Q1 2022 Rattler Midstream LP Earnings Call

May 4, 2022

Good day, and thank you for standing by. Welcome to the Rattler Midstream Q1 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To 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. If you require assistance during the conference, please press star zero. I would now like to hand the conference over to your speaker today, Adam Lawless, Vice President, Investor Relations.

Good day and thank you for standing by welcome to the Rattler Midstream Q1 2022 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. To ask a question during this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require assistance during the The conference please press Star Zero. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations.

The conference please press Star Zero. I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations.

Thank you Andrew. Good morning and welcome to Rattler Midstream's first quarter 2022 conference call. During our conference call today, we will reference an updated investor presentation.

Thank you, Andrew. Good morning, and welcome to Rattler Midstream's first quarter 2022 conference call. During our conference call today, we will reference and update investor presentation.

which can be found on Rattler's website. Representing Rattler today are Travis Stice, CEO , and Kate Svantos, President.

Which can be found on Rattler Midstream LP's website. Representing Rattler today are Travis Stice, CEO and Kaes Van't Hof, President.

During this conference call, the participants may make certain forward looking statements relating to the company's financial condition, results of operations, plans objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors. Information concerning these factors can be found the company's filings with the SEC.

During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to variety of factors.

Results of operations plans objectives future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors information concerning these factors can be found the companys filings with the FCC and.

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

In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found on our earnings release issued yesterday afternoon. I will now turn the call over to Travis.

In addition, we will make reference to certain non-GAAP measures the reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

I'll now turn the call over to Travis D. Stice.

Thank you Adam. Welcome everyone and thank you for listening to Rattler Midstream's first quarter 2022 earnings calls.

Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream's first quarter 2022 earnings.

The first quarter of 2022 was another exceptional operational quarter for Ratcliffe.

The first quarter of 2022 was another exceptional operational quarter for Rattler Midstream LP.

and together with the effect of a full quarter of post the recent transactions, showcases the Rattler business going forward.

And together with the effect of a full quarter of post the recent transactions showcases the Rattler Midstream LP business going forward.

This is reflected in the operating results with a sequential increase in adjusted EBITDA of 8% quarter over quarter.

This is reflected in the operating results with a sequential increase in adjusted EBITDA up 8% quarter over quarter.

Despite limiting volume growth in the near term, the flat production guidance of Rattler's sponsor Diamondback Energy allows Rattler to efficiently manage its business and minimize unnecessary operating and capital outliers.

Despite limiting volume growth in the near term; the flat production guidance of Rattler sponsor Diamondback energy allows Rattler Midstream LP to efficiently manage its business and minimize unnecessary operating and capital outlays.

With inflationary pressures on both the capital and operating expenses resulting from a tight labor market and materials derived from hydrocarbons and steel based commodities; the operating team at Rattler performed admirably in controlling costs.

With inflationary pressures on both the capital and operating expenses resulting from a tight labor market and materials derived from hydrocarbon and steel-based commodities,

The operating team at Rattler performed admirably in controlling costs.

Our focus for the rest of the year is holding the line on costs wherever possible.

and continuing to provide the highest level of service as responsibly and economically as possible.

And continuing to provide the highest level of service as responsibly and economically as possible.

The outlook for the equity method joint ventures is also extremely positive.

The entirety of the joint venture portfolio, consisting of long haul and intra basin oil and gas transportation systems is now in full service and the overwhelming majority of the expected capital contributions has been made.

The entirety of the joint venture portfolio consisting of long haul and intrabasin oil and gas transportation

is now in full service and the overwhelming majority of the expected capital contributions have been made.

Additionally, in keeping with the expected growth the overall Permian basin volume in years to come and these projects are expected to continue to grow volumes and accordingly cash flow for years to come.

Additionally, in keeping with the expected growth of the overall Permian Basin volume in years to come,

These projects are expected to continue to grow volumes and accordingly cash flow for years to come.

