Q3 2022 EnLink Midstream LLC Earnings Call
Good morning, and welcome to the Enlink Midstream third quarter 2022 earnings call.
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I would now like to turn the conference over to Brian Brungardt Investor Relations director for Enlink Midstream.
Please go ahead.
Thank you and good morning, everyone welcome to <unk> third quarter of 2022 earnings call participating on the call today are Jesse Air Nevis, Chief Executive Officer, Ben Lamb, Executive Vice President and Chief operating Officer, and Pablo Mercado Executive Vice President and Chief financial.
Sure.
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 dot com.
Today's discussion will include forward looking statements, including expectations and predictions within the meaning of the federal Securities laws.
The forward looking statements speak only as of the date 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 <unk> SEC filings.
This call also includes discussion pertaining to certain non-GAAP financial measures definitions of these measures as well as a reconciliation of comparable GAAP measures are available in our press release and the appendix of our presentation.
<unk> 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 will start today's call with a set of brief prepared remarks by Jessie Ben and Pablo and then leave the remainder of the call open for questions and answers.
With that I would now like to turn the call over to Jesse <unk>.
Thank you, Brian and good morning, everyone.
Thank you for joining us today to discuss our third quarter results, which include another quarterly record adjusted EBITDA.
I joined in like a little more than a 100 days ago and that time my expectations have been exceeded by both the size of the opportunity and the team's commitment to executing on our plan.
In this short time, we've set new quarterly adjusted EBITDA record.
We're on pace to grow 2022, adjusted EBITDA of 23% over the prior year.
And secured a landmark carbon transportation deal with Exxonmobil.
I want to take this moment to highlight five areas, where enlink execution is driving momentum in building a unique opportunity that our team is ready to seize.
First enlink is executing our financial outperformance in 2022 last night, we announced quarterly record quarterly EBITDA of 343 million, which represents a 34% growth rate year over year.
Due to the strong momentum we are seeing today, coupled with our robust results year to date, we now expect in the year with adjusted EBITDA at the top of our guidance range.
Second Enlink is in a strong financial position.
We have reduced leverage by half a turn so far this year and proactively addressed our capital structure.
We have ample liquidity and no meaningful near term maturities.
Third we continue to execute our balanced capital allocation.
While we continue to de lever, we're finding attractive investments to grow our business, including our carbon solutions business.
We are increasing the return of capital to common unitholders with our continued execution of our unit buybacks.
Fourth.
It's still building momentum we.
We see visible volume growth in 2023, and our GNP business.
We're also well positioned for the future with 90% of our business of natural gas and Ngls.
Which will be in high demand for decades to come.
In addition, we have what I think is a premier energy transition opportunity in the midstream space.
The Ccs business, we are building.
Finally to elaborate on that point, we are seizing on the unparallel unparalleled opportunity we have to be the transporter of choice in Louisiana.
Prior to joining enlink.
Our new Enlink was well positioned to secure carbon capture transportation and sequestration agreements. However, the opportunity is even larger than I realized.
<unk> is extremely well positioned with 4000 miles of pipe in Louisiana much of which is in the coveted last mile to the industrial facilities in the Mississippi River corridor area that emits approximately 80 million metric tons a year.
Utilizing our extensive network enables us to offer the most timely and cost effective Sidoti Sidoti transportation solution with a significantly lower environmental impact.
And various recently highlighted enlink opportunity by estimating 49 million metric tons per year of sub $55 per ton capture breakeven within 10 mile radius of our system.
Enhancements to the 45 key carbon sequestration tax credits and the recent <unk> legislation should only serve to expand and accelerate the development of the Ccs market.
As we shared in our recent announcements.
We are executing on our first mover advantage in Louisiana by signing a definitive transportation service agreement with Exxonmobil for Sidoti Transportation with the reserve capacity of up to 10 million metric tons per year.
With this agreement.
Enlink has done something no other midstream company has been able to do.
Secured a definitive agreement for us.
