Q3 2019 Earnings Call
Good morning, and welcome to Enlink Midstream <unk> third quarter 2018 earnings conference call.
All participants will be to listen only mode should you need assistance. Please comfort specialist by pressing star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
Ask your question.
What are your telephone keypad <unk> questions you May press star too.
Please also note today's event is being recorded.
I'd now like turn the call whatsoever, its U.S.K. Walsh, Vice President Investor Relations Ma'am you may begin.
Thank you and good morning, everyone. Thank you for joining us today to discuss Enlink midstream third quarter results.
Participating on the call today are very Davis, chairman and CEO .
Executive Vice President and Chief operating Officer in there, that's held executive Vice President and Chief Financial Officer.
The company today's call we've posted our earnings press release quarterly report to the Investor Relations section on our website.
During today's call will refer to certain aside included in our quarterly report.
A replay of today's call will be made available on our website at www Dot dot com.
Today's discussion will include forward looking statements, including expectations or predictions within the meaning of the federal securities laws.
The forward looking statements speak only as of the data this call.
Okay, no obligation to update or <unk>.
Actual results may differ materially from our protection.
Special factors that could cause actual results to differ can be found in our earnings press release quarterly report.
<unk>.
This call also includes discussion pertaining to certain non-GAAP financial measure.
Definitions of these measures as well as reconciliations to comparable GAAP measure.
Doubling our earnings press release.
In the appendix our quarterly report.
We encourage you to review the cautionary statements other disclosures made in our earnings press release, <unk> SEC filings, including those under the heading risk factor.
That's a quick reminder, we modified our segment reporting earlier in 2019 to better align with how we're running and tracking our business.
Any comparisons between 2019 and 2018 at a segment level utilize 2018 segment results that have been recast to align with the 20 Nike segment reporting methodology.
Well start today's call what does that have prepared remark I buried in there and then lead the remainder of the called open for questions and answers.
With that I would now like to turn call over every day.
Thank you Kate and good morning, everyone. Thank you for joining US today as we report our third quarter results and discuss expectations for the remainder of 2019.
We will also give a preliminary outlook related to 2020 and discuss the execution plan, we put in place to ensure our success going forward.
In the third quarter, we navigated market dynamics and executed effectively to deliver financial results in line with our expectations. When you take into account a severance cost related to our CEO change and the regular seasonality in our Louisiana segment.
Adjusted EBITDA was $261 million for the third quarter of 2019.
After netting out the severance cost and taking into account the seasonal uplift we expect in the fourth quarter, our fourth quarter. Adjusted EBITDA is expected to be higher such that our adjusted EBITDA outlook for full year 2019 is forecasted to be at the low end of our guidance of $1.07 billion.
And the growth capital expenditure standpoint, we invested $150 million across all of our assets during the third quarter.
And since all of our major projects were 2019 or now in service, we expect to be at the low end of our growth Capex guidance range for 2019 coming in around $630 million.
We continue to see producer moderation in Oklahoma in response to the lower natural gas and NGL commodity price backdrop, and I'm very proud of how effectively our team and our platform have been able to flex growth capital in response to these market conditions.
With a reduction in growth capital spending this quarter combined with our strong base of diversified cash flows we generated positive free cash flow and we expect free cash flow to be significantly higher in the fourth quarter and into 2020.
For fiscal year 2020, we are forecasting an approximate 50% reduction in growth capital spending as compared to our 2019, Capex, which will enable us to continue to generate free cash flow.
Being back in the CEO role now for around three months I've had the opportunity to reconnect closely with our employees our customers and our investors.
After a comprehensive evaluation of where Enlink is today and where we want to be in the future. We have developed an execution plan with clear priorities aimed at strengthening our financial position and our business.
The philosophy behind our execution plan is simple.
Just to take excellent care of what we already have.
We are committed to maximizing our current asset platform for profitability, while preparing the company to take advantage of opportunities over the long term.
The first priority in our execution plan is to enhance the profitability of our existing business.
We currently estimate that we can generate up to $75 million of adjusted EBITDA on a same store basis, and 2020 versus 2019 by executing our plan.
We have a number of initiatives that are targeted at improving our asset utilization and margins in new Mexico, Texas, Oklahoma in Louisiana.
We are focused on keeping our assets bull and creating new capacity to efficiently take on new business, all while reducing cost and improving processes throughout our operations.
The second priority in our execution plan is to position enlink to capture long term opportunities.
In the Permian Basin, we have a strong roster of producer customers that are well capitalized and very active.
The real opportunity for us here is centered around growing alongside our customers filling up our asset and then investing in low cost high return bolt on projects when do we need more capacity.
This is very similar to what we've achieved historically at Enlink and our during around our platform today.
In Louisiana strong demand growth along the Gulf Coast is the key driver to our opportunity set.
When we look at the growth opportunities across our platform about half or in Louisiana.
For example, we recently announced an agreement with venture global to transport natural gas to their Calcs you pass LNG facility.
And yesterday, we announced our latest commercial win by entering into a natural gas purchase agreement, whereby we will transport natural gas from northern Louisiana domain to demand markets, along the Gulf coast at an attractive long term right.
