Q3 2020 EnLink Midstream LLC Earnings Call
It is in our industry's history.
We also generated $99 million of free cash flow after distributions for the quarter marketing a substantial increase compared to the first two quarters of this year importantly, we expect to exceed the high end of our 2020 guidance range for free cash flow. After distributions. This is a critical metric for us as we continue to reduce debt our team.
Is doing great work very hard work, which is positively impacting results across our footprint and we will continue to do so as we navigate the dynamics of the road ahead.
When we drill down into our asset segments. All four segments are generating strong free cash flow.
Operations.
This makes us an industry leader when it comes to operating efficiency and necessary cost reductions in our sector.
We are committed to making sure. The majority of those savings are sustainable and our operational excellence team has a number of key initiatives underway to ensure that we do that.
The second priority of our execution plan is to maintain financial strength and we have made significant progress this year.
As I mentioned already we are generating strong cash flow as a result of our teams relentless focus on strong execution cost reductions and capital disciplined.
We have reduced net debt by approximately $145 million during the third quarter and are already ample liquidity has been bolstered by a new accounts receivable securitization facility that we announced recently.
Pablo will cover this in more detail.
Our third execution priority is to drive organizational efficiency.
Turn it over to Ben to discuss our operational update.
Thanks, Barry and good morning, everyone.
I'll start with the Permian.
We achieved strong segment profit in the Permian for the quarter reporting $46 million, which is approximately 7% higher than the third quarter of 2020 and.
And approximately 28% higher than the third quarter of 2019.
Strong results for the third quarter were driven primarily by growth in natural gas volumes with additional contributions from cost reductions.
So we are even further limited in terms of impact should activity slowdown in that area. In addition operators have been very proactive and have accumulated a multi year inventory of drilling permits.
Pivoting a bit to the topic of asset rationalization.
In the materials, we issued yesterday, we mentioned that we were successful with a small asset sale.
And I'll give a few more details on that now.
We sold the Victoria Express pipeline system in the Eagle Ford for $20 million $10 million to be received in 2020 with the remainder to be collected throughout 2021.
As we've said before we really like the four core areas, we're in and the assets we have.
Transportation volumes during the third quarter were approximately 5% higher compared to the second quarter of 2020, and 6% lower compared to the third quarter of 2019.
Average crude volumes handled in Enlinks, Ohio River Valley operations for the quarter were flat compared to the second quarter of 2020, and lower by approximately 26% compared to the third quarter of 2019.
Volumes continued to be negatively impacted by macro demand weakness for crude oil during the third quarter.
Segment free cash flow for the quarter was $61 million, representing an increase of over 10% compared to the second quarter of 2020, and an increase of 33% compared to the third quarter of 2019.
The main driver was a reduction in capital expenditures as a number of projects have been completed and the connection to venture Globals Cashew pass LNG facility is nearing completion.
Moving on to Oklahoma next we.
We delivered $108 million of segment profit for the third quarter of 2020.
Which was approximately 9% higher than the second quarter of 2020.
For the third quarter was $64 million and it is important to note that this is the same result, we achieved last year.
This highlights our team's great work and ability to control costs and a declining volume environment.
North, Texas continues to be a predictable stable and significant source of free cash flow for us.
And lastly on October Onest, the transaction between Devon, and BK be closed and we have begun teaming with dk be on their ownership transition.
We are excited to partner with them as they come in with fresh eyes, and keen attention to maximizing value from the acreage.
As we've mentioned before with BK be transitioning into debits ownership position.
Focus on cost and efficiency has allowed us to take count over 20% of operating in general and administrative costs from our structure.
This has been highlighted by pulp sell side analysts as pier, leading and our people can be proud of that result.
We believe that a very high percentage of our cost reductions is sustainable over time.
Although some of those savings are available in nature, and we will come back as industry activity increases, we expect 85% to 90% to be sustainable even a modest growth environment.
Additionally, we have a continuous improvement process and I am confident that our team will continue to find ways to operate more efficiently.
In addition to our focus on cost our team is showing great capital disappointed.
