Q1 2020 Earnings Call

And good morning to everybody Welcome to cnx midstream's first quarter conference call we have in the room today Nick delius or chairman and CEO Chad Griffith president and Chief Operating Officer and donned our Chief Financial Officer today. We'll be discussing our first quarter results, and we have posted an updated slide presentation to our website as a reminder any forward-looking statements we make or comments about fuchsia spectations are subject to business risks, which we have laid out for you and our press release today as well as in our previous Security and Exchange Commission filings.

Thank you.

We will begin our call today with prepared remarks by Nick followed by Chad. And then what we would open the call for Q&A with that. Let me turn the call over to you Nick. Okay. Thank you Tyler. Good morning. Everybody. I I hope everybody's doing well out there and and managing through this. I just wanted to take a minute at the front really the Highlight two things that we've been talking about those internally with our team as well as externally with all of our stakeholders. Both of them coming very apparent. I think with the last couple of of weeks and and month and half or so nationally and globally first one. In fact is that you know the teams and the individuals and the workers that you find in the industries that work with them Midstream energy in general have been absolutely phenomenal. I don't think that comes as a great shock to many of us who have been familiar with these industries in these individuals over our careers are through time, but it is certainly something that was to be hold and a really strong.

Cool crisis. Not just for our nation. But again globally and that sort of leads into the the second sort of comment at the start which is this crisis is once again highlighted how Cruise schedule a foundational how essential the Energy natural gas petroleum Midstream processing Industries our to our way of life. So you think about all these things that really really matter during this recent time. Hospitals and and what's powering them you think about just the logistical Supply chains to transport essential Goods to and from the manufacturers or producers of them to the the consumers of them everything's driven off of the products that we're transporting and processing and cnx Midstream food. You know, you think about what's fertilizing the food know how it's being transported the processing what's processing the food. What's what's preserving it if the grocery store and what's ultimately cooking at all of it again, really dependent upon the industry that wage

Stream operates within and then even things like the masks and hand sanitizers shows really the the end product use opportunity the petroleum and natural gas provide. So it's been I think in some ways this challenge has been as stressful as it's been it has been I think very rewarding to see our industry play a crucial role in in underscored. Once again how important it is the other things that I wanted to to Really highlight before turning it over to the team chat in particular want to talk about how in these times it's also become a very strategic crucial and I think it highlights the natural relationship that cnx Midstream enjoys any alignment that it enjoys with cnx resources to have a strong anchor in a strong ship or strong defined by Reserve based wronged by footprint, but also strong defined by balance sheet and financial wherewithal to have that as our our anchor shipboard our largest customer that puts us in a position to do some great things and and navigation.

And also Thrive during these challenging times. So we're strategically linked to the right Upstream partner, and that wasn't by accident. Of course that was by a methodical effort over a long period of time.

and we're happy that that that's the situation today another thing I wanted to hit upon is how our Capital intensity has been changing and improving frankly dramatically the build-out of course is completed of these Midstream assets we've been talking about that towards the end of 18 and all through nineteen and that is largely completed now I think slide three and the deck that we posted Thursday morning sort of shows in the lower left of that slide with the capital-intensive is doing quarter-by-quarter almost looks like an exponential Decline and that's the type of thing that we had ejected and that's the thing that we wanted to see and it's good to see that coming to manifest it's just the right time and it was talked a lot and this about maximizing free cash flow very complicated stressful Times Like These sometimes things get very simple with respect to what works best so generating free cash flow obsessing on spend whether it's topics cat bath

Overhead, but it's testing on that spend and trying to make that as efficient as it possibly can be in paying down debt increasing liquidity lowering leverage ratio. Those are the Hallmarks of what's going to be a successful entity versus those that would not be successful in an environment like this. It preserves value. I think for the unit holders and it sets the NX Midstream not just in the position as I said to navigate. Times but actually to to thrive in them and that's what we're prepared to do. So with that I'm going to turn it over to Chad. Now who's going to go into a little more detail with respect to the other quarter of what we're seeing. Thank you. See you next time had a strong quarter with sixty point four million dollars of adjusted ebitda and forty forty six point nine million dollars of distributable cash flow. Of course Capital expenditures were down 57% sequentially as we close out the major system overhaul. We began last year the two major Greenfield stations Drive range of Buckland are both now online and moving gas.

