Q3 2021 Altus Midstream Co Earnings Call
Today's conference will begin momentarily. Thank you for your patience today's conference will begin momentarily.
[music].
Good day, and thank you for standing by what which of the Altus Midstream third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During the session you will need to press star one on your telephone please be.
Be advised that today's conference is being recorded and if you require any further assistance. Please press star zero.
And I'd like to hand, the conference over to your Speaker today, Patrick Cassidy director of Investor Relations with Altus Midstream. Please go ahead.
Good afternoon, and thank you for joining us on Altus midstream company's third quarter financial and operational results conference call.
We will begin the call with an overview by Altus midstream CEO and president Clay branches, and Ben Rodgers CFO will summarize our financial performance and outlook.
Our prepared remarks will be approximately 12 minutes in length with the remainder of the call allotted for Q&A.
Remarks during the call May also refer to the Altice midstream investor presentation, which can be found on our investor Relations website at Altice midstream Dot com forward slash investors.
On today's conference call, we may discuss certain non-GAAP financial measures. The reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted.
Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations.
However, a number of factors could cause actual results to differ materially from what we discuss today a full disclaimer is located with the investor presentation on our website.
With that I will turn the call over to clay.
Yeah.
Good afternoon, and thank you for joining us today for Altus Midstream third quarter 2021 conference call.
On the call today I will begin with a brief review of our operating performance and provide background on the new gas processing agreement between <unk> and Apache then I will discuss the business combination with Eagle quality that we announced two weeks ago, highlighting what it offers investors customers and other stakeholders.
Don will provide more information on that transaction and a review of our financial results.
Following that we will move on to questions and answers from the sell side community.
Given the disclosure made last month, the strong performance <unk> achieved during the third quarter it could easily be overlooked but it deserves recognition.
As noted in the news release issued yesterday, we continue to make steady progress on the key performance metrics that we've guided to for the year.
With our joint venture pipeline and gathering and processing businesses have contributed to strong results in the third quarter G&P.
G&P volumes growth Capex and adjusted EBITDA are all in line with our annual guidance and joint venture pipelines continued to contribute to our results with the minimum volume commitments on the natural gas pipelines, providing stable predictable cash flow.
Our liquids pipelines are well positioned for volume growth as activity returns to the basin.
Moving now to our gathering and processing business.
Gas processing volumes were up slightly about 1% compared with the preceding period.
This reflects a full three months contribution from the Ducks recently brought online at Alpine high in 2021, offsetting the natural decline from legacy production.
No new wells were added during the quarter and we had no material disruptions or other events that impacted our operations.
Our operations team has done an excellent job focusing on cost structure, identifying and capturing efficiencies across the system and maintaining the strict discipline necessary to operate safely and responsibly.
During the third quarter for the first time in two years operating expenses were higher than the preceding period.
The main factors contributing to the increases were all non routine in nature, including maintenance work associated with other service equipment weather related road and right of way repairs and inventory cleanup.
A further increase in costs during the quarter was related to servicing a new compressor lease with Apache.
These increase lease costs are more than offset by the related lease income.
Importantly, despite these higher costs during the quarter, we remain on track for a 15% year over year reduction in operating cost.
Last month, we signed a new gas processing agreement with Apache and announced our combination with Eagle claw midstream.
The updated processing agreement contains modified gas processing fees for new volumes that are more consistent with the current market.
The circumstances that existed when the original agreement was signed have changed dramatically in the outdated terms impacted our ability to attract new business from both Apache our existing customer and third party producers and midstream companies.
With these new terms for gas processing Apache has further incentivize to initiate new development activity at alpine high and with the removal of contractual constraints that limited the infrastructure capacity to serve other operators third parties can now be assured that they have access to capacity on our facilities under current market terms.
Since we formed Altus midstream in 2018, our goal was to create a pure play midstream companies in the Permian and grow the business to support all of Apache's gas gathering processing and transportation assets at Alpine high.
As the business evolved we continue to seek new opportunities to grow and compete for third party opportunities.
We have created a very successful business literally from the ground up building a team of midstream specialist operating state of the art gas processing facilities and investing in four of the newest Permian to Gulf coast pipelines through.
Through the quarter. The Altice team has worked over two and a half years without a reportable incident.