In Oklahoma, we have the leading midstream position in the stack play our size and scale in Oklahoma position us well to benefit from consolidation in the basin and we have great operational leverage.
But when natural gas and NGL prices improve.
In North, Texas is another area in which we have the leading midstream system, our size and scale position us well to benefit from midstream consolidation in the Barnett shale play.
Our acre customer Devon energy is currently in the process of selling their acreage position in the Barnett.
And while we are planning for it in the budgeting process. If the new buyer is more active than Devon has been we could see some upside in the future.
Stepping back a bit and thinking longer term I see the main objective of this priority as increasing our downstream president.
We are more heavily weighted towards the gathering and processing in the.
Midstream value chain right now and we envisage future state whereby we are more balanced throughout the value chain.
We are one of only a few midstream companies that has the asset platform to leverage into the downstream.
The third priority in our execution plan is to strengthen our financial position.
The key steps, we're taking in 2020 with respect to this strategy is to reduce our growth capital expenditures program by approximately 50%, which will lead to strong free cash flow generation.
We are forecasting our growth capital spending to be in the range of 275 million to $375 million with most of that capital deployed on high return well connects and gathering lines.
This type of capital is quick the cash low risk and usually results in an EBITDA multiple in the sub four times range.
Our long term leverage and coverage targets remain unchanged.
Where we continue to target credit facility leverage of sub four times over time and coverage in the 1.3 to 1.5 times range.
Our fourth and final priority centers around driving organizational efficiency, while maintaining a high level of customer service and safety.
There are a number of initiatives that we've identified and or pursuing which will lead to meaningful general and administrative cost savings.
These initiatives will have a direct and positive impact to our bottom line in 2020 and beyond.
As we look forward and think about the big picture for 2020, there are two important variables to consider.
First our producer customers are currently undergoing their budgeting process for next year in which there are working to determine their capital allocation priorities.
Second commodity markets, specifically natural gas and NGL remain less constructive in certain areas, which influenced the cadence magnitude and location of producers spending.
Based on these variables we recognize as many of you have called out that there could be significantly less activity in Oklahoma. During 2020, then what we experienced from 27 team through 2019.
We were acting with a strong sense of urgency and are taking the necessary steps today to effectively manage our business and to realize the opportunities of our execution plan, which we estimate to provide up to $75 million of adjusted EBITDA during 2020.
A number of initiatives are already underway, which are expected to generate significant positive results in the near term.
But here's what we want you to hear today.
Given everything we know we're confident.
We can achieve modest growth in adjusted EBITDA in 2020 compared to 2019.
We look forward to updating you in February with our detailed 2020 guidance outlook, which we based on the added clarity provided by a producer budgets.
In the meantime, I can assure you that we're taking a comprehensive look at everything in our control and we are taking action on execution priorities for the benefit of all in like stakeholders.
I'll now turn it over to bend to discuss our asset segments in more detail.
Thanks, Barry and good morning, everyone as Barry mentioned Enlink executed effectively during the third quarter and delivered results in line with our own expectations.
In the Permian Basin segment profit was $36 million, representing approximately 13% of total segment profit.
Average natural gas volumes experienced strong growth as gas gathering and processing volumes increased by approximately 10% as compared to the second quarter of 2019.
In late September we brought our 65 million cubic foot per day riptide expansion online in the Midland Basin Inter evaluating further expansions to the facility in response to our producers growth activity in that area.
Our Permian natural gas assets now support over 800 million cubic feet a day of processing capacity.
The Tiger gas processing plant construction in the Delaware Basin is progressing well and is expected to become operational in the second half of 2020 as planned.
Once operational Enlink processing capacity will exceed 1 billion cubic feet per day in the Permian basin.
On the crude service side, we're seeing solid crude gathering activity in the Delaware basin, but have experienced some volatility on the crude trucking side in the Midland Basin.
Average Permian crude volumes were down 22% for the third quarter 2019, as opposed to the second quarter of 2019 due in part to a reduction in first purchase crude volumes in the Midland Basin.
Turning now to Louisiana segment profit was $67 million for the quarter, representing approximately 23% of total segment profit.
Average NGL fractionation volumes were down slightly by 3% during the third quarter of 2019 as compared to the second quarter due to a lower ethane composition in the average barrel as a result of increased industry ethane rejection during the quarter.
We saw the ethane rejection trend reverse somewhat in October and currently expect average volumes to be moderately higher in the fourth quarter as compared to the third quarter.
NGL volumes increased approximately 10% year over year as a result of the cadence of bone three expansion placed in service in the second quarter of 2019.
Average natural gas gathering and transportation volumes in the Louisiana for the third quarter were approximately 9% higher than the second quarter. Although segment profit contribution was down from the second quarter.
Several of our long term, Louisiana natural gas contracts came up for renewal over the last few years and we re contracted some volumes in a lower rate environment.
We are now through the cycle of contract roll offs, and we are seeing improved demand for our services across our system.
Our Ohio River Valley assets continued to perform well and consistently.
Average volumes were 5% higher during the third quarter 2019, as well as compared to the second quarter and segment profit contribution grew by 9%.
