Q3 2019 Earnings Call

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Park, where manager Investor Relations.

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Thank you Jay good morning, everyone and welcome to the Noble Midstream partners third quarter 2019 earnings call with me today to review our result, Brent Smolik, CEO and Tom Christiansen CFO .

Following our prepared remarks, we'll hold a question answer session here to participate in the question answer session. We also have Chris Stabenow director of capital projects and Barry Guy director of operations.

This morning, we announced third quarter, 2019 result, as well its fourth quarter and updated full year guidance.

The press release and supplemental slides on the Investor section of our website N.B.L. midstream Dot com.

Upon filing later today, our 10-K will be available in the same location.

As a reminder, today's discussion will contain forward looking statements.

Certain non-GAAP financial measures. Please refer to our latest news releases for non-GAAP reconciliations as well as our latest filings with the FCC for a list of factors that may cause actual results could differ materially from those in the forward looking statements.

This time I'll turn the call over to Brett.

Hi, Karen good morning, everyone.

Hi, My apologize in advance I've got something going on with my voice today, but.

Yes, you're right at this and this is a this is my first earnings call in the and the midstream CEO role the first call that Tom and I posted together.

And I feel fortunate because we're we've got a really strong third quarter to update you on you may have seen in the release, we made good progress on both operational and financial objectives.

During the quarter no. We continue to focus on execution and cost management, and we announced a new business development wins.

Plan, the second half ramp up in throughput and an EBITDA began to show up in the third quarter and we expect that momentum to continue into the fourth quarter.

So I'll give you a few more details beginning on slide three.

For the third quarter in a row now we've delivered record throughput volumes as our gathering business continued to grow and its connection cost per well continue to trend lower which has resulted in capital spending that was below guidance.

That's combination allowed nobody likes to deliver higher than forecasted distributable cash flow and coverage for the quarter.

Oil and gas gathering throughput averaged 319000 barrels oil equivalent per day up above the high end of guidance and up 8% versus the second quarter produced water volumes were consistent with guidance going up 10% versus Q2.

Freshwater volumes of 135000 barrels per day decline quarter over quarter consistent with upstream activity.

The partnership delivered water to two frac crews during the third quarter compared to approximately 2.3 crews during second quarter.

We continue to diversify our business with third party expansions and the addition of services or provide benefits to customers further downstream from the DJ Delaware basins.

These diversification efforts continued into third quarter, and we secured an option for up to 20% equity interest in the Saddlehorn pipeline expansion, which connects to our black Diamond gathering system.

In the quarter, we also expanded our black Diamond <unk> acreage dedication by 53% heading for dad is a new customer.

Well connections increased in the third quarter up as expected nearly 30%.

And we expect lower activity to the remainder of the year again as planned.

As we move as we head into 2020, we have good visibility into till activity along with a favorable mix shift between Devcos led by Bronco River in the Permian, Colorado River in the DJ Basin.

Oh, well has indicated that the focus of 2020 activity will be in the Delaware in the DJ and those assets are expected to grow to overcome Eagle Ford decline.

Momentum then throughput and EBITDA is happening in conjunction with you know these continued savings on the capital front.

I'm focusing a lot on capital efficiencies. This morning, since we expect this to be a longer term benefit.

But this year, we focus on cost efforts in three primary areas more efficient standardized designs.

Better coordination with customers, resulting in more efficient planning and scheduling and redesigning our contracting strategy focusing on a limited number of core contractors.

These improvements have allowed us to reduce total capital expenditures and drive down our connection cost per well by 20% in the DJ basin and by 50% in the Permian Basin.

We have reason to believe that those capital efficiency gains are sustainable.

For example in the DJ Basin, we've got clear operational synergies with noble with wrote development and Noble's Eco design, we're now able to gather up to 16 wells at a single receipt point.

This approach will be realized again in 2020.

Well be able to leverage existing Mustang ROE infrastructure built in 2018, and 29 team, which will result, again and lower average connection capital per well.

