Q4 2019 Earnings Call
All participants are listen only mode. After the speaker presentation will be a question answer session.
Good question during the session you'll need to press star one on your telephone please be advised the today's conference is being recorded.
You acquire any further assistance. Please press star Zero I would now like the hand the conference over to your Speaker today, Adam Lawlis, Vice President Investor of Investor Relations. Please go ahead Sir.
Thank you Josh good morning, and welcome to lobby Midstreams fourth quarter 2019 conference call.
Our call today, we'll reference an updated investor presentation, which can be found on <unk> website.
Representing probably today or try to start CEO and Kate Spade <unk> President.
During 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 businesses.
We caution you that actual results could differ materially from those that are indicated in these forward looking statements did a variety of factors.
Information concerning these factors can be found in the company's valley for definitely see.
In addition, we'll make reference certain non-GAAP measures reconciliations with the appropriate GAAP measures can be found the earnings release issued yesterday afternoon.
Pardon me call overthrown stuff. Thank you Adam welcome everyone and thank you for listening to Rattlers Midstreams earnings conference call covering results for the fourth quarter and full year 2019.
Well <unk> fourth quarter results ended the year on a high note as all four operated midstream segments exhibited strong quarter over quarter growth.
Operating team continued to accommodate this exceptional volume growth, both effectively and economically.
Produced waters in the fourth quarter.
Were 26% hard than just the first quarter 2019, and 26% of the source water volumes in the fourth quarter of 2019.
Recycled from right were produced water up from less than 10% in 2018 or much lower absolute volumes.
This performance reflects the strong relationship between right learned diamondback as well as the benefit of Justin <unk> Capex, resulting in a high return on capital employed at Rattler.
Fourth quarter financial results reflected the strong operational performance in the quarter as Ratner grew net income 7% quarter over quarter over 52 million and adjusted EBITDA over 6% quarter over quarter to over 71 million in the fourth quarter.
The company is also traveled the fact.
That full year 2019 financial results exceeded pre IPO estimates.
Despite lower than expected contribution from equity method investments with full year net income of 186 million.
And adjusted EBITDA of 265 million.
The company continued the build out of or very systems spending 54 million on Mitch Green capital expenditures in the quarter contributing 261 day into the equity method joint ventures, including closing the previously announced joint acquisition.
Reliance gathering with works midstream.
Most importantly, right look today also announced a 16% increase to our quarterly distribution of 29 cents effect immediately which is also ahead of pre IPO expectations.
Looking forward to 2020, we're reiterating our previously announced guidance, which implies 42% year over year, adjusted EBITDA growth, including base business EBITDA growth with over 25% year over year.
While reducing base business capex by 12% from 2019.
Furthermore.
Remaining contributions to equity method investments are expected to be 135 250 million in 2020.
And 170 to 185 million overall to complete all outstanding commitments on our equity method joint ventures, including our newly announced Amarillo Rattler partnership.
Right what has entered into a 50 50, 50 50 joint venture with Emerald, a midstream to own and operate a natural gas gathering compression processing system in our Spanish true north acid.
The joint venture will also construct a new 60 main a day cryogenic natural gas plant for the system that is underpinned.
On an acreage dedication on the asset Diamondback required for Ajax resources in 2018.
Together with the joint acquisition number Lawrence gathering with which midstream and Rattlers investment and Gray oak and epic crude and linked Webster long haul pipelines.
The Amarillo Rattler joint venture is another example of leveraging the dominant back relationship and significant visibility as an upstream operator to pursue attractive investment opportunities.
To conclude rightly will continue to execute on our core business of fulfilling its long term fixed fee contracts was down about.
The underlying organic volume growth on the downturn back dedication combined with a declining capital expenditures as the various gathering systems approach peak required capacities is expected to drive earnings and free cash flow growth in pershare in years to come.
Rattlers Conservative capital structure, and low leverage is expected to allow us to prioritize return of unit holder capital through distributions.
As evidenced by 16% distribution increase announced today with these comments now complete operator, please open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound Keith Please stand by we compile the <unk> roster our.
Our first question comes from Michael Lapidus with Goldman Sachs. You May proceed with your question.
Hey, guys. Just curious how are you thinking about your you're setting ourselves up to being a significant cash flow position come to second half of 2020 and really in the 21, how you're thinking about utilization of that cash flow for 2021 and beyond.
