Q3 2022 Crestwood Equity Partners LP Earnings Call
But are based on assumptions and information currently available at the time of today's call.
Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ.
Additionally, certain non-GAAP financial measures such as EBITDA adjusted EBITDA distributable.
Distributable cash flow and free cash flow will be discussed.
Reconciliations to the most comparable GAAP measures are included in the new and the news release issued this morning.
Joining us today with prepared remarks are president Robert Halpin.
Executive Vice President and Chief Financial Officer, John Black and Executive Vice President and Chief operating Officer <unk> <unk>.
Additional members of the senior management team will be available for questions and answers for.
The question and answer session with Crestwood current analysts following the prepared remarks.
Today's call is being recorded if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
At this time I would like to turn the call over to Robert Halpin.
Thank you operator.
Good morning, everyone and thank you for joining us today, as we discuss our third quarter financial and operating results as well as our outlook for the remainder of 2022.
Now before we get started we do have a couple of housekeeping items I wanted to touch on.
First Bob Phillips is unable to join US. This morning as he is traveling internationally on a previously planned trip and unfortunately is in a location with unreliable Internet service.
I know Bob has disappointed to not be on the call. This morning, but he sends his regards and he looks forward to connecting with many of you over the course of the fourth quarter at some of the various investor conferences or other events around the upcoming holidays.
Second I would like to recognize and congratulate Johnny Black who was recently promoted to Chief Financial Officer.
Johnny has been with Crestwood since 2014 in various financial roles of increasing responsibility and we are really excited to have him join our executive Committee here.
So let's get started.
I'll kick off the call with a few opening remarks, and then turn it over to <unk> to cover an operational update and then finally over to Johnny to cover our financial results in more detail.
The third quarter was another busy quarter for Crestwood with a number of significant accomplishments that position the company to better execute our long term strategy around our core assets.
Early in the quarter, we closed on the previously announced acquisitions of some darrow midstream and CP JV, Our 50 50 joint venture with first reserve.
Collectively these transactions significantly increased our operational footprint in the Delaware basin and make the Delaware basin, a much larger contributor to our overall cash flow.
This narrow assets are already significantly exceeding our expectations as our diverse set of public and private producers continue to drill strong wells and maintained very active drilling programs.
And just a few short months, our operations and project management teams have fully integrated and interconnected the sin Darrow and Willow Lake assets.
This now enables crestwood to efficiently accelerate utilization of existing gathering and compression capacity as well as available processing capacity at both our orla plant and the newly acquired Carlsbad plants the.
The Delaware Basin continues to be the most robust and prolific and active play in North America, and we remain very excited about our growth opportunities in that basin as our producer customers continue to aggressively develop their substantial inventory positions.
In September we completed two more strategic initiatives that align with our strategy to maximize unitholder value.
First we announced the divestiture of our Marcellus gathering and compression assets to Antero midstream for $205 million in cash, which further streamlines, our asset portfolio and our high growth core operating regions.
We immediately redeployed a portion of those Marcellus divestiture proceeds by playing a significant role in the 16 million unit secondary offering from CT energy alongside many of our long term public unit holders.
As a part of that transaction Crestwood repurchased and retired $4 6 million Crestwood common units from CT energy for approximately $124 million and towards ownership and Crestwood was reduced to less than 5% of total units outstanding.
We are very excited to play a sizable role in this transaction through another large unit repurchase.
When you combine this transaction with the first reserve transaction, we completed back in March of 2021.
Adds up to Crestwood, having repurchased approximately $380 million in common units over the last 18 months, which amounts to a very sizable return of capital to our unitholders.
I would be remiss if I did not also take a minute to thank our long term dedicated <unk> investors that partnered with us in the cord secondary transaction you all showed tremendous support with your participation and enabled us to reach a win win solution with cord, who has been a great partner to us over the last 14 months or so and remains a.
Very important customer for us going forward.
Now shifting gears and before I hand, the call over to <unk> and Johnny I wanted to provide some high level commentary on a few factors that impacted our results in the quarter and outlook for the remainder of 2022.
In the wake of our series of M&A transactions are portfolios. Adjusted EBITDA has grown substantially and has evolved to be comprised of 90% gathering and processing assets.
The fundamentals around our business remains strong and we have an extremely active producer set running 16 drilling rigs across our dedicated acreage. Additionally.
