Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Altice Midstream Company fourth quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised at today's conference is being recorded if you require any further assistance. Please press Star then zero.

I'd now like the hand, the conference over to your Speaker today Mr. Patrick Cassidy. Thank you. Please go ahead.

Good afternoon, and thank you for joining us on Altice midstream companies fourth quarter, and full year 2019 financial and operational results conference call.

We will begin the call with an overview by Altice midstream CEO and president clay branches and been Rogers CFO will summarize our financial performance and outlook.

Prepared remarks will be approximately 15 minutes inline with the remainder of the call allotted for Q in a.

Remarks during the call May also referred to the Altice midstream investor presentation, which can be found on our Investor Relations website, and altice midstream dot com forward slash investors.

On today's conference call, we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted.

Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations information being discussed today is based on estimates at this time in the final amounts and the Altice midstream form 10-K may be materially different than those on last nights earnings release or reference.

First in today's call Altice Midstreams form 10-K is expected to be file next month upon completion of the audit of the financial statements for the year ended December 30, Onest 2019 for each of the pipeline entities in which we own and equity interest a full disclaimers located with the investor presentation on our website.

Right.

With that I will turn the call over to clay.

Good afternoon, and thank you for joining us on our call today, we'll highlight key accomplishments during 2019 in the recently completed fourth quarter provide an update on the operating environment, we're facing today and offer an outlook for the year ahead.

By nearly any measure 2019 was a challenging year prices for natural gas and natural gas liquids collapse compared to historic levels basis differentials out of wall, how were volatile and generally weak and activity levels at alpine high declined significantly from the prior year.

Our fourth quarter and full year 2019 results include a 1.3 billion dollar impairment related to a reduced alpine high development outlook in weak commodity prices.

Despite these challenges we largely accomplished the goals we set at the beginning of the year.

We entered 2019 with an ambitious plan to exercise the remaining three options to acquire ownership and our long haul pipeline projects secure financing for our capital plans without issuing common equity complete construction of three state of the art cryogenic processing plants and conduct our operations to meet the highest safe.

The in environmental standards in the industry.

Im pleased to say, we've accomplished all of those goals the employees working on altice projects have done an outstanding job.

I'll start the review with our joint venture pipeline projects as these will be the key drivers to our earnings growth in the foreseeable future.

The Permian basin remains takeaway capacity constrained, even with expected activity levels lower than a year ago, leading to strong inherent value in these joint ventures.

For 2019, JV pipe adjusted EBITDA exceeded the midpoint of our guidance and we are encouraged with the prospects going forward.

Altice owns equity interest in for long haul pipelines that transport natural gas Ngls in crude oil from the Permian basin to the Gulf Coast.

The Gulf Coast Express natural gas pipeline, and which allows us only 16% came into service in September ahead of schedule.

Gcs and supported by minimum volume commitments and Kinner Morgan recently disclosed that it has been routinely operating at its full capacity of approximately 2 billion cubic feet per day.

Altice holds an approximate 27% equity interest in the Permian Highway natural gas pipeline, which is also operated by Kinder Morgan and supported by minimum volume commitments required permits have been granted and construction is underway along a full stretch of the line from West, Texas to the Kt hub near Houston.

He is expected to commence service in early 2021 with capacity of 2.1 billion cubic feet per day.

The enterprise products operated cenote natural gas liquids pipeline was our first JV pipe to come into service with the mainline commencing operations in early 2019, adjusted EBITDA contributions to Altice commenced shortly after we exercise our option in the third quarter 2019.

Altice holds a 33% equity interest in Sunoco.

Sunoco has currently averaging approximately 300000 barrels per day in the pipeline was recently expanded to handle 550000 barrels per day. The line is integrated with enterprises entire system in the Permian and its ability to deliver Y grade directly to fractionation and storage facilities at Mont Belvieu on the Gulf Coast provide significant enough.

Managed to MP companies in the Permian.