In combination with the operated Capex, which is expected to decline dramatically once Rattler Midstream LP completes the construction of the centralized gathering systems. The return of capital from these joint ventures will bolster Rattler Midstream LP's free cash flow as the gap between equity method distributions and the growing equity method EBITDA convergence.

In combination with the operated capex, which is expected to decline dramatically once Rattler completes the construction of its centralized gathering center,

The return of capital from these joint ventures will bolster Rattler's free cash flow as the gap between equity method distributions and the growing equity method.

The return of capital from these joint ventures will bolster rattlers free cash flow as the gap between equity method distributions.

And the growing equity method EBITDA convergence.

With Rattler Midstream LP's pure leading leveraged position limiting the need for principal reduction; we expect to return this growing free cash flow to unitholders in the form of either the distribution and the common unit repurchase program as the market conditions warrant.

With Rattler's peer-leading leveraged position limiting the need for principal reduction, we expect to return this growing free cash flow to unit holders in the form of either the distribution and the common unit repurchase program as the market conditions warrant.

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

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

Thank you. As a reminder to ask a question you will need to press star one on your telephone. To withdraw your question, press the pound key. Please standby while we compile the Q&A roster.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster.

Our first question comes from Spiro Michael Dounis from Credit Suisse.

Hi, This is Chad on for Spiro.

Hi. This is Chad on for Spiro. Starting off, it sounds like you're entering a more stable period following the act of M&A over the past few months. Do you view any incremental M&A as unlikely in this environment, or are there still some smaller opportunities around your footprint?

Starting off it sounds like you are entering a more stable period following the active in M&A over the past few months. Do you view any incremental M&A as unlikely in this environment? Are there still some smaller opportunities around your footprint that you're seeing?

Yes Chad good question. I certainly think large scale M&A or new equity method JV are off the table today, given what we've done in the last nine months or so.

Yes, Chad, good question. I certainly think large-scale M&A or new equity method JVs are off the table today, given what we've done in the last nine months or so.

You know, there are little deals here and there that could, you know, make our systems a lot more, you know, efficient. It's not really anything that's going to move the needle much on the corporate level, but certainly can help at the asset level, and that's kind of where we're focused. So, you know, building out our system, but also making sure we have great connectivity, particularly in the Martin County area, as we build that out.

There are little deals here and there that could make our systems a lot more. efficient. It's not really anything that's going to move the needle much on the corporate level, but certainly can help at the asset level and that's kind of where we're focused.

efficient. It's not really anything that's going to move the needle much on the corporate level, but certainly can help at the asset level and that's kind of where we're focused.

So, building out our system, but also making sure we have great connectivity, particularly in the Martin County area as we build that out.

Okay understood, that's helpful. And then would few expansion projects being announced for Permian gas takeaway; just wanted to get your latest thoughts on how conversations are developing on participation on a greenfield Permian gas pipeline? From a rep perspective.

Okay, understood. That's helpful. And then, I guess, just with a few expansion projects being announced for Permian gas takeaway, I just want to get your latest thoughts on how conversations are developing on participation in a green fuel Permian gas pipeline from a RAP perspective.

Few expansion projects being announced for Permian gas takeaway.

Just wanted to get your latest thoughts on how conversations are developing on participation on a greenfield Permian gas pipeline.

From a rep perspective.

Yes, that's a good question too. I think just like you've seen over the course of Rattler Midstream LP's public history, we are focused on JV and participating somewhere where Diamondback has a significant amount of volume or acreage dedicated to that particular system.

Yeah, that's a good question, too. You know, I think just like you've seen over the course of Rattler's public history, we are focused on JVs and participating somewhere where Diamondback has a significant amount of volume or acreage dedicated to that particular JV or system. And right now,

Participating somewhere where diamondback.

It has a significant amount of volume or acreage dedicated to that particular.

Our system right now.

Right now on the Greenfield side, Diamondback doesn't have control of enough gas molecules to contribute to a Mayfield pipe.