Yeah, Michael you know I think when we turn we went public we're very focused on a you know establishing that we're gonna grow the distribution, while staying under two times leverage I think we've added some.
Some projects here on the joint equity in that area the equity.
Side of the business, that's going to allow for significant free cash flow over timing I think for US you know excess free cash flows is going to go towards growing that distribution, while we know we addressed the distribution here three quarters and.
Well you know the future if free cash flow looks looks really good and there's not capital to be spent on other growth projects and then we'll return to shareholders.
Got it and it just curious on the Amarillo, how can you the new JV, how do you think about or what's the potential and whats the physical room actually for incremental gas gas gathering and processing and especially on the processing side, meaning is there room inside the fence, if you needed to add another plane or too.
Is it easy to do under the structure or would you do it down outside of it.
Yeah, well have the sights set up to be able to add capacity should we need. It you know I think the unique part about that that plant and where it's located is that diamondback has a lot of other acreage that dedicated to other people right now, which the JV will have a you know a nice opportunity too.
Get that business overtime, you know right now Diamondbacks contribution is going to fill up almost two thirds of the of the new plant. So on top of that you know there are opportunities to fill up that plant and add more if the opportunity arises.
Got it thanks, guys much appreciated.
Thank you.
Thank you. Our next question comes from Jeremy Tonet.
JP Morgan you May proceed with your question.
Hey, good morning, as James on for Jeremy.
Hi, James just wanted to Hayden.
Just wanted to start with epic in terms of the cadence kind of or how you guys mahbod throughout 2020, including I guess figure out a one cheaper than I've seen there's no countries not and customer.
Yeah, we're modeling a little bit of a drag in the first quarter and then you know some some solid contribution.
Going forward and I can't speak for all the operators on the on the system, but I know diamondbacks gonna be.
Sending 80000, plus barrels a day, which is above our take or pay commitment for most of the year. So we're excited for early for full start up also excited for full start up on the on the graphic side as you know done back not shipping on that today, but will be a large shipper on full startup of above ground and.
Perfect.
Great. Thanks, and then looks like fresh organization stepped up where where there's definitely over 80%.
In terms of modeling that also for quite funny. So.
Is that a good run rate or.
Or the other drivers there.
Yeah, freshwater still moves around a little bit because some of the assets still sit at donlin back the energen operated freshwater assets in that dedication still sits at the diamondback level. So it's really about where the frac spreads move has operated by dialing back I can say for the first half a year or you know there is a big.
Heavy pay cuts county component as well as a reward component.
From the Don backside, so that's going to contribute you know solidly to the to the freshwater volumes, but you know those do move around a little bit, but if we do at some point get all of those assets dropped down then you can you know more accurately model freshwater as being essentially 100% of diamond backs needs for eight to nine frac spreads.
Okay, and just one more.
The amarilla footprint kind of looks like it overlaps.
With your line is gathering system are there any like a synergy there or what kind of thinking in terms of.
From there.
No I mean.
Just a little background on the Amarillo on them are all story here you know we inherited a dedication when we bought the Ajax asset that Donna back.
To the you know the old aim that and as a public company a you know the gas plant there at the time just can't.
Satisfy the needs of the growth plans that we have and that's why we when we talk to the Amarillo guys. We just basically flip that contract into a new contract, which improves the recoveries for dialing back but also allows for.
The growth that we had planned in the area I think this just tags onto a the lessons we've learned when we entered the Delaware basin that we do want to control the pipes in the midstream offer for what we are good at which is you know the oil gathering.
Water and water disposal side, and we want to leverage that size and scale to you you know how partnerships and let you know the experts do what they do Beth particularly on the long haul side and now are now on the gas gathering and processing side.
Great. Thanks, that's it for me.
Thank you.
Thank you. Our next question comes from Pearce Hammond with Simmons Energy you May proceed with your question.
Hi, good morning, and congrats on a on a good quarter. My first question is I wanted to get your thoughts on capital allocation in light at the Jvs and equity investments that you've made should we expect more such JB formations in the future are you comfortable with your current asset footprint and the priority on cash.
Moving forward will be less on investment it more on returning cash to shareholders.
Yep here, you know I think we've done as much as we possibly can here on the Oh on the JV side, you know leveraging anything that was available I don't think you won't see as being a large acquirer of third party assets on the water side.