Additionally, we have seen a meaningful amount of producer M&A activity around our assets, including <unk> merger with lighting to create CT energy Devins acquisition of rim rock on our arrow assets and continental's multiple acquisitions in the powder River basin.
All of these transactions further enhanced our customer base around our core assets and highlight the quality and long term value of the inventory behind our dedicated acreage.
During the quarter Williston basin gathering and processing volumes were negatively impacted by timing delays to well connects on our system.
As our key customers integrate those recently acquired assets and worked to catch up from second quarter weather disruptions near term challenges in the oilfield services labor market and supply chain constraints, we have seen delays in well completions, which have led to the DUC count on the aerospace <unk> to increase to approximately <unk>.
<unk> wells.
As a result, we have solid visibility to the fourth quarter and 2023 activity levels, but are revising our full year 2022, adjusted EBITDA guidance range to $780 million to $800 million to fully reflect some of these timing shifts.
As Crestwood and our customers continue to work through these short term challenges we are increasingly confident in the strength of our portfolio and with our operations now squarely focused on the leading north American basins, we expect our asset base to generate meaningful and growing free cash flow that enables us to continue creating long term value for.
For our unit holders.
With that I'll turn the call over to <unk> to provide additional details on our operations for the quarter.
Thank you Robert and good morning, everyone. I'd also like to Echo Robert settlement on our high graded asset portfolio and how we are positioned heading into 2023.
The budget season kicks off for our customers receiving updated guidance for 2023 activity and expect to have an active year. Our producers are in excellent financial health and are now better equipped to navigate some of the oilfield service constraints experienced this year our.
Our strategic execution in the past year has built competitive scale in our core basins in commercial operations and project management teams are capturing additional value.
Let's get started in the Williston basin.
As discussed this year was impacted by winter weather and well connect delays.
Some wells originally expected to come online in the second and third quarters have shifted into the fourth quarter and a few fourth quarter wells are now expected to come online in 2023.
Today, we've got four rigs currently running on our acreage we expect to have 40 to 45 wells connected in the fourth quarter.
Our gathering and processing assets support some of the best acreage in the Williston Basin.
That offers producers exceptional economics, and this composite commodity price environment.
Cash flow growth in the fourth quarter and into 2023 is coming from this high level of activity.
Im really pleased to highlight our teams continue to capture incremental merger synergy through the optimization and improved efficiencies.
We're well on track to exceed our previously identified 2023 operational synergy cost target of 20 $25 million in 2022.
Moving southwest of the Powder River basin, excluding the Continental Express pipeline during the third quarter. There are six new wells connected to our jackalope system.
That drove year over year volume growth of 11%.
Operators are currently running three rigs on prestwood acreage targeting multiple formations as our producers continue to delineate the stacked formations across over 400000 dedicated acres.
We expect this ongoing level of activity to result in increasing volumes on the jackalope system throughout 2023.
In the Delaware Basin, both public and private producers continue to operate strong development plans across our footprint.
During the third quarter 43 wells were connected across our systems and producers are currently running a total of nine rigs that are expected to result in an incremental 40 to 45 well connects in the fourth quarter.
Since completing the scenario and CP JV acquisitions, our commercial teams continue to capture incremental opportunities to attract volumes to our expanded system.
Current activity in the basin is placing a premium on excess processing capacity and our optionality process volumes, both in new Mexico and in Texas is a big advantage for our producers as we're better able to optimize activity and provide them flow assurance.
Finally, I'll conclude with a quick update on Tres Palacios gas storage facility in South Texas.
We recently filed the FERC application for a six five bcf expansion to the facility by converting an existing Brian production well into a fourth cabin.
This expansion is fully supported by two long term contracts with existing investment grade Counterparties and expected the band servicing approximately six to nine months after the approval of the application.
Crestwood continues to see strong interest in that facility since winter storm here in February 2021, and through increased Gulf Coast LNG demand from customers needing incremental storage and Wheeling services.
With that I'll turn I'll turn it over to Johnny to cover our quarterly financial results.
Thank you Thiago for.
For the third quarter, Crestwood generated adjusted EBITDA of $209 million and distributable cash flow of $131 million year.
Year over year increases of 50% and 53%, respectively, driven by our M&A activity over the past 18 months for.