As we pursue new business, we didn't limit ourselves to just E&P companies, we engaged with other midstream service providers in the effort to fully utilize our facilities.
In the past year, we have found that the vast majority of acreage proximal to our alpine high gathering system was dedicated to other gas processors.
Leases were under long term contracts locked up otherwise suitable and economic midstream opportunities. This dynamic occurred frequently during the height of Permian and the shale drilling frenzy.
Understanding this competitive landscape, we recognize the necessity of working with a midstream company.
That had commitments and infrastructure, including a vast network of pipelines in the Delaware Basin.
We evaluated a wide range of strategic alternatives for creating long term value. This effort prioritized a number of factors, including the protection of the sixth stellar annualized dividend implemented this year addressing debt and preferred equity financings and prudently and efficiently and growing a sustainable profitable.
Business.
The transaction with Eagle claw meets those criteria the opportunity to combine our assets is a great next step for <unk>.
I have watched the growth of Eagle call for several years and Im impressed with what their management and operations teams have accomplished they have built a competitive and diverse midstream business in west Texas.
Their asset footprint and client base are extensive and strategically located in the core of the Delaware Basin.
I always thought Eagle claw system would be a great complement to the altice midstream footprint Eagle claw has done an impressive job of maintaining and growing contracts. They currently serve over 30 customers with 14 drilling rigs on their area of dedication today much of the A&D and M&A activity that has recently transacted.
In the Delaware Basin has been on the nearly 800000 acres dedicated to Eagle claw.
This transaction outlines a clear path for growth and use of offices excess processing capacity. The combined company is expected to have a lower risk profile than either company on a standalone basis.
New management team led by Jamie Welch as President and CEO will take on executive management responsibilities at <unk> following the close of the transaction.
Jamie and his team are aligned with the core objectives of voltage, including earning capital to shareholders and operating in an environmentally responsible manner.
Our combination provides the scale and operational capabilities necessary for long term success, the combination of Altice and Eagle call will create the largest pure play midstream company in the Permian Basin.
Will become the largest gas processor in the Delaware Basin and third largest in the Permian.
We expect the transaction to close during the first quarter next year, following customary reviews and regulatory approval.
This transaction is really about the efficient utilization of assets in the Delaware Basin.
The new company is better positioned for the rebound in activity across the basin with long term growth opportunities.
Commodity prices are improving and production activity is accelerating in the Texas, Delaware Basin, making this an opportune time to take advantage of market conditions by expanding our processing and transportation capabilities for oil gas and Ngls.
The combination truly creates a leading pure play Permian integrated midstream company with a capital return focus Ben over to you.
Thank you clay and my prepared remarks, I will highlight additional aspects of Altus midstream business combination with Eagle claw as well as our financial performance for the third quarter and outlook for the year.
The combination that we announced two weeks ago, we will establish a robust cash flow generating business focused on providing midstream services to producers in the Permian basin.
Creates the largest gas processor in the Delaware basin with pro forma adjusted EBITDA for 2022 projected between 809 hundred $50 million.
The combined company expects to achieve at least $50 million of annual EBITDA synergies with a total integration spend of less than $100 million spread out over the next three years.
Capital synergies from combining the systems are estimated at more than $175 million and the five years post closing.
One of the key highlights of the transaction is the ability of the combined company to generate significant free cash flow not only due to low forecasted capital needs, but also the ability to convert EBITDA into free cash flow.
Capital spending for the pro forma enterprise is minimal which gives us increased confidence in the ability to return capital to investors over the long term.
The pro forma cash dividend coverage ratio for the combined company is estimated to be 175 times for 2022.
Higher than what our Standalone all of this would have been able to achieve next year.
The company has not only committed to maintaining the existing dividend through 2023, it is targeting 5% dividend growth starting in 2024.
We are clearly excited about the prospects for the combined company the new business will operate into segments midstream logistics, which includes gathering and processing businesses water handling services and crude oil gathering and storage will represent approximately 65% of EBITDA.
Pipeline transportation represents the remaining 35%.
This segment comprises four joint venture long haul pipelines to export natural gas Ngls and crude oil from the Permian basin to the Gulf Coast. These.
These include a 53% majority interest in the Permian Highway pipeline, a 16% interest in Gulf Coast Express a 33% interest in Shin Oak and a 15% interest in the epic crude pipeline.