Moving forward we expect to step down the businesses Capital intensity as we've been describing the past several quarters. We ended the quarter with 3.1 times leverage ratio and 258 million dollars on the quiddity echoing Nicks comments lower leverage sample available liquidity in cash flow generation to find our position are essential in this time of uncertainty caused by the global pandemic in response covid-19. We brought up Social distancing in quarantine protocols to our field operations and and construction locations to protect the health and safety of our employees and service providers so far off of gas in our capital projects have not been materially impacted by the virus.

Slide for looks at our major capital projects in the southwest in Southwest Pennsylvania. Now that Dry Ridge in Brooklyn are both well and gas we are working closely with our shippers on the timing of phase two which includes the issue of additional horsepower at those two locations. We currently expect to install this additional horsepower this year and it is included in it is included in the year's Capital guys. We are also in Iraq is expanding our top capacity and Dry Ridge giving our shippers some additional delivery capacity into each express way. They can expect to receive slightly better pricing. We have a handful pack connection the plan for the year. In fact our first two arms lamp new pad connect, which we expect to have completed during Q2. We expect these projects that have long utilization profiles and are essential to providing system capabilities for our shippers wage. It's further improves. Our operation are operational Leverage.

You don't have any expenses are planned at bank on improving markets and volumetric growth levels or capacity overfill.

Turning to slide six. We've updated guidance and capital allocations reflecting ever-changing environment. We produced our plan Capital expenditures for the Year by

16% driven largely by improved bit prices for the work. We have planned for the balance of the year are even the guns reflects a potential expected range of volume deferrals from our customers in 2020.

Late in the first quarter. We saw on CNN shippers begin to defer flowing volumes from NGL richfield's the covid-19 pandemic has created unprecedented demand laws for certain fuels which is reduced the demand for certain gl's this has resulted in significantly depressed and GL pricing as as a result the economics for what gas production are challenged and some of our shippers have begun to defer production Volare.

Fortunately, we see two reasons to be optimistic about these flows resuming soon. First. The gas trip is very strong heading in the winter in 2021 for producers with wet Wells both gas price and NGL Price play a factor in the equation. So strong gas prices can also we transfer your prices or vice versa second. We see the oil price and fuel demand losses temporary. We already beginning to see signs that the u.s. Is ready to begin earning some level of normalcy and we expect demand demand to recover alongside. Meanwhile, the collapse of oil prices has resulted in significantly large Productions and bring a fresh activity in oil plays such a permanent which which also provides significant amount of ngls and Associated gas in direct competition with ngos and gas from Appalachians.

The recovery demand and declining Supply should push commodity prices higher and went gas well economics to recover to the point that our shippers should resume any deferred production.

But the energy markets are more Dynamic than ever and we will continue to update the public with our best view of performance expectations.

There continues to be tremendous uncertainty with respect to the covid-19 bar situation and how the global economy recover from this unprecedented shutdown how things play out over the coming weeks and months will start to greatly into how come down markets perform and play a huge role in the availability of capital do this uncertainty. The board of seen them has decided to temporarily reduce cash distributions by 80% beginning during the summer quarter of 2020. We expect to use this incremental retain cash to strengthen the balance sheet and to pay down debt.

With that. I'll hand it back over to Tyler to open QA. Thanks Chad and operator if you can open the line up for Q&A at this time, please.

Okay, we will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question is from Jeremy from JPMorgan. Go ahead.

Good morning. I was just wondering if you could dive into kind of what's happening in Appalachia in a bit more detail on the liquids-rich side. And when did you start to see this happen exactly and just wage kind of thoughts on duration and and also really how much of this is cnx versus third-party producers here where you're seeing the reduced activity.

So to the first part of your question sort of some of the broader macro context, you know, we really even before the the OPEC Russia oil supply situation and then the demand destruction caused by covid-19. You know, I think a lot of Appalachian producers were already challenged by little gas prices and then to be hit with plummeting oil prices from the you know over supply of oil from from from Russia and OPEC as they went into their price war and then get hit by demand destruction covid-19. But this is not a perfect storm of just negative factors that weighed heavily upon like a second nomics really across the country and I think I think we're seeing that it really across across the region North America in any kind of oil production or or wet cast production.