Given the currently we differentials that wall Theres economic incentive to recover ethane as ethane comprises close to half of the Y grade barrels.

EBIT crude oil pipeline announced yesterday that it has begun delivering crude oil successfully commissioning is 30 inch permanent crude oil pipeline, we anticipate that lessons learned from operating the interim line last year, we will contribute to a smooth startup in an ongoing operation of the pipeline going forward, we hold a 15% equity interest in the epic.

Crude in line.

The epic crude oil pipeline provides transport out of the Permian and Eagle Ford basins to the Gulf Coast in December epic announced that it stocking facilities in the Corpus Christi Harbor loaded their first 700000 barrel aframax size crude carrier.

This capability offers a strategic export option to shippers a second dock that can handle larger million barrels suezmax size tankers is under construction and expected to be operational in the second half of 2020.

Also this midstreams ownership and JV pipes is a compelling investment proposition that offers of diversity of stable cash flows and long term contracts across all three commodities streams being produced in the Permian Basin.

Move on now to gathering and processing.

Negative Warhol differentials and low NGL prices reduced expected volumes from Apache during the year is production was curtailed however, lower operating costs combined with the lower capital investments, resulting from reduced activity helped to mitigate this impact to earnings for the year, our GNP business generally.

Good EBITDA at the top end of our guidance with capital coming at the low end.

We also benefited from a restructuring of our organization earlier in the year.

With the shift from multiple widespread edmar you operations to a centralized cryo processing center, we were able to adjust to changing activities more efficiently as we streamlined our processing capabilities. We continue to benefit from this lower cost structure.

Our operational performance for the year exceeded our goals all three cryogenic processing plants were built on time and on budget demonstrating excellent performance in both ethane recovery and rejection modes uptime exceeded 99% and flaring was less than 1% with an improving trend coming into 2020 the rail.

Road Commission of Texas conducted routine audits of our deal to you regulated pipeline programs and observe no areas of noncompliance.

Especially proud of our safety performance as we had 2.1 million construction man hours without a recordable incident in 2019.

We are aggressively pursuing third party volumes to replace declining production from Alpine high.

We have had initial success in this area as we are currently processing third party non spec natural gas liquids through our NGL stabilization unit.

Though not currently immaterial component and are expected adjusted EBITDA. This is a positive step and demonstrates that we are open for third party business.

All this has advantages that we can leverage in this effort. The SRX technology, we've installed at our Cryo complex offers improved netbacks to customers were also installing hqs treating facilities, which will provide another competitive edge, allowing us to treat sour gas for Delaware basin producers Altice is uniquely positioned.

To provide treating processing and transportation solutions to customers, earning a fee at each stage of the stream.

Then we'll provide more on our guidance for this year, but significantly lower GNP capital requirements and lower operating expense in 2020 will help to offset lower throughput volumes.

Clearly our stock prices underperformed, our peers and we continue to examine a full range of strategic alternatives. We are taking a view of opportunities that encompass all of our assets with a singular goal to maximize value for all this and its shareholders.

With that I'll turn the call over to Ben.

Thank you clay.

As noted in the press release issued yesterday Altice reported a fourth quarter net loss, including non controlling interests of $1.33 billion. This included $1.36 billion for impairments of altos gathering and processing assets to reflect lower volume expectations from alpine high and associated deferred tax.

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As Apache noted in their call today, they dropped the remainder of their drilling rigs at alpine high and have no current plans for future drilling.

Excluding those and other items altice generated fourth quarter, adjusted EBITDA of approximately $46.2 million.

Gathering and processing volume weighted average 643 million cubic feet per day.

Up 38% compared with 467 million cubic feet per day in the preceding period.

The quarter to quarter increase represents both new well hookups at Alpine high and production volumes that were brought back online with the startup of Gtx in late September.

Approximately 65% of fourth quarter volumes or rich gas.

Capital investments in midstream infrastructure during the quarter were $196 million.