Our plan is to integrate to altice and eagle assets into a gathering and processing Super system.
This provides competitive advantages with greater scale reliability and flexibility for customers.
We think theres little execution risk with this transaction all material consents have been secured in connection with our joint venture pipeline interests and bank credit facility lenders are preferred equity holders have executed waivers and amendments in support of the transaction and Apache are 79% owner has agreed to vote in favor of the transaction.
We expect to issue more detailed 2022 guidance for the pro forma enterprise closer to the closing date.
Now I'll move on to our third quarter results, we generated free cash flow for the third consecutive quarter Altice paid its third cash dividend in September and this week. The board of directors declared another quarterly dividend of $1 50 per share, which will be distributed at the end of December.
As noted in the press release issued yesterday also reported net income, including Noncontrolling interest of $50 million for the third quarter.
This includes approximately $4 million related to an unrealized embedded derivative gain for the quarter, which reflects a technical accounting revaluation of the embedded derivative in our preferred units for the period.
Adjusted EBITDA was $70 million and growth capital expenditures were approximately $3 million.
Gathered volumes increased slightly from the preceding period, averaging 452 million cubic feet per day of which approximately 75% was rich gas.
Our results benefited from numerous factors, including strong operational uptime during the quarter as there were no material weather events continued cost discipline and lower growth Capex.
I'll move on now to our outlook for 2021.
We have not changed our guidance ranges for 2021. So I would note we are trending better than the midpoint for all items and to clarify for growth Capex, we are looking to spend less than the midpoint.
Overall, we had a very good quarter and expectations for the year remain constructive as we are outperforming across the board.
Operator that concludes our prepared remarks, we can now move on to Q&A.
At this time to ask a question. Please press Star then one on your Touchtone phone.
Let me draw your question press the pound key once again Thats star one for questions.
One moment for questions.
Once again Thats Star one quick question.
And I'm not showing any questions at this time.
I'll turn the call back over.
Hey, Patrick Cassidy.
Closing remarks.
Thank you for joining us on the call today and welcome to reach out to Investor Relations. If you have any questions. Following this call.
Victor Thank you and back to you.
My pleasure.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].
Okay.
Yeah.
Yes.
Yes.
Yes.
[music].
Okay.
Yes.
[music].
[music].
Good day, and thank you for standing by and welcome to the Altus Midstream third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero, Oh, and I'd like to hand, the conference over to your Speaker today, Patrick Cassidy director of Investor Relations with Altus Midstream. Please go ahead.
Good afternoon.
Thank you for joining us on Altus midstream company's third quarter financial and operational results conference call.
We will begin the call with an overview by Altus midstream CEO and president Clay branches, and Ben Rodgers CFO will summarize our financial performance and outlook.
Our prepared remarks will be approximately 12 minutes inline with the remainder of the call allotted for Q&A.
Remarks, starting to call May also refer to the Altice midstream investor presentation, which can be found on our investor Relations website at Altice midstream dotcom forward slash investors.
On today's conference call, we may discuss certain non-GAAP financial measures.
Filiation at the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted.
Finally, I'd like to remind everyone that today's discussions will contain forward looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today a full disclaimer is located with the investor presentation on our website.
With that I will turn the call over to clay.
Yeah.
Good afternoon, and thank you for joining us today for Altus Midstream third quarter 2021 conference call.
On the call today I will begin with a brief review of our operating performance and provide background on the new gas processing agreement between <unk> and Apache then I will discuss the business combination with Eagle claw that we announced two weeks ago, highlighting what it offers investors customers and other stakeholders.
Ben will provide more information on that transaction and a review of our financial results. Following that we will move on to questions and answers from the sell side community.
Given the disclosure made last month.
<unk> performance also achieved during the third quarter, it could easily be overlooked but it deserves recognition.
As noted in the news release issued yesterday, we continue to make steady progress on the key performance metrics that we guided to for the year.
Both our joint venture pipeline and gathering and processing businesses have contributed to strong results in the third quarter <unk>.
G&P volumes growth Capex and adjusted EBITDA are all in line with our annual guidance and joint venture pipelines continued to contribute to our results with the minimum volume commitments on the natural gas pipelines, providing stable predictable cash flow.