On the Greenfield side, Diamondback doesn't have control of enough gas molecules to contribute to a Greenfield pipe. We're certainly pushing, I'm putting my Diamondback hat on, we're certainly pushing the GMPs to commit to a new long-haul pipe, but it won't be through the Diamondback name or the Rattler investment alongside it. But we think it's going to happen, it's just we won't be a major participant in it. Thank you.

And that doesn't have control of enough gas molecules.

Dubuque two eh.

Mayfield pipe, we're certainly pushing putting my diamondback.

We're certainly pushing the GNP to commit to our new long haul pipes, but it won't be in terms of the Diamondback name or Rattler Midstream LP's investment alongside of it, but we think it's going to happen. It's just that we won't be a major participant in it.

Our new long haul pipes, but it won't be in terms of the diamondback name or the rattler.

Investment alongside of it but we think it's going to happen. It's just we won't be a major participant in it.

Okay understood. Thanks for the time today.

Thanks, a lot.

As a reminder, to ask a question you will need to press star one on your telephone; withdraw your question press the pound key.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key.

Next up, we have Michael Lapidus from Goldman Sachs.

Next up we have Michael Jay Lapides from Goldman Sachs.

Hey, guys, thanks for taking my question. Real quick, when you think about just.

Hey, guys. Thanks for taking my question. Real quick, when you think about just the organic growth capex on your systems, can you talk about the cadence? Like when you're thinking about this year relative to maybe what the next two years spring. How dramatically different should we be thinking about the cadence of organic capex to build out the system?

the organic growth CapEx on your system. Can you talk about just cadence? Like when you're thinking about this year relative to maybe what the next two years bring, how dramatically different should we be thinking about the cadence of organic CapEx to build out the system? And if one part is up, one part is down, or if they're moving in lockstep, like I'm just trying to think about it given a little bit of the focus on having more recycled water capability, just trying to think trajectory.

cadence like when you're thinking about this year relative to maybe what the next two years spring. How dramatically different should we be thinking about the cadence of organic capex to build out the system?

If one part is up one part is down or if they're moving in lockstep? I'm, just trying to think about it given a little bit of the focus on having more recycled water capability, just trying to think trajectory.

More recycled water capability, just trying to think trajectory.

Yeah good question Michael. This year is certainly a heavy year for operated Capex at $80 million to $100 million I think we still feel good about that range despite inflationary pressures.

Yeah, good question, Michael. You know, this year is certainly a heavy, a heavy year for operating CapEx, you know, 80 to 100 million. I think we still feel, still feel good about that range, despite, you know, inflationary pressures. You know, I would say that that's going to encompass the majority of our necessary.

I feel good about that range despite inflationary pressures.

I say that that's going to encompass the majority of our necessary build out across our Martin County system, and then things will kind of move back down into a blocking and tackling maintenance slash new battery connection type of capital.

Our necessary build out across our Martin County system, and then things will kind of move back down into a blocking and tackling maintenance slash new battery connection.

our Martin County system and then things will kind of move back down into a blocking and tackling maintenance slash, you know, new battery connection type of capital. So, you know, if you look back at kind of where we were last year before we started building these new systems in Martin County, it was kind of a, you know, $8 to $12 million a quarter of CapEx, you know, I would think that we're probably moving back towards that in 2023 and beyond.

So if you look back at kind of where we were last year before we started building these new systems in Martin County is kind of $8 to $12 million a quarter of Capex I would think that we're probably moving back towards that in 2023 and beyond.

$8 to $12 million a quarter of Capex I would think that we're probably moving back towards that in 2023 and beyond.

When you think about capital allocation at the Rattler level, how does the team think about what's the most accretive way to return the capital? What are the metrics you guys are using when you're sitting around talking and saying, hey, you know what, we ought to bring forward maybe a greater pace of distribution hikes versus, hey, at a certain metric or certain valuation level, the right thing to do is buy in.

