Q1 2021 Rattler Midstream LP Earnings Call

Thank you for standing by and welcome to the Rattler Midstream first quarter, 2020 One conference call at.

At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

Ask the question during the session you will need to press star one on your Touchtone telephone. Please be advised that today's conference may be recorded should you require any further assistance. Please press star zero I would now like to turn the conference over to your host Vice President of Investor Relations. Adam Lawlis. Please go ahead.

Thank you good morning, and welcome to Rattler Midstream first quarter 2021 conference call. During our call today, we will reference an updated investor presentation, which can be found on rattler website.

Representing rattler today are Travis Stice CEO of in cases of Intel's 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 and future performance.

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

Information concerning these factors can be found on the company's filings with the FCC.

In addition, we will refer to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found on our earnings release issued yesterday afternoon, well now I'll turn the call over the drive of stuff. Thank you Adam welcome everyone and thank you for listening to Rattler midstream first quarter earnings call.

Despite winter storm Yuri had an outsized impact on rattler throughput volumes and operations during the quarter.

Rattler was able to deliver strong free cash flow of over $47 million for the quarter because of capital spend was kept under $6 million.

This free cash flow was used to fund our <unk> per unit distribution of $11 million of common unit repurchases and reduce debt the.

Display and our commitment to return capital to investors on.

Operating cash Capex is down almost 90% from one year ago.

Illustrating the ability of the company to quickly adapt to a new business model, where lower growth is offset by increasing free cash flow to fund more capital return to unitholders.

We are maintaining our full year 2020, EBITDA guidance, even after the slower start for the year due to the impacts of the winter storm expressing our confidence on the forward outlook. In fact March operated EBITDA was back on track with the run rate, we expect it to hit the midpoint of our 2021 guidance.

Yeah.

We also see upside from our equity method investments as volumes are expected to grow significantly on our Omar oil gathering system, driven primarily by Diamondback activity. After closing this merger with QEP resources.

Lastly, operated Capex is expected to remain low on the second quarter, giving rattler optionality.

The on our capital plan for the second half of the year, depending on the Diamondback forward development plan.

Moving on to our non operated equity method investments. The first quarter of 2021 was the first in which our distributions received from these investments exceeded our contributions.

We're also announced the.

The sale of our Amarillo Rattler joint venture, which in addition to upfront and deferred consideration of potentially up to 37, and a half million net to rattler.

Moves the need the contribute substantial capital to fund the construction of a new gas processing plant.

Rattler of receiving an attractive return on its investment and diamondback secure and having the gas gathering and processing capacity necessary to develop one of its core operating areas. The joint venture exhibits the mutually beneficial relationship between Diamondback and rattler.

With this sale and Wink to Webster expected to begin full service in the fourth quarter of 2021.

Our equity method joint venture build cycle is substantially complete and.

And we expect to reap meaningful and increasing distributions from these investments in the years to come.

We also sold a noncore asset for $10 million shedding of real estate asset that was no longer quarter wall business.

The cash from this and the Amarillo Rattler sale will go towards the balance sheet for the time being it could be a source of funds for our future dropdown or investment.

In conclusion.

With our full year 2021 guidance unchanged Rattler is focused on executing on its business plan of providing the highest level of service to our customers and the most environmentally responsible and efficient manner possible.

In doing so rattler should continue to benefit from the substantial investments over the last few years peer leading balance sheet.

And best in class sponsor, which all position rattler to capitalize on opportunities in this dynamic and essential industry.

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

Okay.

Okay.

Yeah.

Yeah.

Okay.

As a reminder to ask yes, Sir pardon me as a reminder to ask a question you will need to press star one on your touch tone telephone to withdraw your question press the pound key once again Thats star one on you touched on the telephones ask the question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of James Kirby J P. Morgan Your line is open.

Hey, good morning.

Just wanted to start here with the Amarillo decision to exit that the JV I just wanted to confirm there was no impact to 2021 numbers here.

And then maybe just on Diamondbacks view of the asset on and what activity levels there.

Kind of budgeting for it going forward there.

Around the that asset.

Yes, good question James.

No impact to our financials this year the.

The business Amarillo Rattler was formed in a time when high growth was in Vogue.

And we were going to need to build the plant in order to meet Diamondbacks growth plans for that.

Area in Northern Martin County, and I think not only has.

Sentiment change towards growth, but so as diamondback.

Pinion on growth and therefore, we didnt need to add that capacity. So generally enlink had the the dedication surrounding this position and so it made a lot of sense for us to approach Enlink and see if if there was a deal that we had so I.

I think the win of wind for Rattler getting some cash in for an investment that wasn't going on we weren't going to spend a lot of capital on on Werent, making a lot of money on the wind for Diamondback for Diamondback gets to send its molecules through the Enlink system, which provides a little bit of an uplift in and I think.

Secures of.

A long term relationship between Diamondback.

And Enlink for for a long time in Northern Martin County, and then to your.

Activity.

He is going to be pretty high there.

We're gonna be consistently running multiple rigs across this dedication and I would say generally we are planning to spend probably 50% of our capital and in Martin County, and this is probably half of that.

At Diamondback excuse me.

Okay.

Yeah.

Thank you. Our next question comes from Pearce Hammond of Simmons Energy Your line is open.

Yes, good morning, and thanks for taking my questions.

