Q1 2020 Earnings Call
Condition results of operation plans objectives future performance and businesses be costing you that actual results could differ materially from those that are indicated in these forward-looking statements from a variety of factors information can say these factors can be found in the company's filings with in addition. We'll make reference to certain non-gaap measures. The reconciliation would be appropriate gaap measures can be found. Her knees release issued yesterday afternoon. Well now turn the call over to try to start.
Ladies and gentlemen, thank you for standing by and welcome to the Rattler at Midstream. First quarter 2020 conference call all lines have been placed on mute to prevent any background noise after the speakers remarks. There will be a question-and-answer session. If you would like to ask a question at that time, please press star one on your touchtone phone. If you would like to enjoy your question, press the pound key. Please be advised that today's conference is being recorded if you require further.
Too late. Twenty Twenty-One based on the current Outlook.
Robert is focused on Capitol and cost-control across the board as evidenced by our immediate reduction reduction to operate and expand went down and back fullback. It's activity levels of March. We will continue to drive down operating costs and preserve Capital wherever possible.
Although the Ford Outlook has weakened. We're very confident in the resiliency of the Rattler business model. Therefore. We announced to $0.29 per unit distribution for the first quarter, which is fly from the previous quarter and in line with previous and current guidance for 2020 the board intends to review the distribution policy each quarter, but with pure leading leverage off record business that is expected to be free cash flow positive and differentiated visibility into Diamondbacks future activities Rattler is well-positioned to maintain its current distribution policy.
Thank you, Adam. Welcome everyone and thank you for listening to the Rattler midstream's earnings conference call covering results for the first quarter 2020 before we get started. I would like to take them to extend our thoughts and prayers to all those affected by the covid-19 and then the challenges presented so far in 2020 or unprecedented, but our perseverance is evident in the decisive actions were taken to preserve our strength through this cycle.
Turn into the results Rattlers first-quarter continue. The previous trend of increasing volumes earnings and cash flow since Rattlers IPO less than a year ago.
Looking forward to the rest of the year. We are reiterating our previously announced guidance of adjusted even down for March which at the midpoint implies growth of 6% year-over-year even in a breast commodity price environment furthermore operated Midstream capex guidance at the midpoint implies a decline of approximately 50% from 2019.
Produced water volumes and gas Gathering volumes were particularly strong in the first quarter up 5% and 13% over the previous quarter respectively while or gathering and said volumes were down 1% and 7% over Q4 2019 due to the effect of Diamondback producing completion activity in March.
Across our organization and our partners we're evaluating ways to conserve Capital as evidenced by the reduced Equity method contribution guidance for 2020, which is roughly 20% down from the previous guidance most importantly the net effect of our updated twenty twenty guidance shows. The resiliency of rappers free cash flow profile has been declining system volumes. And even though is more than offset by the clients and operated Midstream capex and contributions to equity method Investments.
First-quarter Financial results reflected the strong operational performance in the quarter as Rattler grew net income 6% quarter-over-quarter 255 million and adjusted ebitda back over 14% quarter-over-quarter 281 million dollars in the first quarter.
The company continued to build out or various systems spending fifty two million on Midstream Capital expenditures in the quarter and contributing 33 million to equity methods or Thursday.
In conclusion, I want to emphasize that rattling was set up to be a sustainable self-funding business to combat the inherent volatility in our business.
It's the Gray Oak and epic crude pipelines begin.
Well, the first application of customers is often seen as the benefit in the Midstream space review Rattlers concentration with Donna back as a clear positive.
Diamondbacks cost structure with low interest expense low leverage industry-leading LoCash GNA a full head book strong Midstream contracts in Mineral through black or Energy Partners has prepared it to operate in a lower for longer oil price environment.
With these comments now complete operator, please open the line for questions.
At this time, if you would like to ask an audio question, please press * 1. Once again. That is star one to ask an audio question.
Jeremy Allen is open. Hey guys, this is Jeremy. Just wanted to start it kind of just looking at the JV portfolio page. Um, how are you? Maybe you can go just one by one in terms of the capital spend you expect this year. And then also just focusing more on asking how you see those package progressing through Superior. Yes, this case I'll go through them one by one, you know the Epic in the pipeline started up in in April a service. You know, we have some small payments left to make on on both of those but you know, not a meaningful number so we should start seeing some TVs all contribution and and most likely get your musicians from from one or both of those pipelines this year. We've already received a distribution from grab. So we you know, certainly expect that to to continue on work log.
on the line JV the JV with orix
The we've already received a distribution out of that business and have cut capital in that business. So, you know expect to see some free cash flow and turn up to the rapid level thousand a year. And then, you know we Webster which is our third pipeline commitment, you know still on track and you know, we've spent about half the capital required for that pipeline to date em, and you know, we look forward to that pipeline coming on in in the first half of the year of 2021 and lastly are a Murillo Rattler, you know gas Gathering and processing, you know, I played all major Capital spend there until at least the back half of 2021 is not the first half of 2020. So, you know, certainly put a lot of of dollars to work here Thursday, and we look forward to receiving some some cash back on from these Investments.
