Q3 2020 Altus Midstream Co Earnings Call
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To ask a question during the session you would need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I'd now like to hand, the conference over to your speaker today, Mr., Pat Mr., Patrick Cassidy director of Investor Relations. Thank you. Please go ahead.
Good afternoon, and thank you for joining us notice midstream companies third quarter 2020 financial and operational results conference call. We.
We will begin the call with an overview by Altice midstream CEO and president clay branches and been Rogers CFO will summarize our financial performance and outlook.
Our prepared remarks will be approximately 15 minutes inline.
With the remainder of the call allotted for queuing Hey, Rick.
Remarks during the call May also refer to the Altice midstream investor presentation.
Which can be found on our Investor Relations website at all just midstream dot com forward slash investors.
On todays conference call, we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found at the investor presentation posted yesterday on the Investor Relations Web site previously noted.
Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations.
However, a number of factors could cause actual results to differ materially from what we discuss today.
A full disclaimer is located with the investor presentation on our website.
With that I will turn the call over to clay.
Good afternoon, and thank you for joining Ulta is on its third quarter 2020 conference call.
We had another good quarter as we saw when commodity prices recover and many operators resumed production activity in the Permian basin.
While there are still headwinds in front of us, it's encouraging to see signs of stability and progress and we are cautiously optimistic about the outlook for the fourth quarter and 2021.
On today's call I'll discuss how all this has evolved since going public two years ago provide an update on our joint venture pipeline projects and our gathering and processing operations and comment on expectations for the remainder of this year and 2021.
Ben will cover our financial performance and outlook and then we'll take any questions from analysts in the queue.
All this midstream has evolved significantly to adapt to a rapidly changing operating environment since becoming a public company in 2018.
Since then NGL prices have degraded by nearly 60%, which led to reduced drilling at alpine high and a review of the opportunities in front of us.
We adjusted quickly shifting our business focus and capital investment from gas gathering and processing facilities in the Delaware basin to the long haul joint venture pipeline projects and options contributed to the company by Apache.
We implemented new operational and commercial initiatives with a concentration on cost structure pursuit of new revenue streams and elevated efforts to identify and evaluate strategic alternatives.
This year's global pandemic and its impacts on commodity prices further validated those decisions.
Through all the macro fluctuations the company's assets haven't changed or nearly equally invested in our two businesses gathering and processing and long haul pipelines.
And our growth capital commitments are decreasing significantly across all of our assets also.
All this remains a competitive Permian basin focused midstream company.
While we are still very interested in gathering and processing, we recognize the changing drivers to our earnings profile from where we stand today, our equity ownership in these JV pipeline projects will contribute the lion's share of Altice Midstreams EBITDA next year.
We expect Permian highway to be in service.
In the first quarter of 2021, which will result in all four JV pipeline projects being in service.
This establishes a strong base that combines exposure to very well known and respected midstream operators through unique mix of long haul pipeline equity ownership with state of the art processing capabilities in the Delaware Basin.
All this is not the single basin focus GNP company, we look like in 2018.
I'll move now to a discussion of our assets beginning with the JV pipeline projects.
I'll start with the Permian Highway pipeline.
Hinder Morgan noted in its recent third quarter release, the PDH pp is more than 97% mechanically complete.
It's on schedule to be placed into service early in 2021.
Phd is designed to transport up to 2.1 billion cubic feet per day of natural gas through a 430 mile 42 inch pipeline from the Waha area to us Gulf Coast in Mexico markets.
The pipeline is fully subscribed under long term binding agreements and altice owns approximately 27% of the project.
Our other long haul natural gas pipeline Gulf Coast Express continued its strong and steady performance delivering results in line with our forecast.
NGL volumes on the Shadow pipeline were relatively flat with the prior quarter.
We forecast a modest ramp in volumes during 2021 as drilling activity is expected to pick up in the Permian basin.
Similarly, the epic crude oil pipeline continues to be impacted by reduced production in the Permian basin.
Volumes are expected to gradually ramp is oil drilling increases.
On the GMP side of the business, we have seen gas volumes recover from the second quarter of 22%. This.
This reflects both higher gathering system uptime and curtailed volumes coming back online.