For the third quarter, Crestwood announced a 65 five cent distribution payable on November 14th to unit holders of record as of November 7th, resulting in a quarterly coverage ratio of approximately one nine times.
Looking at the segment results in the gathering and processing segment third quarter 2022, EBITDA totaled $157 million, an increase of 48% over the third quarter of 2021, driven by higher natural gas gathering natural gas processing and water gathering volumes from the expanded.
<unk> of the Oasis midstream assets.
In the gathering and processing South segment third quarter, 2022 segment, EBITDA totaled $53 million more than double year over year.
Segment growth was driven by a combination of the scenario in CPE JV acquisitions, coupled with volume growth from the legacy Crestwood assets offset by the sale of the Barnett assets, which closed on July one.
In the storage and logistics segment EBITDA totaled $11 million for the third quarter.
Decrease year over year, due primarily to realized hedge losses.
Our NGL storage and logistics business continues to perform in line with our original expectations for the year.
Positioned to perform well for the upcoming winter heating season.
On the cost side Crestwood has done a great job managing expenses, despite the inflationary environment throughout 2022.
O&M and G&A expenses totaled $79 million for the quarter, an increase over the third quarter of 2021, primarily due to the Permian and Williston basin acquisitions this year.
During the third quarter, we invested approximately $59 million in growth capital primarily related to the continued build out of the multi product gathering system for CT energy and other recently contracted third party producers in the Williston basin expansions of our gas gathering and compression system in the Delaware basin as well as the build out.
<unk> of our Panther crude oil and water gathering system for percussion petroleum in the Delaware Basin.
Based on the deferral of well connects in the Williston Basin as previously mentioned from earlier this year to later in 2022 and into 2023 and the exceptional job executing projects below cost targets.
In an inflationary environment, we have been able to optimize our capital spend throughout the year and are therefore, reducing our growth capital guidance range for this year to 200 to 220 million.
$20 million reduction at the midpoint of the range and we are reducing our maintenance capital guidance range to $25 million to $30 million, representing a $5 million reduction at the midpoint of the range.
Based on these updated and reduced capital figures, we are projecting positive free cash flow. After distributions. This year of approximately 5% to $25 million on a full year basis.
Turning to the balance sheet Crestwood ended the third quarter with $3 6 billion in long term debt outstanding, including $2 5 billion of senior notes and $1 3 billion outstanding on our two revolving credit facilities as mentioned on October 25th Crestwood closed on the sale of the Marcellus assets for.
$205 million in cash and all of the sale proceeds were used to pay down our revolver debt.
Pro forma for the sale of the assets Crestwood now has $3 4 billion of long term debt outstanding and a consolidated leverage ratio of four one times at the end of the third quarter.
As we think about our capital allocation priorities going forward, we remain squarely focused on the balance sheet and are committed to reducing our leverage ratio to our long long term target of less than three five times through a combination of EBITDA growth and free cash flow allocation to debt paydown.
As we start to look into 2023, we are focused on the continued integration and optimization of our acquisitions through the capture of commercial and cost reduction opportunities and maximizing our free cash flow generation from the assets based on our preliminary outlook for the business. We believe the company is well position next year to accelerate our leverage reduction.
<unk> and create financial flexibility in the balance sheet.
With that operator, we are ready to open up the line for questions.
Thank you, ladies and gentlemen at this time well be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
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Our first question comes from the line of Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, Good morning. This is Susan Mcgee on for Jeremy.
I guess, starting now just going through the <unk>.
The walk down in EBIT, if you could just kind of walk us through.
What led to that.
How much of it was.
Was the asset sale and then how much of it was timing is it possible for fourth quarter to come in better than your expectations because of because of the timing.
Just walking us through that would be great.
Yes, no problem at all of this is John speaking.
<unk>.
There's really two drivers of the change in the in the guidance range.
The midpoint coming down from $820 million to the.
The new guidance range of $790 million.
The first factor obviously, the Marcellus assets.
We are estimated to contribute an additional kind of $5 million to $6 million of EBITDA for part of October November and December that will obviously be removed from earnings after the divestiture closed on October 25th.
And then the remainder is really driven by the shifting and deferral of well completions in the Williston from the second and third quarters of this year into the fourth quarter. In 2023. This drives a roughly $20 million impact to our earnings for the second half of 2022 compared to our original expectations. So that missed coupled with the removal of the Marcellus cash.