Significant Ccs project with commitments from the pop industrial matter and a high quality sequestration provider.
Ben and Pablo will provide more details on this agreement, which I believe is the first of many more to come for the Ccs business.
In summary, Enlink is well positioned and executing on the significant opportunities in front of us.
Which I believe provide a significant energy transition growth plans for our existing business.
With that I'll turn it over to Ben to provide an overview of our operations.
Thanks, Jessie and good morning, everyone.
Let me start off by saying how excited I am about the performance across Enlink operations.
Despite the volatility in commodity prices, we are seeing solid momentum in each of our segments.
Now, let's walk through our assets starting in the Permian, where we continued the momentum from last quarter by generating segment profit of $111 4 million during the third quarter of 2022.
Segment profit in the quarter included approximately $8 6 million of operating expenses tied to the relocation of the Phantom plan and $2 4 million of unrealized derivative gains.
Excluding plant relocation opex and unrealized derivative activity.
<unk> profit in the third quarter of 2022 grew 8% sequentially and an impressive 74% from the prior year quarter.
These strong third quarter results drove segment cash flow of $49 $7 million.
Average natural gas gathering volumes for the third quarter were approximately 7% higher compared to the second quarter of 2022, and approximately 44% higher compared to the third quarter of 2021.
Average natural gas processing volumes for the third quarter were approximately 6% higher sequentially and approximately 43% higher compared to the third quarter of 2021.
Producer activity remains robust on both sides of the basin and we remain well positioned to grow alongside our customers to meet.
Just your plans on the Midland side, we recently commissioned the Phantom plant, which adds 235 million cubic feet per day of additional processing capacity.
Turning now to Louisiana.
<unk> profit for the third quarter of 2022 came in at $97 million, including unrealized derivative gains of $4 million.
Excluding the impact of unrealized derivative activity segment profit in the third quarter of 2022 increased 20% sequentially and over 28% from the prior year quarter.
Louisiana benefited from strong gas volumes and higher margins, which were partially offset by normal summer time seasonal weakness in NGL markets.
The solid third quarter results drove segment cash flow of $95 million.
Third quarter gas results were particularly strong as a number of favorable market conditions aligned resulting in higher volumes and margins and we see in a typical quarter.
Shifting to the fourth quarter, we will see positive seasonality in our NGL results, although economics are starting to favor ethane rejection in some supply basins.
We continue to evaluate attractive growth opportunities leveraging existing infrastructure to support LNG and other industrial demand growth with the potential to generate strong returns.
On that front, we recently made the decision to execute an efficient expansion of our gas system. In 2023 supported by an incremental 200000 Btu per day transportation commitment from venture global to support its Calcasieu pass LNG facility.
Moving up to Oklahoma, We delivered segment profit of $104 5 million for the third quarter of 2022.
<unk> profit in the quarter included approximately $1 1 million of operating expenses tied to the relocation of the Phantom plant and approximately $9 5 million of unrealized derivative gains.
Excluding the plant relocation opex and unrealized derivative activity.
<unk> profit in the third quarter of 2022 increased 4% sequentially and 7% from the prior year quarter.
Average natural gas gathering volumes for the third quarter were approximately 2% higher sequentially and approximately 4% higher compared to the third quarter of 2021.
Oklahoma continues to deliver solid and stable cash flow for us during the third quarter of 2022, the segment generated $86 3 million and segment cash flow.
Last quarter, we talked about an inflection point in Oklahoma.
Based on the latest conversations with our customers. We now expect double digit volume growth next year.
This confidence is driven in part by the accelerating activity, we're seeing this year.
We expect to end 2022, with nearly 100, new wells connected during the year and our producers have plans to connect well over 100 wells next year.
Wrapping up with North Texas segment.
Segment profit for the quarter was $82 $7 million, including unrealized derivative gains of $2 3 million.
Excluding unrealized derivative activity segment profit in the third quarter of 2022 increased 25% sequentially and increased 33% from the prior year quarter.