This included $164 million for our JV pipeline projects, which comprises capital calls for our ownership in our long haul JV pipeline projects.

Capital for gathering and processing infrastructure for the fourth quarter came in at $32 million.

For the year Altice reported a net loss, including non controlling interests of $1.34 billion. Excluding the impairment items noted above we generated $86.3 million of adjusted EBITDA coming in above the high end of our guidance range, mostly achieved through aggressive cost cutting and.

Organizational rightsizing.

Performance related to our investments in Gcs and Shadow pipeline also exceeded expectations.

Gathered volumes averaged 509 million cubic feet per day above the high end of our most recent gathered volume forecast for 2019.

In 2019 capital investments totaled $1.47 billion, which represents cash outlays by altice during the year.

Of this $1.17 billion was for JV pipeline projects and approximately $300 million was for gathering and processing assets.

Including our gross proportionate share of capital in relation to equity method interests, which is how we guide to growth capital investments 2019, Capex came in at $1.62 billion within our guidance range for the year.

As outlined in our press release earlier. This month, we recently exited the initial period of our revolver as expected.

This enhances our liquidity by $150 million, bringing our revolver commitments up to $800 million and providing ample liquidity for 2020 and 2021.

Liquidity may be further enhanced as we evaluate and execute additional asset sales, we previously identified $40 million to $50 million and assets for potential sale of which we've closed on $18 million, we're continuing to work towards the sale of the remaining noncore assets in 2020.

Moving onto guidance gathered volumes for 2020 are forecast to range between 480 to 520 million cubic feet per day.

Adjusted EBITDA is currently expected between 190 and $220 million.

These revisions from previous guidance, primarily reflect apache's plans to remove drilling rigs at alpine high and defer completions.

With the prevailing week basis pricing of Wahab Apache may choose to deferred production at certain points during the year in quarterly volumes may be less predictable based on the actual timing of any curtailments.

We have considered this potential in our revised guidance and estimate full year volume could be up to 15% to 20% lower and adjusted EBITDA and DCF could each be up to $10 million to $15 million lower.

As Clay noted we continue to actively pursue third party business from other midstream companies and producers in the Delaware Basin.

Though we expect to close third party business. This year, we have not reflected this in our revised 2020, adjusted EBITDA or capital guidance.

We will update our guidance accordingly upon the signing of such contracts.

Our JV pipeline adjusted EBITDA assumptions are relatively unchanged.

Gross capex guidance for 2020 is $300 million to $360 million, which is primarily attributable to PDH pp with a lesser amount budgeted for epic capital calls.

Capital associated with the epic crude line is expected to come in above the previous planned budget due to completion of projects that were out of the original project scope and general cost overruns as the pipeline nears completion.

We expect the total overage will be funded with a combination of operating cash flow increased debt funding is at the asset level and equity contributions from all partners.

As we have done in the past our capital guidance reflects our gross proportional share of capital without taking project finance into account. So we don't anticipate having to equity fund all of the overage.

GMP capital in 2020 is expected to be de Minimis and will remain so until we add third party volumes to the system.

Following completion of the two remaining JV pipes Altice will have almost no growth capital requirements and only nominal maintenance capital requirements, which will position the company to generate significant distributable cash flow.

This ability to generate cash is underpinned by the strength of our diverse set of long haul JV pipes, where we have partnered with some of the strongest pipeline operators in the basin.

We also remain confident in our ability to attract third party business, which can fill throughput gaps in our cryogenic plants and provide upside to our guidance.

Ill now turn the call over to the operator for Q any.

Thank you as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question press the pound key please stand by what we compile the culinary roster.

Our first question couple of Aspira Udonis with credit Suisse. Your line is now open.

Hey, guys.

Let me pick up on one last time as mayor on this strategic options available to you just just looking for more color. There sounds like you kind of that taken up everything is on the table approach.

Just trying to think through maybe weeding out some other things that maybe are kind of out of reach thinking acquisition, maybe tough just given where your stock currency is.