Cash flow really drives the approximate $30 million revision downwards, I would say to answer the second part of your question.
And what could kind of push us towards the higher low end of that range. Obviously as <unk> mentioned, we are projecting a significant amount of connections here to catch us up volumetric really in the fourth quarter across both the Williston and the Delaware with 40% to 45 incremental wells in the Williston and 45% to 50 incremental wells in the Delaware.
So just given the substantial amount of connections here this quarter.
The exact timing and the initial production rates for those new wells will have a big impact on our EBITDA.
This quarter and really be the driver of kind of the low to the high end of the guidance range.
Yes.
Got it. Thank you and then as far as the delays go in on the Oss constraints do you see this opening up and to enter 2023 is there any risk that maybe it gets delayed further because of these constraints just how you see 2023 kind of shaken out now and then.
Also with the Ducks, how many are on the bakery or the Bakken acreage.
Yes.
<unk>.
Answer the second one first the ducks that we quoted are only on Aero.
There is additional ducks across our footprint across the U S. So those are only on arrow and our expectations for that number at this point in time in the year were much lower than what we quoted of 20.
Going into the impacts of the Oss activity.
We don't expect that to continue into 2023, we think are our customers have.
Kind of done the approach taken the appropriate actions to manage those issues.
So 2023 should shape up to be pretty robust.
And the activity we have today is a good reflection of that.
Got it alright, that's it for me thanks, guys.
As a reminder, it is star one to ask a question.
Our next question comes from the line of Neal Dingmann with Truest. Please proceed with your question.
Neil Your line is live.
Oh, sorry about that guys. Good morning, thanks for the time.
My first is just on the Bakken you all mentioned a little bit odd I think anticipated for rigs and 40 or 40 to 45 wells.
When you're talking about some weather that you're currently seeing or maybe just talk about expectations on Bakken.
Little bit not not just beyond the color you gave but maybe into 'twenty three if you could.
Yes, Neal this is Robert.
We were referencing was really the second quarter.
And back in April and May of 2022.
What we've experienced kind of as a result of that is that obviously kicked out a lot of the timing of completions.
In the second quarter, and we anticipated those in our producers anticipated those to come on in <unk> and <unk> of this year as they kind of tried to bounce back from that and then navigated some of the operational challenges on the <unk> side, that's really what we've seen in the timing slippage and then adding to that a little bit with that we've also had a decent amount of M&A activity from some of our key.
Operators.
Obviously, the integration timeframe around those assets has caused some of those timing shifts as well so that 40 to 45 well connects as for the fourth quarter of this year, we've got pretty good line of sight to that coming online we've seen a handful of the pads come on here already through the first month of the quarter.
So I think we have a good degree of confidence in that outlook. Given does wells are ready to go and completion crews are up and running and then I think further to that in 2023 into <unk> commentary, we do feel based on our producer feedback that they have navigated well through this and have made appropriate plans to be able to navigate some of the operational challenges.
And we feel pretty good about our 'twenty three outlook up in the Williston basin on both the arrow assets as well as the rough rider assets from the Antero Midstream acquisition.
Great details and then just a quick one.
You had just slightly revise the commodity type I'm just wondering when you look into 'twenty three do you anticipate that shifting a bit more I mean, right now I think around 53% gas and 14% Ngls and the rest of oil and water do you think that could.
Could potentially get a little bit oiler and 'twenty three or how are you thinking about that.
I really don't I think the big states relatively consistent because the well completions are going to come from the same basins. We have our three core operating areas up in the Bakken the powder in the Williston.
Sorry, the Bakken powder and the Delaware.
As we look at the access.
Acceleration of activity, obviously, we expect Delaware to be pretty robust next year. So you could see volumetric mix shift a little bit to the gas side, given our gas service there, but overall I think it stays pretty consistent.
Great. Thanks again for the time.
Okay.
Our next question comes from the line of Ned <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, Thanks for taking the question.
It seems the inventory build in the <unk> segment is now complete.
You also got the proceeds from the sale of the Marcellus assets and I think capex requirements should be moderating from here. So can you maybe elaborate on the decision to exercise the accordion on your revolving credit facility.
Yes sure no problem. Ned This is John speaking again that was really just like you said the Marcellus divestiture. It gives us an extra $205 million liquidity.