Natural gas gathering volumes increased 18% sequentially and increased 22% compared to the prior year quarter, driven by our acquisition of Crestwood, North, Texas assets, new producer activity and some onload volumes from other midstream companies in the area.
The integration of the assets that we acquired from Crestwood in July is underway and progressing as planned. The acquisition was completed at an EBITDA multiple of about four times and with new drilling and faster asset redeployment is already outperforming the investment case.
We continue to see sufficient activity in north, Texas to support continued volume stability in 2023, our largest customer <unk> is continuing its successful re frac and drilling programs and brought online its first new wells during the quarter.
Now turning to our Ccs business, we are very excited with the signing of a definitive transportation service agreement with Exxonmobil.
The TSA Exxonmobil has reserved capacity of up to 10 million metric tons per year with an initial reserve capacity of $3 2 million metric tons per year, beginning early 2025.
The TSA includes industry standard terms and conditions similar to long haul natural gas transportation contracts.
We are paid a fee in this instance, and amount per metric ton on the reserved capacity.
The total distance for this transportation is less than 100 miles.
We've identified a 36 inch diameter natural gas pipeline for conversion that covers approximately two thirds of this systems.
From there we will build the remainder using a smaller diameter purpose built pipe to flow and the supercritical phase using additional compression.
Supporting our agreement with Exxonmobil CF industries, and the largest of its kind commercial agreement with exxonmobil to capture and permanently store up to 2 million metric tons per year of existing cotwo emissions.
<unk> is one of the largest emitters in the Mississippi River corridor, and the largest emitter in Donaldson Bill area.
CF has expressed a desire to continue to use ccs to improve its emission profile and we expect other emitters in the region to follow.
With the passing of the IRR.
Discussions with emitters and other sequestration providers have accelerated we continue to expect additional contracting activity to occur over the next 12 to 18 months as industrial emitters target in service dates beginning in 2025.
With that I'll pass it over to Pablo to discuss our financial update.
Thank you Ben and good morning, everyone I'll start with the third quarter highlights.
As Jesse mentioned Enlink delivered another quarterly record for adjusted EBITDA.
Enlink achieved $343 million of adjusted EBITDA, representing an increase of 34% from the third quarter of 2021.
This first salt reflects growth in all four of our asset segments.
Enlink also achieved the $85 million of free cash flow after distributions for the third quarter of 2022, driven by strong operational results and timing of capital projects.
Continuing the trend from prior quarters, all four of our asset segments delivered positive and significant cash contributions.
Capital expenditures net to Enlink plant relocation expenses and investment contributions were $121 million.
This included a $19 million contribution to our matter foreign joint venture.
Bringing our investment to date to $45 million of the total $70 million, we expect to invest this year.
On the balance sheet side, we find ourselves in a very strong position with a leverage ratio of three four times at the end of the quarter and ample liquidity.
In August and link issued an upsized offering of $700 million of senior notes due September 2030 at six 5%.
The proceeds were used to tender for a portion of our 2024 and 2025 senior notes.
Following these transactions, we have no meaningful maturities for over two and a half years with less than $100 million remaining outstanding on our 2024 notes.
Consistent with our capital allocation plans to increase returns to investors, we continue to be active with our common unit repurchase program.
In the third quarter, we repurchased $72 million of common units, including $33 5 million for the pro rata units from GOP, which settled after the end of the quarter.
The increased buyback activity during the third quarter takes our execution year to date to approximately $147 million.
And we're on pace to spend $200 million on the buyback program. This year.
Driven by the strong results and the growing momentum in our operations. We expect to end 2022 at the top of the adjusted EBITDA guidance range of $1 9 billion.
And to achieve our third consecutive year of at least $300 million and free cash flow after distributions.
Looking ahead 2023, as Jesse mentioned, we're seeing strong momentum across our businesses and we expect meaningful volume growth in our G&P segment.
On the capital front, we expect a similar level of investment in 2023, as we have this year positioning us to continue to generate robust free cash flow.