Capital expenditures net to and link for the quarter or $38 million down close to 35% from the second quarter of 2020 and down 70% compared to the third quarter of 2019.
We expect to come in around the mid point of our capital expenditures guidance range for this year, which is $190 million to $250 million.
In addition, after the end of the quarter, we successfully closed the small asset this decision that been discussed which add approximately $20 million of cash available for reallocation a high return opportunities.
With substantially all of our large projects complete we expect a significant step down and capital expenditures next year.
At this time, we expect 2021 capital to be heavily weighted too well connects and gathering infrastructure.
Future projects that have very high returns and quick paybacks, and we will have a high hurdle rate for other new projects.
We will continue to evaluate small tuck in acquisition opportunities around our existing footprints, but those investments will also have to clear a high bar with respect to returns and not impede our deleveraging objectives.
One of our top priorities continues to be to maintain our strong liquidity in financial position.
We reduced net debt during the third quarter of 2028 by $145 million and ended the quarter with that to adjusted EBITDA for two times as calculated per hour credit agreement.
Reducing leverage below four times continues to be our initial objective and we will likely set a lower objective overtime.
Subsequent to the end of the quarter, we completed a three year 250 million dollar.
Securitization facility with an attractive rate of LIBOR, plus 162, and a half basis.
Pro forma for the application of the proceeds of the new facility. We ended the quarter with only $75 million strong on our 175 billion revolving credit facility.
In addition, we had $55 million of cash on the balance sheet.
We expect to go into 2021 with a non turn a revolver and to generate significant cash flow after distributions similar in magnitude what we expect to achieve this year.
Although small relative to the size of our balance sheet.
Facility is an important transaction for us.
Coupled with a strong free cash flow generation of our business and our ample revolver availability.
We are solidly positioned to repay hour $850 million term long before or at its maturity at the end of next year without having to access the capital markets.
As we look forward, we have a favorable senior notes maturity horizon.
With approximately 35% of our bonds not maturing for 20 years or more.
Our neck tenure notes maturity is not until 2024.
The <unk> team has not only adjusted our business model to self fund all capex and distributions, but it will also generate significant free cash flow after distributions.
We are committed to a disciplined and balanced allocation of that excess free cash flow.
While deleveraging the balance sheet continues to be our top objected.
We have to foot financial flexibility to pursue other high return opportunities.
To that end Asperity mentioned, our board has approved a unit repurchase program of up to $100 million.
The program provides another tool to return capital to unit holders and as we evaluate other uses of cash we will measure them against the return that can be generated through equity repurchases, which is currently very attractive.
Let me turn to our 2024 year outlook.
From an adjusted EBITDA standpoint, we are now on track to meet or exceed the high end of our previously guided range of $950 million to $1.25 billion.
We are very pleased with the resiliency that our business is shown this year positioning us to end the year on high now.
With respect to the free cash flow after distributions, we now expect to exceed the high end of our previously guided range, which was $280 million by 5% to 10%, putting us and the ZIP code of $300 million.
We are generating a free cash flow yield of close to 40% setting us apart in our industry.
Before I turn to call back to Barry I want to thank our team for their very high level of commitment to our success and they are strong execution focus error.
Their efforts have helped us to strengthen our financial position and given us ample liquidity. We are now on a solid path to meet our financial objectives with that I'll turn it back to Berry.
Thank you Pablo I'll sum up our discussion so far by saying this enlink delivered another strong quarter and is solidly on track to meet or exceed the high end of adjusted EBITDA guidance for 2020 and more importantly, we're on track to exceed the high end of free cash flow after distributions guidance by five to 10 <unk>.
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The momentum we have created will carry into 2021, whom we expect to generate free cash flow after distributions similar in magnitude to this year's results.
Are strong performance has enabled us to reduce leverage and we have outlined a clear path to continued leverage reduction and we're not stopping there our team wakes up on go every day and we will continue to mind for and deliver value each and every day, while we maintain safe and reliable operations for our employees customers and the communities we.
Working with that you may know open the call for questions.
And ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Please pick up your secret or if you're using a speaker phone. Please pick up your handset before pressing the keys to majority of question. Please press Star then too.
And our first question will come from Schnorrer Christiani with Evs. Please go ahead.
Hi, good morning, everyone.
Maybe to start off I was wondering if we could talk about the the unit buyback authorization I was just wondering if you change walk us through.
Any targets you have in terms of utilizing yet what how your tongue complaint and thinking about it and it's part of the question.
How do you measure the benefit of flying back the units versus let's say buying back some of your longer David with charities that are trading in the sixties.
Cheniere good morning, and thank you. This is Barry I'll start and and Pablo probably want to add some comments here first of all let me just say that the.
Strong business results that we have so thoroughly communicated to you. This morning, and the prepared remarks, I think is the starting place.
And when you look at the free cash flow generation.
It really creates an opportunity for us to use several tools to create value and provide returned to our stakeholders and so.
The share repurchase program is another tool in our toolkit and we intend to use it we think that given our forecast for the business that it will make sense to do that that said, let me be clear that deleveraging is the top priority and we are very focused on our initial target of getting below four times in terms of our own.
You're all leverage.
So.
Let me just say specifically to the question that you've asked around the pace.
We do not have a specific or formulaic approach as to how much of our cash flow that we will actually allocate.
To to share repurchase program.
Look at a number of factors and will really be looking for what we think is the greatest opportunity.
To improve the financial position and create value for the company.
So next year as we've said we anticipate having.
Something in the range of 300 million free.
Free cash flow and so when we look at that compared to the authorization for 100 million.
I am sure buybacks.
I would say is that we will only use a small portion of our free cash flow next year don't don't hear her say that we would anticipate in 21.
Using all of that authorization in the buybacks, but we will use some assuming.
The forecast in the business continues to operate the way it is so.
Another tune toolkit and Pablo maybe you want to comment on the debt repurchases well sure Yeah, just to reemphasize, where Barry said it is we liked the flexibility of the unit and repurchase program flexible way to return capital to shareholders as you such an error in your report it's another.
Throwing the quiver and we like that.
Of course, the other tool.
That can help us delever is that buybacks. Thank you saw do some of that in the second quarter over there were very attractive discounts in our bonds and we were able to buyback close to 60 mailing are some thoughts about a 50% park.
The discount if not us attractive today, but it's certainly a tool attendant toolkit that can help us the lever.
We look forward to that.
Well I appreciate the color and maybe Pablo will talk off white.
The idea of.
Unique buybacks versus long term that you can take it out.
Maybe the painful.
This is yet let me just comment a little bit more I think I would say.
The last nine months have shown us or anything it's just how quickly things can change and how opportunities can arise in different parts of the balance sheet and so.
We wouldn't have anticipated that after a two thirds cutting our distribution, which you'll be trading at a 15% yield and so that's an opportunity as we look at the units today.
Likewise, a few months ago, we wouldn't have anticipated that we would be able to buy the that back at somewhere in the range of 50 cents on the dollar and so.
I think we're in a great position, we have strong free cash flow, we have lots of tools in the tool kit and we will be very active in when we think about those opportunities.
No that makes perfect sense and I liked the fact that you guys are.
Being able to pivot between the different opportunities just in the interest of time in to the other let's works as well to.
Just wanted to focus a little bit on the costs and asset optimization site.
You highlighted that.
Obviously variable costs will potentially increase it volumes come back, but I was wondering if there's more that you could do that could potentially offset that that you could actually continue at this run right. Even if volumes came all the way back and then secondly, just with respect to capital efficiency and so forth we're seeing some other players.
Chopping up plants and moving them to other basic and so forth and you've talked about that and the cost as well too, but I was wondering if it's possible to even just sell an asset to somebody else, who could make it better use of it by moving it as well to it if that's an option that you're considering.
<unk>, it's been yeah, there's a lot there to unpack first.
On the cost reductions.
As you yourself have highlighted.
We've taken.
Larger portion of the cost out than probably anybody else out there and we're proud of the work that we've done.
