Q2 2021 EnLink Midstream LLC Earnings Call
Good day and welcome to the Enlink midstream second quarter 'twenty 'twenty 1.
All participants will be in most of my only mode.
You need assistance. Please signal of a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask the question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2.
Please note. This event is being recorded I would now.
I'd like to turn the conference over to you, Brian Brian Kearney Director of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to Enlink, the second quarter of 2021 earnings call participating on the call today are Barry Davis, Chairman and Chief Executive Officer.
Ben Lamb Executive Vice President and Chief operating Officer, and Pablo Mercado Executive Vice President and Chief Financial Officer.
We issued our earnings release and presentation. After the markets closed yesterday and those materials are on our website.
A replay of today's call will also be made available on our website at www Dot Enlink Dot com.
Today's discussion will include forward looking statements, including expectations and predictions within the meaning of the federal securities laws the for.
<unk> looking statements speak only as of the day of this call and we undertake no obligation to update or revise.
Actual results may differ materially from our projections and a discussion of factors that could cause actual results to differ can be found in our press release presentation and SEC filings.
This call also includes discussion pertaining to certain non-GAAP financial measures the.
Definitions of these measures as well as reconciliations of comparable GAAP measures are available in our press release and the appendix of the presentation.
We encourage you to review the cautionary statements and other disclosures made in our press release, and our SEC filings, including those under the heading risk factors.
We'll start today's call with the set of brief prepared remarks by Barry Ben and Pablo and then leave the remainder of the call open for questions and answers.
With that I.
I'd now like to turn the call over to Barry Davis.
Thank you for joining us today I first wanted to take a moment to remember Jim Cramer, who joined the Enlink family as a member of the board of directors of our predecessor company in 2005.
Jim served us faithfully and diligently for the last 16 years, including attending in Enlink Board meeting on the last day of his life.
His contribution to Enlink was great and we will Miss Jim.
On the call today, we will discuss our second quarter results, our current operating environment and the opportunities we see for our carbon solutions group.
After the significant disruption from severe weather in February the strong momentum exiting the first quarter continued throughout the second quarter with producers, adding rigs and completing wells that had been drilled but not completed.
We achieved adjusted EBITDA of $258 million in the second quarter, which built on the strong first quarter results and represents over 6% growth from prior year net of MVC payments that ended in 2020.
This is a tremendous outcome and positions us well for the second half of 2021.
With continued momentum in producer activity on our footprint and strong commodity prices, we expect the in 2021 and the upper end of our previously updated adjusted EBITDA guidance range of 1 point or 2 to 1 point out of $6 billion.
We generated approximately $72 million in free cash flow after distributions during the second quarter, which takes our trailing 12 month total to nearly $360 million.
As the first half of 2021 has shown we remain focused on executing our plan and driving sustainable value.
Our first execution plan priority is to optimize our existing business and improve efficiencies.
After leading our peers last year with the greater than 20% reduction in operating and general and administrative expenses.
We have maintained those reductions through increased efficiencies, even with the growth and inflation. We are now seeing.
The second priority of our execution plan is to maintain financial flexibility and we have continued to make significant progress on this front.
As I've already mentioned, we are generating strong cash flow and using the majority of that cash to pay down debt.
We have previously discussed our near term leverage goal is to get below 4 times and that goal is now within arm's reach as we exited the second quarter at 4.1 times.
Our third priority is deliberate and disciplined growth.
As we previously announced in the second quarter, we closed the Amarillo Rattler transaction, a very attractive Permian basin acquisition with an excellent customer behind it and we remain very confident in achieving a 6 multiple on full year 'twenty to EBITDA.
As far as capital projects. Our team has been hard at work as we continue to utilize our capital Y growth model to handle higher Permian volumes, driven by robust customer activity.
We have been expanding our Midland basin capacity creatively and efficiently through of plant relocation and other plant optimizations.
Now looking ahead I am excited about the opportunities in our Louisiana business.
Our team continues to work on exciting downstream growth opportunities and we expect to bring some of those low capital high return opportunities to closure in the next few months.
In addition, we announced in June the formation of the carbon solutions group, which will focus on carbon capture utilization and sequestration as.
As we all know the United States as a whole and a growing number of companies have set aggressive climate goals focused on reducing greenhouse gas emissions.
According to the IEA sustainable development scenario CCU S should account for approximately 15% of the cumulative reduction in emissions.