The third party GNP market is soft right now, but it's not frozen and they are still size of deal flow picking up with a more favorable gas market and more stable oil prices, we're seeing more opportunities and we couldn't have said that three months ago even.
Even though we are not seeing a strong sense of urgency from producers. We are currently in discussions with third parties to process gas.
As discussed previously we have executed some smaller third party deals and we continue to look for larger once we've completed two compression service agreements with Apache a compressor stations outside of alpine high expanding our footprint in their Permian basin portfolio and.
And we are looking for additional business, both with our sponsor and third parties in the region.
We installed a product cooler at our NGL loading facility in April and have processed nearly 600 truckloads of off spec condensate over the past six months.
We commenced a load shedding transaction in June with our electric compressors there.
Building on this we recently signed a contract to participate in an electricity grid response program starting in 2021 that we'll use generators we have on site.
In aggregate, we expect these projects will contribute $4 million to $6 million in EBITDA per year, and we're working on additional transactions to monetize underutilized assets.
Before moving on to my closing remarks, I want to note that we continue to attack our cost structure and for the fifth consecutive quarter have reduced our operating expenses on an absolute basis year over year, our operating expenses down 33%. This is particularly impressive as you can.
Sidor, the additional protocols and procedures, we've put in place in the field to prevent the spread of COVID-19.
Altice operations have not been materially impacted by the Corona buyers.
And I want to recognize the team for their ongoing diligence in this effort.
In fact, the execution of the Altice team since its startup has been impressive which is contributing to a more promising outlook for the year ahead.
As we reviewed our strategic alternatives over the last 12 months among various scenarios, we considered where the timing and where it was all for all this to return capital to shareholders with a positive execution seen across our operations and the imminent in service date of ph, Pete we have much more confidence with our.
EBITDA forecast, especially the contributions from our JV pipeline projects.
The forecast for distributable cash flow has also improved from the view we held earlier this year with increasing certainty of cash flows and limited future capital needs are.
Our leverage profile is manageable well within our covenants.
For these reasons, we now expect to be able to support a substantial dividend beginning in 2021.
As originally planned when all this when public.
We view this as the best option to maximize shareholder value.
Ken will elaborate on this outlook in his remarks, and now I will turn the call over to him.
Thank you clay.
In my prepared remarks, I will briefly review our financial results for the third quarter update our guidance for 2020, and 2021 and conclude with comments on our financing outlook through 2021 and plans to implement a dividend next year.
As noted in the press release issued yesterday also reported third quarter net income, including non controlling interest of $29 million. This.
This included approximately $4 million related to an unrealized embedded derivative loss, which reflects a technical accounting revaluation of the embedded derivative and our preferred units at the end of the quarter.
Excluding this and other items altrus generated third quarter, adjusted EBITDA of approximately $53 million, a 21% increase over the preceding quarter, which was impacted by both planned an unscheduled production curtailments upon.
Approximately 71% of third quarter volumes were rich gas.
Capital investments in midstream infrastructure during the quarter were approximately $134 million. This included approximately $119 million for the Permian Highway pipeline would.
As clay mentioned and Kinder Morgan recently announced is nearly complete.
On the guidance, which you can also reviewing the quarterly presentation posted on our website yesterday.
Capital spending for 2020 will decline significantly in the fourth quarter as the Permian Highway pipeline moves into its commissioning stage. Consequently, our growth capital for this year is being refined to $330 million to $360 million, a slight increase in the midpoint, but still under the upper limit of the range provided earlier this year.
As we have done in the past our guidance reflects our gross proportionate share of capital without taking project finance into account.
Crude is the only JV pipeline that has project level financing and the upsides of that debt earlier. This year funded a portion of the projects capital overruns there.
Therefore, we expect our share funding will be lower than the gross proportionate share weve outlined.
Gathered volumes for 2020 are still expected to range between 480 to 520 million cubic feet per day with volumes currently trending towards the middle of the range due to production curtailments previously discussed moving on to other guidance items adjusted EBITDA for the year has been revised as we've updated our forecast from the JV pipes in.
Our GMP business.
We're lifting the lower end of our range to $170 million raising the midpoint for the year to $180 million up from $175 million in our last report.
We're also updating 2020 distributable cash flow raising the midpoint based on expected higher cash distributions from our GNP operations and JV pipes.
