Q4 2020 Western Midstream Partners LP Earnings Call
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I would now like to turn the conference over to Kristen Shults, Vice President Investor Relations and Communications. Please go ahead. Thank you I'm glad you could join US today for Western Midstream sports quarter, 'twenty and 'twenty conference call I'd like to remind you that today's call and the accompanying slide deck and last night's earnings release contain important disclosures regarding forward looking statements and non-GAAP.
Please reference our public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today.
Relevant reference materials are posted on our website.
Additionally, I'm pleased to inform you that the western midstream partners K ones will be available on our website beginning March 12th hard copies will be mailed out several days later.
With me today are Michael year, our Chief Executive Officer, and Chief Financial Officer, and Craig Collins, Our Chief operating Officer, I'll now turn the call over to Michael.
Thank you Kristen and good afternoon, everyone.
Yesterday, we reported fourth quarter, 'twenty and 'twenty, adjusted EBITDA of $484 million as a meaningful reduction and producer activity throughout the year relative to our plan culminated with a decrease in fourth quarter throughput across all products remarkably. Despite this reduced activity, we reported full year 'twenty and 'twenty adjusted.
EBITDA in excess of $2.1 billion, a year over year increase of more than $310 million or 18% due to our increased focus on cost and capital discipline and west delivered fourth quarter, 'twenty and 'twenty free cash flow totaling approximately $465 million on 37% sequential quarter increase.
For the full year, 'twenty and 'twenty, we generated free cash flow totaling $1.2 billion, that's roughly 10% of our year and enterprise value.
Early in 'twenty and 'twenty, we pivoted, our focus to free cash flow as a financial performance indicator as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage.
By operating within free cash flow, we better align company and stakeholder interests of building a long term successful organization and while providing results that offer comparability in and outside our industry to demonstrate our excellent free cash flow and total return profile.
During 'twenty and 'twenty, we generated $530 million of free cash flow after distributions by reducing cash capital expenditures by approximately 65% from 2019 and reducing the distribution, although 'twenty and 'twenty was the first year, our company and generated positive free cash flow. After distributions, we have made a fundamental shift and our mentality as an organization.
And to ensure this success continues as we start in 'twenty and 'twenty, we recognized it would be a historic year for Wes as we executed several agreements with Occidental and December 2019 that established Wes as a stand alone Midstream company.
The ensuing global pandemic two months later confirmed this historic nature of 'twenty and 'twenty, but not for the reasons. We initially believed while the pandemic created numerous challenges that were not unique to us our team sees the opportunity to reexamine every aspect of our operations to identify incremental cost saving opportunities and pursue efficiencies.
This deep dive into our business continued producer outperformance and additional cost efficiency realizations from deconsolidation enabled west to exceed all expectations and our first year as a standalone company, removing more than $175 million of O&M and G&A costs compared to our original 'twenty and 'twenty guidance contributed to the high.
Annual adjusted EBITDA and Western Midstream history, we compounded these cost savings with the efficient execution of our capital program landing $590 million below the original 'twenty and 'twenty guidance midpoint and $100 million below the revised 2020 midpoint.
We price to $3 5 billion dollar for tranche senior notes offering, which was 6.2 times oversubscribed with more than $21 billion of demand.
At the end of the third quarter, we announced and $250 million common unit buyback program of which we've repurchased $49 million as of today's call.
The careful protection and efficient management of our balance sheet and the significant work by our employees to discover cost savings enabled us to return more than $1.2 billion to stakeholders through debt repurchases cash distributions unit buybacks and units acquired through the Anadarko note exchange.
Furthermore, as a result of the unit buyback program and the note exchange we've increased our free cash flow after distributions by over $22 million.
On a year over year comparison, we increased throughput and every one of our products, what the 1% increase and natural gas throughput, 7% increase and crude oil and Ngls throughput and a 28% increase and water throughput.
Our teams implemented mutually beneficial commercial solutions with producers to keep volumes on our system and generate incremental capital advantaged EBITDA per west while also providing near term relief to customers adversely affected by lower demand for its products operationally, we benefited from the completion of three significant projects in 'twenty and 'twenty the second Latham train.
Which commenced operations and the first quarter at a 250 million cubic feet per day of total processing capacity and the D. J basin and train three and train four at the loving road of and the Delaware Basin. The latter of which was completed nearly two months ahead of schedule and required 35% less capital than our previous north loving trains.
Our staff put forth a tremendous effort to complete these organizational and operational changes in 'twenty and 'twenty and we're confident that the foundation. We developed will continue to enter to the benefit of our stakeholders in 'twenty and 'twenty one.
This provides us with momentum to work toward a further sustainable cost efficiencies safe and superior customer service and returning value to stakeholders.
Our previously communicated 'twenty 'twenty, one guidance of adjusted EBITDA between 1.8 to five and $1.9 billion to $5 billion and capital expenditures between 275 and $375 million along with maintaining our year end debt to adjusted EBITDA ratio at or below 4.0 times is currently unchanged.
While we are still evaluating the full financial impact of the recent winter storm, which will adversely affect our first quarter results. We do expect to make up those impacts throughout the year.
We've already seen increased activity across the DJ and Delaware basins at the end of 'twenty, and 'twenty and into 'twenty and 'twenty, one and we expect.
