Q4 2020 Rattler Midstream LP Earnings Call
Ladies and gentlemen.
And welcome to the right.
Midstream Q4, 'twenty plenty of conference call.
At this time, all participant lines aren't any of it isn't one of the balance after the speaker's presentation, there will be a question and answer session.
During this time you won't eat the press Star one last quick question.
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I would like to hand, the conference over to Adam Lewis Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you, Brian Good morning, and welcome to Rattler Midstream fourth quarter 2020 conference call.
During our call today, we will reference an updated investor presentation, which can be found on the Routledge website.
Representing rattler today are Travis Stice, CEO and Keith <unk> President.
During this conference call of 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 variety of factors.
The information concerning these factors can be found on the company's filings with the SEC and.
In addition, the you'll make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in the earnings release issued yesterday afternoon, and I'll now turn the call over to Travis Stice.
Thank you Adam and welcome everyone and thank you for listening to Rattler midstream fourth quarter earnings call.
The fourth quarter of 2020 continued the trend of Rattler normalizing operations volumes and capital spend to a business plan with low to no growth from its sponsor diamondback.
As a result, EBITDA increased over 9% quarter over quarter to $78 million and operated capex decreased by over 60% quarter over quarter to $12 million.
These metrics set the baseline for Rattler 'twenty 'twenty, one and forward outlook as Diamondback plans to maintain relatively flat production and activity levels at current commodity prices off.
Operated capex is expected to decline by approximately 50% year over year.
And we'll be down over 70% from levels seen two years ago, setting rattler up for significant free cash flow generation debt will be returned to unitholders.
On the form of our distribution and common unit buyback program.
Fiber is also near the end of our multi year investment cycle. The non operated equity method investments.
With the distributions from equity method investments nearly reaching parity with contributions in the fourth quarter.
In 2021, we expect distributions from these investments to significantly exceed our expected remaining contributions.
Our only remaining meaningful contributions are the complete the wink to Webster pipeline project.
We are forecasting significant distributions from both our gray oak and Omar the investments in 2021.
Looking forward to 2021 with Diamondback planning to keep of fourth quarter 2020 oil production volumes relatively flat.
<unk> 'twenty 'twenty, one guidance reflects a continuation of the strong results seen in the second half of 2020.
The stable operated business underpinned by Diamondbacks low cost development of its top tier Permian assets.
Along with the equity method distributions outpatient contributions is expected to deliver increasing free cash flow the rattlers unitholders this year.
In conclusion, when we created rattler to build out of the infrastructure necessary to develop diamondbacks assets, we envisioned of midstream entity, the combined conservative financial management visibility to volumes.
And a clear and honest relationship with its sponsor of the low cost independent producer in North America.
We still believe that each of these attributes apply today and the.
There is a clear advantage.
Adapts its business model from accommodating growth to optimizing operations and free cash flow, which will accrue to unit holders in the quarters and years ahead.
With these comments now complete operator, please open the line for questions.
Operator, you can open the lines of questions.
Ladies and gentlemen.
This time after the wish to ask a question you will need the press star one.
Sure the pound.
The key again that if I want to ask the question Lisa.
Goodbye.
Sure.
Okay.
Brian we're unable to hear the question.
Kind of an.
Yes.
Here, we're waiting on the.
You have to put the questions there.
Yeah. So we have the last question here on the first question from James Goodman.
With J P. Morgan.
Just wanted to start the Diamondback had made comments.
Following the recent acquisition with Q P about potentially dropping down.
On the midstream assets held at QEP.
Wondering if you can provide any commentary there in terms of the nature of those assets on.
Is that something youre looking at in the near term or kind of of later day to growth.
Yes, James Good question.
And the QEP did a really good job building out their midstream.
Assets in there you know the county line area and the Mustang Springs area, where they've been.
Pretty active here for the last few years.
A lot of.
Freshwater assets disposal of assets recycling assets and on top of that some some small oil gathering terminals and assets. So I think we're pretty excited about about how they they develop their their midstream capabilities and I think over the long term those assets you know likely belong at rattler.
But we got to do a lot of work here post hopefully closing this deal in a few weeks and then and then working working up the the valuation and getting to board's aligned on valuation for a potential dropdown, but it's certainly our intent.
Wouldn't expect it to happen in the first half of the year.
Got it that's helpful. And then just a follow up on on the on that.
When you're thinking about financing of it.
Leverage shares below two.
Do you have any early thoughts in terms of how you would go about financing of the dropdown and if that would kind of coincide with buybacks maybe.
He's the the buyback pace in favor of the financing of the Dropdowns.
Yes, I mean, I think it's too early to make that call, but I think you know in general.
