Q3 2020 Rattler Midstream LP Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the bathroom midstream third quarter 2000 uncertainty conference call. At this time, all participants lines are not listen only mode. These.

Please be advised that todays conference is being recorded.

After the speaker's presentation, there will be a question and answer session to ask a question during that time, he will need to press star one on your telephone.

If you're required to put assistance please press star zero.

I would like to hand, the conference over to your first speaker for today Mr., Adam Lawlis, Vice President for Investor Relations. Thank you Sir Please go ahead.

Thank you operator, good morning, and welcome to route where midstream third quarter 2020 conference call.

During our call today, we will reference an updated investor presentation, which can be found on the website.

Representing rattler today are Travis Stice, CEO encase vehicles president.

During this conference call. The participants may make certain forward looking statements relating to the company's financial condition results of operations plans objectives future performance and businesses.

We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors.

Information concerning these factors can be found in the companys filings with the FTC.

In addition, we will make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measure can be found in our earnings release issued yesterday afternoon I.

I'll now turn the call over to Travis Stice.

Thank you Adam welcome everyone and thank you for listening to Rattlers midstream third quarter earnings call.

The third quarter of 2020 witnessed a normalization of ratable operations. After the disruption caused by the historic volatility during the second quarter of this year.

With Diamondback resuming completion operations in the third quarter source water volumes rebounded strongly and volumes in the produced water crude oil and natural gas gathering segment's stabilized after declining sequentially in step with diamond backs volumes in the second quarter of 2020.

This normalization was reflected in the 32% quarter over quarter increase in EBITDA to over $71 million in the third quarter.

Net income of almost $39 million also more than tripled quarter over quarter.

This level of activity and cash flow can be seen as a baseline for rattlers business for the coming quarters as diamondback plans to maintain relatively flat production and activity levels.

At current commodity prices.

Moving forward, rather is well position due to the strength of its parent company Diamondback, who has a strong balance sheet and industry leading cost structure.

And downside protection offered by a textbook.

Even when discounting the potential for down and back to resume volume growth in the future.

Ratner will grow free cash flow through its declining operated Capex program and completion of its equity method investments build cycle.

We currently estimate Rattlers 2021 operated Capex program will be approximately half the level of a 2020 program in less than a third of the 2019 budget.

Okay companies and captive subsidiaries in our industry very closely and.

And hope this buyback program is seen as further aligning the interest of parent and subsidiary.

With this buyback our partners are presented with an option remained.

To remain partners and hold or increase your position or sale to us.

In conclusion.

When we created rattler to build out the infrastructure necessary to develop diamondbacks assets.

We envision to midstream entity that combined conservative financial management.

Visibility to volumes.

And a clear and honest relationship with its sponsor the low cost independent producer in North America.

We still believe that each of these attributes apply today.

And is a clear advantage as rattler adapts its business model from accommodating growth to optimizing operations.

The resiliency of this business model will be proven out in the quarters ahead.

With these comments now complete operator, please open the line for questions.

As a reminder to ask a question. Please press SAR one on your telephone again, that's star and the number one on that satisfied.

So without a question confessed to pound <unk>. Please.

<unk> V composite Q&A Leicester.

First question comes from nine of Jeremy to next from J P. Morgan.

Yeah, Lance how open.

Hey, Good morning guidance. This is James on for Jeremy just wanted to start with the buyback maybe just confirm that.

The program is active now so maybe we if we can expect any buybacks for this quarter.

And you touched upon it in your prepared remarks, but.

Just looking ahead of 2021, what factors impacts the pace of buybacks that you are looking to execute on.

Yeah James.

Windows, So close with earnings but buybacks in place it's authorized it's ready to start once the window opens and a couple of days. So we expect to be active in and.

In the fourth quarter and pretty consistently active through next year. So I think for US we wanted to frame. This is obviously leverage neutral.

So you've been free cash to buy back shares in an offensive fashion and and I think you know we'll be consistently buying back stock probably starting starting next week.

James just as a reminder.

We intend to maintain and grow the distributions from here, but we just think that today is using this excess cash flow is really taken advantage of an extraordinary opportunity.

We're doing this because we think that long term.

Strategy rewards are unitholders.