Or are you know there, they're very limited opportunities left.
On the oil gathering side. So I think we're done on on JV for now you know what the asset base, where it is.
We're excited that the base business Capex is going to decline you know double digits year over year, while the EBITDA from the base business is going to grow 25%. That's a that's a trend we need to see continue.
Which will allow us to continue to grow. This this distribution a you know it consistently over time.
Hi, Thanks case, and then my follow up is can you provide some additional color about the JV with Amarillo midstream how did it come about what attracted you to form the JV and how do you see it benefiting radler shareholders over time.
Yeah, you know like I said, a little bit earlier, it came out of the Ajax deal and turning a what was a negative or poor performing contract in poor performing plant into a modern 60 million a day cryo with with the qualified partner. So you know I think for for Rottler shareholder.
As you know we are now you know partners with a a qualified operator to handle the growth that's going to come out of that area. That's you know from a diamondback perspective has.
The most or or one of the most undeveloped inventories in our in our portfolio.
Thank you.
Thanks peers.
Thank you. Your next question comes from Jeff Grampp with Northland Capital markets. You May proceed with your question.
Hey, guys I'm, just curious if we could talk a little bit about kind of the volume ramp expectations for 2020 looks like for Q.
In volumes came in.
Quite a bit higher than memoir model was Athens seems like there already kind of maybe in the range for the full year 2020 guide. So it's just kind of wonder and I know, we're barely couple of months ended the year, but seems potentially conservative there on the volume front. So I was just trying to I guess a frame expectations for how we should think about volume growth throughout 2020.
Yeah, Jeff I mean, if there is one thing I can say it's that.
While forecasting oil is a pretty difficult as an operator or forecasting salt water disposal volumes, even more difficult. So we've always erred on the thought of caution there.
In water has continued to a surprise has to be upside <unk> I think as.
As you know from our history together as a diamondback, we'd like to have a beaten raise type story.
Rattler here you know through its first three quarters to gain investor confidence in the story and Guinea investor confidence in what we're trying to present, which is a a business that has a 20% return on capital in a 7% dividend yield and 40% EBITDA growth.
We were trying to prove that this water business, which most of Rottler EBITDA is water cut should compete with the best midstream assets in North America.
Got it appreciate that and my follow up I was looking at slide 14, I think here that goes through the the oil gathering system that you guys. Just recently closed on seems like there's maybe some dedicated thing acreage that shouldn't be too much of a stretch to tie into the system. So just kind of wondering.
That is that a fair conclusion that is there any capital that you guys are contemplating and kind of the near medium term to expand that system.
Yes, the you know on on the Martin County side on the he started out position. That's all dedicated to planes today and that was you know inherited from Energen Oh, you know I will say the Kimberly area, which is southwest Martin County, we're working right now to to get that hooked up and eventually get hooked up to two reliance I think that'll be a nice piece of it.
That's for the combined.
Reliance rattler, JV or sorry, the orix Rottler JV excuse me.
Got it okay.
Thank you Jeff.
Thank you. Our next question comes from production with Bank of America. You May proceed with your question.
Good morning, guys. Thanks for taking my question.
First one on your distribution program, obviously, we've got a small surprise here yesterday with the step up earlier.
That is schedule can you share some thoughts on on that decision and if we could expect similar unplanned step ups in the future given where your free cash lists and maybe what you think that right distribution yield is forever.
Yeah, I'll, let a case answer that in detail, but you know just like we communicated on on down the back when we think about dividend increases yeah. We're looking at ways to drive both current and long term shareholder value and and dividend decisions are typically addressed on an add on an annual basis.
I guess you want to finish them. Yeah. You know I think I think you know were new to the midstream business. We've tried to address it on an annual basis.
You know should should leverage stay under two times in the business outperform.
You know and we start getting some free cash from our JV investments over the course of the next couple of years.
No work, we with my other hat as as you know, 70% owner of the business.
Our looking to get your cash out via the distribution. So we were going to we're going to keep pushing that I think it's too early to push it more than we did a with the announcement today, but its capital continues to decline in our JV commitments decline that we start getting free cash from there, it's certainly going to be part of the story.
Thanks for that and a small follow up on the Amarillo JV.
Partnership there.
Can you discuss the current volume profile.
In that acreage and what type of earnings contribution you expect in 21 2020 this year and.
