Q2 2020 Crestwood Equity Partners LP Earnings Call
And welcome to today's conference call as Crestwood equity partners provides second quarter 2020 financial and operating results.
Before we begin the call listeners I reminded that the company may make certain forward looking statements as defined in the securities and exchange active 1934 that are based on assumptions and information currently available at the time of today's call.
Please refer to the company's latest filings with the FCC for a list of risk factors that may cause actual results to differ.
Additionally, certain non-GAAP financial measures such as EBITDA, adjusted EBITDA and distributable cash flow will be discussed.
Reconciliations to the most comparable GAAP measures are included in the news release issued this morning.
Joining us on today's call. We prepared remarks is chairman and President and Chief Executive Officer, Bob Phillips.
And executive Vice President and Chief Financial Officer, Robert Halpin.
Additional members of the secured senior management team will be available for a question and answer session with Crestwoods current analysts following their prepared remarks.
Today's call is being recorded.
If anyone should require operator assistance. Please press star zero on your telephone keypad.
At this time I will turn the call over to Bob Phillips.
Thank you operator, and good morning, and thanks to all of you for joining US early today I know, it's a busy schedule. So we're going to push pretty quickly through all materials and try to get 'em person with you and I.
For a lot of he has dropped to go the other calls I want to start by hoping a truly that all of you and your loved ones are healthy and safe from the pandemic. We are conducting this coal remotely today and what I think will be our new normal in the midst of the cobot pandemic.
I, particularly want to thank all of the Crestwood employees, who have very professionally adapted.
To this new work environment, Oh, you might be interested to know that we are in varying stages of reopening our corporate offices in Houston in Kansas City, but still largely working remotely workforce and importantly, our central field personnel continue to do a great job of operating.
Assets safely and efficiently.
The health and safety of our employees, our contractors, our vendors or business partners and our local communities is absolutely our number one priority. During this time period, we remain vigilant, we've got new and significant safety protocols in place and we are continuing to provide the same level.
Great customer service.
That our customers and partners have come to expect in the past.
Now, let me turn quickly to the second quarter I'm very pleased that you would expect.
That our business outperformed the guidance that we laid out a last earning call Robert can go into much more detail, but that guidance was based upon it.
50% or shut in assumption and obviously, we did much better than that.
While the industry experienced extreme.
Commodity price volatility as the market adjusted to lower hydrocarbon demand from the pandemic.
During the quarter once the economy started to reopen we saw increased demand that drove higher commodity prices and producers are very quickly brought shut in gas production back online much quicker than we expected.
As a result, Crestwood generated second quarter, adjusted EBITDA of $128 million and distributable cash flow of $74 million. That's a leverage ratio of 4.2 times and a coverage ratio of 1.6 times respectively.
And despite the market challenges our second quarter 2020 showed year over year improvement and we handily beat a analysts consistent consensus estimates across the board now. These results were driven by contributions across the entire crestwood portfolio. They incur.
It is lower than expected shut ins across our gathering and processing segment as I mentioned earlier.
And Robert will give you more detail on we had stronger than normal second quarter contributions from our MSL group and that came from both our NGL teams and our crude oil and storage logistics teams.
We had a timely contribution from the NGL storage it assets that we acquired from planes closed on that deal in April we quickly integrated that into the Crestwood NGL platform.
And those assets did quite well for us during the quarter and we also had stable earnings from our storage and transportation segment.
Really look forward to seeing what they do in the second half of the year I might just to add some color there are stagecoach.
Northeast natural gas volumes have been hitting record highs recently as northeast, Pennsylvania dry gas economics have become much more favorable for our producers up there and northeast power demand is very strong here in the summer. So looking forward to their contribution second half of the year overall the quarterly result.
As highlighted the diversity and the balance of our asset portfolio, particularly during these extreme market conditions now.
You know they all of the room for the last few weeks has been Chesapeake bankruptcy in a potential dapple shutdown that clearly pressured our units based on the information we know today neither of that is expected to have.
A negative impact on our ability to meet our revised adjusted EBITDA guidance of 520 million to 570 million for full year 2020, Let me restate that we do not expect either event to have a significant negative impact on our ability to meet our guidance.