The Permian, we've seen even greater success and increasing capital efficiency.

I entered by recently interconnecting the three northern CGS, we can efficiently move volumes across the system extending the utility of our install CGF capacity.

Well this infrastructure in place our capital program in 2020 should be primarily focused on well connections and driving costs down further.

In the DJ Basin overall gross gathering volumes were up 9% from the third quarter 2019, primarily driven by noble upstream activities.

Oil and gas gathering throughput continue to set records in their Green River Devco, well, Colorado River also experienced growth in the quarter from new well connections and wells Ranch.

[noise] Laramie River, that's our third party TJ customer Devco gathering in sales volumes declined quarter over quarter as we expected.

But we still expect full year black diamond volumes to exceed 90000 barrels per day.

In addition, we expect to a benefit in Q4 as TCPC O'connor to plant continues to increase its capacity through year end and we see more NGL capacity relief.

Through the white cliffs in front range pipelines.

In the Delaware Basin gross gathering volumes grew 15% compared to the second quarter third quarter gathering activity increase with nine well connections during the period and looking ahead. We expect this momentum to continue with another nine wells.

On fairly early in Q4.

We currently expect third party gathering customers in the Permian basin to average around that one rig average through 2020.

Moving to our equity investments our Permian projects are critical to.

Extending or expanding our our Permian basin in our Texas platforms.

The projects had high quality stable cash flows to the portfolio and they probably provide another source of growth beyond field gathering.

One of our initial investments in the basin. The advantage pipeline continues to provide those benefits and it remains a high return projects for the company.

During 2019, the the pipeline continued to see lower throughput due primarily to a key shipper are temporarily utilizing volume credits that were earned 2018.

Those credits are expected to expire by year end 2019, and we expect the customer resumed by matching and the throughput to exceed 80000 barrels per day.

As you probably know entering interim crude service through epic Y grade line commenced in mid August with several downstream destinations in Corpus Christi completed during the quarter.

Regarding the epic crude line all of the 30 inch pipe has now been delivered and construction of the mainline is about 75% complete.

I feel for the permanent service crude service is expected to begin by year end continue into the early part of 2020.

And finally, Delaware construction, Delaware crossing construction is going well.

The weight terminals complete and the truck line from trying to win and then Liberty terminal or expected to be online by year end and contribute cash flow in 2020.

Before turning the call over to Tom and I'd like to see a few words on to the novel Strategic review.

The current macro environment and our response to those.

Double energies nearing the conclusion of the strategic review process and we expect resolution by year end.

In the meantime, nobody likes and noble energy continue to collaborate on synergistic opportunities.

I'd like to Saddlehorn pipeline project and a daily operations with things like collaboration on an interesting electrification project in the Delaware.

And we'll continue to work together to identify additional synergies.

As we look into 2020 beyond we'll continue to plan for a 50 to $60 oil price environment.

Continued capital discipline by the producers.

Therefore will remain hyper focused on customer service cost control and execution.

For 2019, we've lowered our DJ Delaware connection cost and we believe we can maintain those levels in 2020 and beyond.

We also increased gathering throughput strengthened our platform driven capital efficiency improvements captured additional growth opportunities.

Expect to maintain that strategic focus that operational momentum into 2020.

With that I'll now turn the call over to our CFO Tom Chris.

Thanks, Brent I am proud of our team third quarter financial performance third quarter adjusted EBITDA to the partnership was 60 million up 7% sequentially driven by more customer well connections in both the second and third quarters.

We recorded a larger than expected combined loss of 8.4 million on our epic crude epic Y grade and Delaware crossing investments during the quarter.

This was primarily driven by epic startup of interim crude service, excluding this impact our base business performed exceptionally well.

As we indicated on our last conference call. These project startups are creating more noise and variability in the second in our second half results. This noise should only have a short term impact as the epic crude mainline begins full service in the first quarter of 2020.