These increased activity levels to continue throughout 2021, allowing us to exit the year at higher throughput levels on our 'twenty and 'twenty exit rate with the increase in activity, we expect our capital requirements to be slightly front end loaded to the first half of 'twenty and 'twenty one.
We also anticipate that our EBITDA will trend upward throughout the year as increased activity levels yield increased throughput.
Overall, we expect the D J basin to account for 37% of our asset level EBITDA with an additional 40% coming from the Delaware Basin.
And a few moments Craig will provide further detail around activity levels and capital requirements, but I wanted to take a few minutes to discuss the impact of our cost of service rate contracts on 'twenty and 'twenty one guidance as a result of declining twenty-twenty volumes, we experienced the upward pressure on cost of service rates. Fortunately the impact of these increases was partially and and so.
Some cases more than entirely offset by the significant cost and capital savings achieved in 'twenty and 'twenty, which we believe will be sustainable on a go forward basis, specifically, our Delaware water and oil cost of service rates decreased as a result of these achievements these cost savings and resulting downward pressure on cost of service rates demonstrate the simba.
The Arctic relationship that west values with its producer counterparts.
We will continue to push forward cost reduction initiatives. These savings are proportionally shared with our partners, which we believe will continue to incentivize additional business.
These are all reasons why west is positioned to be the midstream provider of choice within the areas. We operate a goal we take very seriously.
These anticipated rate changes were taken into consideration as we released our initial guidance at the end of third quarter. The impact of the rate changes was deemed immaterial to the total guided amount and that remains the same after our final calculations.
Our 2021 guidance also includes nearly all of the $175 million of cost savings realized in 'twenty and 'twenty three.
Through optimization efforts and our existing assets the transition to a standalone business model and strengthening our relationship with Occidental, we've identified sustainable opportunities that improve operability more efficiently deploy capital and ultimately drive value for our stakeholders to reiterate our third quarter call our strategic contractual protections minimize the impact on.
Decline and throughput has on our EBITDA.
Using 'twenty 'twenty, one guidance as an example, if DJ and Delaware throughput levels decrease by an additional 10%. It would result in only a 5% to 6% decline and our asset level EBITDA with that I'll turn the call over to Craig to discuss our fourth quarter operations and provide more thoughts on 'twenty and 'twenty, one on activity and capital requirements.
Thank you Michael operationally gas throughput decreased by approximately 282 million cubic feet per day or 7% on a sequential quarter basis as a result of minimal investment throughout 2024.
Full year, 'twenty and 'twenty natural gas throughput averaged 4.3 billion cubic feet per day, representing a 1% increase from full year 2019, our water throughput decreased by approximately 16000 barrels per day, representing a 2% sequential quarter decrease as a result of lower producer activity and the Delaware Basin.
Full year, 'twenty and 'twenty water throughput average 698000 barrels per day, representing a 28 per cent increase from full year 2019.
<unk> from additional volumes early in the year the conversion of trucked water volumes from our existing producers onto our system and incremental new business that we brought online throughout the year.
Our crude oil and natural gas liquids assets experienced a sequential quarter throughput decline of approximately 70000 barrels per day or 10%.
During the fourth quarter volumes decreased across the portfolio as a result of minimal investment throughout 2020.
Full year, 'twenty, and 'twenty crude oil and natural gas liquids throughput average 698000 barrels per day, representing a 7% increase from full year 2019.
This growth was driven primarily by higher throughput from our D. B M oil complex with the startup of loving road of trains three and four and higher throughput from our cactus to equity investment.
Our gross margin per crude oil and natural gas liquids increased by 15 cents for the quarter to $2.69 per barrel, which is attributed to the accumulative adjustment related to the annual cost of service rate resets, we expect 'twenty 'twenty, one crude oil and natural gas liquid margins to be slightly below third quarter, 'twenty and 'twenty margins as a result and.
Lower Delaware basin cost of service rates and lower gross margin contributions from equity investments before I provide some color around 'twenty 'twenty, one activity and capital requirements I want to take a moment to thank our operational engineering and commercial teams for an outstanding year their passion to improving customer service and consistent care and.
Churn for one another through our lives safe culture continues to serve as cornerstones to our continued success and such a challenging time our.
Our operations team worked effectively to maintain our system availability above 99% for 'twenty and 'twenty outperforming our internal targets and sharing system capacity and Operability enables us to move as much product as possible to market and further mitigate producers' needs to flared natural gas our commercial team's ability to create win win solutions with Purdue.
<unk> during the depths of the pandemic helped to keep volumes on our system and protect our revenue streams.
Finally, our engineering organization added 150000 barrels per day of water disposal capacity 210 million cubic feet per day of compression and 60000 barrels per day of oil treating capacity.
Optimize processes increased system reliability reduce project cycle times and identified significant cost savings on.
All which enabled our commercial team to build on their recent success and aggressively compete in the marketplace turning to 'twenty 'twenty, one and the return of activity towards the end of 'twenty, and 'twenty and into 'twenty and 'twenty, one and brings us great optimism, we're expecting rig count to remain relatively constant and the DJ and Delaware basin over the course of the year with the anticipated activity levels.
And DUC completions, we expect our producers to bring online approximately 315 wells across our portfolio in 'twenty and 'twenty, one about 60% of which is located in the D. J basin we.
We expect to exit 'twenty 'twenty, one with gas throughput relatively flat to our 'twenty and 'twenty exit rate, while oil and water will increase compared to the 'twenty and 'twenty exit rates by high single digit and low double digits respectively.