Taking a look at Oklahoma now segment profit for the quarter was approximately $109 million, representing approximately 39% of total segment profit this quarter.
Average natural gas gathering and processing volumes experienced modest growth of between two and 3% for the quarters compared to the second quarter of 2019.
Segment profit was down by 4% for the third quarter as compared to the second quarter, primarily as a result of lower NGL and natural gas prices and the resulting impact on fixed recovery contracts.
Crude volumes increased by 10% for the third quarter as compared to the second quarter as we continue to gather incremental volumes for Devon and marathon in the stack.
Overall, we continue to see producers moderate activity in Oklahoma in response to commodity prices and as Barry mentioned, we've done a tremendous job flexing our growth capital spending across our diversified asset platform as drilling programs ebb and flow.
We now expect to spend approximately 35% of our 2019 Capex budget in Oklahoma, and we can see that percentage cut in half for 2020 spending.
Our spending remains nimble and we'll continue to monitor market conditions to ensure we are deploying capital to the highest impact opportunities.
Barry also mentioned that producers are currently underway with their 2020 budget planning as we all know there are a number of variables and play and we will have a much better view to share with you when we release detailed 2020 guidance.
For context today, though in a scenario in which our Oklahoma assets experience about half the activity in 2020 that we are experiencing in 2019, we could see Oklahoma volumes decreased by mid to high single digit percentage and segment profit reduce by low single digit percentage from full year 29.
18 levels, we have minimum volume commitments on certain acreage positions, which helped mitigate the margin impact relative to the volume effect.
As Barry mentioned when you combine our sensitivity analysis in Oklahoma with the overall adjusted EBITDA improvements, we've already identified that should enable us to achieve modest adjusted EBITDA growth in 2020 as compared to 2019, even with substantially lower activity in Oklahoma.
I will round out my comments by touching on North, Texas segment profit for the quarter was approximately $69 million, representing approximately 25% of total segment profit.
We saw average natural gas gathering transportation and processing volumes stay roughly flat for the third quarter 2019, as compared to the second quarter.
New activity is limited in the area that we made a small acquisition in the second quarter of 2019, which has been a great project for us, earning an EBITDA multiple of sub three times.
Overall segment profit in North, Texas was down by approximately 5% due to a change in contract mix.
And with that I'll turn the call over to Eric to discuss our financial highlights.
Thank you Ben and good morning, everyone at length delivered another solid quarter of cash flow results for the third quarter of 2019, we achieved adjusted EBITDA of $261 million inline with our own expectations for the quarter when you adjust for severance costs and normal seasonality.
We achieved distributable cash flow of $168 million for the quarter.
Enlinks declared distribution of 28.3 cents per unit common unit holders for the third quarter 2019, which is consistent with our second quarter common unit distribution results in distribution coverage of 1.2 times for the quarter.
We are projecting that 100% of our common unit distributions over the next three years will be characterized as return of capital for tax purposes.
Taking these cash distributions highly efficient for tax purposes.
During the third quarter 2019, we invested approximately $150 million in growth capital projects and have invested approximately $510 million here today.
With all 2019 major project now in service, we're expecting lower capital spending during the fourth quarter and estimated full year 2019 capital expenditures to be the neighborhood of $630 million, which is at the low end of our guidance range of 630 million to $710 million.
As a result of our asset base generating strong cash flow and the reduction in our capital program, we generated free cash flow during the third quarter of 2019 and as our growth capital moderates, we expect free cash flow to increase.
From a leverage perspective, our debt to adjusted EBITDA ratio during the third quarter of 2019 as calculated under our credit facility was 4.2 times as compared to approximately four times in the second quarter.
Our long term leverage target remains unchanged at below four times.
As mentioned earlier, we're currently expecting to reduce growth capital expenditures by approximately 50% in 2020.
Indicated a preliminary guidance range of $275 million to $375 million.
Of our 2020 growth capital, we're expecting to invest approximately 20% in our Tiger project, a new natural gas processing plant in the Delaware Basin currently under construction, which will serve exzeo as its primary customer beginning in the second half of 2020.
We are projecting that another 45% to 50% of our capex will be allocated to the Permian for gathering infrastructure.
We're planning to spend 15% to 20% of our total growth Capex in Louisiana, partially on our natural gas transport project with venture Globals Calcasieu pass LNG facility, which is expected to be operational in early 2021.
The remaining 10% to 15% is expected to be invested in Oklahoma, primarily on highly efficient quick to cash well connect projects.
Our capital allocation philosophy remains unchanged, we are prioritizing investments in low multiple high return projects across our footprint.
While maintaining a common unit distribution level supported by the business.
We expect to manage our debt level through increasing free cash flow from the business prudent growth capital spending and potential asset monetization initiatives. If we feel there's an opportunity to realize value from any dislocation between the private and public valuations of our assets.
With that I'll turn the call back to bear.
Thank you Eric before we open the call for questions I'll summarize where we are.
Enlink is a strong midstream company generating over $1 billion of adjusted EBITDA.
We are entering a new chapter where our focus is on generating free cash flow and running a highly efficient profitable business in areas, where we are today.
We're mining our assets where opportunities to enhance profitability and have identified up to $75 million of adjusted EBITDA, we expect to achieve in 2020.