You know, it's it's beginning to become a a parent that you know with Adam and destruction, you know, no one's traveling, you know, no one's flying. There's a lot of there's a lot of demand destruction associated with those things like Thursday to go into those activities. And so that's that's backing up Refinery runs and that's resulting in a reduction of constant demands. It's resulting and as the climbs butane demand and see if I'm just a man and you know, unfortunately look like ass you can't just hand, you know, you can't just cherry pick which of those products you want to produce that. It's sort of all comes out of the ground together. If you don't have any place to move some of them some of the gas flow, you know, it becomes very challenged to produce the rest even if the rest comes out a favorable pricing so, you know, we we've we've we offer working with our with our with our producers to try to find ways to keep this gas blowing. It's just unfortunately right now it's very tough to to move some of these products and even if you can't move those products the prices are dead.

I know folks are looking at storage options there looking at different ways of blending blending the stuff and using this stuff. But but right now for the here now, there's just a lot of uncertainty about what needs to happen with black ass with kind of state with ngos. So that's not really played a lot. You know, that's that's one of the many factors of why we we've decided to retain a little bit more cash and try to strengthen the balance sheet at least a month. We get through the summer and really the a lot of the uncertainty and risk associated with what the wet gas market is going to do in the climb markets going to do over the course of the summer and and from the from from the Mickey Mouse see you next Saturday means release earlier, they kind of walk through the the different production profiles they could happen up there so can't can't get into third-party specifics, but at least gives you some color of how much could be home. See you next side and his chest touched on earlier, you know delay of of a couple of months or a couple of quarters changes a little bit of twenty nineteen S profile, but the gas isn't going anywhere else.

Sorry 20/20 profile but the gas is not going anywhere. It'll be there as we move into twenty Twenty-One. The cash flows that were expected from from these wells will be harvested by TJ Maxx Midstream and and that net it is very very difficult to predict how the the next you know months and quarters unfold and you know, even as you roll into Twenty-One, but see you next Midstream to generate a substantial amount of free cash flow and in really focused on making sure that that free cash flow is put in the best place possible. So so near-term patience Prudence focused on birth sheet liquidity in debt management makes a lot of sense long term for Phoenix Midstream, but it's a it's a it's a phenomenal business with a a lot of free cash flow and a lot of allocation opportunity to age put it to work and and then many many years to come and I think also got a correlation between the comment of when you look at what's happening with liquids dead.

Not going anywhere, right? It's being deferred for a different time. It also correlates with respect to what we're doing with our free cash flow at cnx Midstream. Whereas

So basically storing that not in the ground, but we're starting that effectively on our balance sheet, which I think is one of the the terms of use actually the slides on one slide six. So again, the value is basically be located and it's been allocated into a place where that flexibility in that optionality will be available to us if it went so we choose the use of and I think just to sort of wrap it up like, you know off the oil situation the oil price constant price NGL price is weighing heavily upon oil producers really across the North America, right? So we're seeing a dramatic drop rig activity to activity and a lot of oil plays probably in bucking, you know activities down dramatically in those areas that's going to bring a lot of the stuff off the market supply of these products are going to decline. It's just a big question is when does the when does the man recover and when to storage levels work down to the point that you begin seeing a good price for for these products? We know it's coming off.

Just a big question of when and and then you know, this is also a big benefit on the associated gas, right? It was oil plays come off you associate it gas comes off brings a lot of strength in the gas market. You see them in the fourth strip with winter pricing and twenty Twenty-One pricing improve materially seen XM is positioned. It's it's future is is weighted heavily towards the dry gas Ares a lot of the Investments over the last year and half has been focused and dry gas areas cnx. Our principal shipper is focused on dry gas. And so all these things that are happening that are potentially negative and the oil space and in jail space is actually positive for the for the dry gas play which is where cnxm and its principles shipper cnx folks.

That's helpful. Thank you. I was just wondering if the follow-up if you could remind us of what you said publicly with regards to how much of your business is third-party in who your larger third-party businesses with phone.

So we try to stay away from naming actually any of our other shippers other than cnx. I would say the flows are roughly a third by the third third party about two-thirds tnx.

Got it, and then just went to turn to the distribution real quick here. I mean it seems to us that the leverage was not that high and so just curious on the level of the cut 80% off have you had conversations with the rating agencies or from from the banks with their kind of pressure there to reduce it to that degree or what were some of the driving factors there?

Yeah, I think you know Nick talked to mention in in in the opening here that this is something we're unprecedented times with capital markets it and with covid-19 and just the whole the whole situation that exists around us. We wanted to be thoughtful and try to just maintain it as much call liquidity and balance sheet strength is we can not knowing you know, how long how long you situations may or may not last in our minds, you know right now bolstering your balance sheet and it making it stronger is a good, you know, near-term risk risk risk risk based decision and his neck said it creates even more option. Ality is we roll forward in to whatever normalcy looks like call it post post this situation.