DCF for the year is now estimated to range between 115 and $125 million.
In line with previous DCF guidance, there are no cash distributions from epic included in 2020.
Given the priority to project level finance.
Our 2021 guidance reflects a growth capital spending program that is nearly zero after the first quarter.
We also expect a significant ramp in cash flow driven by our substantial 27% ownership and Permian Highway.
2021 forecasts include a modest volume ramp efficient oak and we continue to exclude cash flow from epic in next year's DCF outlook. Please.
Please refer to the Investor presentation posted yesterday for details on the positive revisions to our 2021 guidance.
I'll now move on to our financing outlook.
First and perhaps foremost office has ample funding sources to execute plans through 2021 and beyond with a very manageable balance sheet and strong liquidity position.
Our revolving credit facility extends through November 2023, and has investment grade like covenants.
In January this facility was expanded to $800 million and $580 million was drawn at the end of the third quarter.
We expect cash from operations and distributions from our JV pipelines combined with available capacity on our revolver to be more than sufficient to meet our capital needs. We have no plans or need to access capital to finance our growth.
Currently we anticipate covenant leverage on our credit facility to be in a range of two to three times debt to adjusted EBITDA through 2022, which is well below the five times leverage covenant.
I'd like to add to Clay's comments on our intention to initiate a dividend next year. We came to this decision recognizing that alters has a strong balance sheet with minimal capital demands and we are confident in the cash flows from our GMP assets and increased distributions from our JV pipes, particularly with the startup of ph Pete.
When we initiated our strategic review last year, returning capital to all to shareholders was among the many ideas. We examined we engaged with the bank to consider a wide range of scenarios from taking no action to various mergers and divestments.
After cobot hit a number of alternatives were ruled out.
Shortly thereafter, the outlook for all to stabilized and over the past several months our confidence increased around ph be entering service.
Following this extensive review of alternatives. We now believe a dividend is the best option to create value for all to shareholders and are proposing a quarterly dividend of $1.50 per share.
This payout reflects the strong cash flow generating capacity of altice assets, while also maintaining very manageable credit metrics under the revolver pro.
Pro forma for the proposed dividend, we still expect to be within the two to three times range of debt to adjusted EBITDA through 2022 that I mentioned earlier.
Altice management believes now is the right time to initiate a significant return of capital through dividends and we believe this could also expand altice ownership to new potential investors seeking income and yield in an otherwise yield starved environment.
Ultimately this is an alters board decision and though we have previewed it with our board and receive preliminary support we will be requesting formal approval by the end of this year paving the way for a dividend to start next year.
I will now turn the call over to the operator for Q and a.
As a reminder to ask a question you may need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the Q and a roster.
Your first question line of Spiro Dounis with credit Suisse.
Hey, guys I Havent.
Hey, Spiro doing great. Thank you.
Yeah, I can tell by my friend.
Going to going to stop you and start out with the dividend announcement.
I was wondering you guys provide a little more color on why a $1.50 is the right amount why ultimately reach that conclusion.
I think another approach of course would have been a more gradual uplift over time or ramp up obviously decided against that at least for now.
So would just love to know more about how that process went and by you landed here.
Sure I.
I think first and foremost the dollar 50.
For quarter.
It does have kind of a sticker shock to it but when you when you actually look at our cash.
Generation from our underlying assets and kind of step back it's really very manageable the inverse of that from an annual standpoint. When you look at next year is a 1.8 times coverage to our distributable cash flow and I think thats kind of where a lot of our midstream peers have been trending is kind of in the higher one.
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And really just feel like that is.
Prudent from a return of capital for.
For our shareholders when we look at the amount of leverage that we are going to have.
Which is extremely cheap cheap debt kind of in and around 1%.
The preferred is has the 7% distribution rate and so.
We feel like that level sets us up to where we can have a decent yield.
I think the yield that that implied.
Based on closing price last week.
Was just outlining really the disconnect that we thought.
Was implied in our share price Didnt think that we were trading at a fair value and so.
It's a very manageable dividend and.
We think that that provides us enough flexibility when you look into next year Spiro is really the only variability that we may have.
Is.
Associated with with Chinook, and we're not making herculean assumptions around around Sherman Oaks.
And think and it's performed very very well even through coated.