Our gross capital expenditures are significantly decreasing in 2020, because we have the backbone of all of our systems in place.
We are committed to managing our balance sheet prudently.
And managing to our long term target metrics.
And by doing all of this we're preparing ourselves to capture accretive opportunities over the long term.
With that you may open the call for questions.
Ladies and gentlemen at this time will begin the question answer session.
Ask a question you May press Star then one on your Touchtone phone. If you are using a speaker phone we do assay. Please pick up your handset before pressing the keys to ensure the best sound quality.
Which all your questions you May press star into.
Once again that is star and then one to ask a question.
Our first question today comes from TJ Schultz from RBC. Please go ahead with your question.
Great Good morning.
I think just first you indicated.
Hi level view on 2020.
EBITDA higher than 2019, what does that assume right now for volumes from the stack in 2020 rigs on your acreage or.
Expected well connects just anymore color there would be helpful.
Yes. Good morning, TJ. This is Barry let me start that and then if theres comments it been wants to make around that but first of all let me just.
I remind you that we will issue detailed guidance in February and and so what we were trying to do today is simply give you a view into 2020 on the things that we do know and and so we highlighted the opportunities that we think we have to improve the business too.
2020 over 19 on a same store basis, and let me be clear what I mean, when I say that if you just take the business that we have the assets that we have.
In 2019 and project goes into 2020, we believe the $75 million is is something that we can drive out of this business in fact.
Let me be clear, we already have executed on or have totally in our control the ability to execute on more than half of that 75 million and the effectiveness of that will be between here and the first of the year. So we'll hit the ground running with these improvements.
In 2020.
But as to how that actually.
The remainder of the business TJ, we really need to see our producer plans, we really need to see capital budgets finalized and maybe I'll turn it over to ban to shape. Some of the things that we think about as we await those details from the producers, yes, TJ on on Oklahoma.
Yes. The truth is we don't know today what activity, we're going to see next year, because we don't yet have plans from our producer customers. So what we wanted to do was to give you guys a sense for what things could look like and just to reiterate in prepared remarks, if the activity level gets cut in half.
We think that looks like a mid to high single digit volume metric declined and a low single digit gross margin decline and I think theres been some pretty wild speculation out there about what those numbers would look like and so hopefully that will give folks a little bit of comfort that even with a significant.
Reduction in in Oklahoma activity, it's not as though the disguise falling.
Okay understood on the 75.
<unk> million dollars plan there.
Can you just breakout.
What of that is taking costs out of business versus margin enhancement versus some of the commercial wins.
Just any more detail there.
Yeah, Great TJ again.
The message that we want to make sure that you here is that our focus has shifted to optimization across the business.
We're really coming out of a cycle of over five years of really a high growth period.
As everyone knows into high growth period, we are focused on optimization, but not it isn't the first priority and we don't have the same sense of urgency that we have when we see a a cycle flattened if you will and so what we've done over the last 60 days or so is to identify everything thats possible and let me.
Hey that we think there are there are more things to do but it is across the business.
In terms of themes its cost reductions both in field operations and in overhead.
It is expanding margins in all aspects of our business, where we think our services deserve more of a fee.
And then lastly, its winning new business across the existing assets, where we would have low capital investment to achieve that and so let me ask then I think he will give you. Some good examples across all of those things, yes, certainly TJ a big big part of it is cost.
And I think Barry addressed that well when you think beyond cost I can give you. Some examples were looking at low to no capital opportunities to further de bottleneck, the NGL system and I'm not talking tens of thousands of barrels a day I'm talking hundreds or thousands of barrels a day that overtime add up and create capacity.
The digits virtually free for us.
We're looking at things like on the NGL pipeline now we have five pump stations and those five pump stations have five different cost of electricity, so that creates an optimization opportunity.
For us to go and dispatch those stations in the most cost effective way.
And and advantage that we have in doing this optimization work is our access to GE IP, they give us extra hands and also extra tools in the tool kit for executing on these optimization initiatives.
Yes, let me I'm going to want to add to that Ben just a little bit of detail on the specifics because I want to be sure you hear that these things are already happening.
Specific examples.
We were providing a service for a north to south movement in Louisiana, given the market dynamics that have evolved in Louisiana, we saw an opportunity to expand those margins and so we announced yesterday.
A contract where we're purchasing volumes in north, Louisiana transporting to south Louisiana to serve all of our markets across the Gulf Coast.
At expanded margins in fact significantly expanded margins and so there's an opportunity where we've done that as far as winning new business in both our Midland and Delaware basins, we've entered into new contracts do essentially provide more service to higher utilization on our existing assets just in the last few.
So those opportunities are happening there are there specific examples the venture global that we announced last quarter is another great example of a large volume of new gas coming onto our existing systems.
And so as I said that is our highest priority.
It is always a priority, but today, we wake up with a great sense of urgency to drive those new opportunities and expanded profitability on the existing assets.
Okay understood.
One last one.
Maybe for Eric What's your view on on the dividend just the potential.
To reset that lower potentially as.
After the financial plan. Thanks.
Yeah. Thanks TJ luck.
