Q2 2020 Rattler Midstream LP Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Radler Midstream Q2 2020 conference call.
I am all participants are in English and only note. After the speakers presentation. There will be a question answer session to ask a question. During this session you need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today Mr. Adam.
Knowledge VP Investor Relations. Thank you. Please go ahead Sir.
Are you Theresa good morning, and welcome to route where Midstreams second quarter 2020 conference call.
During our call today, we'll reference an updated investor presentation, which can be traveled rattlers website.
Representing her out where today are traveling outside the UK Santyl president.
During this conference call. The participants may make certain forward looking statements relating to the company financial condition results of operations plans objectives future performance in businesses.
We caution you that actual results could differ materially from those that are indicating these forward looking statements theater variety of factors.
Information concerning these factors can be found in the company's filings with the FCC.
In addition, we don't make reference certain non-GAAP measures reconciliations would be appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.
Now I'll turn the call it a truck side.
Thank you Adam welcome everyone and thank you for listening to right were Midstreams second quarter earnings call.
The second quarter of 2020 presented historic volatility and global energy demand and commodity prices.
Right, where despite all of its operations main located in the Premier low cost of shale basin and operated by the low cost operator, Andaman back was not immune from this volatility.
Coming back made the prudent decision to suspend completion activity and curtailed production in the quarter directly impacting rattlers second quarter volumes.
Diamondback has now returned all of these curtailed volumes back to production and is currently running three completion crews both of which will help rattlers cash flow grow significantly in the back half a year from the second quarter lows.
And a maintenance scenario for down back in 2020 warm weather will have fewer operating capital requirements and relatively flat volumes in the second half of 2020.
Producing free cash flow at the operated level.
We're also reiterating our previously announced EBITDA guidance for the year, which at the midpoint implies growth of 6% year over year, even in the current commodity price environment.
Turning to our equity method investments, both the grey oak and epic crude pipelines began full commercial service in April.
Generating cash flow at the project level and contributing meaningfully to Rattlers EBITDA Austin starting up.
We have also been impressed by the resilience of our own log oil gathering JV with volumes growing on this system in the second quarter.
This highlights the quality of the acreage underpinning the system, which was the primary rationale for investment last year.
Three or four or five equity investments are now operational with Wink to Webster pipeline expected to come online in 2021.
And our Amarillo, rattler gathering and processing expansion delayed into a commodity prices recover.
And volumes return to growth in that field.
We expect about two thirds of <unk> equity method EBITDA to convert to distributions to radler over the next 12 months.
Moving to our operated business Radler is intently focused on capital and cost control heading into the second half of 2020 and 2021.
Due to lower activity levels at Diamondback.
We have reduced our operated capital spend for the back half of the year and expects to spend about half of or 2020 capital budget.
On a 2021 maintenance scenario for dialing back.
On the operating cost front, we will continue to drive down operating costs and increased mortgage preparing for a lower for longer commodity price environment.
Although the forward outlook remains uncertain, we feel the worst is likely behind us and we're very confident in the resiliency of the rattler business model.
Therefore, we are maintaining or 29 cents per unit distribution for the second quarter, which is flat from the previous quarter and in line with previous and current guidance for 2020.
The board intends to review this distribution policy, each quarter, but with peer leading leverage significant liquidity.
Our core business that is expected to be free cash flow positive.
A large capex cycle in the rear view mirror.
<unk> differentiated visibility into diamondback future activity.
Robert is well positioned to maintain this distribution with free cash flow generation.
In conclusion, I want to emphasize that we're set up to be a sustainable.
Self funding business to combat the inherent volatility in our business.
While diversification of customers is often seen as a benefit in the midstream space. We view Rattlers concentration was down in back as a clear positive.
Diamondbacks cost structure with low interest expense low leverage low cash DNA of full hedge book strong midstream contracts and mineral ownership through Viper 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.
As a reminder to ask a question do we need to press star one on your telephone to withdraw your question, Chris The Pelkey, please standby when compared to Q and a roster.