And just wondering you feel like you have the balance sheet capacity to go after some larger.

Third party project here thinking about asset sales as anything larger scale fit and does Apache become part of the strategic review as well just hoping to really narrow the focus here a few maybe tangible options that you think are available to you.

No I will first and foremost thorough thanks for the question, but first and foremost the objective our foremost objective is to maximize value for all to shareholders. So when we look at this we look at how we can do this the the menu that that we see before US is it includes third party business.

It includes potential divestments partnerships. Some other form of combination or joint venture really nothing is off the table at this point in time and again go back to the the first and foremost objective and that is to maximize value. So were entertaining a variety of ideas. We had a few inbounds from barrier.

Banks and others that have ideas on ways to do this.

We're also brainstorming internally on how we can do that we're very active on the third party side in terms of trying to attract business both from producers and other midstream players in the area and we have a good line of sight on that and we've actually started.

As we stated in our release.

We've actually started some third party business, taking off spec natural gas liquids into our plants. So that we can clean those up and make them marketable.

Thats, a nice margin business and something that we feel like that we can grow and scale up as far as being able to bring in additional business on the third party side. We are very much opened for business. We have state of the art SRX technology, Ortloff SRX technology cryo plants that have the highest recoveries in the.

Basin, So we think that thats going to be a strategic.

Component in our Arsenal. In addition to that we have connections to multiple pipelines, both NGL and natural gas.

And we believe that getting those liquids out in the basin into the Gulf Coast in teaming up with Apache on those pipelines is going to make the diamond facility. The diamond cryogenic facility very attractive for third party business. In addition to that we've mentioned that we're looking at a set.

Our gas.

Gathering business, which we think is something that we're going to see a great need for in the basin.

Given the amount of sour gas associated sour gas that we see within a 30 or 40 mile range of the diamond cryogenic processing facility, where we can bring that gas in clean it up and process. It all for fees and we think that thats going to be a good business for us as we go forward. So we have a line of sight on several third.

40 ideas on the GMP side of the business, let's not forget we have some great assets in those takeaway pipelines as for pipelines that we have equity interest in those are great cash flow assets, that's going to sustain us in the near term and the long term those are great assets in another themselves.

Stand alone, but what we're really focusing on right now is what do we do with the GNP side of the business to make sure that we're maximizing value there.

Got it Thats very helpful and just on the JV assets Segway since my next question here.

You guys laid out the GMP impact just from a volume perspective to the extent that you see further declines in the basin.

But just trying to get a sense of what's underlying your guidance with respect to JV pipes, obviously, a lot of those volumes do flow through this pipes. Good amount of is on NBC, but you still have some volume risk. So just trying to get a sense of quantifying that is the all that sort of in your guidance as well.

Yes, So let me take a swing at it nonetheless been get over into the specifics, but you point out correctly, the natural gas pipelines, both Permian Highway Gulf Coast Express Nvcs on both of those fully subscribed great pipes, great assets for us to have a piece of so super excited about those.

The other two pipelines that don't have the MVC is many mbcs when we put it that way.

Sunoco on the on the NGL side, and then epic crude pipeline, which has some nvcs more shorter term in nature, but but there are some nvcs associated with that but we continue to see volumes climb on epic and been can can talk a little bit about that we've been very conservative in the way that we forecast set but we believe that epic is.

Great crude pipeline and we believe the destination in Corpus Christi is going to be strategic to Permian producers as we move forward. So we think thats going to be a really great pipe as time goes on.

Sure as well, we have a lot of confidence that sooner because more and we'll see.

Additional volumes on Sunopta Theyre running at about 300000, a day right now on Sunoco, we actually seldom ramp up to 550000 barrels per day in the fourth quarter. We think we're going to see those volumes continue to grow as we see recovery occur and I mentioned this in my comments earlier, so we see more ethane recovery occurring right now.

Because of the the all four wall hub.