Got things and just one moment from you. I'm looking at the slides on 11:00 you guys talk about the kind of the savings issues with objects. Maybe if you just provide any influence of color on uh-uh. Guess the the surface royalties there. Um, maybe I'm just trying to better understand kind of kind of what the two savings are dead. Yeah, you know, it's very tough to get major savings on Surface World sees, you know just depends on that particular area and the lease and what the lease says in some cases you may I required to buy on these water and and in some cases the opposite is true. So they're certainly going to be some optimization that we can do, you know, you can if you're buying water at $0.30 a barrel from one section, but two sections over $0.10 a barrel, you know makes sense to buy from the the cheaper section. So now that you know, everything's slowed down a little bit, you know on the optimization front we're surfing
Looking through to buy cheaper water.
And also disposed water on, you know Lisa's or or acreage that has a lower disposal rate. So I can't quantify but the savings they're they're certainly going to be some optimization wage. I think the you know, the real savings is going to be on the on the true effects side of the equation where you know, our our Service Partners reduced costs by you know anywhere from 15 to 25% off across the border.
Thanks. I'll stop there. Appreciate it.
Thank you Joy. Next question.
Morning guys, just sticking on on slide 11 here. I think you mentioned I guess first want to clarify last comment. Do you say kind of a 15 to 20% off high production is is what you guys were targeting and then could you clarify if any of that kind of baked into the existing guidance you guys to put out for us to bake in looking at Cost reduction, you know similar to the Diamondback side or we just like to give you what we're seeing and I think we need to see this proved album the numbers and Q2 and Q3, but certainly, you know across the office costs or or on the table. So you would seen some some reduction the date, you know particularly on on the true service side of the equation and we'll see it run through and and if it was a significant higher margins will walk with that accordingly.
Got it understood and then for my follow-up on the distribution, you know, you guys kind of reiterated expectations to maintain that through the rest of the year just kind of curious. I guess that the same activity of that and and maybe if we look at a downside, you know to the extent, you know prices don't firm up or maybe they get weak or through the year, you know, presumably Diamondback, you know, make some some economic decisions to maybe capital and or production how comfortable and in that type of environment. Are you guys, you know, maybe relying on the balance sheet to maintain the distribution and and maybe in general, you know, what kind of a general level wage you may rethink things on the distribution side. Yeah, you know the outline in my prepared remarks did you know the board intends to review that distribution policy every quarter and you know, if you purchased the macro view of it, you know rabbit has purely leverage and and of course business that's that's turning the free cash flow positive. So, you know, the future is hard to predict, but I can log
Right now but you know the this is just what the board is committed to is, you know continue to evaluate, you know, you know how we're going to how we're going to address the the dividends but or the distribution, but as of right now the proud to have opposed to the dividend for this quarter. Yeah, I think I think it goes across the board at all three companies just so we're going to analyze each distribution or return of capital every quarter, you know, based on the Ford Outlook today, which assumes you know, some sort of return to work in the back half of the year, you know, we're confident in in the distribution today and I'll tell him just you know, we're getting that that relationship did rather hasn't done the back. We we have more visibility into Diamondbacks, you know future activity than than any relationship between a Midstream with the Midstream company. And so well utilize that if we try to understand, you know how we're going to you know, how we're going to navigate the future, but that that Insight that visibility is is truly differential.
for the right one unit holders
Yep. I totally agree. I appreciate the comments guy. Thank you.
with credit with
they got to hear me. All right, perfect. Good morning. First question just on the volume guidance and focusing on Fort Worth specifically here. I am I can surprise about a 30% volume stepped down for the rest of the year. Imagine that's heavily weighted to two q and three q but I guess anecdotally we're hearing about about 15 to 20. The race or declines in the in the Permian. So it seems like you guys obviously plan out performing that is that you have this reconcile that is that a war Dynamic. Is that County specific? Maybe thank specific wage. I help their yes. I really I really can only talk about it back without that has one main customer and you know Diamondbacks release date and execrate oil guidance of a hundred seventy-five or eighty thousand barrels of oil per day versus q1 at a little over two o one so that's you know, it's a mid-point a look a little less than 15% reduction birth.
You know that kind of ties to the rather numbers were we're projecting, you know, I think overall on the disposal business you too will be the weakest, you know, you we will be, you know down to that little bit of a rebound in or should we return to activity levels.