Additionally, we are still on pace with the Delaware crossing commencing crude service on its main line during the fourth quarter.

Together these investments are expected to generate meaningful EBITDA in 2020.

We remain focused on maintaining healthy liquidity as a company and prudent leverage throughout the construction period for epic in Delaware crossing projects.

In August we secured additional financial flexibility with a new three or 400 million dollar term loan which was used to repay the outstanding borrowings on the partnership's 800 million dollar revolving line of credit.

This term loan is repayable at anytime at no cost and was priced inside of our existing facilities, resulting in annual cash cost savings of 1.5 million.

We ended the third quarter.

With 767 million in liquidity, including 750 million available on our revolver.

We also have access to a 350 million accordion feature in our revolver.

For Q3, we continued our 20% annual distribution growth cadence and maintain strong distribution coverage at 1.6 times.

As planned our Q3 annualized leverage ratio increased to just over 3.9 times.

As Brent mentioned, we're closely monitoring our capital program and as a result, we are approaching an inflection point in generating.

In.

And cash flow generation positioning us to begin Delevering next year.

Looking ahead to the fourth quarter, we anticipate net EBITDA of 64 to 69 million.

This is below our prior implied guidance due to epics early service performance.

Our gathering and freshwater assumptions are unchanged as we continue to expect solid gathering throughput and net EBITDA momentum into the fourth quarter.

We've been prudent in our assumptions around activity levels and in completion intensity given our customers have historically evaluated their capital programs near year end.

We've also added some optionality heading into 2020 with our recently announced Saddlehorn deal.

Saddlehorn is a natural extension of black Diamond strategic footprint and a win win for noble midstream and our customers.

This is consistent with our strategy of focusing on backyard opportunities, adding services around existing customer equity barrels and expanding further downstream.

At the same time, we're enhancing the all in value proposition for our customers by providing low cost access to the Cushing market.

As part of this arrangement Black Diamond received an option to purchase 20% ownership saddlehorn highly competitive multiple.

This is a unique opportunity to invest in an operational and committed pipeline.

Yes, the option expires in April .

Up next year, and we will evaluate this investment relative to the others in our portfolio as we move through the 2020 budgeting cycle.

Additionally, during the third quarter Black Diamond added another long term oil gathering dedication across approximately 85000 acres in the DJ basin.

We've been able to absorb the incremental 2019 capital within our existing budget given the capital savings Brett mentioned earlier.

The first wells on the acreage our anticipated in early 2020.

In total we now have approximately 243000 dedicated acres on what the black diamond system more than doubling since the time of acquisition.

Our strong asset footprint and customer relationships in the areas. We operate have repeatedly produced incremental backyard and expansion opportunities for the partnership.

Our team is energized by our recent commercial successes and are excited about the opportunity set in front of us.

As usual, we will continue to take a measured approach towards additional opportunities to expand our portfolio.

Finally Britain I wanted to thank our operations and business support teams for the capital discipline and diligence this quarter.

We which resulted in such strong quarterly performance for the partnership.

2020 will be an exciting year for MPLX as our people continue to execute and as our recent investments begin to generate material cash flows to the partnership.

With that I'll turn the call over for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset therefore pressing the keys to draw. Your question. Please press star and then too.

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

The first question comes from Jeremy Tonet, but JP Morgan. Please go ahead.

Good morning.

Just wanted to start off with distribution growth here in.

Seeing how a and b elecsys has been yielding more than 10% for some time negative year to date performance and then deals not growing at the same rate in the DJ in the Delaware as they were before it seems like growing the idea is a 20% really only benefits. The idea is at this point. So I'm just wondering what juncture it would make sense to kind of.

Stopped the distribution growth or any thoughts there.

Yeah, we're worried considering the same things you're talking about Jeremy Thats.

Nick Clegg clearly that's a we've got plenty distribution coverage.

Today, but but also clearly we're not getting full credit for the for the distribution growth and evaluation. So.