And so.
That's going to be the material driver to any type of variability.
But even with a 1.8 times coverage again, if you look at the inverse we've got flexibility in there to manage through that and keep that dividend flat.
Got it Thats helpful.
So maybe expanding on that a little bit further I totally agree you guys have plenty of capacity here in the near term to cover that.
Clay you alluded to this a little bit in your prepared remarks. It sounds like some of this was covered during the strategic review, but just thinking about what the complexity and evolve this looks like.
Longer term pursuing growth opportunities pursuing third party business and M&A I.
I guess with the dividend consuming a good amount of your free cash flow.
Alpine high debt next year and potentially after that without any new investment. How are you guys weighing the ability to use the remaining free cash flow you have to continue to grow that business to make sure that this is sustainable and growing dividend over a longer period of time.
No. It's great question and it's been stated what we have here is a good base level of cash flow to cover our current dividend for now and into the foreseeable future but.
But what it comes down to potential upside we view two of our key assets as having that potential upside sunoco being one of them because we believe that additional growth in the Permian basin can grow that flow rate and ultimately the EBITDA that comes from Sunoco and then also epic that Matt.
But then a big piece of this is our gathering and processing business. We have some of the best assets in the Permian Basin.
And while we're a little bit south of some of the Delaware basin activity, we still feel like we're in growing distance and in the ability to go. After some of this is third party business that will come our way. Once there is a return of activity to the basin. So we do believe that there is growth potential in the GMP side state of the art of equipment.
And it's from an EPS standpoint, it's some of the very best in the basin and we think about how other plants. Other GMP processors in the basin with with much older equipment and potential for regulations into the future that's really going to cause some problems for them we will.
See is that all this is going to become one of the most attractive alternatives for gathering and processing. So we think we're sitting in a really good position.
We've we continue to lower our cost structure.
The gathering and processing side. So I think the the upside is very good very bright and what we're covering right now with the dollar and a half per quarter dividend thats baseline, but we really believe that that will have the ability to generate additional cash flow either for.
An increased dividend or some type of additional business be it no additional processing or additional gathering that we need to put into place.
M&A type activity, but we think we'll be prepared for that when it.
Great makes makes a lot of sense really appreciate the color today guys Congrats take care.
Thanks, Spiro you too.
Your next question will come from the line of Timm Schneider with Citi.
Hey, Good afternoon, guys, Hey, just quick question, obviously your dividends announcement today can raise a lot of.
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I guess confidence in future cash flows a lot of that obviously coming from your JV project can you just maybe run us through by asset how much of that cash flow is kind of locked in under longer term contracts versus what has what has spot exposure.
Hey, Tim so as.
As we've done in the past we've not outlined.
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EBITDA or DCF contributions by JV.
You can you can see.
A large ramp next year coming from PDH pp.
We aren't including any additional wells turned online and alpine high or any third party.
And so you can look at the percentage that our GMP.
Is contributing this year compared to next year.
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And so.
It's over 50%.
I believe of our EBITDA comes from both TCX and ph P., but we havent provided a breakdown beyond that okay.
Okay got it so sort of read through basically and you don't have to get specific then as kind of assuming alpine high. It is what it is for now but going forward do you guys have a pretty a lot of confidence does cash flows will come and there wasn't a lot of.
Youre not skating close to the edge, having then that said big dividend its basically what I'm getting at.
In terms of cash flow from those jvs.
Tim we're not skating close to the edge at all we take a look at this and then we take a look at our our president production in decline at Alpine High we're not been stated we're not adding any third party, we're not adding additional activity at alpine high. So it's really the whole thing is substantiated by by what we will have coming from alpine.
In high end its present state with no additional no new drills.
And then also a very conservative views of what these pipelines will be able to deliver that in terms of EBITDA as we go forward, yes, and just to add on to that.
For PDH pp same operator.
Fantastic operator, with Kinder Morgan that we're partners with on Gtx and so.
Having gone through the startup of Gcs and experienced the time that it takes to get that up and going for such a large two bcf a day pipeline.
It's a pretty good blueprint for what's going to happen with ph piece, so very confident around everything that they have announced.
They'll get there on time, so that does provide a lot of stability to our cash flows.
