Q3 2019 Earnings Call

A question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.

A reminder, just conference is being recorded I would now like to turn the conference over here host Mr., Adam Lawlis, Vice President of Investor Relations. Please go ahead.

Thank you for <unk> good morning, welcome to rather than Midstreams third quarter 2019 conference call.

During our call today, we'll reference an updated investor presentation, which can be found them that was website.

What was anywhere hours, a day or Travis Stice, CEO Tracy that CFO in case, they helped together.

This conference call. The participants may make certain forward looking statements relating to the Companys financial condition results of operations plans objectives future performance in business.

We caution you that actual results could differ materially from those that are indicating these forward looking statements Peter variety of factors.

Relation concerning these factors can be found in the company's fairly for deficit.

In addition, we'll make reference certain non-GAAP measures reconciliations would be appropriate GAAP measures can be found their earnings release issued yesterday afternoon, I'll now turn the call other Travis Stice.

Thank you Adam welcome everyone and thank you for listening to Rattler Midstreams earnings conference call covering results for the third quarter of 2000 and locked in.

To start <unk> third quarter results were continuation in exceeding the expectations presented at the time of IPO almost six months ago.

We continued to execute on the core business, while announcing the Georgia acquisition of relaunch gathering for 355 million with words midstream.

Opportunistic investment, which increases our exposure to Dom Buck and overall world volumes, while partnering with a top midstream operator to grow and manage the relaunch system.

This deal is expected to close you normally this quarter.

Robert Group net income, 3% quarter over quarter over 48 million and adjusted EBIT dollars over one person quarter over quarter over 67 million in third quarter as a result, outperformance trouble oil gathering salt water disposal business launch.

The company spent 85 million on midstream capital expenditures in the quarter and contributed 39 million to equity method pipeline investments.

This quarter, we updated our 2019 gardens by raising the midpoint of a volume ranges or cost all four segments as well as adjusted EBITDA estimates for the year.

We're also initiated its first distribution of 34 since she was a dollar annualized for the period from IPO through Q3 of 29.

Looking forward to 2020, we provided initial guidance it implies 44% adjusted EBITDA growth, including the base business EBITDA growth of over 25% year over year, while reducing base business capex by 15% at the midpoint from 2019 guidance.

250 million.

Furthermore contributions.

Equity method investments are expected to be hundred million next year substantially completed on capital commitments to all three pipeline bought into 2020.

Bottlers long haul investments include equity investments in ethic Grail and the went to work through pipelines. These pipelines will.

Upon completion transport crude oil from Dom and back and older Permian Basin producers to Gulf Coast crude markets around Corpus Christi in Houston.

Ethic began interim crude service in August with full service in early 2020.

And Gray Oak is on track to begin service this month.

The Webster will mark the completion of three pipelines when it begins service expected or 2021.

To conclude what we will continue to execute on its business model of growing pershare metrics in free cash flow to meet the needs of its long term fixed fee contracts, we've done a buck.

Robert is expected to continue to grow in the fourth quarter of 2019 and significantly into 20 Twond.

While capital requirements for both the base business and one product endorsements are expected to continue to decline.

As Diamondback gross production in 2020, M. beyond particularly in the Delaware Basin.

So, we'll bottlers earnings and free cash flow continue to grow with declining capital requirements to meet these growth forecast.

With these comments now complete operator, please open the lines for questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question that's been answered or you wish to remove yourself from the Q. Please press the pound.

Your first question comes from the line of Jeremy Tonet with JP Morgan Your line is open.

Good morning, guys because it offers on foot Jarden me, thanks for taking my questions here.

[laughter] Firstly I just wanted to check on hobby short read the fun fact would be shift the gassier was at the right level like how sensitive is this shift so that that's what the guidance like when do it wouldn't be or beyond.

Oh really there's no there's no impact I mean, I think as you think about.

Rattlers water guidance as Diamondback daus, others owns like the middle Spraberry in the Midland Basin in the bone Springs.

Ah formations in the Delaware basin those formations actually are.

Have a higher water cut than the Wolfcamp formation. So.

Well you know Diamondback is moving to more co development of multiple zones. You know you shouldn't see a major impact to Rottler production. In fact, you probably see a little bit then uplift due to a higher water at low ratio a companywide.

[laughter].

Mr. Oh, that's helpful. And then going forward from cared ends on the front to go into guidance you guys laid out yesterday Oh in terms of like completions on how we should think about step up 100 watts as to how it's going to be.

Yes, it should be pretty consistent you know diamond backs Gonna Ron you know eight or nine frac spreads for for the full year.

You know should commodity prices cooperate and done back you know.

Gets towards the higher end of our projected completion cadence that should help maybe the back half a year, but the way. We're modeling right. Now is you see a pretty consistent growth through.

You know through most of the year, rather there's not a big a big swing one way or the other now certainly with the pipelines coming on through the first quarter. That's gonna help EBITDA in the first quarter, a step up a lot versus Q4, but the base business you know, we'll see consistent growth.

Understood. Okay. That's helpful. And then one final one I didn't like the guidance. It got started yesterday are fine I know, it's all dawn talked about the producer out looks to have on that or land system or do you see them multiple compression targets and that's what we'll do it wouldn't be on the longer term.

Yeah, you know, we're really excited about the deals about it's about the close we've already worked with.

Reliance to dedicate so some new acreage to Oh, sorry worked with works to dedicate some new acreage to the system, which should support the growth profile.