21, and also are there other operators.
In the area.
Yes, so the way we have it right now as we know we won't have any contribution in 2020, because the existing plant will operate under the existing contract when the new plant is put in place is when the JV kicks in.
In mid 21, and that time, we should be producing almost 30 million today on the diamond backs side to contribute to that plant. So you know it'll be a meaningful contributor to the back half of 21. So I think the way we haven't set up on the JV side is you know the orix JV is contributing today.
So that they can the graph jvs.
Stark meaningfully contributing in the second quarter of 2020 and linked Webster comes on and 21 and then in the back half you add the the final JV. So really setting up a you know this backlog of of cash flow coming our way over the next couple of years.
Gotcha, and maybe one last one.
We we saw that you increased your 2020 freshwater volume guidance, what's your anything in particular that drove that increase that did you to do that decision.
We just have more clarity on the on the Diamondback completion schedule on where those completion crews are going to be moving around.
As we as we're now closer to the 2020 plan. So that just boosted the freshwater volumes that we saw in the model versus where we were three months ago.
Great. Thanks, that's helpful. Appreciate it.
Thank you.
Thank you. Our next question comes from Spiro Dounis with Credit Suisse. You May proceed with your question.
Hey, good morning, gentlemen, I'm, just one follow up on some of the questions around a return capital what are your thoughts around a special dividends.
Like many buybacks or an appealing from a flow perspective, I imagine you you wouldn't want over extend on the dividend yield side.
Then leverage to your point earlier is already fairly low and probably stays fairly low going forward. So does that kind of puts you into a special dividend or somebody consider.
You know, it's not something we're considering right now certainly buybacks off the table given we want the float.
No to improve or increase versus you know where it's been.
We tried to do a large IPO to get the float up we were we're very proud of the shareholder roster that we have and that's a lot of sticky money. So thing for US you know.
Growing that distribution is certainly first and foremost I'd say second would be would be slight debt reduction and in.
In a great bold scenario, where we don't have any cash to allocate to ER to growth projects are returned to shareholders. We would we would maybe consider a special but that's not on the table today.
Okay. That's a that's fair high class problem to have and then just switching back to the Amarillo JV suddenly be a little bit of room to grow there.
And realize that maybe you can't talk to the cadence yet, but just any color around.
The trajectory there as you kind of grow that footprint.
One plant a year from year to aggressive I, just how to think about the the cadence of that Chris.
Yeah, I'm really focused on one plan right now you know I'm, hoping that the JV can be competitive to get or some other dedications in the area from both diamondback and other operators and you know should those dedication.
You know had the way of the JV. Then then we will be more aggressive on on the growth from you know I think we have a well capitalized partner that's focused on growing this business and incentivized to do so in a and will be a you know supportive partner if those opportunities come up but for right now we're kind of just assuming the benefit of this one plant.
Got it that's it for me thanks, guys.
Thank you.
Thank you. Our next question comes from call Me with capital One Securities. You May proceed with your question.
Hey, good morning, guys.
You talked about.
26% of the source water volumes were from recycled produced water is this a good indicator for 2020 and then also how does this impact the financial results for Rattler.
Yes, Kyle so I'll speak to the financial results you know certainly helps improve margins rattler takes possession of.
The produced water barrel and then sells it back to done back at a at a much cheaper rate then the freshwater barrel.
So that's a win win for both companies there.
From a percentage perspective, it really depends on where your operating right I mean and take its county in some cases, we can use 100% recycled water for our Fracs in that you know in that area because there's so much water production, but then you go to an area like Spanish trail or Midland Basin, where there is so good.
It'll water production that you're pulling all the water that you're producing but that you start to supplement that with some freshwater to complete the frac. So 26% was a really good number I think for US we're targeting on average somewhere in the mid teens percent on a yearly basis and upside to there would be would be a benefit.
Throughout LER.
Got it that's helpful. And then one more for me on the on the Amarillo Amarillo JV in Orange JV do you have any opportunity to add incremental midstream services to those.
Not from a service perspective, but certainly from an acreage perspective.
Okay got it thanks guys.
Thank you.
Thank you then I'm not showing any further questions at this time I would now like to turn the call back over to Travis Stice.
For any further remarks.
Thanks, again to everyone participating in today's call if you've got any questions. Please reach out to us using the contact information provided.
Okay.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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