Great partner and enterprise doing a lot to get the volumes on that pipe up as well.
And then to Clay's point from a third party standpoint, even though this is a I think a big dividend from a per share basis.
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The if you look at the amount of cash that we're able to put aside or that which we can use for third party, we can pay down debt.
We've also got upwards of $200 million plus of liquidity on our revolver.
And you think about third party, we already have over 600 million a day of processing.
And so thats, where a lot of new capital as you know has to go into and so then you're just looking at gathering.
So we could swallow some third party deals without having to outlay a bunch of capital.
Which would then be accretive to cash flow anything we look at is going to be accretive to cash flow and keeping our leverage in check in.
And so we feel like we have.
A prudent amount of debt.
There is a lot of our peers that also have preferred equity.
Just like we do and thought that the dividend was very prudent and it still doesn't close the door on anything as we look into the future.
And maybe last one here real quick I'm, assuming this decision obvious.
Obviously didnt happen overnight. It took you guys couple of weeks months, however, long that to reach that conclusion, so I'm, assuming the outcome of the presidential election. It looks like it is as bright and at this point. There is not doesn't have anything to do with us on the regulatory front or anything else I mean in terms of for you guys being worried about it.
No from a just.
The political landscape, we feel like.
That the assets are going to do well no matter, what and perhaps it might even do better under Biden presidency, just because of what could happen from a regulatory standpoint on federal lands, but if you take a look at the throughput through all of our equity.
Ownership positions in the pipeline as you take a look.
The gas throughput through our plants and our gathering systems.
None of that is related to federal lands and maybe a small portion on the pipelines, but a very small.
Person on the pipelines. So we really feel very insulated from that and again it may be a little bit more of a bullish scenario in terms of overall basin activity with the Biden presidency.
Got it appreciate all the color. Thank you.
Yes.
Again, if you like to ask a question. Please press Star then the number one on your telephone keypad again, starting in number one to ask a question, we'll pause for just a moment to capacity on a roster.
We do have a question from Heather Garnick with Barclays.
Yes, good afternoon Heather.
Hi, Good afternoon I appreciate all the commentary on the dividend.
Actually great dining out yesterday I, just wanted to touch base on the periphery.
You get your latest thinking there in light of the anticipated dividend policy I think the latest messaging has bank a potential peak out in the late 2001 early 2018 timeframe, but.
But wanted to see if there is any shifting timing or financing consideration.
Hey, Heather this is Ben.
Not not really a shift we've got the capacity under our revolver and with the preferred.
I think again when you look at that excel math, the crossover the MOIC and the IR puts it kind of late 21 early 22.
So we've got I think plenty of time to.
It to work through our refinancing alternatives on the preferred.
And in the meantime, it's a very manageable, 7% distribution rate and so public company Weve got plenty of different options as you think of capital markets and obviously anything we do with the with the preferred and our balance sheet in a hole is going to make sure that we do.
In a prudent fashion and not.
Not over lever ourselves and and obviously with the with the dividend.
Starting hopefully starting next year.
Acting that the viability of that moving forward, our cash flows and the business that you can as you can see from how.
We've we've done very well this year on EBITDA and DCF and expect to continue that into next year. The cash flows from our assets.
Obviously can support a balance sheet that we have plus the dividend and we're going to make sure that any financing instruments, we put in place continue to do that.
Okay got it thanks.
Thanks for taking the question.
Sure thing thanks Heather.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I will turn the call back over to clay Bertrand for closing remarks.
Okay, I would like to thank everyone for dialing into our call today I'd like to leave you with the following thoughts about Ulta as midstream.
First our outlook has improved considerably with the expected startup of the Permian Highway pipeline right Gulf Coast Express it is fully subscribed with minimum volume commitments. However, we have a more material, 27% ownership and ph Pete.
We have revised upwards several of our guidance items for 2020, and 2021, including adjusted EBITDA and distributable cash flow. These.
These estimates do not include New third party business, nor additional wells turned online at alpine high including the three Ducs mentioned on Apache is call. This morning.
Finally, I would note that last month, we announced that Joe front has joined Altice Midstreams Board of directors. We welcome him to the board and look forward to working with him I would like to thank Doug Johnson, who retired from our board in September for his service to the company now.
Now I will return the call to the operator.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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