Our recent CCF agreement with Exxonmobil will involve a $200 million capital program with approximately 20% could be spent next year with the remainder in 2024 and some in 2025.
This project has great economics for us.
The initial reserve capacity of $3 2 million metric tons underwrites, our minimum investment case and result in a typical midstream build multiple for a transportation deal in the high single digits.
However, when volumes for this project reached the maximum reserve capacity of 10 million metric tons per year.
That will improve the project build multiple to the low single digits.
In summary, Enlink achieved a record third quarter and.
And the outlook for our operations this year and in 2023 and beyond remains strong.
We continue to be disciplined in our investment approach and can both grow our business and return capital to our common unitholders.
With that I'll turn it back to Jesse.
Thank you Pablo.
I'm proud of the Enlink team for their relentless focus on execution, which has resulted in excellent results. This year.
We are well positioned to build upon our team's success to create value for our investors and I am excited about what the future holds for Enlink.
With that you may now open the call to questions.
Okay.
Jordan.
Okay.
Sure.
Jordan.
Okay.
Yes.
Our next question comes from Gabriel Moreen with Mizuho Securities. Please go ahead.
Hey, good morning, guys.
Just had a couple of quick ones.
I guess I'm just curious in terms of thinking about 'twenty three capex overall, Pablo you mentioned I think the spend on.
Your commitment on the new TSA I'm just wondering if you can maybe.
Take a step back and talk about Capex for 'twenty three broadly speaking for the rest of your businesses.
What should we be contributing for Matterhorn next year.
I can maybe start with that.
Yes happy to Gabe Thanks for the question.
So at this point, we're not ready to give guidance just yet of course, but as we said, we do see meaningful volume growth across our TMT business.
And so that's going to drive similar level of Capex next year as what we have had this year.
We see $40 million or so of investment in the Ccs business, just the deal with Exxon itself.
So <unk> 40 of the 200.
Our Matterhorn, that's going as planned and so we expect the investment to be $70 million. This year and at least 30 for next year for a total of $100 million.
Since we still expect the project financing that is about 75% loan to value.
Beyond that we see attractive downstream investments Ben mentioned our expansion of the.
Venture global deal.
That's an incremental $20 million of capital or so at very attractive returns.
And so you can see the mix might.
Might be changing but the capital spend is probably similar to this year and that's great because it keeps us generating very significant free cash flow after distributions.
Thanks, Pablo and maybe if I can kind of ask a related question given your outlook now in the mid Con for next year for the double digit growth can you just talk about.
Where things stand with processing capacity, how tight you may or may not be getting into maybe doing the outflows contemplate a new build.
Just if you're going to talk about that high class problem, but if you can talk about that.
Yes, Hey, Gabe it's been we've talked about having.
20% or 25% all in in terms of processing capacity in the mid continent, and so we've got quite a bit of room to run before before we would be out of capacity.
We.
We don't currently foresee needing to add additional capacity to the basin.
Not next year.
If activity stays heightened for an extended period of time, that's always a possibility and the good news is we've got very capital efficient alternatives to do that but I think for next year, we are well taken care of in that respect.
Thanks, Pat and then maybe if I could just pivot back to the TSA agreement.
Just how quickly you think you can get additional volumes beyond the minimum commitment to what.
The announcement has brought other I guess the meters out of the woodwork looking to participate so just looking for for <unk>.
So on that on how quickly you think you might be able to ramp there to that low single digits.
Yeah, Hi, Dave This is Jesse I. Appreciate the question I think when you look at it broadly.
We obviously made the investment in anticipation that Exxonmobil will win.
That business in the area up to the 10 million metric tons a year.
We believe Exxon will execute.
Timing is a bit uncertain, but we would expect over the next 12 months to 18 months, we would see additional deal flow come in.
With respect to the IRS.
The biggest impact.
Absent the increased credit is going to be on the emission reduction threshold. So we see that is expanding.