Within the U S. The Mississippi River corridor in the Gulf Coast of Louisiana is 1 of the largest C O 2 of meeting regions and.
And we believe that our extensive assets in the ground, our customer relationships and long history of operating in the state of Louisiana uniquely position us to build the business aimed at helping companies achieve their of carbon reduction goals.
Last but not least our fourth priority of sustainability and safety.
These are part of our DNA and I'm pleased to report that we have strengthened our governance governance through the formation of board level sustainability Committee to monitor our performance risks and opportunities.
In summary, I believe the momentum that we're seeing in our business today, coupled with a strong first half of 2021 and our team's relentless focus on the execution of our plan.
Have us well positioned to drive sustainable value and growth in the second half of 2021 and beyond.
With that I'll turn it over to Ben to discuss our operational update.
Thanks, Barry and good morning, everyone.
I'll start with the Permian segment, which continues to see robust activity and generated $44 million in segment profit.
Segment profit includes $10 million of operating expenses in the second quarter related to our Midland Basin plant relocation project project work force.
The second quarter of 2021 also marked the fourth consecutive quarter of positive segment cash flow was $4.5 million being generated.
Average natural gas gathering volumes were 11% higher compared to the first quarter of 2021 and increased by approximately 18% compared to the second quarter of 2020.
Average natural gas processing volume for the second quarter were 9% higher compared to the first quarter of 2021 and increased by approximately 7% over the prior year quarter.
Project War-horse continues to progress as planned as previously announced we expanded the scope of the project, which will bring its processing capacity to 95 million cubic feet per day.
We expect the place the plant in service in the third quarter with the full expanded capacity available in the fourth quarter.
Between an uptick in rig activity during the second quarter and the recent Amarillo acquisition.
We anticipate our capacity will be well utilized in the first half of 2022. So we continue to work on other capital light alternatives to accommodate higher volumes.
We have also seen Delaware activity pick up and forecast the restart of the Tiger plant in early 2022.
Turning now to Louisiana, where the second and third quarters are seasonally lower segment profit for the second quarter of 2021 came in at $67.3 million, which represents an increase of 5.5% over the prior year quarter.
Louisiana continues to generate very strong cash flow was $65.1 million in the second quarter of 2021.
And we continue to forecast strong cash flow for the remainder of 2021.
The segment saw a strong gas and NGL volumes with NGL margins had expected summer seasonal lows.
Moving to Oklahoma, our team continued to execute as operator activity picked up during the quarter.
Segment profit for the second quarter of 2021 came in at $85.6 million.
This compares to $55.5 million reported in the first quarter of 2021, which was negatively impacted by winter storm Yuri.
Excluding the impact of MVC payments to the expired in 2020 the segment profit in the second quarter grew over 5% compared to the fourth quarter of 2020.
Oklahoma also continued to show significant segment cash flow of $87 million in the quarter.
Oklahoma is a combo play where gas NGL and crude prices all matter of for producer economics, we've seen our customers, particularly private operators look to take advantage of the improved commodity backdrop, and we saw rig activity on our footprint approximately doubled during the second quarter when compared to the first quarter.
The Devon Dow JV continues to progress as planned with its 2 rig program for 2021. The first volumes are projected to hit our system in the third quarter, there will be more significant in the fourth quarter.
As producers have been more active we expect our overall decline rate in Oklahoma to moderate significantly and we currently forecast the decline in the mid single digits for 2022 based on current operator activity and plans.
Wrapping up in North, Texas segment profit for the quarter was $57.9 million, which is slightly below the $61.9 million reported in the first quarter of 2021, excluding the approximate $15 million 1 time impact of winter storm here.
Gathering volumes for the second quarter of 2021 increased 2% from the first quarter of 2021.
Similar to Oklahoma, North, Texas producers benefit from higher gas and NGL prices.
Our primary customer BK V continues to focus primarily on reactivating old wells and re stimulating active wells.
This along with some new completion activity from other customers is moderating decline rates with the second quarter coming in at 7% year over year.
With that I'll pass it over to Pablo to discuss our financial results.
Thank you Ben and good morning, everyone all.
I'll start with the second quarter highlights.
Barry mentioned Enlink delivered a solid second quarter building off the momentum exiting the first quarter and achieving $258 million of adjusted EBITDA and $72 million of free cash flow after distributions with all 4 of our asset segments delivering positive cash contributions.
Excluding the impact of the M. B C that rolled off at the end of the year adjusted EBITDA increased approximately 6.5% from the second quarter of 2020.