As we look at the increased regulatory environment, and our related risk profile, our federal and exposure and the DJ and Delaware basins is incredibly limited currently in these areas western and 5% of our gas throughput originates from new Mexico Federal lands.
Water and oil exposure is immaterial in the event federal land permitting issues jeopardizes new volumes, we believe the impact to our 'twenty 'twenty. One adjusted EBITDA is immaterial to the guidance ranges provided our analysis contains various assumptions concerning permitting locations and timing, but this projection is another demonstration of the minimal <unk>.
Impact federal land regulations would have on our portfolio.
Turning to capital, we expect our capital requirements to be slightly front end loaded to the first half of 'twenty 'twenty, one with a projected increase and producer activity.
Our capital guidance of 275 million to 375 million supports a steady level of activity growth throughout 2021.
Similar to recent years, we expect to deploy the majority of our capital about 59% and the Delaware Basin. The majority of our capital will be spent on expansion projects, including saltwater disposal facilities additional pipelines and well connections with excess capacity and the DJ basin, we do not expect any sizable.
Next to materialize in the foreseeable future.
On the Delaware Basin does not have as much excess capacity at the DJ Basin, we expect the intensity of capital spending to continue to decline capital will continue to be required for regional projects, including additional saltwater disposal facilities and compression as we alleviate areas have constrained now I'll turn it back over to Michael to discuss.
And our focus areas for 'twenty and 'twenty one.
Thanks, Craig.
After executing separation agreements with Occidental and in December 2019, much of our internal efforts last year were spent on standing up and organization transferring more than 1600 employees and contractors, establishing separate systems and processes and creating an entrepreneurial culture unique to us.
As we move through 'twenty and 'twenty, one we intend to further strengthen and refine our business model and internal processes enhance our focus on customer service and operational excellence and continue our active work to minimize our environmental footprint on.
On the financial front, we believe we have identified most of the available O&M and G&A savings as part of our 'twenty and 'twenty transformation. However, it is part of who we are as a company to continually examine our operations and challenge the status quo to identify innovative ways to reduce our cost structure and work more efficiently.
We believe this culture of cost management continuous improvement responsible operations and the use of technology to enhance safety and efficiency is imperative to provide value to our stakeholders. We regularly monitor costs as a percentage of gross margin and throughput questioning and challenging the use of capital and actively monitor spending to protect against cost creep and went on.
Higher level of activity returns, we remain committed to responsibly, managing leverage and returning value to stakeholders through further debt repurchases cash distributions and unit buybacks, our ability to generate free cash flow after distributions last year and into the foreseeable future enables us to repay all near term maturities when do totaling 1.2 billion.
And payments over the next four years, coupled with expected EBITDA growth, we intend to further reduce leverage to at or below three five times at year end 'twenty and 'twenty two.
In addition to debt repurchases, we want to remain flexible and opportunistic and how we return value to stakeholders. We expect full year 2021 distributions of at least one dollar and 24 cents per unit and we're committed to evaluating distribution increases on a quarterly basis as a potential avenue to return excess cash to unit holders the remaining two huh.
And $1 million of the $250 million common unit buyback program provides us with additional options to return value to unitholders.
As you've seen in our inaugural ESG report posted on our website. We're proud of our recent ESG performance and the passion of our people have to address ESG issues and a transparent way. We believe the world will continue to require hydrocarbons and particular on natural gas to power our lives.
The recent freezing temperatures and the southern U S is another example of the important role hydrocarbons play and providing fuel and warmth for our communities.
We take seriously our responsibility to minimize emissions by thoughtfully designing constructing and operating our assets and collaborating with state and federal regulatory agencies and environmental groups producers and industry to find the best solutions to today's climate related challenges.
Our ESG philosophy is rooted and three pillars, creating sustainable environments, focusing on people and operating responsibly, our operational philosophy and the design of our facilities dating back more than 12 years ago are a testament to how we view ESG specifically the design of our Colorado, Kocis and West, Texas wrote Us enabled.
US to gather oil directly from producers well sites, eliminating the need for well site storage tanks and associated oil vapor flaring, leading to emission reductions across the upstream sector as a proactive measure to minimize our facility emissions footprint West began installing electric driven compression as early as 2008 two.
Day, Wes operates more than 350000 horsepower of electric driven compression returning more than 22 billion cubic feet of gas to the market that would otherwise be combusted and natural gas driven compression.
We have also been progressively designing our facilities to limit our flaring to activities to those required for safety purposes. For example, when feasible, we install closed loop process vessels and systems to capture and transport gas to market instead of flaring product.
And we utilized technologies that recycle waste gas is back into our process instead of flaring, that's not only the right way to operate our business, but it also ensures that our facilities can easily adhere to future regulatory changes.
These forward looking designs are unique to western midstream and it demonstrates how our creativity ingenuity and planning can provide solutions to deliver resources too and energy hungry world, while protecting the environment. In addition, our customer focus drives our level of commitment to ESG as our teams work closely with producers to minimize upstream flaring during the product lifecycle.
Our commercial team works to have all infrastructure and pipelines in place before production commences as well as the contracted capacity and reliability to receive and transport our customers products through our natural gas pipeline infrastructure compressor stations and processing facilities and.