You will note that we have taken the growth rate of the distribution to zero this quarter, which will pay out next week and as we've talked about in the past.
We evaluate this distribution policy regularly and as a management team and also with the board to set that policy as Ben pointed out as the budget comes together and producer or.
Perspective has become more clear or in the coming weeks that will be part of the analysis that we go through as to the the business that we have to support the distribution and what the right policy will be going forward.
Okay. Thank you.
Our next question comes from Jeremy Today from JP Morgan. Please go ahead with your question.
Hi, good morning.
Just wanted to follow up in the Oklahoma scenario that you guys outlined there.
If activity precede such next year.
Would you be able to provide kind of like a rough estimate as far as what capex would be needed to kind of keep EBITDA flat.
Well, yes, hey, Jeremy its Eric as you know this is something that we've talked about on a on a regular basis. I think you can see you know what Ben went through and we're not getting into more specific detail of exactly what the expectation is for Oklahoma, but.
When you look at the Capex that we have for next year in Oklahoma. It is.
Very high return projects, it's sub four times well connection gathering in one of the questions. We have gotten as well as we've talked to folks in the last couple of months is you're going to have 50% lower capex, how does that flex and what that will flex on his with activity levels and so as we go into the.
Sure with Oklahoma that is very flexible capital as it has been this year and we anticipate that that will support some of it the high level items that been laid out I think when you think about the sustainability of a capex number over the business, we need to think about that over a long period of time because.
With a layering of projects, we referenced the Tiger project, which we won't get benefit for until late next year. The global venture Pro program is late or more likely early 2021, and so when you think about that the sustaining number needs to be evaluated over a long term and we think that.
We've got the right program in place that maintain and grow the business over the long term.
So I guess, maybe just over that long term basis than what do you think is kind of a normalized number two for capex to sustain EBITDA.
Yeah, Jeremy I mean, as we have in the past, we're not going to give a specific number on that but if you look at what we're doing this year, we're addressing the lower levels of activity by moderating capex, accordingly, and managing that along with the the initiatives that Barry laid out.
To maintain our EBITDA and a modest growth going into next year.
Okay, just one last one if I could given.
Devon Enron don't seem to be running rigs right now in Oklahoma, just wondering if you could provide and sensitivity if.
For some reason activity declines by more than 50% next year just for modeling purposes, we're trying to work that out as we monitor the rig count.
Yes, Yeah, Jeremy first let me say, we do not envision a no activity case, we don't we don't think thats realistic at all.
But to put a floor under if you will if we had no well connects at all in Oklahoma next year, we think the volume metric decline is mid teens.
And we think that gross margin decline is high single digit percentages relative to full year 2019.
So can contrast that to the hypothetical scenario in the prepared remarks of activity being cut in half and you're looking at high single digit Volumetrically low single digit gross margin. So again I think that there's.
In some pretty wild speculation out there about what Oklahoma could look like in a downside scenario and some of it has been.
A bit overblown.
But again, we do not see a no activity cases being something that's even in the realm possibility.
I'll stop there thanks for taking my question.
Thank you Jeremy.
Our next question comes or Colton Bean from Tudor Pickering Holt. Please go with your question.
Good morning, So just a follow up in the question around the dividend. So you spoke to the urgency and realizing some of the cost saving initiatives, what's sort of timeline you evaluate reaching your leverage in coverage targets on.
Yeah, I felt and this is Barry let me just again.
We just add to what Eric said earlier.
We hear you.
We hear the market as it has spoken loudly and into this subject and there have been a lot of different voices, let me just acknowledge that and what we've consistently said is that the distribution is appropriate for our business and the factors that we consider as we look at that are the projections for our business and the resulting distribution coverage and leverage as you as you speak too.
And.
So that will continue to be a high priority for us to manage our balance sheet. We're serious when we say that we want to sub four leverage position and we want distribution coverage to be in the 1.3 to 1.5 times.
When it is clear to us that the business can't support that.
Then we would certainly have a different different answer.
The pace of change we've seen in the last several months has been dramatic and as you know in response to that we discontinued the growth of the distribution and I think all we can say today is that we will continue to evaluate and assess the appropriate distribution and if we saw something that told us it should be different than we quit we would be quick to act.
But today, we still believe that is the right distribution for the business that we're operating.
Got it and just on that point are there any external factors as you evaluate the dividend to take into consideration whether that be you kind of secondary leverage on that dividend or is it solely NLC financial metrics.
No no consideration and on what it may mean to others.
Other than the fact that we care about all of our stakeholders and we want to do the right thing for our stakeholders, but if you're specifically referring to what it might mean to the leverage from a GLP perspective.
We don't think that that's a factor we think that what what the metrics for you now see our what's critical and we need to be able to see leverage and distribution coverage be at appropriate levels.
Got it that's helpful and just the final one from me so on the mid teens decline rate in a new activity scenario is that they're material diversions here between what you're seeing on oil and gas declines and is there something going on with the Geo our shift or just kind of any additional commentary there would be helpful. Thank you yeah Colton certainly in the basin, we see all declined faster than.
Then gas.
I think that.
I think that Devon addressed this in their call and I would point you back to their comments about about there.
Particular acreage portfolio, but I think they talked about.