Also although there's always volatility in quarterly cash flows due to the timing of capital expenditures Enlink.
Enlink has delivered $359 million of free cash flow after distributions over the last 12 months.
I'm very proud of our Enlink team for their continued focus on execution, including their focus on efficiencies and on holding on for the significant cost savings that we achieved last year.
The focus is helping us offset some inflationary pressures we have seen this year, primarily in labor and materials like chemicals and lubricants.
Our operating and general and administrative expenses in the first half of 2021 are just about flat from the second half of 2020. After adjusting for project work force operating expenses and the noise from winter storm here.
We continue to see the significant cost reductions that we achieved in 2020 as largely sustainable in a modest growth environment, which is what we're experiencing so far this year.
On the capital expenditures from our team continues to focus on the capital light high returns of approach.
As Ben mentioned, our Midland Basin plant relocation project is going well and the scope expansion of 15 million cubic feet of day only added a couple of million dollars of capital.
Also in June we announced a new chickadee crude terminal in the Midland Basin.
Which will secure additional gathering volumes and blending opportunities.
We expect this project the cost of about $12 million and achieve a low single digit 'twenty 'twenty 2 EBITDA multiple.
These projects are both incorporated in our updated Capex guidance from June, which was $165 million to $195 million.
Now as Barry and Ben both mentioned, we are seeing strong producer activity, which improves and makes more festival the growth outlook for our 2022 volumes.
As a result, where we sit today, we expect to be at the higher end of Capex guidance, but we will continue to monitor market conditions closely and remain nimble with our plants.
On the balance sheet side, we find ourselves in a much stronger position than where we were a year ago.
We have ample liquidity have made a lot of progress on debt reduction and have effectively managed our term loan maturity, while preserving the ability to continue to delever through cash flow.
During the quarter, we paid down an additional $100 million of our term loan and we continue to be well positioned to repay the remaining 250 million by yearend given our strong free cash flow generation and our 175 billion Undrawn revolver.
Our debt to adjusted EBITDA ratio under our credit facility was just below a 4.1 times at quarter end debt.
Puts us very close to our near term leverage goal of under 4 times.
And as a result, we're beginning to consider a more balanced capital allocation approach that allows us to continue to delever the balance sheet, but makes us more return of capital to unit holders.
This could include common unit distribution increases as well as common and preferred unit buybacks.
Did that and we repurchased $10 million of common units between June and July and we will continue to be opportunistic with the unit repurchase program.
Now as we look ahead following the successful first half of 2021 we feel very good about our outlook for the second half of the year of.
As Barry mentioned with the current market backdrop, we expect to end of 2021in the upper end of our adjusted EBITDA guidance range of 1 point out 2 to 1 point out of $6 billion.
As a reminder, we do have seasonality in our Louisiana, NGL business, which is typically strongest in the fourth quarter.
In addition, we continue to see solid operator activity across the Permian strong industrial and commodity pricing trends in Louisiana, and improving operator activity in Oklahoma and North Texas for sure.
Shifting us to achieve continued growth in 2022.
With that I'll turn it back for Barry.
Thank you Pablo I'll sum up our discussion so far by saying this enlink.
Enlink delivered another strong quarter and is solidly on track to be in the upper end of our updated adjusted EBITDA guidance for 2021 the.
The outlook for volumes and cash flow growth in 2022 has also improved.
Our strong performance over the last several quarters has enabled us to reduce debt outstanding approach, our near term leverage goal of less than 4 times and begin to review a more balanced use of the free cash flow after distributions.
We're not stopping there however, our team wakes up every day with a focus on how to be more efficient and grow in the sustainable and capital light manner.
This is exemplified with the work our carbon solutions group is doing to partner with companies to help them achieve their emissions reduction goals.
With that you may now open the call for questions.
Okay.
Thank you lose on the I'll begin the question and answer session.
Just 1 question you May Press Star then 1 on your telephone keypad, if you're on.
You're using a speakerphone please pick up on the handset before pressing on the cheese.
To withdraw your question. Please press star 2.
At the time, we will pause momentarily to assemble all of us.
Our first question comes from Schneider of Shenae with UBS. Please go ahead.
Hi, good morning, everyone maybe.
Maybe to start off the kind of want to focus on debt.
On your closing remarks, and sort of how you talked about the set up for for 2022.
You know when I sort of look at the numbers today.
On Oklahoma seems to be outperforming your expectations Youre talking about drilling activity there.