Perfect. It's South Pole and just thinking about Catholics here. Let's say staying mean but then he sent Fang commences activity again late in 20 20, I guess is that already predicates need the guidance or code? We see it just at higher and then as we think about next year, what's a good base level of capex to use if we go into something like a maintenance mode? I think your guidance of the rest of twenty-twenty applies about $55 million a quarter, but it feels like that could be ratcheted down if we're truly in a no-growth scenario.
Yeah, you know like like we said in a prepared remarks all all costs are on the table, you know, the midpoint of guiding supplies seventy-five million of operating Capital spending for the rest of the week is probably a little heavier weighted towards Q2 than Q3 and Q4. And you know, I think it's certainly the base case Diamondback plan of going back to work and some respect is is based off that guys and I think you know, you can use a few three q 4 run rate for a 20 21. Should we be in a a maintenance mode through all twenty twenty-one.
Perfect for me. Thank guys very next question is a good morning and thanks for taking my question case given the attractive and and robust market right now. Would you consider doing an offering to pay down the revolver? And then what is the max time? You'd want to be on your revolver? It really good question you want while all the debt markets probably about what's good for larger cap companies, you know, I'm not very confident in that, you know that interest rate you would get it at the Rattler level. So I think you know overall strategy has been to be patient. And you know, we're we're working with the with our banks and and making sure they're happy and getting everything they need that they're certainly going through a lot of stress right now. And so I think overall for us over time, I would like to have, you know some sort of term on on our revolver and Ed.
Your next question comes from the line of students.
And a lead the banks of lead the banks of of the the bearings on the on the credit facility.
I just don't think that's that's in the cards yet, you know certainly should the market continue to heal, you know, we'll be opportunistic and and look at our opportunities in the debt Market.
Thanks case that that's it for me.
Thank you. Thank you.
Your next question comes from the line of Tristan Richardson with hey, good morning gents just a quick question. Appreciate the commentary on the the Cadence of the year at life with regard to the the sponsor call. You talked about your rig schedule for the rest of the year as well as the hundred and fifty Ducks exiting 20. Can you talk about either the the reschedule or the duck inventory break out? How much of each of these are are behind Rattlers footprint? Yeah good question for you know, I think the majority of that have have certainly have rather water exposure whether its water fresh water or or disposal. So you'll see a hundred percent of those deaths sort of those off you go to that were there, you know, most of our ducks are going to be in the Midland Basin probably two-thirds to three-quarters of them. So you probably have less or exposure and less gas exposure.
But you know nearly a hundred percent on the water and the freshwater side, which is the majority of the the cash flow of the business.
Fairy tales from a capital perspective, you know, we we spend capital in preparation before those Wells are completed. And so, you know, we're prepared from a rattler perspective to draw down ducks at Diamondback and not have to spend many incremental dollars on on Capitol growler.
Makes sense. Thanks guys very much.
Thank you. Thank you.
Your next question comes from the line of you with Bank of America.
Good morning, guys. This is Louis. Well, thanks for taking my question. First one on your expectation for remaining free cash flow positive from here. That's great. I really want to do get at you know, what sort of commodity price assumptions and maybe Frank's Baseline Drilling and completion plans is baked in their home.
Yeah, you know, I think I think the base case is you know, some sort of return to activity in the third or the fourth quarter. It's certainly not going to be a major return to activity. You know, I think if I were running scenarios from 2 to 2 to 4 or fractures at the at the Diamondback level today and you know that's baked into you know, the Rattler guidance going forward. I think as we look into twenty one, you know, we can go one or two ways, you know, things can stay week and we'll be drawing down ducks at Donner back and spending very few Capital dollars a traveler or you know, the world starts g e o and an oil price starts to heal and you know, those activity levels remain constant, you know through twenty Twenty-One. So I think you know our order right now. The parent is one would return our cocktail production which you know, we're going to curtail ten to fifteen percent of production in May, you know to get back to work in a small back off of the year and then third, you know keep production flat dead.
Yeah, I can tell you from a relative respect.
You know, that one back is going to want to you know going to want to focus on you know, doing activity that benefits rather because not all back still owns 71% of off at 4. So we're going to be naturally motivated to to do work that benefits the benefits rather.
Got it. Thank you. That's helpful and secondly nice Gas Distribution up around ten million from your Equity Investments. Is that what do you say that's readable from here in the Club Quarters?
You know, some of that is a little ones on with the the Old Navy returning some cash early after the after the close, but with the 251 starting up a you know, the Old Navy in Full full steam ahead. You know, I think I think that number is probably a fair number, you know starting to 2 or to 3 to to consistently receive back that we spend so much on.
Great. Thank God. Thank you.
I am showing no further questions. I will now turn the call over to Travis Stice CEO for closing remarks.
Thanks again for everyone participated in today's call. If you've got any questions, please reach out to using the contact information provided.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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