No that that makes sense. Thanks for thanks for the color of their.

And then maybe a.

Given the.

Mmk call consolidation upstream and particularly in the Permian.

It just made me want to hear your thoughts.

If guy them back is involved on that and on either side of deal.

If you can just talk to the sponsor really sharp and the confidence you have that.

The current contracts in place won't be impacted.

And maybe just just talk to a stranger the relationship there.

Sure James will you know it was pretty clear and the download that call on Tuesday download that perception of war, our view of of basement consolidation.

We're only going to do it.

Grow our asset base like we always have which is when they can drive shareholder value and.

And I think the relationship that we have with rattler is going to benefit with that.

Laser like focus on driving shareholder value of preparing level, yeah, and I think I think rattlers assets are so integral to diamondbacks operation that they're going to be.

It'll to any acquire or.

Continue to be vital to us. So I think rattler will benefit if Simon Baxter consolidate or and I don't see a lot of downside if not them back is consolidated just because all of these assets are integrated into the seven big development areas that we have today.

Thanks for the questions are all of that.

Thanks James.

Next question comes from nine of Jeff Glemp from Northland Your lines now open.

One of the guys.

I just was.

Was curious hey, Travis.

And I think you know with the with the security yielding 18% you know this kind of ties to our buyback capital allocation philosophy.

Theres not a lot of capital projects that we have in the portfolio that generate a higher return than that year one so.

Capital dollars are going to be very scarce at rattler in if we.

Continuing a maintenance mode for 2022.

If anyone's guess, but if that were the case capital will continue to come down at rattler from from even to the 2021 levels.

Okay, Great. That's all I got thanks, guys.

Thank you Jeff.

As a reminder to ask a question. Please press star one on your telephone.

Next question comes from <unk>, which was up one from Bank of America. Your line is now open.

Hi, everyone. This is alexandre whose law or maybe just starting off on a capital allocation I'm should we anticipate you to renew the buyback program. After it expires in 21, and what would kind of be the puts and takes of further capital return here.

Yeah, Alex what the what the board is committed to the $100 million and we'll evaluate that just like any you know any other investment decision that we make we'll we'll evaluate that you know probably on a quarterly basis, but the board's very comfortable with the hundred million dollar allocation right now.

Understood. Thanks for that and then maybe just one more [noise] regarding I'd sum of diamond backs comments with producing flaring in the Permian is there is there any from meant opportunity for Adler to catch capture some more gas heading into 21.

Yes, certainly the the benefits that we've seen in the you know almost 75% reduction in flooring from this time last year at the at the parent level is in large part to the efforts of of what Radware has done and as we continue to see whether there are emerging technologies and methane monitor or methane a row gas capture.

You know what I expect a expert right were to to be able to be on the front of the front of that conversation.

Perfect. Thank you both.

Thank you Alex.

Next question comes from that I know of Pearce Hammond from Simmons Energy. Your line is now open.

Good morning, and thanks for taking my questions. Just a quick statement I think it's smart to cut the distribution and.

Allocate the capital to.

Buyback, so I think that's a smart capital allocation decision.

The first question, though is when you think about.

Growth opportunities over the next few years above and beyond Diamond back do you see opportunities to grow your third party business and are there opportunities to make maybe small acquisitions are bolt ons that would help facilitate that.

Yeah appears to me and I I think there certainly are smaller opportunities on our existing asset base, you know to improve margins. Yeah. We pay a lot of royalties to you know the landowners for disposal and for freshwater so you're trying to reduce that burden will increase margins outside of that you know small bone.

Upon the existing systems, if we need capacity is certainly on the table.

But but we have to then do the build versus buy analysis and most of the time, it's cheaper for us to or higher return for us to to build than by overall you know on top of that I don't think and we're trying to keep this business model pretty simple and.

Buying third party exposure reduces that line of sight that we like you know to through our operations and that starts the crowded a little bit. So I think I think staying pretty consistent on the story that you know rattler should benefit should diamondback be a consolidator, but but outside of that you know sticking to.

Oh, the base business, rather than a lot of third party exposure. Yeah. You know peers. If you just circle back them up because some of them are opening comments I think it was in the first question you know rather we're going to always look at things that that can drive unit holder value just like at the parent level. You know that's that's singular focus of trying to deliver value to the people that.