Got it. And then when you think about capital allocation at the Rattler Midstream LP level; how does the team think about what's the most accretive way to return the capital? Like what are the metrics you guys are using when you're sitting around talking and saying "Hey, you know what? We ought to bring forward maybe greater pace of distribution hikes versus pay at a certain metric or a certain valuation level". The right thing to do with buying the units.

How do you how does the team think about.

what's the most accretive way to return the capital? Like what are the metrics you guys are using when you're sitting around talking and saying "Hey, you know what? We ought to be forward may be. Greater pace of distribution hikes versus pay at a certain metric or a certain valuation level. The right thing to do with buying the units.

Forward may be.

Greater pace of distribution hikes versus pay at a certain metric or a certain valuation level. The right thing to do with buying the units.

Yes. Good question, it's certainly become a harder debate as the stock has has improved in price.

Yeah, you know, good question. It's certainly become a harder debate as the stock has improved in price, you know, the flip between distribution and buyback, you know, we're very aggressive on the buyback back half of the year last year, you know, still out there, you know, we didn't we didn't get as much done and in Q1 is maybe we'd like to, you know,

The flip between distributions and buybacks and we were very aggressive on the buyback last half of the year last year that's still out there.

Distributions and buybacks and we're very aggressive on the buyback back half of the year last year still.

Still out there.

We didn't get as much done in Q1 as maybe we'd like due to trading days and blackout periods, but it's still out there in times of weakness. I think generally we think of distribution is the primary return vehicle for Rattler Midstream LP as well as other midstream companies, but we're not afraid to lean into the buyback if we see weakness.

trading days and blackout periods, but it's still out there in times of weakness. I think generally we think of distribution is the primary return vehicle for Rattler Midstream LP as well as other midstream companies, but we're not afraid to lean into the buyback if we see weakness.

trading days and blackout periods. But it's still out there in times of weakness. I think generally, we think the distribution is the primary return vehicle for Rattler as well as other midstream companies. But we're not afraid to lean into buyback if we see weakness.

But we're not afraid to lean into the buyback if we see weakness.

And does the concept of doing one-time upsizing of the distribution, meaning specials, does that fit into the Radler portfolio?

And does the concept of doing one time upsizing of the distribution, meaning specials, does that fit into the Rattler Midstream LP portfolio?

No, I just think this year we spent some money in Q1 on the bangle pipeline and we've got a lot of capex relative to before the outlook, which is coming down. So I think a distribution increase is certainly something the board is going to discuss as we get more confidence in the free cash flow. I think we are at a good place on that today, we probably don't need to pay down to much more debt.

I just think this year, you know, we spent some money in Q1 on the Bangle pipeline, and we've got a lot of CapEx relative to, you know, the forward outlook, which is coming down. So I think, you know, a distribution increase is certainly something the board is going to discuss as we get more confidence in the free cash flow. You know, I think we're.

Before the outlook, which is coming down so I think a distribution increase is certainly something the board is going to discuss as we get more confidence in the free cash flow I think we are.

We're in a good place on debt today, so we probably don't need to pay down too much more debt and we're certainly not going to sit on the cash, so I think there's discussions to be had in future quarters on raising the distribution, quarterly or more consistently.

And a good place on that today, we probably don't need to pay down to much more debt.

We're certainly not going to sit on the cash. So I think there's discussions to be had in future quarters on raising the distribution quarterly or more consistently.

Got it. Thank you guys much appreciated.

Thanks, Michael.

I'm showing no further questions at this time. I'd now like to turn the conference back to Travis D. Stice, CEO.

I'm showing no further questions at this time. I'd now like to turn the conference back to Travis Steist, CEO .

Thanks again to everyone participating in today's call. If you've got any questions please reach out to us using the contact information provided.

Thanks again to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided.

Okay.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Thanks guys good job.

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Q1 2022 Rattler Midstream LP Earnings Call

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