For this year Chesapeake is our primary customer in the powder River basin.
But one of many customers that we have on our stagecoach assets in the northeast Marcellus.
At this point in that Chesapeake bankruptcy process, neither of those contracts as men submitted for rejection don't have any indication that they will be on your any reason to believe that.
We believe both contracts are clearly market based in our competitive with a similar contracts for similar services in the regions. We operate Chesapeake remains current on all invoices.
We have cash flow protections in place with letters of credit and we continue to provide critical services to Chesapeake in both areas. We have good relationship with the firm and are developing a good relationship through the bankruptcy process with what might be the new owners of the company.
Now to the Bakken given the uncertainty of the dapple pipeline, our commercial and marketing teams have done a phenomenal job of engaging with our producer customers on the arrow system to ensure that their volumes can clear the basin.
In the event of the dapple shut down either temporary or permanent.
We're going to use the colt hub, we're going to use third party pipelines and we're going to use trucking crestwood is uniquely positioned in the Bakken to be able to offer that kinda takeaway capacity Aero as you May know currently connects to dapple. The Holland system owned by candor and that Tesoro pipelines on by MPLX.
Yes.
That provides significant downstream delivery capacity for our arrow producers far more than we are currently producing at we're working on additional downstream connections to market from Arrow and we've already started the process of contracting with arrow producers for prowler.
I'd firm takeaway service at cold to diversify their downstream options in the event of the long term disruption at Apple. So we're making good progress there and believe there are barrels off the arrow system will continue to flow notwithstanding what happens to dapple in the courts over the next several weeks tomorrow.
Yes.
As a quick reminder, for those that haven't been following the stock very long Crestwoods colt hub in rail facility is the leading crude oil terminal in the Bakken we have multiple pipeline connections there both in and out 1.2 million barrels of crude storage, which we used quite well in the second quarter.
And 160000 barrels a day of rail loading capacity be able to take gas take oil off the pipeline off the trucks put it on the railcars are headed out to our customers colds volumes have more than doubled in the past few months.
Now if you look at the average for the quarter doesn't look that impressive but from start to finish they ramped up every month throughout the quarter and we're moving significant barrels through coal now in anticipation and for customers that might be anticipating a potential dapple shutdown, we have no indication that's going to happen.
But in the event it does happen we've got the takeaway capacity to be able to serve our east and West Coast refiners, who are looking for optimal market barrels and our producers who are looking for more takeaway options.
And you then have a shutdown we do think it'll cause a three to four dollar per barrel negative impact on basing differentials that simply the incremental whale cost to market, but we're confident in the ability of our aero producers to both flow volumes through cold.
And at a current roughly 40 dollar per barrel WT I price, which is the current forward curve.
Many of our customers are hedged well above that level and we're confident that with those netbacks, even with a slight increase in basis differentials are bucket, our Bakken producer customers will continue to flow their production in that scenario in the third and fourth quarters for this year.
Now, let me give you a little bit of color on our view of the second half of 2020, and 2021, starting with our gathering and processing segment as oil prices have stabilized near $40, a barrel and surprisingly the fundamentals for natural gas have turned decidedly bullish weak.
Expect a good second half 2020 with volumes continuing to grow.
And all shut in volumes, we expect those to return by the fourth quarter.
In the Bakken, particularly 20% of the active rigs in the state are running on the Port Bertold Indian Reservation, you might recall, that's considered to be the best Bakken acreage left to be developed with the lowest breakeven cost.
We are encouraged by the return of completion growth crews that are taking on ducs on the arrow system, we have quite a few.
And we expect volumes to end the year approximately 20% above the second quarter average volumes and we are moving in that direction today here in the third quarter.
Now in 2021, that's different story in volume growth will clearly be a function of commodity prices and individual producers drilling and completion costs versus the net backs that they can receive and the market access that they've contracted for.
I would put our GNP assets and producers in the Bakken and the powder River basin and in the Delaware Basin up against any other GNP assets.