In 2020 and beyond you know dialed back we're allocating you know we're allocating rigs to do this particular system, we're probably increasing our girls completions honest system as we look at 2020 and I think the other operators on the system have provided a pretty visible growth targets particular.

We wanted the other large operators on the system anticipates growing your southern half percent or sell CAGR over the next few years. So.

For US you know this deal was an opportunity to acquire in oil gathering system, where we held a lot of intimate knowledge.

About the quality of the acreage that underlies the system and the price paid for us. It felt like a deal that was wants gonna be very extensive Kim can do offset a at a low potential multiple and we took advantage of that with our balance sheet, but.

If you don't want to be clear that you know I think from a large acquisition standpoint, that's probably it for for Rattler, We're very focused on the free cash flow profile the business and the promises we made at the IPO to not need to externally fund growth. So do you see 2020, we've got a business. It's gonna do you know mid.

Point 375 million EBITDA spend a little under two I didn't know little over 200 million of capital and you know 100 million or some onetime investments and be significantly free cash flow positive.

Understood. All that's really helpful color guys. So thanks for taking my questions. That's it for me.

Thank you.

Your next question comes from the light of Michael Lapidus, We'd Goldman Sachs. Your line is open.

Yeah, Hey, guys couple of questions first of all how should we think about EBITDA contribution over a lion summing. It is it basically kind of in that $25 million to $30 million range or is it something much on either side of that that's question. One question too if if you're not thinking about other material kind of M&A. How do you think about utilizing the balance sheet and the.

Capital structure, right, you're going to be really under levered relative to peers. If he deliver on kind of 2020 and 21, just curious how you're thinking about utilizing that balance sheet strength.

Yeah, Michael you know I think we've kind of sad said since the get go that you know two times leverage as is our our limit costs on the target is to limit.

Because we think about leverage on a consolidated basis at the parent company I know that's not traditional for a midstream company, but it's just how we run our business in the past so.

We do anticipate the you know the capital needs, particularly in the base business to continue to the continued to decline.

As we mentioned at the time of of offering.

That's just going to result in more free cash flow more free cash flow is gonna get paid back to shareholders ER and diamondback who's who's the largest shareholder. So I think the focus of the board is to grow this distribution and a in probably addressed that you know early in 2020 because of the free cash flow profile, we expect.

Got it and just curious can you remind me how much of the volume that flows through reliance comes from diamond back versus other producers.

You have today, it's about 30, 540% Diamondback.

You know overtime that probably increase is closer to 50% timing back just because of our growth plans in that area. You know that the Spanish trail more theory out you know the area. We acquired from Ajax Maniacs, all last year, probably has the most undeveloped inventory in the diamondback portfolio it and as the least developed so over the next.

You know five to 10 years, we're gonna be consistently developing and growing in that in that particular area.

Okay and then therefore, what are the other producers who are on reliance would've they've been saying about production levels and how does that impact the expected volume up or alliance and the world kind of changed over the last three to five months. It just curious how you're thinking about that.

Yeah, the largest the largest contributor outside of Diamond back you know they publicly stated no high single digit growth rate over the next couple of years and I anticipate them to keep that and then the other operators is a large Permian operator, so the volumes pieces and smaller piece of their total, but you know recognizing that they've been at.

Given the early on and you know will probably continue to be be somewhat active I I don't have as much visibility on their growth rate as I do diamond backs not other the other operator.

Got it thanks guys much appreciate it.

Thank you Michael.

<unk>.

Your next question comes from the line up with.

With Bank of America Merrill Lynch. Your line is open.

Good morning, guys. Thanks for taking my question first one I just wanted to quickly clarify on the 2019 EBITDA guidance, which you have tightened yesterday at the midpoint. It seems like it implies a decline in Fourq. Your 19 or is there anything to note there operationally or does that exclude the.

The long haul pipeline equity earnings.

Yeah, we're essentially excluding any contribution from them in the fourth quarter. You know I think I think we expect to see some growth off of the Q3 number from a consolidated adjusted EBITDA perspective.

Gotcha.

And.

With regard to the long haul capex contributions.

That went up for 2019 and I think the 2020 number is also a little higher than what you had mentioned before.

Can you discuss what that increase is or you know previously you've just how to the previous that was not the final lumber.

Yeah, I think the previous one was on final number now you know, it's a little bit of a mix shift right because linked Webster spending some money in 2019 to that hit 2019.

Up a little bit and then 2020 the majority of the 100 million is linked Webster, but the rest is completing epic and ground.

Got it and if I mean, one more yesterday in the release you had a comment about how <unk> equity investments that you had had recently won continuing to say matter in a in a meaningful we would you be able to unpack that a little further a and maybe discuss what's.

Sort of new M&A, we could expect a in support of diamond backs activities.

Yeah, I don't think there's a lot of M&A required you know to continue to grow this business I think there's enough infrastructure, we need to build on diamond backs properties to grow for a long period of time, you know I was trying to be clear that you know we spent a lot of money I'm going to western we spent a lot of money on reliance and.

And those are great investments, but you know we're not actively seeking out a more large scale investments to put on rattlers balance sheet and said you know we're going to make sure we have to capital to grow or the the needs of the dedication for the next few years and get the full field development and therefore harvest that free cash flow.

Great. Thank you.

Thank you.

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There are no further questions at this time I will now turn the call back over to Mr. Travis Stice.

Thanks again, everyone participating in today's call if you have any questions.

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