Your first question comes from Jerry Tom Jeremy Tonet with JP Morgan.
Hi, good morning.
Good morning.
Just wanted to start off it seemed a thing continues to shift to the Midland maybe trends 70, 30 split and if you could just kind of remind us like how this influence rattler in terms of watercolor and any other impacts that we should be thinking about there.
Yeah, Jeremy Good question, you know certainly the the water cut on the Midland Basin side is lower than the Delaware, but that also means you know we have to spend less capital dollars on infrastructure in on <unk> as as Diamondback was ramping in the in the Delaware Basin. I mean, we were having to drill a new disposal well almost every.
Every couple of pads and that's you know pretty capital intensive side of the business. So you know with Diamondback moving more to the Midland.
The Delaware is kind of more of a steady state the declining a bit but but we don't have to spend any more dollars out there on on the S. Three d. side, so that helps us on the capacity fraud.
I'd say in the Midland side.
You know we are doing some some drilling and completing some wells in some shallower zones that have a little higher water cut on the Midland sides, you're probably closer to two to three barrels of water per barrel of oil now on on.
The forward outlook on the downside, but overall you know I think a you know as ER and the numbers that we're seeing on the steady state or the stay flat plan at the at the parent company you know Rattlers cash flows gonna grow into Q3, and we don't see a lot of a lot of movement and the cash flow over the next four quarters with with.
That's even with that shift.
Got it that's very helpful. Thanks.
Just want to think <unk> from kind of a higher level if.
Diamond backs moving to more of a maintenance mode, what type of ongoing capital needs do you see at Rattler, just trying to see what you know what capex, we needed to kind of sustained EBIT at these levels.
Yeah. Jerry also a good question you know were scoping out 2021, right. Now you know I think every dollar is gonna be highly scrutinize over the next six quarters I'm you know what I can tell you right. Now is that operated capital will be at least at least half of what we saw and we're seeing in 2020, So 2020 operated.
Capital budget to 125 to 150 million and you know I think I think the way I see it right now it needs to be at least half of that in 2021.
Got it that's very helpful. I believe it there.
And I think you know Jeremy overtime right that that number is going to continue to to decline. If we stay flat over a longer period of time, you know, we don't have a crystal ball yet on on 2022, let alone the fourth quarter of 2020, but you know overall you know less growth at the at the parent co results.
And less need for capital at the subsidiary.
Got it that makes sense that's helpful. Thank you.
Thanks, Jeremy.
Your next question comes from the line of steel Stewart with Scotiabank.
Good morning, guys. Appreciate you all taking the time this morning.
If we could start on the Omar JV I'm pretty encouraged to see volumes actually increase quarter over quarter on that particular assets I'm. Just curious I mean I know there are two other primary operators. In addition to some additional third party operators on that.
System. In addition to dining back, but just curious what the outlook is for that asset in particular over the next couple of quarters.
Any visibility into what you think the third parties are gonna do there and if that asset could potentially kind of hold flat in terms of oil throughput volumes over the next couple of quarters.
Yeah I felt good question you know I think overall our partners it'll work you've done a great job operating that system, you know and I think that they've done a lot to cut a lot of cat a lot of required capital out of that that's system and that's resulting in.
Significant distributions back to us.
Pretty consistently but yeah, we were surprised that that the system grew in Q2, even face of.
Everything that was going on in the market.
I certainly don't expected to grow into Q3 in Q4, but but the commentary from the.
But one of the largest contributors are skewing P seemed pretty positive in the in the fourth quarter timeframe. So we might take a dip in Q3, but I'm, hoping that things Oh.
Come back up here in Q4, you know I can also say.
I'm in back has eight or 12 wells planned in the in the back half for Q4 this year that should carry on nicely into into 2021.
Because we have a lot of mineral ownership up there as well as the this ownership and a in the Oman JV.