Thirtys high Thirtys decline on the oil in year, one and only a high twentys decline on gas in year. One so yes. The geo are.
Broadly speaking in central Oklahoma is an increasing function over over the wells life.
Great. Thank you.
Our next question comes from Ethan Bellamy from Baird. Please go ahead with your question.
Hey, guys, if the commodity prices are.
Good Fiftys and sub three are the new normal and you're seeing rig and capital light from Oklahoma.
Do you think that means for Oklahoma longer term is simply a more marginal basin.
What you thought it was and what does that mean strategically for for the next five years.
Hey than it's been yeah, I'll I'll start very may want to may want to add on at the end.
First you're right the challenge in the stack right now is that it's a combo play and it's more dependent on on gas and Ngls for the economics of the wells than say the Permian is where.
Really the gas and Ngls and after thought.
In terms of the long time long term competitiveness of the play.
It's a it's a multi variable equation, certainly gas and NGL prices matter I think something that has been interesting to hear this week from from Devon as an example.
Is that they've managed to reduce the well cost in the basin by as much as 30% and that that's getting them close to competitiveness.
In there in their capital portfolio, even at these prices that we're seeing today.
And so I take that to mean that we don't need a heroic improvement in prices, we probably just need a bit more support particularly from the NGL barrel that we think will come in time as we see more cracker capacity come on in the Gulf Coast and more LPG export capacity come online as well.
Ill.
Yeah, and Ethan I would I would add onto that I think that the execution priorities that you've seen us lay out or exactly what we should be doing in response to a moderated.
Activity level in Oklahoma that could be a long term scenario and first and foremost is too.
Be as efficient as possible in our operation in Oklahoma.
Looking for synergies looking for efficiencies that could come from midstream consolidation again, having the largest position in Oklahoma will put us in a position could drive those opportunities into benefit from those more efficient operations.
Secondly, we need to do what we said, we're doing which is positioned ourselves to grow in other places and our focus downstream to leverage our Louisiana Gulf Coast, NGL and gas position.
For future growth is the right thing to do.
We also have a great platform in the Permian and we will expect Permian to continue to provide great opportunity. So.
Longer term growth in the downstream growth in the Permian and in the immediate term driving efficiencies in Oklahoma to make sure that were rightsizing the business to match the growth.
Okay. Thank you Barry.
Your question more or no if its cosmetic reduced incentive base, but.
You may disagree with me, but I think the utility it.
Distributable cash flow as a metric is pretty poor.
You know that has no traction with generalist investors and even dedicated midstream investors are now focused on free cash flow. After distribution what are your thoughts on targeting free cash flow, particularly one that's the metric all your producer customers.
Yes, it's Eric Thanks.
Good question and that's something that you know that's been a long conversation and still not I take your point on perhaps some level of convergence, although I might argue that we're not quite there yet in terms of full convergence I'm on how everybody defines that but I think ultimately.
We're looking at trying to generate as much cash as we can from the assets, we have which is part of what Barry and Ben have laid out and minimizing our capex to do that is a step towards trying to achieve that.
Excess cash flow and that's all of what goes into the analysis I talked about before in terms of fine tuning.
Those policies as we get more clarity on the 2020 outlook.
Alright, Thanks, good luck.
Thanks.
Thanks.
Our next question comes from Shneur Gershuni Krish any from U.S.. So you have with your question.
Hi, good morning, everyone.
Just wanted to clarify one of.
Your responses to previous question.
We've been modeling a down 14% decline rate if there was no new well connections.
Is that consistent with what what you're seeing did did I hear correctly that you said it would be high single digit some mid teens.
Yes, sure so in a zero well connections scenario.
We think it would it would be mid teen so that sounds like it's in the range that your that you're describing we don't think the zero well connections is realistic we do think it it is completely possible that Devon may run no rigs in the play.
When we look across our entire portfolio producer customers were confident we're going to have some activity next year, we used on how much that's going to be yet and so between the prepared remarks, and then in the queue at I. here hopefully, we've given folks enough sensitivity to know what a reduction by half would look like and what a complete reduction to zero would look like.
You can calibrate with your own view.
Accordingly.
Great and just to two follow ups.
Just first on the $75 million of reduction.
It is all of that sort of an expense reduction whether its its head counts are optimization of expenses and so forth is any of the it's coming from optimization up your assets themselves in terms of being able to run them harder operating leverage and so forth like I recognize.
You are sort of going on at 2.0 type of strategy here.
And just wanted to understand if it's just the 75 million and it's an expense reduction and there's still an opportunity for asset optimization or.
That sort of encapsulates all of it.
Yes, sure I'll I'll start and then Barry may want around to soft.
When we talk about.
And opportunity of up to $75 million. It's certainly includes a lot of expense reduction, but it does also include facility optimization and so that includes things like optimizing the way that we dispatch the system from both a marketing and an operating cost perspective it income.
It's things like some de bottlenecking projects that we've done on the NGL system. It includes some work that we've done to create a central monitoring station here at the company's headquarters, where we can monitor the performance of the gas plants in the Fractionators remotely.
And provide support to the field personnel, who are operating those facilities. So that we improve ethane recoveries as an example in the gas plants.