But what I want to emphasize for everyone is that this is a continuous improvement process when it comes to cost management.
And so we will be focused on.
On continuing to drive cost out and trying to find those offsets effect.
The day before yesterday, I was spitting out with our supply chain leader.
And we were talking about his priorities for next year.
The thing that really impressed me. He said there are a few places where we haven't done as much work as we've done in some of our big fan categories that.
But the biggest opportunity is to continue to manage our big spend categories for the excellence.
Went on to say that you felt like all too often supply chain leaders failed to do that.
Any assured me that we would we will have a continuous improvement process and so I do think that will continue to find opportunities.
On the capital efficiency question.
I'd say, we've been doing that before it was cool.
We moved an entire compressor station out in the Permian.
Last quarter, we've moved tens of thousands of horsepower compression equipment.
From North, Texas, and Oklahoma into the Permian.
And when there are opportunities as you say to cut up plants and move them.
If if we get to the point, where we need to expand capacity and.
In the Permian that is very much an option that's on the table.
And as for asset sales.
Something we've done as well.
You might remember that last year, we did a very small acquisition.
In North, Texas, and part of the way that we realized to return on that acquisition is to sell a lot of the equipment that we acquired that we didn't need because we can handle the volume with with assets that we already have on the ground.
And may be final point on that is you can go a little bit bigger on that and highlight the sale that we announced Victoria Express not a big asset for us, but something that we were able to get a very high cash flow multiple for.
And put that money back into the capital allocation mix.
Great perfect really appreciate the color on that guidance.
Take care of amendments safe day.
Thank you Sharon.
And our next question will come from TJ Schultz with RBC capital markets. Please go ahead.
Hey, good morning.
So how does all of the announced.
Me an upstream <unk>.
Consolidation impact your current dedication our outlook on growth and the Permian and are you are you seeing are expecting.
Similar consolidation in the stack from some of your smaller producer customers are seeing any activity increasing in the stack given.
The relative gas price improvements thanks.
Yes, I will starting with the Permian T J.
You are right, we've seen three big deals and the Permian two of those deals involve companies with whom we have.
Significant Permian.
Operations or business.
Look it's way too soon to talk specifically.
Out how it changes things, but what I would say is we feel like the acreage. This dedicated to US is some of the best in the basement.
Particularly on the Midland based on site.
And we think that part of the reason that these deals are happening.
Is because people want to hydrate their portfolios and focus on the best acreage and so I think that.
That over time.
It should benefit us.
Having larger even better capitalized disciplined producers with good planning horizons do what they say, they're going to do will be will be a benefit for us.
In the stack.
I would say certainly less activity than what we've seen.
In.
In the Permian most of our customer base in the stack consistent the large independent like Devon like marathon like opens his.
I will say, though that in time there needs to be.
A rationalization of the smaller private equity back companies that are that are in Oklahoma. Some of that has begun primarily with the private equity.
Sponsors.
Combining some of their portfolio companies, but I think in time, there is a consolidation to happen there I'm just not sure whether it's today's issue.
Okay, and then just activity levels in the stack with gas prices, where they are.
Yeah. So.
I would say unchanged today for what we've been telling you really for the last two quarters.
Average activity level of two rigs are so I think today it happens to be one rig.
Outlook TJ I would say.
Two pieces of it.
First we're looking forward to the commencement of the Devon Dow JV. If you look at the evidence materials from a few days ago, you saw that they speak in there about the potential to commence that early.
Early next year, I'd say, that's certainly certain I expectation.
And then outside of the Devil now JV, you're right with this gas price dependent in part I would say, it's too soon to say just given.
The.
Where we all are including our producer customers in there and they're budgeting cycle.
Okay makes sense and then just lastly, some of the growth projects.
You discuss potentially longer term do any of the projects beyond.
Some of the wall connects.
That you target for next year potentially compete for capital over the next year or two and is that more.
Likely midstream.
Consolidation with within GMP or the or the tuck into your disguise is it more downstream focused are there energy transition projects just any further details on what the likely next steps from a strategic perspective are for you all assuming a more stable market in depth profile. Thanks.