The addressable market and we feel very well positioned and our positioning we do believe we have the last covenant mild to the emitters long standing relationships with them over many decades, providing <unk>.
Service to them in a safe and efficient manner and believe we are well positioned there.
As far as the other LOI is I think they are progressing and we would expect kind of a summer timeframe. So.
We're very excited about our position in Louisiana first mover as evidenced by the Exxon deal and we look forward to many more deals to come.
Great and then maybe if I could just have a quick follow up on that just for your Newbuild portion of that pipe are there any significant permits or.
Things you would anticipate that you need.
To get a hold of.
Yes, there will be standard permitting coastal use permit corps of engineers, but it's all all stuff that we are used to dealing with and we've allowed ample time in the schedule.
To obtain those permits.
Got it thanks guys.
Thanks Gabe.
Again, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our next question comes from Michael Cusumano Pickering.
And congrats on the release.
Hey, Martin is focused on the Permian first.
Mentioned that most of the growth this past quarter.
Came on the Delaware side.
I'm curious as you as you ramp up Phantom.
Or are there volumes that you had to maybe.
Offload or.
Yes.
Sure there might not be the right word, but at least like temper growth on the Midland side waiting for Phantom just trying to get an idea of how that ramps up with.
With the especially with the added capacity that you are able to bring online.
Yes, Michael it's been you are exactly right about that the growth for the past quarter was on the Delaware side, because it had to be we didn't have the capacity to grow on the Midland side, we were offloading some volume prior to the plant starting up.
Late October and so now we're not offloading any volume the system's unconstrained and we're back to growth mode on the Midland Basin side.
Very exciting.
And we are looking forward to seeing that plant.
Be well utilized in the.
Next year.
Okay and assuming.
Does that give you enough line of sight for the next 12 months.
Just want to think about when you could be looking for potential expansion beyond Phantom.
Yes, it does give us good line of sight to having ample processing capacity for 2023.
Just on all of our conversations with our producers.
And we're not ready at this point to say what the next step in terms of capacity in Midland will will be.
But as the market evolves and we get more communication from our producers next year.
We'll consider all of the same alternatives that we considered when we made the decision on Panther. So the opportunity to do a newbuild plant the opportunity may be to rely on some offloads. If the market is right for that or the opportunity to relocate another plant and I'll remind you that just recently, we acquired over 400 million.
Cubic feet per day of <unk>.
<unk> that is either already idle or it will be either in the near future. After we do our integration work and some of that capacity could be a really good candidates for future relocation.
Got it yeah that makes sense.
And then wanted to follow up also on a couple of comments John made.
On the Oklahoma growth.
Not to be nitpicky, but on the double digit comment I believe previously you said high single digits, just want to make sure.
<unk>, 8% to 9% go into 10 to 11, and how we should think about it or.
Sure.
I guess, if you can elaborate on the double digit comment.
Yes, Michael on.
On the second of November a little bit hard to narrow it down to a one or two percentage point.
Number.
For next year, but suffice to say that like we just said we went from high single digit to low double digit which means our expectations have increased from the last time that we work together not whether next year, that's 12% to 14% or 16%.
It remains to be seen a little bit as we as we wrap up plans with our producer customers to see how the year unfolds.
And that kind of a range.
Okay. That's helpful.
And then if I can ask one more on north Texas.
You had mentioned the two rigs there I was wondering if you could just kind of help us understand what kind of programs. Those are are those.
There is a there is full year drilling programs or are they kind of pick up a rig put down a rig every now and then just to complete a pad here or there.
Yes, both in the case of BK.
It's a full drilling program that sustain.
In their case, they brought online their first new well pad during the quarter and Im happy to say it exceeded our expectations I think was in line with your expectations, but exceeded ours.
And it's a great start to.
To their plans for the rest of this year and all of next year.
The other customers it's more opportunistic.
In fact, we had a customer surprised us a bit during the quarter and drill a four well pad on the acreage that we just acquired for Crestwood.
Outside of our expectations and the investment case there.