The scaring us towards the higher end of your guide, which would suggest the strong exit rate as well so.
And at the same type of you talked about the Tiger plant.
You know potentially coming on line in 'twenty 2.
I'm not sure if you have like specific insight from Exxon, there or not but I was kind of wondering how you're thinking about the growth rate from 22 versus 21.
Do you think it's you know modest growth from versus where you exited in for Q or do you or do you think that there's going to be a step up especially with all of them.
Yeah of course, you've done on reducing costs and improving efficiencies and so forth.
Yes, Shneur this is Barry.
Thank you for the question and look I think you did a good job summarizing the things that we highlighted the positive momentum that we've experienced here in the first half of it we expect to continue through the second half.
All of those are very good drivers to what we expect in 2022 that being said, we're not going to give guidance today on 2022.
I think we've said sure of what really needs to be said, we're seeing increased producer activity in the key basins of Oklahoma and North Texas.
Great opportunities that we're taking advantage of Louisiana market and then the strength of the Permian growth. That's just continued and.
We're very optimistic about what will happen in 2022.
So the level of growth in 2022, we haven't actually quantified that at this point either.
Anecdotally revive percentages, but I would just say, we're continuing to increase our optimism about the growth that we'll see in 2022 bid.
<unk> would you add any specific comments around the license maybe just a few things.
In Oklahoma, I said, just a minute ago, we've seen rig activity roughly double.
Right at the moment, we have 7 rigs working on dedicated acreage.
From 4 of 5 different producers 2 of those of the Dow JV rigs, but the others are.
Our other companies, mostly the private on.
Operators.
And so we're at a point, where we now see 2022 declined significantly moderating to be in the mid single digits versus 2021 volumes.
If you look out in the Permian you touched there on exxon's plans in the Delaware.
Certainly we do have updated plans from Exxon debt support the restart of the Tiger plant early next year, but it's not just Exxon.
We have a fairly diverse book of business in the Delaware and in addition to Exxon on 1 of our other large independent public producers is accelerating their activity on our dedicated acreage so that along with Exxon along with some other activity from smaller producers is what's leading to the restart of of the Tiger plant.
And of course Midland continues to be our strongest basin overall with 17 or 18 rigs working on dedicated acreage today on the gas side.
Okay. That's the really appreciate that and I understand that it's too early to provide 20 of guidance, but just kind of wanted to make sure I understood the drivers.
You know maybe the the pivot a little bit here I'm not sure if it's true.
Specifically of Pablo question, but on.
You sort of talked about how.
How are you evaluating options looking at buybacks looking at the portfolio I know that you've gone to the 250, Alaska on the term loan, but you have a lot of capacity on your revolver as well too.
It's kind of the thought process there to sort of think about either a just retiring that completely but putting it onto the revolver and being opportunistic around.
Buybacks and preferreds, and then sort of use your excess free cash is kind of balance of work that down just given the flexibility that the revolver has or is that something kind of that you want to take away or take care of first and then buybacks from preferred type of the half to where it's just kind of interested in your thought process on how it will sort of sequence itself out over the net.
You know lets say 6 to 18 months.
Cash in there thanks for the question.
We have made of a lot of progress on the capital structure as you mentioned.
We were very purposeful when we termed out the vast majority of the term loan in the fourth quarter with a bond deal.
On to leave some outstanding so that we could continue to delever. The term out all your debt then it's hard to do that right. So.
We've got the $250 million remaining outstanding will take care of that through cash flow and put in the remaining piece on the revolver and then continue to chip away at it.
I would say, we don't need to see that before we turn to what we're calling of more balanced capital allocation approach.
The increase the returns to the equity holders of bit.
That's more related to how close we are to our leverage target of just below 4 times.
Okay got it so just just to clarify so it doesn't get in the way of buybacks.
That you'd opportunistically will actually chip away at the for lunch and so it'll be more you know the.
The the pivot really or takeaway that we should take it that you are pivoting to focus more on the on the buybacks on preferreds.
Yeah, and its not just buybacks, but we also mentioned distribution increases that something will be of reviewing with our board over the next couple of quarters.
Okay perfect really appreciate the colors today. Thank you very much in the stay safe.
Sure.
The good and if you'd like to ask the question. Please press Star then 1.
Our next question comes from day to Chatty with JP Morgan. Please go ahead.
Hi, good morning.