So all all of that is on the table now having said that is $75 million, where the opportunity and no. We don't think it is but we think that that's a realistic range.
Range of what we could achieve for 2020 .
Yes, I think thats.
That's complete answer been the only thing I'd emphasize is your last point I mean this is the work that we've done today and this work will continue.
In fact, many of the initiatives that we've initiated.
We'll continue to evolve and we believe the 75 is a great start.
No I appreciate that and.
Obviously, we've seen that from some other players as well too.
Just to I guess beat the horse dead completely.
If we can talk about the distribution one more time.
Yeah, It's obviously discretionary it's a decision of the board can you describe to us the discussion at the board level for this most recent.
Declaration.
Was it a unanimous decision to to make maintain the distribution where was that was was the information around Devon bonding zero rigs already available at that point 'cause it sort of feels like obviously with all the questions that you've been getting that that's clearly a focus obviously you want to get your leverage down as well too and it's it's probably the biggest.
Elaborate that you can you can probably pull.
So just kind of wanted to understand how that discussion sort of evolves.
And the key points in terms of the decision because it's sort of seems like you would actually we're moving overhang on your stock. If you were to actually reset that level and give people clear comfort on on where your leverage is headed.
Yes, sure. Thank you and I mean, you said a lot I won't repeat what you've said, but what we hear you again, we hear you and what I'm sure. We'll continue to hear the market's voice on this topic.
Let me, let me just respond maybe first and foremost to the alignment that we havent boardroom.
I don't know of any situation in my tenure that we don't have alignment we stay there until we do have alignment and so the board is aligned the board believes that the distribution, but we've set is the appropriate distribution for the business today.
But also let me say.
Repeat what you said the pace of change in recent days has been dramatic.
And so everyday we have more information than we had the day before in the days ahead, we will have more information around producer activity and our projections for the business going into 2020, and we will continue to assess the distribution and what's appropriate. The last thing I'll do is just acknowledge what you said, it's a big lever.
And it's also an important.
Aspect of to the way people invest in the company and so we take all that into consideration and do everything we can to come up with the right answer as to what the distribution ought to be.
Alright, perfect. Thank you very much and have a great weekend.
Thank you can are you there.
Our next question comes from Praneeth Satish from Wells Fargo. Please go ahead with your question.
Hi, Good morning are there any changes on your view of asset sales is that something you're looking at more closely now as one of the options that you're considering.
Sooner. This is Barry let me just say that first of all we think the number of core basins are core segments that we havent of business is a is into right ZIP code. We think for core areas. We think that the opportunities represented by each of those are a fit in our portfolio.
We're always looking at small things that we may have outside of that and actually have executed on some sales. Some small sales over the last several months that were so small that we quite frankly havent pointed them out.
We will continue to evaluate.
All of our assets everything is on the table and to the extent, we see a dislocation in the way the market views the value of one of our assets compared to.
The way it is valued in our portfolio.
We will evaluate that and consider a divestiture of something that is more significant than small assets, but today, it's not something that we think is is appropriate.
Or necessary in the business.
Okay got it and then just in terms of the cost savings and de bottlenecking projects.
Could you see some of that momentum spillover into 2021 or is this mostly a 2020 initiative.
Yes, Hey, preneed Thats been no it doesn't stop the calendar the calendar is irrelevant, we as Barry said.
Of the.
Initial view of up to 75.
We have more than half of that either executed or completely within our control and to be executed by by the first january's will be in effect for next year.
And we will be attacking it with urgency all year next year and there's no no reason why that would stop at any point no. What I would say been I think it's a theme that's consistent throughout the industry I mean, we're seeing it from upstream downstream and midstream that we are all.
Driven to find ways to provide drive free cash flow out of these businesses. So I think it's a necessary.
And appropriate thing for us all to be focused on.
Thank you.
Our next question comes from Chris single copy from Jefferies. Please go ahead with your question.
Hey, good morning, guys.
On a gross acres.
To a to start up there you had mentioned in your prepared remarks, just some severance costs, which I think you. You. You said were recorded in the third quarter I didn't see those quantified in the release I suppose they'll be in your Q. When that's published but I was just wondering if you are Eric just provide some quantification of what those impacts were.
Yeah, there is about $5 million.
Okay and that's that's all recorded Eric in Threeq, you and there's no spillover effect, we should anticipate next quarter that also correct.
Those were all in the three Q.
Okay.
And then Eric I guess, I guess I'd add on a follow up on some of the conversation around activity levels and I see well you list well connects activity or capital as a meaningful meaningful portion of the 2020 growth capital budget.
And I think you in Barry both characterize that type of spend as well multiple and quick the cash type of outlay.
But you know in Rick and going through your annual and quarterly filings I also see well connects or something you volunteer as an example of maintenance activity. So I'm just wondering either from you or from Ben How do you quantify I guess characterize or distinguished one type of welcome back from another type welcome.
Yeah, I'd say some of it in North, Texas Historically has been well connects because that's been a clear declining basin and I think that as we continue to evaluate the business. The we'll continue to evaluate what what's appropriate for a maintenance number but what you've seen historically is that number has been the north.
Texas piece of it.