I think we will continue to see that kind of activity from the smaller private customers with.
With gas prices, where they are and will continue to see a little bit of that opportunistic activity.
Okay, Great. That's all from me guys. Thank you.
Thanks, Michael.
Sure.
Our next question comes from Jeremy Tonet with JP.
Morgan. Please go ahead.
Hi, good morning.
Good morning.
Just wanted to start off with Wahaha, a little bit if I could just wondering.
What type of exposure I guess.
And your pop and how much of that is hedged.
And then at the same time I guess your producer customers.
Feel good about them having sufficient ft.
Get out of the basin. So it doesn't kind of impede production growth that's expected.
Sure.
Yeah, Great question. So let me kick it off this is Pablo and I'm sure. We'll have some comments as well, but we don't expect the widebody have differentials to have a big impact on volumes.
The Permian is driven by a crude activity.
The based producers don't want a player and so we expect the gas flow.
<unk>.
Just as a reminder, we're 90% face fee generally.
Little less than that in the Permian basin.
And about 25% of our.
Volumes.
Our already to structurally tied to Gulf coast pricing through.
Through our transportation agreements.
We've hedged about a third of the remaining exposure. So if you combine those numbers you can see we've managed about half of our exposure.
And again, a little more than 90% fixed fee.
And with respect to transportation capacity on the Midland side of the basin that is mostly our responsibility we market most of the gas for our customers on the Midland side of the basin, which is the reason why we entered in to the firm commitment on Whistler.
Here recently.
And also why we're investing in the Matterhorn project for the future now as part of that Matterhorn investment we negotiated some additional short term firm transportation to help get us through this time period in the market that we expect to see in 2023. So we think we're in great shape for next year on the Midland side of the basin on.
On the Delaware side, mostly our customers handle their firm transportation needs.
The book of business, we have in the Delaware the kinds of companies that we're talking about Exxonmobil oxy EOG to do an excellent job of planning their businesses and taking care of transportation capacity. So we don't have any any concerns on the Delaware side of the basin either.
Got it that's very helpful and you've talked about Matterhorn a bit here just wanted to confirm if things progressing on schedule cost on budget any chance. It comes on line a little bit early or when could any gas start to get in there even at the top.
Fully powered up.
Yes.
Too soon to talk about an early in service.
Not really our place anyway since we're not the.
Operator, but I would say in terms of on time and on budget at this point, yes. It is and as we get closer to the in service date will certainly be working with the operator to make sure that they are in service.
Efficiently as the handy.
Got it and if I could just pivot over to the <unk> pipeline side, just wondering for the converted portion I think you said it was about 30 miles.
33, new pipe 67 or thereabouts.
The breakdown.
Wondering what the pipe that's been converted as this $14 40 Psi and what state do you see the <unk> moving at that across that line and how much.
Pressure, how much horsepower do you need to kind of get into that state.
Yes, so it's going to move in the gaseous phase III to converted pipeline.
And the great thing about the pipeline that's going to be converted 36 inches in diameter. So it's got an enormous amount of capacity at a relatively modest gaseous state pressure.
At the southern terminus of that line, we will construct a pump station, where we'll take the fluids supercritical phase and the Newbuild pipeline to the Exxon delivery point will be a 2000 plus.
Si supercritical based pipeline.
Got it.
So the part that's being converted 14 <unk> 600, just wondering do you have to add any more compression or pumping there just trying to think through how that part works.
No we do not we will be accepting the fluid.
At sufficient pressure to make the movement all the way down to our compressors are pump station.
Got it that's helpful I'll leave it there thanks.
This concludes the question and answer session I would like to turn the conference back over to Jesse Aaron Nevis prevent any closing remarks.
Yeah. Thank you Jordan for facilitating our call. This morning, and thank everyone for being on the call and your continued support.
As always we appreciate your continued interest and investment in Enlink.
We look forward to updating you on our fourth quarter results in February .
In the meantime, we wish you well stay healthy and have a great day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.