Just wanted to follow up on your on slide when physicians group financing you didn't discuss that unplug the fight to execute against the tough fishing to take to make low hanging fruit projects projects viable.
Just maybe if you could expand any for debt on potential opportunities I just add on what does the timeline to get anything of a day.
Sure.
Hey, <unk>, it's Ben Lamb.
Start with the second question first the size of the opportunity.
You can think of it as not much different than the size of the gas market today.
And specifically in the Mississippi River corridor.
Where our infrastructure is the most robust.
There is between 80 and 100 million metric tons, a year of total see out of 2 emissions.
The ultimate addressable market is vast.
Now the first part of your question.
Is it economic today with the current 45 Q tax structure. Some carbon sources are economic today with the effort with the 45 key tax structure, certainly not the entire market Barry.
Enough of the market that we believe we have the opportunity to build a scale business with the 45 Q tax credit Thats in place today. We also think that we've seen a lot of bipartisan support in Washington.
For Cc U S and for expanding the scope of 45, Q and as that happens more and more of those 80 to 100 million metric tonnes of year will become will become economic overtime.
And I want to emphasize that.
We have the ability to take advantage of this opportunity repurposing some of the assets that we have in the ground.
And that's because we have assets of sufficient diameter that we can operate at the pressures required to move to efficiently and move at quantity of material.
And move of distance that we think fit the market as we expect it to develop in the next few years.
Got it.
Maybe just trying to understand on the guidance yet some of the commodity.
Hey.
Joining me on guidance, it's been kind of slow comeback of what we had the patterns of 2 piece.
Maybe if you could chat and it depends on what drives the upper end of the guidance items on <unk>.
The items for which we should keep in line.
Other than the seasonality of what you already mentioned.
Yes the name.
<unk>.
Good question, we did outline the commodity prices that we used for the full guidance range update that we gave in June.
Obviously prices have been stronger, particularly on the NGL and natural gas side.
And so that is 1 of the contributors to the commentary that we gave on today's call, which is that we expect to be in the upper end of the the range that we previously provided.
Got it that's it for me thank you.
Thank you.
Your next question comes from T. J Schultz with RBC capital markets. Please go ahead.
Hey, everybody good morning.
My first question is just the for the mid line you talked about looking.
And the 'twenty 'twenty 2 for.
The other capital light expansions does that.
As you look at ways to expand that capacity does that consider moving.
Another plant and then what's the current outlook.
Thunderbird Thanks.
Hey, P J, yes, so youre right.
With the capacity that we're adding with workhorse.
Initially 80 million of day here in the near term and then another $15 million by the end of the year will be up in the 600 <unk> of capacity, but we expect that we will start to fill that fairly quickly in the first half of next year.
And so we are already looking at efficient ways to increase processing capacity.
That could include.
The offloading the others because there are others, who are constructing facilities in the Midland basin today Newbuild facilities.
It could include.
Moving another plant as you say and we do have a couple of candidates in our portfolio that could be available for debt.
It could include something like a joint venture.
With 1 of our Midland neighbors to make sure that we fully utilize the capacity that that someone builds.
Another 1 that's come up recently, when we acquired Amarillo Rattler, we acquired a small refrigeration plant that today can only process about 20 million cubic feet a day.
The relatively low recoveries.
As we've done more work around that facility, we think that facility may be expandable and we may be able to significantly increase the recoveries in that facility such that we might have a smaller version of war horse on our hands in terms of the efficiency with which we can can add some processing capacity so all of that.
Those options will be on the table with the with a focus on these capital light alternatives.
Okay makes sense.
And then just taking the questions on the stack. It so certainly of conducive commodity environment and if that persists as your guide.
For this year and the kind of outlook into 2022 does that assume that the 7 rigs persist or.
It's getting to the higher end of the guide and viewed at 20 to consider more rigs just trying to understand maybe the appetite from some of the private producers too.
Consider and are continuing to increase activity from current levels, just given where the commodity is now. Thanks P. J, we don't we don't even need the 7 rigs for persist 2 to get to the mid single digit decline in 2022.
What we're seeing right now is <unk>.
Very nice helpful tailwind and if the 7 if a rig count of 7 sticks. So to speak then we would we would see upside from what we're talking about today.
Okay, great. Thanks.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Barry Davis for any closing comments.
Thank you Sarah for Chris.
So as any of our call. This morning, and thank you everyone for being on the call today and the for your support as always.
We appreciate your continued interest and investment and when Mike and we hope you have a great day. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now.