And the business were breakeven cost netbacks quality of acreage dedicated and connectivity to the market, we really feel pretty confident in the second half of this year and going into next year, depending upon where oil prices shakeout.
Now to our marketing supply and logistics business had another great quarter again again, congratulations to those guys that keep knocking it out of the part for US with the recently required NGL assets, we expect that team that segment to contribute $35 million to $40 million in cash flow over the next 12 months.
Yes.
Making that a very timely acquisition from planes at a really good value at four times multiple.
We now have a under ownership and Operatorship about 10 million barrels and NGL storage propane butane.
1.2 million barrels of crude oil storage largely in the Bakken, but some in the powder River basin and that positions Crestwood to take advantage of market imbalances and dislocations across the various NGL product price curves and it also provides a very good hedge for our GNP business. Once you think about that.
Two final notes financially, we expect to start generating free cash flow in the third quarter, which will continue to drive our leverage lower we have not forgotten about our commitment to get our leverage below four times, we continue to work in that direction, while balancing all of our other issues and opportunities.
He says well our capital spend in the second half of this year and next year it will be minimal.
At current commodity prices, because we had excess gathering and processing capacity today.
From our 2017 in 2019 expansion program in all regions, we don't need spend a lot of money.
We do need to sit back operate efficiently cheaply and continue to watch volumes go back to where they were in 19 and headed higher we have plenty of liquidity on our balance sheet. We have no near term debt maturities our bonds are back to trading near par again.
So we have the financial flexibility to navigate this crazy market and potentially take advantage of consolidation opportunities. If we see them, which we always do in a down market like this.
Our distribution decisions will continue to be made quarter to quarter as they always have and will base our decisions on our forward outlook and the opportunities that we have to invest or acquire or simply to improve our capital structure or lower our cost of capital for the long term, we are aware of what the opportunities.
Our and we will continue to focus on that on a quarter to quarter basis, and finally organization link I want to let you know that we have not wavered at Crestwood on our core values.
They are safety integrity diversity inclusion and we continue to advance our sustainability strategy.
In June of this year, we filed our second annual sustainability report that was prepared in accordance with the GE are a lot and SaaS speed midstream framework I was a big accomplishment for us in our second here.
As a result, Crestwoods Bloomberg DSG score increased over 65%.
Based upon improved disclosures on waste biodiversity spills and air emissions.
Crestwood continues to be a leader in this field, we're committed to transparency and the Bloomberg score validates our efforts to provide investors and stakeholders with a deeper insight into our business risk.
And more color around our core values.
And with that I will remotely turn it over to Robert Halpin, our CFO to discuss the second quarter results and give you an update on our financial condition Robert.
Thank you Bob.
During the second quarter, our assets outperformed the base case assumptions that we outlined in our revised guidance, which we issued back in May of this year as we generated adjusted EBITDA of $128 million up 5% year every year and distributable cash flow of $74 million up 15%.
Year over year.
As market conditions improve throughout the second quarter, our producer customers were able to breed shut in production back online quickly and efficiently leading to GNP volumes meaningfully above our downside estimate our 50% shut ins on our oil weighted basis.
Additionally, our recently acquired NGL storage assets and our crude oil storage assets proved extremely valuable in capturing contango opportunities during the quarter.
Our financial and operational results for the quarter drove a leverage ratio of 4.2 times and the coverage ratio of approximately 1.6 times.
Based on our second quarter results, we announced a flat distribution quarter over quarter, our 62, and a half cents per unit or $2.50 on an annualized basis, which is payable on August 14, two our unit holders of record as of Friday August seven.
Now moving to our operating segments in our gathering and processing segment EBITDA totaled $87 million in the second quarter of 2020, roughly flat year over year.
Today, approximately 10% of the Bakken remains shut in.
40% of the Powder River basin remained shut in and the Delaware Basin is 100% flowing.
We expect all of that shut in volumes to be back online fully by the fourth quarter. This year.
As we look at the second half of the year. There are currently two rigs running on arrows footprint on the Fort Berthold Indian reservation and in the month of July WPS energy resumed completing its DUC inventory, which we expect will drive an incremental 30 to 43 product well connects in the second half of this year.