Our liquids pipelines are well positioned for volume growth as activity returns to the basin.
Moving now to our gathering and processing business.
Gas processing volumes were up slightly about 1% compared with the preceding period.
This reflects the full three months contribution from the Ducks recently brought online at Alpine high in 2021, offsetting the natural decline from legacy production.
No new wells were added during the quarter and we had no material disruptions or other events that impacted our operations.
Our operations team has done an excellent job focusing on cost structure, identifying and capturing efficiencies across the system and maintaining the strict discipline necessary to operate safely and responsibly.
During the third quarter for the first time in two years operating expenses were higher than the preceding period.
The main factors contributing to the increases were all non routine in nature, including maintenance work associated with other service equipment weather related road and right of way repairs and inventory cleanup.
A further increase in costs during the quarter was related to servicing a new compressor lease with Apache.
These increase lease costs are more than offset by the related lease income.
Importantly, despite these higher costs during the quarter, we remain on track for a 15% year over year reduction in operating cost.
Last month, we signed a new gas processing agreement with Apache and announced our combination with Eagle claw midstream.
The updated processing agreement contains modified gas processing fees for new volumes that are more consistent with the current market.
The circumstances that existed when the original agreement was signed have changed dramatically in the outdated terms impacted our ability to attract new business from both Apache our existing customer and third party producers and midstream companies.
With these new terms for gas processing Apache has further incentivize to initiate new development activity at alpine high and with the removal of contractual constraints that limited the infrastructure capacity to serve other operators third parties can now be assured that they have access to capacity on our facilities under current market terms.
Since we formed Altus midstream in 2018, our goal was to create a pure play midstream company in the Permian and grow the business to support all of the Apache is gas gathering processing and transportation assets at Alpine high.
As the business evolves, we continue to seek new opportunities to grow and compete for third party opportunities.
We have created a very successful business literally from the ground up building a team of midstream specialist operating state of the art gas processing facilities and investing in four of the newest Permian to Gulf coast pipelines through the quarter. The <unk> team has worked over two and a half years without a reportable incident.
As we pursue new business, we didn't limit ourselves to just E&P companies, we engaged with other midstream service providers in the effort to fully utilize our facilities in.
In the past year, we have found that the vast majority of acreage proximal to our alpine high gathering system was dedicated to other gas processors. These leases were under long term contracts it locked up otherwise suitable and economic midstream opportunities.
This dynamic occurred frequently during the height of Permian and the shale drilling frenzy.
Understanding this competitive landscape, we recognize the necessity of working with a midstream company.
One that had commitments and infrastructure, including a vast network of pipelines in the Delaware Basin.
We evaluated a wide range of strategic alternatives for creating long term value. This effort prioritized a number of factors, including the protection of the $6 annualized dividend implemented this year addressing debt and preferred equity financings and prudently and efficiently and growing a sustainable profitable.
Business.
The transaction with Eagle claw meets those criteria the opportunity to combine our assets is a great next step for <unk>.
I have watched the growth of Eagle call for several years and Im impressed with what their management and operations teams have accomplished they have built a competitive and diverse midstream business in west Texas.
Our asset footprint and client base are extensive and strategically located in the core of the Delaware Basin.
I always thought Eagle claw system would be a great complement to the altus midstream footprint Eagle claw has done an impressive job of maintaining and growing contracts. They currently serve over 30 customers with 14 drilling rigs on their area of dedication today.
Much of the A&D and M&A activity that has recently transacted in the Delaware Basin has been on the nearly 800000 acres dedicated to Eagle claw.
This transaction outlines a clear path for growth and use of offices excess processing capacity. The combined company is expected to have a lower risk profile than either company on a standalone basis.
The new management team led by Jamie Welch as President and CEO will take on executive management responsibilities at <unk> following the close of the transaction.
Thanks, Jamie and his team are aligned with the core objectives evolves, including earning capital to shareholders and operating in an environmentally responsible manner.
Our combination provides the scale and operational capabilities necessary for long term success, the combination of Altice and Eagle call will create the largest pure play midstream company in the Permian basin. It will become the largest gas processor in the Delaware Basin and third largest in the Permian.
We expect the transaction to close during the first quarter next year following customary reviews and regulatory approval. This transaction is really about the efficient utilization of assets in the Delaware Basin.