So it's something that we've got on the radar.

Would it make sense under any circumstances, the start kind of buying back and be ilecs units to support the unit price out here.

As possible it I wouldn't say, it's our highest priority today, but it's something we'd consider but.

Lower party.

Yeah.

That's all for me Thanks for taking my question.

Right.

The next question comes from pairs Hamon rent Sevens energy. Please go ahead.

Yes, good morning, and thanks for taking my questions first question pertains to 2020, and if you appear out to 2020 and you think about Capex is it fair to say it could be lower should be lower year over year, because you've had a lot of success. This year on capital expenditures trending materially lower you highlighted slides.

It's in the Investor deck, 20% reduction and per well connection capital in the DJ basin in a 50% reduction in the Delaware Basin. So just want to see if you think that sort of continues into next year in there or what are some guardrails around like 2020 Capex.

Yeah appears the that the thing that we're benefiting a lot from is that we've built out.

The major backbone infrastructure and that in the Delaware.

And then noble is is doing a lot of their development in and around that infrastructure to fill it up.

And I think we'll be in that posture, they have not yet finalized the budget and a plan yet on the novel side, but I think that will be the the behavior that we've we've got signal from there. So we're going to be basically doing well connects into existing infrastructure and the well connect capital is down and so I think we'll have that benefit will be.

Sustainable.

And in the DJ it's similar because we've drilled the than the upstream companies drilled out these long road developments and and Mustang and wells Ranch and as we come back in and develop the next ROE that will benefit from all a lot of the existing infrastructure that's in place and so it'll be again, well connect heavy and 2020 so.

We will definitely have that those are in sustainable parts of the.

Of the of the capital so we should be lower on on that basis alone.

Okay. Thank you Brent for that color and then my follow up pertains to Jeremys question I've, just a few minutes ago, but and I understand obviously all these things are on the table under given him thought but if you were to prioritize would the priority be more on debt reduction.

Or would it be on equity buybacks at this point.

No. It's interesting because I think what we will experiencing in the midstream company is not unlike what noble's experiencing.

No.

Our our leveraged statistics or higher.

At the end of this year because of the on the equity pipeline.

Buildout that we've got in the program.

Thats largely behind US this year early next and we'll start to de lever naturally as we go through next year.

So we are focused on leverage and we'll stay focused on it but I think it's going to.

It's kind of naturally happen as we go through the second half for next year.

It's not unlike noble's situation, if you're familiar with the Leviathan project, where they've three years of spending capital and that project has pushed up leverage a bit and as soon as it comes online in December it'll naturally delever.

Great and then last one for me it looks like Green River Devco in the quarter.

Freshwater delivery volumes were zero.

Making sure I see that correctly or was there something going on in the quarter and the Green River Devco.

Yeah, where do you see that were discretionary.

I.

Yeah I'll follow up.

With a phone call afterwards, okay, I think maybe we missed something a little misleading maybe.

Okay. Thank you thanks for the help.

The next question comes from Chris Toronto with Barclays.

Please go ahead.

Hi, guys good morning, and good afternoon rather.

Just a quick one for me on the Saddlehorn option that you guys announced.

A couple of weeks ago I noted the the option price itself has not been disclosed but could you provide any comments around how you would expect.

Exercising that option to impact the balance sheet if at all.

If you choose to exercise it.

Yes, the option pricing largely reflects some of the value that was brought to the the anchor shippers that we brought to the line. So it is a very competitive project and it's a.

Immediately accretive to our cash flows at the cost that you are seeing so you'll see that it's a it's a pretty.

Pretty a highly attractive option.

Okay.

That's it from me thank you.

Thank you Chris.

This concludes our question and answer session I would like to turn the conference back over to.

Part of career for any closing remarks.

Yeah. Thanks, Jay Thank you all for listening to the no midstream third quarter earnings call. If you have any further questions will be around please reach out to Tom right. Thank you.

The conference.

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