And please stationed at our regional control centers use automated remote sensing equipment to continuously monitor our gathering and processing infrastructure. This helps us to ensure system availability, which reduces producers need to flare natural gas.
And to demonstrate that we're part of the solution. We firmly believe our industry must work together to bring greater transparency to our environmental impact and actively communicate our mitigation efforts over the last few months. We have worked closely with the energy infrastructure Council EIC member companies and investors to create a standardized ESG reporting template for the midstream sector.
We've also taken an active role and drafting GPA midstream climate policy principles, which impart supports our technological advances and solutions that minimize G. H G emissions that collaboration expense and local governments and regulatory bodies as well to generate economic solutions to environmental issues and Twenty-twenty west support.
And a proposed rule from the Colorado Department of public health and environment, requiring emission reductions from existing natural gas fired engines over 1000 horsepower.
As part of an effort to ensure real emission reductions occur we will achieve nox reductions by at least 800 tons over the next three years, starting in 'twenty and 'twenty. Two we also plan to permanently retire three natural gas fired compressor engines by mid 'twenty and 'twenty four eliminating 17000 metric tons of C O two.
And this commitment to be good stewards of the environment starts at the board level and continues down through the organization to each of our employees as further evidence of this commitment from the top West recently appointed a board level ESG Committee, whose charter is to steer our efforts on issues and performance regarding environmental protection, social causes and strong corporate governance we.
And as a management team are excited to work with this new committee to drive positive performance in each of these elements for the future. It's in that spirit of working together that I'm excited to announce our recent membership and one future.
The one future coalition is a group of 37 natural gas companies working together to voluntarily reduce methane emissions across the natural gas value chain to 1% or less by 2000 and twenty-five the coalition's approach to reducing emissions aligns with our priorities as we work together to identify policy and technical solutions that yield continuous improvement and the management.
Segment of methane emissions, we look forward to continuing to demonstrate our commitment to ESG issues and their operational changes enhanced customer service and partnerships like one future I'd like to close with my appreciation to the 1600 employees and contractors at Wes while the global pandemic and the precipitous decline in commodity prices, we're not unique to us on.
Our team's resiliency outstanding determination and long hours to standup and organization, while working remotely provided our stakeholders with a historic performance one that may be unprecedented for a first year Standalone Midstream company. Thank you for your efforts I would like to especially thank those hard working people who worked through these freezing temperatures to deliver valuable.
Fuel to those in desperate need during the recent storms.
Today, while we continue to work through the day to day challenges that are inherent in our business. We are committed to delivering long term value to our stakeholders by operating safely delivering exceptional customer service and returning cash to stakeholders. Furthermore, if twenty-twenty taught us anything at Western midstream. It is the importance of remaining nimble and adaptable when change occurs.
Excelling and an evolving and fluid environment as the scale, we've been perfecting since we undertook our current focus midstream strategy with that I would like to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on the touched on.
If youre using a speakerphone, we actually you please pickup your handset before approaching the keys.
Enjoy your question. Please press Star then two.
Today's first question comes from Shneur <unk> with UBS. Please go ahead.
Hi, good afternoon, everyone.
Thank you for the thorough update today.
I was wondering if we can start off with.
You know operating leverage potential within the western midstream assets right now.
You know I was looking at slide 30 in your updated presentation, where you talk about volume changes and changes in EBITDA and so forth and.
And we started looking at your four Q throughput for example, and natural gas being about 8% below kind of like your average for 'twenty and 'twenty two.
Clearly there is there has to be some degree of operating leverage I was wondering if you can share with us how much operating leverage you think you had without needing to spend on the material capex.
Yeah, Hey, Shneur how are you. Thanks for the question, let me, let me comment a little bit as it relates to that trend and how that might play out going forward and the way that we look at it.
As noted we did have a decline in volumes going through the back half of 'twenty and 'twenty as we had expected that decline. We would expect will continue through the first half of 'twenty 'twenty. One is the increased activity levels.
And some delay you know before they before they find themselves into the volumes into our system and <unk>.
On the capital is a little bit you know preloaded. So that we're prepared to take those volumes when it does occur however to give some indication we would expect that if the.
Activity levels for 'twenty, and 'twenty, one word and trend in the same at the same level into 'twenty and 'twenty two given that we are expected to exit 'twenty and 'twenty wanted a higher level than 'twenty and 'twenty. Therefore on a growth trajectory that that growth would trend into 'twenty and 'twenty, two and the capital requirements associated with getting that growth.
We were deemed to be similar to what we have projected are included in our budget for 2021.
And just to clarify do you have a sense of what your capacity actually a show like.
And just sort of following the forecast that you have right now and you've given us the volume sensitivities you know could 22 from a capacity utilization perspective like entering 'twenty. Two would you be at 80%, 85% on 90 per cent like is there some sort of light utilization level that you can give us so that we can sort of utilize the sensitivity.
Is that you you outlined.
Yes, we don't actually provide a specific detail as it relates to our projected utilization, but you know.
Again, I would I would indicate that even if you. If you play that into forward years, we wouldn't expect that there would be a material.
Increase and the and the amount of capital requirements, you know for a foreseeable period of time, obviously, there's there's limits to that but you know as we project forward over the next several years, we wouldnt expect that there would be a material increase and capital if the activity levels continued into the future.
Okay, and so you can you can handle a 20% volume increase without capital.
The takeaway from that fly them well.