Yes, Thank you T J.
Let me just say all of the above.
We certainly wake up everyday looking at all of the opportunities to allocate capital to growth projects.
Today, our focuses on what we described earlier in the prepared remarks as being kind of small tuck in capital light projects that have a higher return in a very immediate return cash flow and so you've seen us do those vitra Global project as an example of that which will come on and 21.
We see other opportunities are very proactively pursuing those opportunities in particular downstream.
We are over allocating resources, if you will to the downstream area of the demand, placing area and we expect to see those opportunities continue.
Like what we see with a bunch of global opportunity.
So we see those and all of the basins that we operate and I would say we're working on again the small.
I returned but also some of the bigger more strategic things, we're always looking at.
From a consolidation standpoint, I'm sure there is a bigger topic that folks are kind of.
Talking about and wanting to know how we think about that and I'll say that the question of consolidation in the midstream space is really.
The broader issue of all of US trying to move to what we think the midstream company that future on look like I think the same thing that the E&ps, we're trying to accomplish with.
With the consolidations, we're seeing there.
So when you look at that what we want is a company that will interact attract investors and give us access to consistent and strong capital in the future.
I think operational efficiency Onyx scale diversity of Austrians and integrated value chain. Those are some of the important attributes that we as a company or others will be trying to move towards and I think one could argue that a quick way and a decisive way to get there would be through consolidation and so.
There is a lot there.
But those are the things that we're thinking about we're right in the middle of our annual strategic planning process and so these things were certainly top of mind for us.
Maybe I'll wait for another question before we talk about the energy transition, but certainly that's something that we're focused on as well.
Okay I appreciate that thank you.
Okay.
And once again, if you would like to ask a question. Please press stars in Boston.
And our next question will come from Christine show with Barclays. Please go ahead.
And can work on my own.
My own response to an earlier cross strong you talk about selling Ah Clinton on the equal don't need.
So let me think about some of the permanent cost savings that you've achieved to date have you idled any facility from being back with the volume to your other nearby asphalt until every opportunity for sell the assets that you just Idaho.
Yes, Christine this is bad we have items some assets, including two processing trains in Oklahoma over the course of the year.
There can be opportunities to sell those but it's not.
It's not.
Big number right by by its nature.
Especially in a market like this it's not like there's a lot of people out there that are looking for.
Looking for that equipment, so we do it opportunistically.
When it makes sense to do but if not I don't see it as being a big driver.
Okay.
And then.
Just sort of looked at the.
The NBC Rohloff next year.
Is going to be an EBITDA headwind should we think that you guys. What's going to end majority of the discretionary cash they'll just to keep flopper H flat would that be a priority.
And take some more thinking about.
Christine is Pablo.
Decreasing leverages a top priority of course for us.
We're very close to that at this time to the four times for two and as you pointed out we do have very strong excess free cash flow of this year and going into next year.
Haven't giving guidance yet on the EBITA side, but.
But on the.
Free cash flow site, we do feel good about that because of the step down significant step down in capital expenditures that the two big projects that we have this year complete.
Don't see things like that at this time.
In our plans for next year.
So it can be very capital light things like well connect.
Which are very very good returns and any other new projects will have a very very high bar.
And then maybe a rattling formal right in the value chain are working hard touch on acquisitions unknowns are certainly do some that are focused on that.
Yes, Christina I would say.
And as I said earlier.
Our over allocating resources on the demand facing side of our business. We think that we have good opportunities there and we liked the way that it further diversifies, our business and integrates us across the value chain and so.
But we're looking at it and all of the basins in which we operate.
So I would say all of the above with an overemphasis in the Louisiana Gulf coast demand, placing assets.
Alright, thank you.
Thank you Christine.
And this will conclude our question and answer session I'd like to turn the conference back over to Bury for any closing remarks.
Thank you go for facilitating a call. This morning, and thank you everyone for being on the call with US and for your support has always we appreciate your continued interest and investment Nin link we look forward to updating you with our fourth quarter results in February in the meantime, we wish you all well and stay healthy have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a great day.