In the quarter really good free cash flow generation and just curious all things being equal how do you see capex spending.

On a kind of run rate basis, as we move forward since you've already spent a lot of capital to get everything in place. What do you think capital spending it looks like as we move forward absent any big dropdowns or anything like that.

Yes, really good question Pearce I'd say, we have a capex budget of $60 million to $80 million out there.

Find it very hard to.

Today on May make the to think that the high end of that is even close to imply.

I think generally Q1 was a really low quarter capex wise, but.

In our budget, we probably have 35 of $40 million of.

What we would call of central projects.

I guess I guess the rest of it.

Out of optional in case, something happens with Diamondback development plan on the rest of the year. So capex kind of stay very very low in Q2.

No I think we have some optionality in the back half of the year pending.

Dropdown or diamondback activity level of shifting significantly, but overall the dollar is going to be very tight on the capex side and thats less.

Travis said in his opening comments, if youre not growing EBITDA like we originally expected we got to grow free cash flow of by cutting capital on cutting costs and that's the game plan today of rattler.

Okay. Thank you case, and then my follow up maybe.

A difficult one to answer but I'm just curious your thoughts on this as everyone knows theres excess oil pipeline takeaway capacity out of the Permian and Theres. Some talk about maybe repurposing some of those assets to maybe instead of carrying on oil carrying natural gas or Ngls. So I was curious if you did see some <unk>.

The up repurpose, how would that impact rattler.

And then Furthermore, I mean, how hard is it to repurpose assets, both commercially and just physically.

Yes.

It reminds me of the days back when the Permian was.

Under piped and everyone said that epic can turn on NGL line into an oil line and guess what they were able to do it but I'm going to leave that up to the experts peers. So I think generally if any basin in the in the U S is going to grow on the oil production in the Permian. So while we're over piped right now on these things tend to go in waves in.

I think if.

The other people decided to repurpose pipelines out of the Permian It would certainly benefit the pipelines we have interest in right now because it would make oil supply tighter but.

That would be my best guess today.

Okay. Thank you.

Thank you Pearce.

Thank you again to ask a question of please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask the question.

Our next question comes from the line Tristan Richardson of Truest Securities. Your question. Please.

Hey, good morning, guys. Appreciate all the comments on sort of.

Plans and thoughts for activity of the rest of the year I guess just on the potential dropdown asset I think maybe on the last call you suggested of general size and scale in some of this could come down all on one piece, but maybe just any update on some some operational metrics of the midstream asset upstairs either volumes or.

EBITDA size just.

To help us get our arms around the scale here.

Yeah, No. Good question and we're working diligently to get the prepared and others.

There is not only the assets that need to be dropdown, but theres also a lot of work going on behind the scenes to.

Get kind of of Master development plan for our Diamondback as Martin County.

The position I think we're going to be more focused on recycling water and storing produced water in order to recycle as part of our ESG goals.

And I think it's just the right thing to do and probably better for Rattler is margin. So that's going on but also we are sizing the dropdown I guess I could say.

Generally it's somewhere in the <unk>.

15% to 20% the size of of Rattler today from a from a cash flow perspective, so certainly a meaningful piece of business and it should belong in the in the Rattler Saab, It's just going to take a little time to get through land agreements end.

And that in that long term capital build out plan.

That's helpful.

And then obviously the name of the game is getting cash upstairs from the parent but should we think that.

From a valuation perspective.

The objective is accretive on day one.

For for any potential drop.

Yes, I think it's kind of it's got to be accretive day one.

You have the of two public companies that need to work through the.

Of these details in and I think unfortunately, there's a lot of.

There's a lot of production already on the QEP position. So there's not there's not a lack of cash flow debt.

<unk> would be dropped down so I think fortunately the asset is in the right position from a cash flow perspective, the key deep.

Details for working through is how efficient can we get with our existing systems.

Spend a ton of extra capital.

On the disposal side and how do we connect everything from a recycling perspective too.

On the store water and set some goals.

On limiting future disposal wells drilled in Martin County.

That's great.

Last follow up I think as we look past the drop in terms of priorities for capital.

Obviously chopped a lot of wood on the repurchase authorization, but when we look forward obviously the theme of this call has been.

The being very prudent on capital spend so I guess, when we think about free cash flow after a drop ship.

Could you talk a little bit about.

Further repurchases aimed or re upping the authorization versus.

Shifting back to a.

Growth in distributions type of model.

Yes, I still think I still think the majority of cash distributed to shareholders, there's going to be in the form of the distribution I mean, even with the the repurchase program. The majority of cash is still being return to unit holders.

We'd like to be a long term distribution growth company, but also be smart with capital allocation, where like in the fall we had to put our hands up and say you know buying back our share.

High teens free cash flow yield back then was the best use of of of shareholders dollar and.

That decision is a little less obvious today.

Generally we want to get through the dropdown in the next couple of quarters, and then get back to distribution growth.

And if there is.

On an opportunity to keep repurchasing I think we will just debt the value of the repurchase has to compete with the value of what we're spending capital on at Rattler.

That's great Travis case, thank you guys very much.

Thank you Tristan.

Thank you at this time I would like to turn the call over to our CEO Travis Stice for closing remarks.

Thanks, again to everyone participating on today's call if you've got any questions. Please reach out of the contact information we provided.

Okay.

Thank you and this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Sure.

Thank you.

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Okay.

Moving forward.

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