Yes, natural gas differential the the basis at Warhol right now is driving a lot of producers in to ethane recovery, which should ramp up the volumes on Sunoco. So we expect those volumes to be going up very soon but all in all great set of assets more more flex more variability I guess.

So you would say on Bose, Sunoco and epic, but again, we feel really good about those assets, but then if you want to talk a little bit about how we we modeled that in the way that those EBITDA targets were achieved.

Yes, I mean, clearly hit most of that really the only thing to add is really just going back to what enterprise said on their call recently with respect to shift our focus.

That's and it's in line with our comments too.

It slowing approximately 300000, a day right now and so.

Now as it but they fully expect to try and do more deals to to increase volumes on that pipe as well as us we can go out and.

Any third party deal that we work through.

We'd be incentivized to make sure that we can try and get Y grade on that pipe as well so.

In line with that we're not.

Assuming a lot of a herculean growth associated with.

This pipe, it's kind of in and around that that same 300000 number that they.

I mentioned and I think all the different aspects that go into it that clay mentioned, we took into account for our guidance level.

Thank you and as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question press the pound key.

Our next question comes back a follow with U.S. capital Advisors. Your line is now open.

Good afternoon guys.

And on your slide deck, you no longer have 2021 guidance can you speak to that.

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Yes.

That kind of goes to what we did last year as well in line with we have provided historically.

Throughout the year as we get more clarity for what the following year is.

We provide updates.

Didnt have not provided volume forecast is more than a year out so that goes into it.

Given the uncertainties around the third party business that we're actively pursuing now that could move GMP volumes.

Additional we know how dynamic the market is on the other JV pipes that we have flows from epic and Chinook.

We are in close communication with those partners and.

Really a lot of discussion we've had with each of those really goes one year out.

And then the other pieces just the timing of ph Pete were 27%.

Equity owner with that the same as Kinder Morgan.

And Eagle claw and the timing of that Couldnt move within the first quarter is what Kinder Morgan is said and until we have more clarity on that.

I didnt want to put anything out there definitively so.

We knew what we had in 2020 with respect to our GMP business and the JV pipes.

Too many moving parts right now for us to.

Land on a specific midpoint in guidance number for 2021 understood. Thank you and then next question is how much third party business are you currently drilling.

The only third party that we have right now is with respect to the NGL stabilization.

Business that clay mentioned, it's at the cryogenic site. It's it's with up counterparty that brings us off spec Y grade barrels and just like you said, we clean them up and sell back to them the condensate barrels that come out of that as well as we sell the Y grade and the residue gas.

And so that is something that we think we can grow our our stabilization unit can handle upwards of 10000 barrels a day and.

We're not we're not doing that volume right now I think our assumption for this year is pretty small that is kind of a month to month style contract that we have but we've been we've been processing that in 2020. So far so it's just a good first step to show that we can attract third party business to the entire site.

Doesn't have to be just as a traditional producer. So it's again, it's and I think clay mentioned this it's immaterial to our our adjusted EBITDA forecast, but it's a good step into right direction.

Thanks, and then my last question is.

When you looked at the strategic review and you go back to the original reason that helped US was put out there is a public company was four alpine high.

And that is no longer at least for now it's not no longer to can be developed and you had a bunch of equity stakes and types, which are good but it's not it's not what normally you would have as a standalone company. So does it make sense for all just to be a standalone company in light of the change in philosophy on Alpine high.

So back to this is clay and to address.

Next question.

It doesn't make sense for now for us to to be a Standalone company. As we are are situated.

You have to realize this is all fairly sudden. This is this is evolved over the last year to the point, where we are now we never expected to be in a situation, where we were not going to be fully servicing alpine high gas. If you go back to where we were a year ago not only did we expect to fill these three credit.

I think plants with alpine high gas, we also expected to be starting plant number four in 2020 or early 21 with plant number five shortly thereafter. So this is a real turnaround we always had an expectation that we would be pursuing third party.

The business, particularly gas processing in gathering.