Our storage and transportation segment totaled $14 million for the second quarter of 2020 on average volumes of 2.1 billion cubic feet per day.
Stagecoach gas services, our joint venture with consolidated Edison has seen stable volumes over the quarter as its strategic natural gas storage assets support strong mid Atlantic in northeast markets.
In the Bakken the colt hub saw decreased volumes quarter over quarter as a result of the decreased production in the basin. However, we expect volumes to increase meaningfully in the second half of the year as curtailed production comes back online and as producers utilize crude by rail to diversify.
Hi basin takeaway capacity with some of the remaining uncertainty around data.
Finally in our marketing supply and logistics segment EBITDA totaled $24 million in the second quarter of 2020, Soc compared to $16 million for the second quarter of 2019.
During the quarter, our crude marketing team maximize storage capacity at arrow and the colt hub to take advantage of market volatility.
Similarly, our NGL logistics team was able to optimize our NGL storage assets and take advantage of depressed NGL prices during the quarter to build inventories ahead of the winter season.
Now turning to the balance sheet as of June Thirtyth, Crestwood had approximately $2.6 billion of long term debt outstanding including $1.8 billion, a fixed rate senior notes and $801 million of outstanding borrowings on our revolving credit facility.
At the ended the quarter, we had more than $400 million of liquidity on our revolving credit facility and our leverage ratio at the ended the quarter was 4.2 times and we have no debt maturities until 2023.
We expect our leverage to peak in the third quarter as we build seasonal working capital for our NGL business, but to come down in the fourth quarter as our working capital position reverses and as we utilize our free cash flow to start working towards our longer term balance sheet objectives.
During the second quarter, we invested $50 million in growth capital focused on the final invoices of the bucking horse to processing plant as well as continued enhancements to our produced water system in the Bakken.
As Bob mentioned now that our 2020 growth capital investment program is largely complete.
Crestwood expects to begin generating free cash flow in the third and fourth quarters of 2020 and into 2021.
Our priority will continue to be on strengthening our balance sheet and driving leverage closer to 4.0 times. The next 12 to 18 months.
We remain focused on liquidity and continuously evaluate opportunities to optimize our capital structure as opportunities arise.
As we continue to work through the challenges. The 2020 has presented I want to reiterate crestwoods positioning during this down cycle.
We have the advantage of a diversified asset portfolio, a strong balance sheet with no near term debt maturities and a significantly reduce capital investment program that enables us to reach our goal of generating positive free cash flow beginning in the third quarter of this year.
We continue to see early signs of improving fundamentals across the industry and across our business, specifically, which drives increasing confidence in our assets generating full year 2020 results at the higher end of our current guidance range and positions us to continue executing on our strategies to build further strength the.
Costs the company heading into 2021.
At this time, operator, we're now ready to open the call up for questions.
Thank you we will now be conducting a question and answer session did you would like to ask your question. Please press star one on your telephone keypad.
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One moment, please let me pull for questions.
Thank you. Our first question comes from the line of Tristan Richardson with truly Securities. Please proceed with your question.
Morning, guys really appreciate all the comments given today on what you're seeing in each of the basin users as well as what you're seeing from your PRB customer just a quick one them on the PRB customer there is there.
If theres talk too.
Reaching out proactively are having an ongoing discussion about.
You guys can do to.
Either incentivize a return to the activity or.
Provide certain.
Relief around contracts in anyway just to.
Head off at the path for the speaker anticipate any sort of.
Potential rejection, even if you don't see that necessarily on the horizon.
Yes. Thanks for the question Kristen This is Robert.
As we commented in our remarks around our relationship with Chesapeake. We continue to work very closely with them on the operating front and on the commercial trials across both bases in which we service them as we mentioned we believe our contract is very well positioned.
Commercially we think it's in line with competitive contracts, we have with other customers in the basin.
And continue to have a very strong working dialogues with them now obviously as they navigate their bankruptcy process and work with our creditors and their service providers. We do expect that they are having real time commercial discussions across our portfolio. They have not listed our powder River basin contract as a contract.