Well again I never gave any specific detail as it relates to a 20% increase and volumes, but appreciate the the probing question.
But you know it did indicate that it would be on an upward trend going into 'twenty and 'twenty two and we would expect therefore, the cash flow to increase in 'twenty and 'twenty two over 'twenty and 'twenty, one and that the capital needs for that period would be relatively similar and if you. If you play that forward for a reasonable period of time, we would expect that that that similar.
Of operating leverage would continue without the need for significant additional infrastructure.
And just add Shneur I would just this is Craig I would just add that given the extensive footprints that we have and the Delaware and DJ basins, we continue to find ways to optimize and and find new capital efficient ways to expand our system incrementally that is very capital efficient and so really you know it.
Exacting a what that capacity is.
Somewhat of a moving target because we're continuing to find ways to to change that number and an upward trajectory.
Yes, definitely appreciate it and obviously you can give us more information and you always want more of them and you provided but kudos to the art work with that presentation.
Maybe it's a follow up question.
You've had a lot of success, adding third party volume this past year.
And does it have the potential to get to a 55 or 60% type of level.
Or will oxy grow faster than that rate mitigating the increase just trying to think about you know how we can can you potentially get to a point, where you can dilute auctions exposure on a two to change the views of the rating agencies on Nacho.
Yeah, why don't I wanted I comment that you know again from from our perspective, we want to grow the pie and you know we don't have a specific focus on you know a target level that we'd like any one of our partners to get to as a whole.
You know as we as we look into 'twenty and 'twenty, one and you know a lot of that growth is going to be driven by activity levels from existing customers, but as we go forward. You know, we're very optimistic that through the cost saving and initiatives that we've been able to put forward. We can be a lot more competitive going forward as those new third party opportunities you know find their way through the <unk>.
Some of that trend goes down to a.
Lower level from a customer concentration risk and then that's great.
But it's not a specific focus for us we want to make sure that we're just we're growing the pie.
And as a whole Gregg I know, if there's anything else you'd like to add there.
Yeah I think it's also important to note just the size of the pie that we add and it it's tough for that number to materially move from one year to the next even given the <unk>.
Successes that we've had and attracting new business, but what we love to see is the pie is a whole continuing to to get larger and and have each of our producers be as active as they can be and these basins and so am.
I think it's just tough to see a material change and that move or a material change and that that.
And that allocation, but.
It's it's a you know our focus is growing the pie.
Perfect.
Really appreciate the color and have a great afternoon.
Sure.
And our next question today comes from Karl Maier with Cabo.
On Securities.
Yeah.
Hi, good afternoon, everyone.
Michael I appreciate that you are still evaluating the impact of the recent winter storm, but just wondering if you have any preliminary thoughts or estimates about the impact to the business.
Yeah, we don't have any we were going through a thorough review overall and it definitely will impact Q1, you know we had a period of about 10 days, where the volumes were definitely impacted and and are still going through the impacts from a cost perspective, and what I can say is that you know we're working today.
Day at what we would deem normalized conditions and so thankfully. It's a it's a period of time that has been.
There, there's sort of a walls to it if you will.
So kudos to the team for getting back.
Back up and up and running and a quick.
Quick manner and light of the conditions that we have but we're still going through the full assessment on the financial impact of it. We do believe at this stage that are in light of the fact that we're still early in the year that will have an opportunity to make up that financial impact, but have not yet fully quantified what it might be.
Understood and that makes sense.
And then although the guidance for this year has not changed since November can.
Can you talk about the recent conversations that you've had with customers just curious of any plans or positioning has changed over the last few months.
Yeah, we actually haven't seen a ton of change over the past few and past few months as it relates to our behavior as a whole you know.
And just generally speaking some of the private operators and been a little bit quicker to respond to increased activity levels are.
And our public customers tend to be a little bit have been a little bit more disciplined as a whole and and we haven't seen a material shift or change since the time that we put out that guidance.
Got it thanks for that and good afternoon. Thank.
Thank you.
And our next question on shows.
Spiro <unk> with credit Suisse. Please go ahead.
Afternoon, guys and.
I want to go back to to leverage if we could and and tying that back to your advancement towards investment grade.
So far tracking better than initial expectations, you put out that new number now of at or below three and a half times by 2022, and so as you continue to advance towards investment grade can you just tell us what the factors are you thinking and we needed to get you. There have the agencies set some targets for you I guess, how close do you think that is.
Yeah, I think Spiro, it's a great question from our standpoint, you know take aside what the actual rating might be we definitely consider ourselves can and consider ourselves and the investment grade territory from a.
From a to a credit standpoint, and and thank you for noting the progress at our progress that we've made up to this point, we had set a target of four and a half times by year end 'twenty and 'twenty, we obviously exceeded that target and then we put out a target for ourselves and 2022, which will come as a result of us repaying our near term maturities. So we've got a 400 and.
$31 million maturity that will pay off in Q1, and then $581 million maturity that will pay off in 'twenty and 'twenty two that along with again the upward trending.
Cash flow our volumes as we exit 'twenty 'twenty, one will put us in a position to be able to get to those levels. As we currently project and so the conversations with the rating agencies have been very positive there.
From what we have heard very appreciative of you know our focus on leverage reduction and on the.
Timing of which obviously is a little out of our control, but the way that we're functioning is under the assumption that we're really operating under a and.
And true investment grade credit profile, regardless of what the rating might say.