We expected that to happen, but we really weren't expecting that to happen until around year. Three so what it has caused us to do is accelerate our program and really augment the commercial side of our business make sure that we have the proper business development staff in place, where we can go out and do the work, but because it.

Is fairly recent at least in terms of of business development days because it does take time, you don't just turn on a dime and start attracting third party business. Furthermore, with the three cryogenic plant in Apache thinking that they were going to utilize all three there wasn't a real willingness on Apache in the past.

For all this to go out and they had first dibs on those plans to go out and pursue third party business now that they have.

Reduced the rig count to zero and are not going to be pursuing any additional activity in the area in the foreseeable future Apache is working very closely with us to release that capacities that we can open that up for third party business.

In addition to then on the commercial side, we work very closely with the Apache marketing and midstream group with regard to the capacity that they have on their pipeline on the on the pipelines that we own that Apache owns the capacity within those pipes.

On the firm transportation within that lives, particularly.

Gulf Coast Express Permian Highway Encino, which are very much related to plant activities.

But that that said Apache is willing to.

Add some of that capacity to the all to service offering where we could gather others gas there the rich gas process. It and then be able to offer some of that firm transportation on apache's, NGL and natural gas space, which would get certain producers to the Gulf coast and we know.

This is very important, particularly for those producers who like to take their barrels or theyre molecules of gas inclined to the Gulf coast and trade them. There. So it really very appealing, especially for some of your larger more integrated producers that would would once something like that.

In addition to that just from a service offerings standpoint, because of the way that this plant was built in this state of the art not only in its ability to recover but also when you take a look at our loss and on accounted for gas, which is almost nil.

That's because the plants jug tight we have some of the best technology. Some of the best leak detection technologies and repair that exists we make sure that we don't have leakage. So from an SGS standpoint, I can tell you that our altice midstream facilities are better than any that are in the basin.

I can make that claim very boldly that producers that are really trying to stay within their SG boundaries and take their gas to a plant that is going to provide them. The best service in terms of it being leak proof and in checked on a regular basis to make sure that we don't have leaks.

And have the highest recoveries and very little flare time, we have our flare time with these these three cryogenic plant that we have right now is less than 1% in the month of December is 0.12%.

Flare times, so reliability, and ESG, which is becoming more and more important too to companies and particularly larger producers. We think that thats something that we have going for us that's going to make this a business in the in the near term in the long term so.

While this is a bit of the setback. If you will go into zero rigs with Apache It's not the end of the road, we're not in the ditch. It just.

Passengers, our need to bring third party business to the diamond facility much faster than what we thought that we would have to so stay tuned on this we feel like this is something that we're going to be able to build on and we'll be able to share with you in the future we have ongoing conversations with various producers.

With various midstream companies about potential for bringing in third party gas. So this the NGL. The I'll speak NGL work that we're doing right now de minimis in as far as moving the needle from an EBITDA standpoint, but stay tuned we really believe we're going to have a good story to tell with regard to third party.

The business in the quarters ahead.

Thank you.

Thank you and Im showing no further questions in the queue at this time I'd like to turn the call back to claim branches for any closing remarks.

So thank you again for listening into our call before year end I want to leave you with some final thoughts as we look ahead into 2020 and beyond.

See a company an asset portfolio well positioned to compete despite increasing pressures and challenges on multiple industry and market fronts.

Our SRX cryogenic processing technology offers best in class capability at scale.

Our operational and on time budget execution performance provide a strong track record in which future producer customers can feel confident as we compete for their business.

At this is proactive and purpose for SG mindset, most vividly illustrated by our very low in declining flaring and curtailment metrics bolster our competitive strengths as potential producer customers and midstream JV partners alike will increasingly seek to align with industry leading performers in this important arena.

And while our stock price performance has been disappointing our balance sheet and liquidity positions are sound, providing altus with differential flexibility to maneuver on a challenging and rapidly changing midstream landscape.

I look forward to sharing with you our progress in 2020, Thank you and good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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