Gotcha.

Last one if I could I think the idea has been taken out recently. I think there were some some deferred payments or there's some contingency payments. You just update us on how that stands I guess and any thoughts on wage reduction in you know, the cut coming right after it.

Yeah, so the the the schedule payments are laid out at $50 million and this year fifty million the end of twenty one and thirty $5 million at the end of 22.

That's it for me. Thanks for taking my question.

Our next question is from Cristela from Barclays. Go ahead.

Hi guys, good morning. I guess first for me the there were some comments out of the from cnx your sponsor with their release this morning that they're looking at entering this mode from 20 to 26. Um, just curious to know I guess we're Midstream perspective sort of what that looks like and and what that means for volumes on the Midstream system.

Yeah, and you know, we we've provided the the the Upstream deck has a lot of information. So for for Midstream, you know, we've we've we've built out a pretty big system to to be ready to call it have a lower Capital program going forward. So from from see you next Midstream to the capital intensity is is much less and you know, the big build is is set up. So make sure it was in the end of you know called an enviable position to to generate a bunch of free cash flow and that type of a world and you know, you know just going back to the cnx call from earlier. I asked if there would be gas price increases or you know, any kind of growth up there that that'll just be incremental, you know future future plans. So Capital densities lower, you know, a maintenance plan with our two and half percent escalation, you know on our on our feet profile and see you next Midstream still allows us to produce substantial free cash flow due to the capital intensity being slow or off Xbox.

Best in Class and like I said that that fee contract increasing is is an escalating as years move on.

Okay, that's helpful. Thank you. And then maybe turning to the distribution for a second. It sounds like from some of the comments you guys have made on this call that you're viewing the page there as sort of or possibly temporary I guess is that is that a fair way to characterize it and if so, you know, when you return to to offer something situation that resembles, you know more normalcy. Do you think we should expect to see you know, uh stair-stepped up in the distribution from the free rated level or or just a straight return to where it was last quarter? Yes, so not not not to get into any kind of future guidance as we've talked it's around wage right right now or the world sits in the call it the unclear nature of how long this lasts and when Capital markets and and the light get back to normal. It's hard hard to say dead.

I move over the long term. We do think right now The Prudent decision is

Just to bolster liquidity to use, you know, incremental cash flow to pay down debt as we've always said we view ourselves as a capital alligator and we like to allocate the free cash flow to the to the best place. So that that is something will stay true to here. And right now the best place for for cash flow is to really pay on debt and bolster the liquidity the business and you know with normalcy normal see, whenever that may be and whatever that that looks like. We'll make sure we keep a you know, a play book that follows the variables and tries to allocate the dollars into the the the best place that they can be allocated to.

Okay, and then maybe just last for me to follow up on something Jeremy touched on the with the distribution cut coming after our transaction and you still have the Deferred payments coming up in the next couple of years. Is there any opportunity there to adjust those payments or renegotiate wage payments given that the you know, the ID our transaction is now, you know seemingly more expensive give given the distribution cut.

A couple of thoughts there one if you look at how we're assuming the world to look with with mainstream and being free cash flow positive and there's a lot of moving parts, right? There's all kinds Gallery rates. There's the payments that you've mentioned this many different components to to what constitutes those cash flows. We assume that basically everything in that room that steady-state. So no assume changes to Gathering rates are contractual Gathering agreements or installment payments tied to the ivr transactions second. Thought is that it's to my office looking at this from the Phoenix mystery perspective the ivr transaction basically took what was the largest unit older at the time and saw them double down with respect to their Holdings in unit wage was a a big vote of confidence in the long-term Prospect of cnx Midstream. So with respect to the distribution policy or the distribution levels that we announced today cnx resources dead.

Fifty-three percent give or take of the units and then the same shoes as the other unit holders and that's what we wanted to see what we're trying to contemplate. What an it our transaction would do or not do coming out of it off. Okay. Okay, I understood. Thanks guys, that's it for me.

At this time, there's no more questions. So we will conclude the question-and-answer session. I would now like to turn the conference back over to Tire Lewis.

for closing remarks

Thank you operator and thank you all for joining us here this morning. We look forward to speaking with you after the call. If you have any questions or next quarter's call. Thank you. The Carfax says now concluded thank you for attending today's presentation. You may now disconnect.