So there's a fair declining basin.
Okay. So if if let's just pretend that Oklahoma or some other basin.
There are two not see any activity for a sustained period of time would you I guess this is the nature of my question would you Redetermine I guess activity levels. Even if it's you know if it's a modest spend was saying doesn't expect no well connects so if it's a modest spent a well connects with that goes on for.
Two or three years do you read determined that basin to be.
Maintenance type activity as opposed to growth activity and.
I guess is all.
Tom.
Yeah, I mean, I think you broadly speaking, you're you're kind of getting into angels on that have a pen kind of discussion, but because when is that point in time, but but I think you know theoretically.
You'd have to continue to evaluate that.
Okay, and I guess <unk> final question for me is that we obviously talked a lot about Oklahoma.
I've noticed that you know haynesville rig count hasn't reacted quite the same way to gas prices like they haven't in Appalachian other than other areas. So I'm just wondering been what's what's the expectation.
For Louisiana next year.
Yeah, Chris I mean look our.
Couple of things done back there, our Louisiana business.
Really isn't driven by the Haynesville rig count.
There was a time, perhaps when it when it was but now the bulk of the Louisiana business is.
Is the NGL segment, and if you look at.
The Louisiana gas business, we've had some historic contracts roll off.
We printed $8.7 million this segment profit for the quarter that or maybe a number slightly higher than that is really a good run rate going forward for that particular sub segment.
So not not really looking to haynesville as a as a catalyst per se as far as the broader Louisiana outlook. You know I think we're just going to need to wait till the point, where we do full guidance and we'll talk about the outlook for each segment next year.
Okay.
Thanks, a lot for the times when you guys appreciate it.
Thanks, guys Chris.
Our next question comes from sales of off from Seaport Global. Please go ahead with your question.
Yes, hi, good morning, guys and thanks on the clarity on the call I, just wonder to get a little bit.
Part and it's hard on more recent trends in the Permian crude.
Got it inside I know you mentioned that there was some.
Declines in a in third quarter, but I was curious you know what kind of trends, you're seeing there and what's the competitive environment there like.
Yeah, So Neil let's take that in pieces.
The biggest part of our Permian crude business is pipeline gathering.
Both on the Chickadee system in the Midland Basin in the Avenger system in the Delaware Basin.
And we've seen solid activity on both of those systems throughout the year.
The sub segment, where we've seen some weakness, particularly in this quarter is our crude marketing business, which includes.
The trucking business and some other related activities.
And most of the decline in volume quarter over quarter is driven by a reduction in that area and one element that you're seeing there is some discipline on our part not to buy market share and lose money to retain volume.
So as in the spirit of what Barry was saying earlier about about making sure that we make the most money we can with the assets we have.
In some cases that may mean, having some discipline.
Around around the business that we choose to do.
Okay got it.
And then just one question on balance sheet.
Curious shifting some of the rating agencies I know you know have you on it.
Valving view had there been any vsan discussions with editing agencies, especially since like operating environment has changed significantly over the course of last Q4 month.
Yes, you know, it's Eric we I think you're referring to fetch, but we have a you know look where in regular dialogue with the agencies as we always are and you know I think one of the other big points that we've been discussing with S&P is how their evolution of treating a preferred securities has gone, but I'd say, there's nothing unusual in the nature.
Of the conversations just regular way discussions with the rating agencies and we will expect to meet with them early next year. When we have the full budget a completely baked as we always do.
Okay got it thanks guys.
Thanks.
Our next question comes from James Carreker from U.S. Capital Advisors. Please go with your question.
Hi, Thanks for taking my call 59 minutes and.
If I could ask for any update on the status and perhaps balance of of G.I. piece.
Term loan that was collateralized by the the units. They received has there been any.
Hey down of that or any other color you can provide.
James This is Barry first of all thanks for your patience and and for staying with US This morning.
No comment on GRP impact.
I'm not familiar with the details of what's involved in that loan and so we really don't have any comment on it.
I guess could you didn't talk about you know I believe the loan balance at the time of their acquisition was.
A billion dollars and the value of the units now is probably somewhere around 1.3 could you talk hypothetically about what would happen if that.
If that you didn't tell you did did happen to fall below the billion dollar balance.
James again, Thats, a shareholder loan that's not a company loans. So that's not something that I think we're prepared to talk about.
Well I do ask because you guys do specifically mentioned in your risk factors that that Shiite piece credit worthiness is directly impactful to your credit worthiness and so you know any additional color on that I think is is useful.
Yeah, I wouldn't I mean, we'll be happy to talk about it offline. If you want about the specifics of the risk factor, but I don't think that that's for this call right now.
Okay. Appreciate it thank you.
Thank you James.
And ladies and gentlemen, we have reached the end of the allotted time for today's question answer session. This point I'd like to turn the conference call back over to management for any closing remarks.
Thank you Jamie.
Facilitating our call this morning and for everybody on the call. We appreciate your participation and your support as always we appreciate your continued interest in investment in Lake and we look forward to updating you with our fourth quarter results in February and anywhere we may see you on the road between here and there. Thanks again have a great day in a good weekend.
Ladies and gentlemen, what that will conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.