The factor the factors there obviously include.
No.
And how it is that we handled.
The pandemic projections going forward you know what it is and we're using with our free cash flow and then customer concentration.
Got it okay. That's helpful.
My question is a bit of a two parter on on ESG and something you guys have been busy on that front since since the last time, we carnival last quarter and so a great initial steps obviously on emissions reduction and youre joining some of these industry groups and I guess as I think about next steps and and other things you can do you mentioned that you know challenging the status quo and.
I guess two things come to mind, and so I'm curious are any resources being deployed now to potentially transition over to C Corp. At some point in time and I'm sure you've been asked that in the past and then as we think about advancing more commercial opportunities as opposed to just the operational ones Youre working on now I'm thinking obviously direct air capture carbon capture and storage.
And how far away are those for you.
Yeah. So first question as it relates to and thank you for noting the progress that we've made it's definitely.
And effort that we feel very strongly about and that goes from the top you know with the creation of the new ESG Committee.
And remember Committee standing Board Committee as well as all the way through the bottom of the organization to make sure that we're being as efficient as we can with the existing assets that we have.
We are at present.
Don't consider a C corp conversion as being optimal for us and our and our unit holders as a whole so not something that we currently believe is and isn't the best interest.
Of us as a unit holder.
And then I apologize.
As a total stakeholder base and I apologize Spiro I didn't get your last question loves it and commercial opt in and no worries yeah, yeah, so or something that you know so a couple of things that I would note there and I'll turn over to Craig for additional <unk>.
Commentary again with the create and creation of the ESG Standing Committee, obviously, that's going to give a significant focus for the organization and make sure that we're being forward leaning around ways in which we can participate in the and the efforts as a whole that committee includes.
Great connection back with Occidental, and we're very and.
Impressed overall with the efforts that they have made in that regard and so obviously it facilitates some partnership and and and in the event that those types of opportunities find there they're way down there. We've also even reallocated some internal resources with a senior team that is focused on those types of opportunities and.
And so together with the Board Committee executive leadership allocation.
And connectivity back with our with Occidental, We think that there are definitely ways in which we can try and find ways that all and <unk>.
Hence return or certainly be productive from a return perspective.
But also be conscious of the climate situationally and today, Craig anything else that you had on there that would just add that the resources that are that we've pulled together to lead this effort.
Led by by one of our top commercial.
Talent set that's been with us for several years and and we think that that that's really going to be an important element of how we advance. Some of these ESG opportunities is to figure out how to how to commercialize and and get into and opportunities and a way that makes economic sense for says Michael points out but also.
Reiterate and underscores the commitment that we have to.
To make and advances on the ESG front and so we're excited by the by the team that we have assembled to to help lead that force and and we're looking forward to what those opportunities will will deliver.
To deliver in the coming months ahead.
Great. That's all I had thanks for the time guys take care.
Q.
And our next question today comes from Sunil Sibal.
And with Seaport Global Securities. Please go ahead.
Yes, hi, good afternoon, guys and thanks on liquidity the just one clarification on the previous questions.
You, obviously laid out and kind of at Cree, our deleveraging plan.
Is that based on your most recent discussions with the rating agencies.
If you execute on that and nothing else changes on the macro environment.
Does that is that sufficient value to get to it and come to the view of the rating agencies on maybe some more work to be done.
Customer concentration etcetera.
Yeah. So neal thanks for the question.
And you know again, it's it's it's there theres a theres a lack of specificity as you might imagine as it relates to you know specific targets that you need to be met in order to you know immediately trigger.
Some sort of upgrade overall from a rating agency perspective, so I wish I could and and each of them. Obviously are individual agencies themselves and have different perspectives on how it is that they assess ratings and credit as a whole so.
So I can't.
Specifically point to anything overall that would then trigger and upgrade but what I can say is that you know.
We're definitely doing everything that we can to put ourselves in the best position, we believe our metrics actually warrant.
Investment grade and and especially as you trend forward you know the way that we're handling the pay off of our near term maturities and you know the overall leverage.
As a whole we believe put ourselves in that position but.
And I definitely can't speak to any specific trigger that would ultimately result, and and and and improvement and rating agency ratings.
Got it thanks for that and then on the.
Portfolio rationalization side, obviously, you're done and Lubbock per started it off.
And I'm curious how should we be thinking about that both in terms of divesting out of third or even maybe looking out of their assets and other basins, which kind of give you more.
Really low businesses et cetera.
Yeah.
So our position is the same that you know we've had for some time and that is that you know, we'll look at opportunistic opportunities both on the divestiture side as well as the acquisition side you know over the past 12 months, it's been a challenging environment to get anything executed on either side, whether you're selling or buying.
You know we do definitely.
Have have constant dialogues as it relates to some assets that may be deemed noncore for us where if someone puts a higher value on it and what it is that we deem the value to be and then we'll execute on those things opportunistically and and that activity level. I would argue is and it is in a better fundamental place today than it certainly was previously but.
You know where were on a a continuous portfolio optimization mentality and have been for the past 12 to 18 months.
Okay got it thanks for the commodity mhm.
And our next question today comes from Gabe Moreen with Mizuho. Please go ahead.
Hey, good afternoon, everyone I just had a couple of question around the cost of service.
Arrangements and and how cost reductions filter into that and the sharing mechanisms around cost reductions can you just speak to I guess.