We're not going to lever up the company, we're not going to lever up the.
The parent in exchange for the solve or vice versa. So I think it'll be.
Prudently financed in the.
It just depends.
I doubt, we put more than two turns of leverage on on the the.
The assets that get dropped down on the rest gets funded with cash or other sources. So we've been we've been prudent and dropdown financing in the past that at Viper and then I think.
For US you know keeping rattler below two times because.
That leverage consolidates up to the parent.
It's probably the right thing for us to do.
Got it that makes sense and the.
Maybe just the point of clarification.
Are you receiving full distributions from from all of your JV is in line with the proportionate of cash flows and do you expect those distributions to remain stable.
Where to grow across the portfolio over time.
Yes, no we're certainly not receiving a 100% because there is some interest to be paid at <unk>.
But we're probably getting 80% to 85% of of EBITDA there.
On the distributions on the <unk> JV there is not a lot of debt at that subsidiary zero right. Now. So we are getting full distributions of EBITDA from.
From that business.
I think we're pretty excited about the for the outlook for the Amas JV. This year Diamondback is very active in few of the other.
For the.
Answers on the system, we're going to grow volume. So I think that system is going to see pretty significant growth.
Now with that comes a little bit of capital that needs to be spent but overall I think the distributions from from those two businesses are going to outperform our expectations and then on the FX side, you know, we're not expecting distributions from that business. So I think I think it's fair to assume that there's probably $10 million to $15 million of EBITDA League.
Two what we receive in the form of distributions from the from the investments.
Got it I appreciate the color there.
The last one from me.
Just previously you guys pause the AMR low build out there and just with current commodity prices, where the or is there any chance that.
Maybe it gets pushed the accelerated ahead and you guys start maybe building something on this year or is that still later dated.
Yes, I mean I think if.
It's still later dated if we decided the even to build the plant I think we're thinking pretty strategically about the.
Asset and how it fits in northern Martin County.
So right now no intention to spend an extra $50 million to build of new plant and an area of that thats, probably long capacity.
So I think we're going to be we're gonna be smart with the with capital there.
Got it that makes sense I'll stop there I appreciate the color guys. Thanks.
Thank you James.
Next question what was the law for the Hong from Bank of America.
Good morning, everyone.
Thanks for taking my questions.
Just wanted to start first on ESG.
ESG and the emission reduction targets.
So all of the items that diamondback disclosed earlier this week.
Diamondback has made significant strides on this area and in many of spec leads the industry with the recent emission reduction targets.
I was curious if you could discuss the emission profile for rattler Standalone.
And whether some of the ESG initiatives.
Within banks broader ESG program.
Some at Rattler as well.
Yes, no. That's a good question and we talked about that a lot on the diamondback call I kind of the see the commitments. The diamondback made as consolidated commitments I think rattler carbon footprint is obviously a lot smaller than diamondback with everything on on pipe, but.
We are doing things at the.
The level to reduce rattler scope on the carbon footprint, which is basically.
Getting rid of as many generators in field as possible connecting.
All of our facilities to two line power.
And then on top of that I think overall and.
This is debated if it's of scope one scope two emissions, but we are buying power from renewable sources and sourcing power from renewable sources and that power gets allocated between Diamondback and rattler. So I think certainly the.
Putting the building Rattler was was ESG positive because you're putting so much stuff. So much production on on pipe versus trucks, but on top of that the next step is you know full field of electrification across all of our fields and in sourcing that electricity from from renewable sources.
Got it and a quick follow up on that so would this be sourcing. The renewables are you able to do that from the grid you don't give on where the operations of our where is it.
Actually investing in some some renewable assets yourself.
It's from the grid when we buy both power and this has been a hot topic. This week for Texas, but when you buy both power you have the option to source it from a 100% renewable sources.
With some some assurances obviously, but.
Most of you a little bit more but it wouldn't be a meaningful amount and that reduces your.
Your total emissions profile.
Got it thanks for that and with the.
The fangs production plants, largely flat year over year and significant the water disposal capacity at rattler novel.
Do you think you could approach of third parties for opportunities to get higher utilization of the disposal capacity.
Yes, we have discussions with third parties all the time.
It usually isn't an offload capacity.
I think.
Those discussions will continue I think there's a lot of consolidation to happen in the water business, particularly in the in the Delaware basin and that means.
Bigger relationships with more well funded counterparties that can take water and vice versa. So I think overall.
That is happening.
I wouldn't bet on it in our in our financials, just because we want to bet on what we can control, which is the the diamondback plan, but but certainly I think rationalization of of capacity.
Capacity.
In all forms of fashion in midstream in the Permian is going to happen here.
Got it.