That they would consider for rejection.
But we are always aligned with working closely with our customers to try to reach mutually beneficial solutions or win win scenarios that further incentivized development.
At this point in time, we don't have any any instances are resolutions around natural we will obviously continue to work in that direction and feel very comfortable with where we're positioned and with our ongoing relationship with Chesapeake.
Thanks, Robert appreciate that and just a follow up on the backing.
Appreciate your visibility, giving on sort of the second half and you mentioned 30 to 40 connects.
Could you talk and as well as a substantial DUC inventory could you talk about that DUC inventory.
You see on your system today are behind Darryl.
Yes, absolutely we estimate that Theres flow current first of all there's two rigs currently running on the system today.
As of today, we expect that about 20% of the total DUC inventory in the basin is on our acreage dedication that constitutes about 50, ducs today and as those rigs continue to work through the balance of the year, we expect that balance to growth as we mentioned WPS, who is our largest customer has brought a completion crew back to the basin.
And we actually experienced our first multiwell Merck multi well pad IP here in mid point in July and we expect them to continue with that plans to connect the 30 to 40 wells through the balance of the year.
And then as the inventory continues to grow that to be the low hanging fruits that they execute around in 2021.
Great Robert Thanks, very much.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Jeremy Tonet with JP Morgan. Please proceed with your question.
Hey, Good morning, guys. This is James on for Jeremy.
Maybe to start with the am SNL segment.
Do you see any opportunities that the business benefited from in Twoq.
Carryover Threeq as you start or I guess through July.
And then just given the guidance the segment provided last quarter.
What can we expect kind of for the cadence for Threeq to Fourq, you just given the seasonality of business.
Yes, I think maybe I'll start with Adam and I might ask John Pal.
Who runs that business for us to give a little incremental color around just the general outlook for the business.
But obviously, we closed the plans acquisition, adding a significant asset base to our are already brought asset based on the NGL side.
On April the first we close that transaction.
And the market set out very favorably for us to capitalize on the deep contango that existed in the early part of this quarter.
The team did a great job of taking advantage of that and as spreads move we did capture a lot of that gain here in the second quarter that factored into a very strong performance with where we're positioned today, we still expect to the second our sorry, the third and fourth quarter to trend inline with our provided guidance and we expect to have a little bit of outperformance on a full year two.
2020 basis based on where we're positioned from an inventory perspective today around the planes assets specifically, we originally guided back on our first quarter, we expected $18 million to $20 million of contribution from those assets. This year I think we now probably expect that number to be closer to 20 to 25 for the year based on where we performed thus far.
Mark and on a full next 12 month basis, we guided we expected that to be in Canada $35 million to $40 million range and then I think we would expect that to be pushing the high end or even ahead of the high end now heading through the first quarter 2021.
Maybe John from just a little bit of market commentary you want to provide a little over side of what you're seeing the market.
Sure. Thanks Robert.
Specifically to your question I think a lot of the gains that we experienced they overage and the second quarter was largely related to a lot of the contango that was presented towards the late into March in early April all the way through the balance of the second quarter and as we look forward really towards the third third quarter in the fourth quarter I would say.
They are there more traditionally in line to what we've seen on typical contango spreads.
For for the business, so not I wouldn't anticipate much carryover in terms of that repeating again in the third quarter, but I would comment is that what we are seeing particularly from the downstream side is.
Very steady and increasing demands.
For these.
For these services at these new assets provide as well as our legacy positions and so like Robert mentioned I think we're very well positioned to be able to continue to capture.
At budget, what we what we anticipate as well as.
Some additional upside from there due to the nature of the business and the Optionality around these assets and what we can capture area in the balance of the year.
Got it thanks for the color.
Then just maybe pivoting just the aero here.
I'm not sure. If you guys have mentions in the past or if you you think about this way, but just looking at 2021.
How many well connects would you ballpark.
To keep kind of Aro volumes flat, if there is kind of maintenance mode.
In the basin.