How those cost reductions whether they go all to you know how they filter through the cost per second service mechanisms and.
Are you sharing at all with your customer are you sharing your within a band and I guess, how much headroom you have.
On cost of sales cost of service savings.
Where you'd need at that point to share everything with your with your customers sorry that was around a rattle along a long question there yeah.
Yeah, no. It's a good question Gabe what I go ahead and take a shot at that and then Craig you add anything that I may Miss here, it's effectively like not all of our contracts are cost of service and so it is a calculation and that's based on the asset level.
Net cash flows associated with the capital and operating costs as well as volume specific to that particular area and which that cost of service contract.
And as relevant and so as you allocate those costs, there's a determination as to what the rate might be based on historical volumes received and then future volumes projected for the area.
We did see.
As it relates to the recalculation for 'twenty and 'twenty. One is that the significant effort that the team had done in order to reduce the overall cost to gather the projected volume has actually had downward pressure to the point, where we reduced the rates and.
Oil and water on the Delaware Basin as a result of those efforts.
And so that's.
Effectively the way that it's calculated the way that we look at it is that you know each dollar that we spend and needs to be really thoughtful and needs to have.
And associated value with it because.
Because regardless of where those savings might be shared it's either incentivizing additional development on our acreage position on recruiting and accruing to the benefit of our unit holders.
So Craig is there anything else that you'd add yeah, I would just add that a big driver for this year as we recalculated those rates were and addition to the 'twenty and 'twenty volumes being well below what they were originally anticipated to be.
Correspondingly, our our capital and 'twenty and 'twenty was well below what we originally anticipated, but then the other big dynamic and those models as the future expectations for capital and on operating expense and as we've been as we've been able to sharpen, our pencils and and and get better.
Better.
Cost around those those facilities and and assumptions around what would be required to deliver those future volumes.
Including our operating costs.
The combination of all of that is just our internal rate of return calculation and and so that's what really drives that that rate adjustment and and so it was both.
<unk> and of 'twenty 'twenty impact, but also what what we can extrapolate going out to deliver those future volumes that really drives those rate adjustments and and you know.
We're pleased that we can that we've been able to find ways to reduce costs as Michael pointed out it's it's asset specific for certain customers.
And so to the extent that we get better at reducing our facility costs and our operating costs.
It doesn't just stop inside those cost of service contracts, but it and extends to our benefit.
And all the other contracts that we have it better at fixed rates.
Got it. Thank you and then maybe Shneur asked about operating leverage and I think also based on the metrics you're disclosing about.
Leverage to volume increases or decreases it seems like you have that but I'm. Just curious as you look across the portfolio and your assets that a N V. Six of them are there any assets, where you are actually materially below your average season.
And volumes may not filter through to the bottom line at least initially.
Yeah. It is.
It is asset specific and it's contract specific so I think it's probably not simple enough to to address.
Through our through our response.
And and the way that would you would find helpful.
I would say that we have all that baked into our into our guidance for 'twenty 'twenty, one and and as part of our long term planning.
You know, we we we are optimistic that as as producers continue to get their feet under them with with a strengthening commodity price deck and and increasing activity levels that are that producers will.
And be outperforming those minimum volume commitments and.
And we look forward to seeing that upward trajectory on volumes again, and and Gabe to comment on that I mean, there is an element of.
Within that calculation and element of the volumes increase and again, 10% the EBITDA increases as we projected 5% to 6% and so there is a little bit of an element where.
And that increase is being eaten up a little bit by the minimum volume commitments and therefore, it's.
You know, it's 5% to 6% increase as opposed to something more than that.
Same works on the downside.
Got it makes sense thanks, Michael Thanks, Craig.
And our next question today comes from Derek Walker of Bank of America. Please go ahead.
Good afternoon, everyone I'm, Mike appreciate the color today.
And just what was the.
Two quick ones for me.
And I think you talked about just on the ESG side I think it was 350 horsepower.
And as electric compression and I think you've done over the last three years.
And you talked about some net gas compression retirements or do you see any more opportunity to convert to compression and.
Do you anticipate those net gas compression retirements this year. Thanks.
Greg on your on them.
Yeah, I think you know the way we think about the compression is you know as were adding new compression and we're looking for opportunities to electrify as much of that as possible and.
And some areas and some basins and even within certain locales and those basins.
And the proximity to reliable power sources.
Sets up better for some some of that compression and others and so it really becomes a function of how available and and and the proximity to.
A reliable power what that looks like.
For example, you know and the D J basin, given the proximity to.
Urban development and the power availability is a very attractive and really the who's at her facilitates opportunities for us to do more on the electric compression side, and we utilized quite a bit of electric compression up and the D. J basin, which is an important.
Part of how we're running our business up there.
And given the environmental regulations that continued to change and we try and stay out in front of those changes.
Changes by by being proactive and and deploying that electric compression and and other areas is it a it becomes a little bit more challenging to find that are readily accessible power grid infrastructure and I think that's you know frankly, one of the one of the challenges or opportunities if you will that.
We see moving forward as as the the power grid continues to grow and expand to facilitate a broader electrification across across the U S and and hopefully within some of the operating areas that we operate in.
Well I appreciate that and then maybe just one quick clarification question.
Look I think he said there is 315 wells.
In the forecast with 60 per cent of the D. J.
