the index that we should care about on the CNX inside.

[noise] you know if that CNXC annex took a little bit there from our approach to marketing or gas things that most it appears right. So they they avoid a lot of the long haul transport they avoided signing up for a lot of long haul after he still either exposure is really about local market and.

Then they protect the volatility that local market for their hedge book right and so that's why at the CNX level, you're seeing a lot of benefited.

After hedge realizations and you mean operate I'll go for it.

As far as like step change.

Events in the basin that will help them. That's how we're looking for continued.

Expansion pipeline expansion projects kick outside of the base and we're looking at our peers as they changed their capital programs and their availability.

To access capital and what their drill programs end up looking like.

It creates an opportunity for CNX in there, they're healthy balance sheet that Ben and sell some of that space as at their peer slowdown and there are folks looking to add additional crackers in the facility right now it sounds themselves up and running so that there's from the demand side there are or components that are I think will help.

Call, it's slowly and overtime build more demand.

Okay. Thanks very much.

Once again, if you have a question. Please press star why we will pause for one more moment for any other questionnaire.

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

Okay. Thank you all again for a for joining US here today, and we'll look forward to speak with you again next quarter. Thank you.

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

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