Yes, I think that we think that producers will have an ability on a year over year basis to hold production relatively flat with the DUC inventory in the completions that we expect from WPS and a handful of the other operators into 2021.
As we mentioned with where we closed out the second quarter, we expect about a 20% increase in our current outlook for the remainder of the year as we exit 2020.
We're actually already at those volume metric levels today and as the completions continue I think we'll see that volume continue to trickle up so feeling good about where we're positioned now I think with what we see on the DUC inventory in the activity levels from from WPS being the most active.
As a few other operators come back hopefully the little bit a rebound in commodity price I think we think we're pretty well positioned kind of what that DUC inventory to hold the production for 21.
Got it.
Two questions.
Our next question comes from the line and Shneur Gershuni with Cvs. Please proceed with your question.
Hi, good morning, everyone glad to everyone as well.
Maybe to start off see the cost reductions that youve put in place at Crestwood.
Can you characterize how much of it is sustainable over the long run.
Versus some of it is more temporary in this things come back.
So will some of those costs I'm just wondering if you can characterize halfway place.
Yes, absolutely share and I'll I'll start then I may hand, a little bit to Steven Daugherty, who's been kind of the leader on our team in terms of our cost reduction initiatives and then maybe Bob's can provide some incremental color as well.
But as we looked at kind of the downturn and made pretty aggressive in swift action around our team and our assets to ensure that we were operating as efficiently as possible. We really look to not only at kind of our 2020 outlook, but really the longer term on where we thought.
The industry might be headed.
And I would say that as we looked at our our workforce as we looked at our.
And our asset base.
Our digital is really focused around capital lead asset needs and how we can optimize our teams to drive towards that environment in which we would be constructing last spending last.
And therefore do it more efficiently so I would characterize it is in the current environment and with our expected outlook. We do believe it fully sustainable heading into 21 and beyond as we don't see a.
Hey industry, turning back towards that growth mode around organic capital spend and expansion.
We do think we've got a good amount of operating leverage across our footprint and the existing team is well positioned to capitalize on that efficiently without the need for any incremental costs.
To the structure Doc any color you that around that yes, I agree with Roberts weight. When you look at the $40 million of annual cost reductions that we are we're targeting we're already ahead of schedule associated with achieving that $40 million a run rate reductions.
Over half of that is personnel costs and with the reduction in force that we did here during the second quarter, we believe that Thats very sustainable very little of that is variable costs in nature. So as a result, even as volumes increase we do not expect a lot of those cost creep back in.
As our volumes.
Alright, perfect. Thank you for the color on that.
Maybe as a pivot here.
You recently declared distribution.
Just wondering if you can talk about the boardroom discussion with respect to the decisions around it.
And then if the change of control provisions with your channel partner as to how it impacts your debt potentially becoming current whether that sort of plays into the discussion as well too.
Yes, sure I'll get a little bit of color I mean, I think our board every quarter and really it at from one quarter to the next on an interim basis, we have a tremendous amount of dialogue around our cash flow.
Generation, our cash flow outlook, and then how we utilize that cash to best position. The partnership Theres a lot of factors that go into that.
In terms of business outlook in what we think the business can sustain what our long term objectives are from a balance sheet perspective.
In other structural considerations as you alluded to and I think that with where we performed in the second quarter.
We expected and guided conservatively to a worse outcome from a volumetric standpoint, obviously, we were pleased that our producers were able to bring production back quicker than we anticipated.
And we have a really good outlook for the remainder of this year and heading into 2021 and with where our metrics have shaped out on that basis, we felt that kind of continuing down the path that we are in the absence of other far more compelling investment opportunities was the right course as we've communicated that decision is made every single.
Quarter.
We continue to evaluate all of the factors in the industry risks around our assets an opportunities around our assets and we'll continue to evaluate that and all the consideration for that that's a third quarter and every quarter thereafter.
Alright perfect.
I appreciate the color today, guys will have a safety.
We have no further questions at this time, Mr. Helping I would now like turn the floor back over to you for closing comments.
Yes, Thanks, a lot everybody for joining us today, I hope everybody stays stay safe and.
We look forward to catch up with you in November with our third quarter.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.