How do you how do you see the cadence of those well throughout the year, you mentioned that some of that might be front end loaded but.
Do you see that cadence difference between the D J and the Permian.
Yeah, I think the the cadence is going to be pretty ratable through the year are more or less.
Our capital spend will be slightly front end loaded to the first half of the year to get out in front of that.
And that those volume and volumes that will come on line.
But are you know are our producers for example, and in both basins right now have increased the rig activity relative to 'twenty and 'twenty.
And a way that and that gives us great.
Our confidence and our ability to to see those volumes come.
Come onto the system throughout the year as Michael noted earlier, you know volumes.
And really in the first half of this year are still going to be lower than where we expect to exit, but we we'd see a per.
Our continual climb throughout the year.
And as that rig activity stays fairly a fairly steady.
Got it appreciate it and that's it for me. Thank you.
Thanks, Sir Thanks, Our next question today comes from Jeremy Tonet with.
J P. Morgan. Please go ahead.
Hey, Good afternoon, guys. This is James on for Jeremy.
Just just one quick one on clarification, the three five times leverage target for year and 'twenty, two there's no asset sales and embedded in that right and I guess any incremental adds.
Net sales will be will be applied to deleveraging first and foremost is that correct, yes, and so we do not have any assumption of asset sales that is embedded and our ability to be able to get to that target that is.
Through the efforts of repaying our near term maturities and then the expected EBITDA profile through 2022.
Got it thanks and.
And then as my follow up.
Maybe if you could just speak to the cadence of buybacks going forward for the remainder of the year, particularly with the recent performance if and if maybe there's a slow down or if.
Maybe you allocate capital to increasing the distribution if the stock keeps working at these levels.
Yeah, So you know as.
As mentioned, we'd actually already been a participant in the and the first quarter as it relates to buybacks as we gave you and updated.
Figure there that Ah is slightly higher than our year end number.
And so you know it's a it's and it's obviously an opportunity that we still have to be able to use.
No. This is something as we've mentioned that our primary goal is to get out of below four times by year and.
And then we have multiple tools available to us to maximize the value to our unit holders that being either a a distribution and potential distribution increase.
Or a buyback program at something that the board has.
Has engaged on and desire to engage on on a quarterly basis to assess which of those tool to use tools to use.
At their disposal, that's and authorization by the way that you know is a.
Outstanding out through the end of 'twenty 'twenty, one and.
And was set so that we could meet that leverage target.
Got it. Thanks, that's helpful. That's it for me.
Thanks James.
And ladies and gentlemen, our next question is a follow up.
Please go ahead.
And yet.
A quick follow up here and actually just with respect to the last question about the gas with respect to the buyback plans.
Sort of a two part question on the first part.
Do you expect to be buying in the open market as you execute on it going forward or is there potential for you to be buying back from biopsy.
As you've been executing on quite quickly your ownership stake goes up dramatically.
And you have and expectation of needing to get below 50% consolidation or deconsolidation and just wondering if you have any thoughts with respect to that.
Yeah. Our thought is that you know, we'd love to buy back units, regardless of where they come from so you know up to this up to this point has been through the open market, but would definitely.
Be interested in considering making a repurchase of some of the OXXO units as well, we're pretty agnostic the way that we're thinking about it is that we've reduced our distribution burdened by close to $40 million net of the interest being received from the note exchange, it's about 18 million I'm, sorry, $22 million worth of free cash flow.
Or distributions that this effort has prompted we've bought.
Bob back a little over $300 million or right around $300 million worth of units 31.33 million units as a whole and so we just we view that as an opportunity for us to improve the free cash flow after distribution profile that.
Mentality exists, whether we buy it from the public unit holders or whether we buy it from oxy. So we would be interested in either of those.
Okay and is it.
Follow up.
Kind of confused a little bit.
And part.
Question on integrating the stock and went up so much seeing shut and.
And whether you were saying you would or you wouldn't because of the stock because they sort of look at it.
And at that you know when Archie first bought at stake and you were installed and C. O you were trading and then the high Twenty's.
Yo versus $17 today, and so I'm just trying to understand if we're all trying to intimate that 17 tie and off or whether it's still cheap enough to continue buying.
I will never indicate that the current unit price is as high enough shneur.
And I'll always.
Looking for ways in which we can improve the value of our unit price without a doubt.
And what what the comment was that we don't have a specific threshold that we see today or going forward as necessarily.
You know on exact number on which we would you know start or stop the buyback program. It. It is an indication that the the board you know.
Would revisit the overall target levels on a quarterly basis and assess whether.
You know potential distribution other way what are the best ways to return cash to unit holders, whether that's through and.
Our distribution growth target or whether that's through the continuation of the buyback program and and just again, indicating that we have up to this point Ben.
Very much utilizing the buyback program to the tune of close to $50 million of and bought back since we announced it at the end of third quarter.
Right and if I understood one of your other answers, but at the end of the day it does improve your.
F C F. A D payout ratio effectively right by reduced on your accounts as well too right, yes, exactly so that's how we think about yep exactly.
Perfect. Thank you very much and sorry for all the questions today and no problem. Thanks Shneur.
Ladies and gentlemen, this concludes the question and answer session and I'd like to turn the conference back over to the management team and for any final remarks.
Thank you very much everyone for joining our call today I. Appreciate your time, please be safe.
Thank you Sir This concludes today's conference call. We thank you over attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.