Turning to Capex plans.
This year, obviously, the capex the operating Capex have come down significantly.
Could be.
One of the last years, where you have bulk contribution to your JV.
<unk>.
Looking forward are you able to comment on what we should expect the run rate capex.
Specific to rattler would be.
Following up on the on Mary Lou.
Buildout comments earlier, how much of of how much capex.
There could be a part of that build out.
Yes so.
If we built Amarillo rattler of the build out would be.
Less than we originally said probably close to 30 or $35 million net to us, but but that's very unlikely to happen.
Don't think that's even a 'twenty 'twenty, one or even 2022 decision but I.
I can't speak to the operating Capex and.
The team understands that.
Rattler budget starts at zero and builds up from there we spent ah.
11% or $12 million worth of capital in Q4.
Our guidance assume somewhere in the range of $15 million to $20 million.
The quarter, but I think overall, we kind of break out the capex into.
Mandatory capex and kind of flex capex debt just in case, diamondback drill schedule or completion schedule changes and I'd say in.
In the budget, we presented today.
75, or two thirds of 75% of it is kind of mandatory capex and theres a little bit of flex for for the good guys in case things change throughout the year, but overall that number needs to continue to decline, particularly in the world, where we're not rolling of Diamondback I think the capital.
<unk> will be extremely limited to areas that are growing rather than areas that are staying flat.
Got it very helpful. Thanks for the answers and I'll jump back on the queue.
Thank you.
Next question goes from the line of Michael The D day.
From Goldman Sachs.
Hey, guys. Thank you for taking my question just curious.
Follow up on the on the potential of maybe dropping down some of the QEP assets can you remind us sort of have yelp disclosed a what's just kind of adopt the book value of the asset value of the QEP midstream assets I'm, just trying to get my arms around kind of how big of a potential series of multiyear dropdowns could that be or is it relatively.
Small that's my first question second one is how are you thinking about the cost of capital for Rattler, right and the best use of cash meaning.
Is the best use of cash for rattler to to buy assets from Diamondback from some of the QEP assets or continue deploying it whether it's even more deleveraging or even more share buybacks at the Sag unit price.
Yeah, Michael good questions I'll start with the size of the dropdown I think in general there is this overall, we're going to drop everything down at once the you know I think life's life's too short for US with three earnings calls on a week to do a multi stage dropdown you I will say.
I'll give you a range of kind of 10% to 20% of the size of.
You know of Rattler today, so it's not a huge dropdown and certainly manageable.
The amount of free cash that we have in the leveraged faster because we have so.
As I said, we're not going to lever up the sub in exchange for the parent.
So I think we'll be smart about funding it but it will be all in in one fell swoop.
Then to your second question no use of cash I think Thats Thats. The question, we need to ask ourselves every quarter and that's the question or our board asked of US and talks about in every and every audit Committee meeting as you know is this the best use of our cash to buy back stock at these levels of our or should we.
Bring back the distribution now.
Lot easier to debt or it was a lot easier in November to say rattler of $4, 18% free cash flow yield is the best place I could put my money, maybe in North America, but.
That decision got a little harder of this this this quarter because of the stocks rallied but.
We're still trading at a 11% of free cash flow yield with all of that cash being returned to unit holders.
And some form of fashion, because theres not a debt issue at rattler. So I think it's a fortunate place to be I think in general we prefer this to be of higher distribution vehicle. Then then of low flow buyback vehicle, but.
I think that's the that's a good good discussion to have.
Got it. Thank you guys much appreciate it.
Thank you Michael.
The next question.
Comes from the line of Kristen Richardson from the truth that's of cravings.
Hey, good morning, guys I appreciate the comment just on kind of relative scale of the the QEP assets curious just about integration to.
To the extent that that guy.
As for it is there organic build out potential or an integration spend potential in terms of.
Linking of QEP midstream assets with rattler assets.
From a connectivity standpoint.
Yeah. That's a good question you know I think if you look at the the map, we're going to have an opportunity to build the very.
Efficient system in Martin County.
QEP <unk> did a really good job building up their midstream assets in and basically on the county line area, where neighbors. So that's not a huge amount of capital to connect our systems, but I think overall as you think about our development theres not a lot of.
Added capacity needed with the combination of the two so I think theres going to be some some nice efficiencies there will minimize capital spend and.
And I think overall I think investors will be surprised with how little capital if needed to integrate those assets because of how built out they are of that both companies.
I appreciate the case, that's all I had thank you guys.
Thank you Tristan.
There are no further questions I will now turn the call over to Travis Stice CEO.
Yeah.
Thanks, again to everyone participating on today's call if you've got any questions.
Please contact us using the contact information provided.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
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