Okay, Great I appreciate the additional information there and then I guess staying on own log are there any material capital requirements for that JV kind of over the next 12 to 18 months.
Yeah.
When we when we bought that asset we believe you're basically a assumed that there was going to be need to be a $100 million of total capital.
To build out the asset to a full field development, our latest numbers point towards the number that's 65 or 75% below that so there's a small capital apartments here in there and a new well connections.
But the overall burden has been has been reduced dramatically.
And we have a a small lot of credit at that subsidiary and I think that that line of credit can easily handle a you know that that's the small capital requirements. So we're not expecting to put any more money into that business and said, we'll get be getting money out.
Okay sounds good guys. That's it for me thanks.
Thank you Phil Thanks, Phil.
And your next question comes from the line of each Wow.
Products with Bank of America.
Good morning, guys. This is going as well thanks for taking that taking my question.
First one on the volume outlook in second half.
Seems even after a tough to Q the first half is tracking towards.
Midpoint up they range for.
Produced water and source water volume guidance, so as we see activity gradually assumed your and Fang, bringing back the completion crews gradually what do you expect that she added so the water volumes would be in the subsequent two quarters and perhaps an at where we would exit the year.
Yes. Good question. So certainly the a you know on freshwater side with Diamondback, bringing back three three to four completion crews you know we're going to see.
Freshwater volumes almost triple off of the Q2 lows.
And then on the on the source water excuse me on the disposal side you know the way we Havent model right now is probably a little bit of a dip in Q3 with a with some more growth into into Q4 him and I think how we.
Generally see it is that Q4.
Salt water disposal volumes will be kind of in line to maybe a little above.
Q2.
Got it. Thanks, that's helpful and on the sourced waterside. It appears you were able to source around 30% of recycled source water, which is I guess high at the higher end up range that you have targeted in the past is that something you expect to be able to repeat leader in.
Would it be the margin greet true.
If that would have yet.
Yeah. That's a good question you know I think Q twos, a little skewed because we completed so few wells right. We only completed 15 wells. So as we get more towards the 40 to 50 completion to a quarter. It's can be hard to top the 30% number that we saw in Q2, but.
Overall, I think I think we've set a internal bogey to be a above 20% and I think the margin enhancement is somewhere along in the range of 10 to 15 cents a barrel.
Got it thanks for that into.
One more you buy me.
Issued to comment on the potential 2021 capex.
Based on the maintenance.
Activity expectation.
Yes.
The expectation was the Capex was.
Supposed to come down after after this year.
So if you could provide more color on what sort of capital projects would that spending for under the maintenance scenario.
Yeah, I I also don't want to get pending a corner on a on the 2021 capex numbers, yet so I'm trying to give a somewhat of an at least.
At least decrease I think as you think about the projects most of the projects involve adding salt water disposal capacity in the Midland Basin, particularly in the Northern Martin County in Northern Howard County areas, where we don't we don't have as much infrastructure as in kind of Midland County.
So most of its going to be.
Drilling some a few disposal wells as well as connecting systems that were effectively utilizing the capacity that we have quick but like I said.
Every every dollar is gonna be scrutinized pretty heavily here and you know we hope to continue to drive down that that number for 21.
Thanks, guys appreciate the color how do they do.
Thanks, a lot.
And your next question comes from Percy Henan with Simmons Angie.
Good morning, and thanks for taking my questions I wanted to start with a SWT and just curious how you are on SWT capacity and what's you're paying right now furnace WD well.
The full cost to drill into bring it into service.
Yeah appears good question, you know I think what with everything you know the cost to drill and complete these wells as has come down.
I think in the Delaware Basin.
DC drilling complete or I guess, a cliff would be which would be the facilities for the SMB or kind of in the three and a half the $4 million range versus kind of four and a half a year ago.
And those are shallower disposals zones in the Delaware Sands, you know Fortunately like I said earlier in the call we were not ramping as much as a as much as much as we expected in the Delaware basin. So we're not having to drill as many of those.