The new company is better positioned for the rebound in activity across the basin with long term growth opportunities.
Commodity prices are improving and production activity is accelerating in the Texas, Delaware Basin, making this an opportune time to take advantage of market conditions by expanding our processing and transportation capabilities for oil gas and Ngls the combination truly creates a leading pure play Permian integrated.
Midstream company with a capital return focus.
<unk> over to you.
Thank you clay and my prepared remarks, I will highlight additional aspects of Altus midstream business combination with eagle crop as well as our financial performance for the third quarter and outlook for the year.
The combination that we announced two weeks ago, we will establish a robust cash flow generating business focused on providing midstream services to producers in the Permian basin. It creates the largest gas processor in the Delaware basin with pro forma adjusted EBITDA for 2022 projected between 800 $950 million.
The combined company expects to achieve at least $50 million of annual EBITDA synergies with a total integration spend of less than $100 million spread out over the next three years.
Capital synergies from combining the systems are estimated at more than $175 million and the five years post closing.
One of the key highlights of the transaction is the ability of the combined company to generate significant free cash flow not only due to low forecasted capital needs, but also the ability to convert EBITDA into free cash flow.
Capital spending for the pro forma enterprise is minimal which gives us increased confidence in the ability to return capital to investors over the long term.
The pro forma cash dividend coverage ratio for the combined company is estimated to be 175 times for 2022 higher than what a standalone. All of this would have been able to achieve next year.
The company has not only committed to maintaining the existing dividends through 2023, it is targeting 5% dividend growth starting in 2024.
We are clearly excited about the prospects for the combined company.
The new business will operate in two segments midstream logistics, which includes gathering and processing businesses water handling services and crude oil gathering and storage will represent approximately 65% of EBITDA pipeline transportation represents the remaining 35%.
This segment comprises four joint venture long haul pipelines to export natural gas Ngls and crude oil from the Permian basin to the Gulf Coast. These.
These include a 53% majority interest in the Permian Highway pipeline, a 16% interest in Gulf Coast Express a 33% interest in Shin Oak and a 15% interest in the epic crude pipeline.
Our plan is to integrate the altice in eagle assets into a gathering and processing Super system.
This provides competitive advantages with greater scale reliability and flexibility for customers.
We think there is little execution risk with this transaction all material consents have been secured in connection with our joint venture pipeline interests and bank credit facility lenders are preferred equity holders have executed waivers and amendments in support of the transaction and Apache are 79% owner has agreed to vote in favor of the transaction.
We expect to issue more detailed 2022 guidance for the pro forma enterprise closer to the closing date.
Now I'll move on to our third quarter results, we generated free cash flow for the third consecutive quarter Altice paid its third cash dividend in September and this week. The board of directors declared another quarterly dividend of $1 50 per share, which will be distributed at the end of December.
As noted in the press release issued yesterday also reported net income, including Noncontrolling interest of $50 million for the third quarter.
This includes approximately $4 million related to an unrealized embedded derivative gain for the quarter, which reflects a technical accounting revaluation of the embedded derivative in our preferred units for the period.
Adjusted EBITDA was $70 million and growth capital expenditures were approximately $3 million.
Gathered volumes increased slightly from the preceding period, averaging 452 million cubic feet per day of which approximately 75% was rich gas.
Our results benefited from numerous factors, including strong operational uptime during the quarter as there were no material weather events continued cost discipline and lower growth Capex.
I'll move on now to our outlook for 2021.
We have not changed our guidance ranges for 2021, though I would note we are trending better than the midpoint for all items and to clarify for growth Capex, we are looking to spend less than the midpoint.
Overall, we had a very good quarter and expectations for the year remain constructive as we are outperforming across the board.
Operator that concludes our prepared remarks, we can now move on to Q&A.
At this time to ask a question. Please press Star then one on your Touchtone phone.
Draw your question press the pound key once again Thats star one for questions.
One moment for questions.
Once again Thats star one for question.
And I'm not showing any questions at this time.
I'll turn the call back over.
Patrick Kennedy.
Closing remarks.
Thank you for joining us on the call today and welcome to reach out to Investor Relations. If you have any questions. Following this call.
Victor Thank you and back to you.
My pleasure.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.