The company is is first and foremost on our mind. So cases governments are entirely correct, but let's let's not forget that we're always here to try to drive unit unit value and shareholder value creation.

Thank you Travis and case and then my follow up question is you've done a rather than on a good job on reducing costs during the downturn and in becoming more efficient.

Our there's still opportunities to further do that in a meaningful way that could could impact cash flows or is a lot of that behind you at this point.

Yeah, you know appears that's a.

Thats a laser focus always regardless of external factors is to reduce costs you know across the board.

Whether it's at the diamondback level or where you're at the right level I think cost reduction is actually more is geared faster.

At the at the right level that is with the diamond back that was the case.

A penny to half million dollars of yeah, Pearce I mean, you know.

The stuff you know the things we're looking at you know operating costs on a on disposal one cents of operating cost reduction is two and half million of EBITDA. That's rattler. So I mean, that's you know that's 1% or so of our of our EBITDA. So that Travis was saying that gearing is a lot higher I'm on the Rattler side, then then even down.

Back and you know peers were actually reallocating some internal resources, you know from DAVA back into into Radler to the hill to help focus on all of that.

Well rather was also to meet your work you know trajectory on our growth over the last 18 months now we've got the extra rise you're really focused on our cost reduction or its case just highlighted your opinion makes a big difference. So that's that's what we're looking to do.

Currently.

Well, thanks, guys great quarter.

Great. Thanks for your son or.

As a reminder to ask a question you will need to press Star then the number one on your kind of fun.

Again, that's star one on your telephone to ask the question.

Last question comes from the line of Tristan Richardson from TD Securities. Your line is now open.

Hi, Good morning, really appreciate the commentary on capital priorities.

And the return profile, you're seeing and projects out there curious to the extent you remain active on the repurchase as you look out into 21 and 22.

I'm just curious your thoughts on use of free cash flow in that distributions in a maintenance mode environment.

Is there a level is there a balance sheet level that would be suboptimal, such that you might actually add leverage to accelerate repurchase or.

Return of cash to shareholders in other ways.

Yeah, Chris I mean, I think for US you know being around two times levered versus other midstream companies is best in class I don't think.

We're looking to step on that and an increase in any meaningful way just given how we think about leverage on a consolidated basis with the parent company and our two subsidiaries. So I think growing you know leverage to buy back more stock is not on the table, but but I think you know should we be in the fortunate position to have free cash flow above.

The distribution and get through the buyback program I think we're going to bring back the distribution and with with lower units.

That distribution is going up so you know we created this vehicle to be a cash return vehicle.

That's still the base case, you know, particularly with 70% of our free cash flow still going towards the distribution, but you know with a Ford yield of 18, 19%. We had to put our hand up and say I think you know I think allocating some capital to buying back stock at these levels is the right decision now longer term.

If we go back to a more of a distribution model I hope, so, but but you know the it's a rare opportunity to be able to buy back stock at the bottom of the cycle, yet using debt to buy back stock or buy back units is never been part of the strategy I go back to my opening comments tradition that that you know this this is just taking it.

Manage of an extraordinary opportunity and the board still intends to maintain and grow the distribution from here that that has been unwavering you know from the very beginning.

That's helpful and in case, you kind of touched on my follow up there, but do you see this model involving into.

Somewhat of a variable model, where you adjust the payout on a more regular basis, depending on what you see in the stock what you see in capital project returns profiles et cetera.

Oh, you know we were familiar with the variable model with with Diamondback or sorry, with the Viper excuse me, but I.

I think we planned on this being a pretty fixed distribution model and just this opportunity that presented itself because of the market dislocation, it's probably the exception versus the norm.

I hope we don't have to go through 2020 again in a few years. So hopefully, we're bringing back the distribution and growing it with a with a reduced unit count.

And hopefully have to unit holders.

Helpful. Thank you guys very much.

Thank you Chris and thank you for thank you for all those questions from the participants I'm now turning the call back over to our CEO try this sites.

Thanks, again to everyone participating in today's call if youve got any questions. Please reach out and 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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