Sales in the forward outlook, but on the Midland side, you know you're a little deeper you enter your disposing into the Ellenberger, which is 13000 plus feet of a total depth. So those costs a little bit more you know there probably.
They probably topped out at six and a half $7 million for a fully.
Built facility and now we're probably closer to closer to five and a half I'm honored to on a total basis. So.
Along with.
You know the capital budget being cut down from a from a number of projects perspective, the cost of those projects continues to decline.
Okay. Thank you case, and then my follow up good job on reducing operating costs and I'm just curious how sustainable do you see that is those operating cost reductions as you move into the future in volumes start to increase.
I mean, I think it in a down cycle you start to pick up you know starts to pick up pennies and without us needing to.
You know feed the Diamondback rig machine as much as you know we did in the last 12 months'. The focus has really turned to the op cost side and being if efficient with our disposal volumes you don't like for instance, in our reward field, we have five or six disposal wells two of them have no royalties.
Mostly to with them. So we're trying to send as many barrels as possible to that those particular disposal wells versus the others. So you know stuff like that where you're managing not only the you know the costs on the chemicals in the Workovers and the maintenance program, but also you know managing that that royalty.
And being as efficient as possible to send you know the lowest cost barrels to the lowest cost disposal wells become a big focus.
So I think it's I think it's pretty sustainable, particularly as volumes are growing like they were expected to a you know does that turns the focus of the efficiency on the operated side.
Okay. Thank you very much case.
Thank you peers.
Once again, if you would like to asking a question press Star did the number one on your telephone keypad.
Your next question comes from Michael Lapidus with Goldman Sachs.
Hi, guys. Thanks for taking my question actually have two of them. One just thinking about the long haul pipelines, where you've got equity investments. How are you thinking about the ramp up volumes, although and great, Okay and on epic and kind of earnings sensitivity that you will face.
It takes a while from volume for those pipes to really go up.
Yeah, Michael you know I I think as we've said since the IPO, we always like to model something we can't control very conservatively and that's what we've done in our assessment of our JV cash flows across the board so I.
I think that that prudence is paying out with us keeping our JV EBITDA guidance intact, certainly volumes on both systems are probably a little lower than everybody expected two years ago, but.
I think with great ALC having.
A lot of a take or pay contracts on on that system that will ensure that we continue to get distributions and on the epic front, you know I think there volumes.
Our more exposed to the operators that underlie those those are those commitments and I can I can speak for diamond backs that that we're sending 75 or 80000 barrels a day found that system and ER and the happy customer.
Got it and then total one unrelated question at the Rattler level.
In a down market and with a pretty healthy balance sheet, Harry I was thinking about M&A like and what are the types of opportunities there and do you think there's a disconnect on the midstream side between may be a.
Okay. So seller viewer views of what assets are workforces potential buyer base.
Oh I can I can certainly say that a seller's view of a of an asset value is a lot because a lot different from the buyers in this market through my experience on the mineral side. The working interest side end to end the midstream side, So I think with.
Any down cycle.
Patience is a patients is rewarded and I think some stability in what the future holds might create M&A for for US, though you know we've been pretty adamant that any any M&A. We do on the rattler side has to have a direct connection to the parent company and what the parent companies doing.
The Almog JV for instances one of the big reasons, we did it because we understood the quality of the acreage and it looks like that systems performing pretty well in the face of some some tough some tough macro headwind so.
I think big M&A for us is pretty much off the table on the rattler side. We are excited that we got our bond deal done and added a ton of liquidity, which I think for US you know ensures that this distribution is safer for the foreseeable future and a and I think thats, probably the big takeaway, there, but but not going to use that liquidity to go.
Go buy things left and right.
Got it thank you guys much appreciated.
Thank you Michael.
There are no further questions I'll now turn the call bagged tea Travis Stice CEO.
Thanks, again to everyone participating in today's call. If you have any questions. Please contact us using the information provided.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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