The accordion.
The major reason, we exercise it was just given the larger scale of our business now pro forma for the acquisitions in the Delaware felt it was prudent to increase the size of that just based on the.
The level of revolver size of our peers. In addition, just given the.
Volatility in the broader market and the uncertainty of.
The bond market's inability to access that in the near term wanted to go ahead and secure the additional liquidity now at this point just given that was an option in the.
The credit agreement with our banks and we were able to get that done under the existing set of terms.
That makes sense.
And then.
Question on Capex I know, it's a little bit early but if you can talk about capex in 2023, given some of the shifts in activity from the fourth quarter into 2023.
Yeah, no problem as we've talked about before.
Extremely excited about the level of activity.
On our footprint right now in fourth quarter, obviously that will lead into 2023 as well.
We've generally at this point built out the backbone of our G&P systems in our kind of three core G&P areas that with the exception of the multi product system. We are building out for CT energy for their western Williston Basin development plans, but overall expecting capital to step down next year, and we will primarily be focused around well connects.
Capital and gathering expansions to meet the capacity needs of our <unk>.
Customers in the areas. They are developing for next year. So definitely stepping down next year as we talked about the capital guidance is stepping down about $20 million this year.
Little bit of that will be deferred into 2023, but for the.
Overall, the program will be stepping down next year in 2023, driving our kind of free cash flow positive business model.
Thanks for that and then maybe just one more on Capex, but this time just related to the expansion of Tres Palacios is there is there any like.
A meaningful capex budget associated with the expansion and then also maybe how much of the currently operating capacity is up for renewal in the next 12 months and then I guess last on this.
Given the improved demand environment, what type of rate increases would you expect to realize upon re contracting. Thank you.
Yes.
Good question, Dan and I'll take those so the first question around the Capex associated with the cabin for expansion.
It's a fairly manageable capex number roughly $30 million eight eights to the JV, so $15 million net to Crestwood, obviously in a very attractive long term project, giving everything going on in the in the markets down there with LNG and everything else.
They.
I have had that underpinned with 10 year take or pay contracts.
Investment grade Counterparties, who would be logical players in that marketplace. So very excited about that opportunity set and a very manageable amount of capital.
Attractive risk profile attached to it.
In terms of excess capacity, we're actually in open season now about three five bcf of excess capacity available for next year.
And early indications look very positive around that which I think speaks to your third question on rates are looking good.
Very thorough thank you that's all I have.
Now as a reminder, its star one to ask a question. Our next question comes from the line of Elvira Scotto with RBC. Please proceed with your question.
Hey, good morning, everyone.
My question just a follow up question on Tres Palacios.
Expansion can you provide kind of.
What your return outlook is for that expansion and then I think you said this.
Open season was oversubscribed I know you have some capacity excess capacity and you're saying that that early indications on contracting that sure. Yes, there is potential for even further expansion.
I'll answer the last piece first I think yes, there is opportunity for further expansion at Tres.
As you look out into the out years, just given all that's going on in the gas markets in South Texas. Some of the volatility we've seen around some of the winter events and unpredictability of the power grid and everything else.
So everything is looking very very positive for the current business as well as future expansion opportunities at that facility.
To speak clearly to your question is around the open seasons and excess capacity. So there's two considerations one was to catharine for expansion process and the FERC filing that we made that expansion is fully subscribed with ta is in place and we're working through the FERC process as we speak that is separate and apart from the $3 five Bcf.
Season, I mentioned around available capacity due to contract renewals heading into next year the rate environment across both of those legs of capacity looks very very solid.
And we have a lot of increasing confidence and optimism around the direction of price Youre last last question around return profile.
I'd say that is an extremely attractive project high teens unlevered rate of return on simply the 10 year contract term and I think we expect ability to optimize as we expand and grow from there.
Yeah.
Great. Thanks, that's all for me today.
There are no further questions in the queue I'd like to hand, the call back over to Mr. Hoffman for closing remarks.
Yes, thanks, operator, and again, thanks to everybody for joining us. This morning I. Appreciate you taking the time as I said in my answer that I know, Bob with disappointed not to be here, but had some travel plans, but he couldn't avoid I'm sure he'll be back in touch with many of you over the course of the quarter as we run into at conferences and in some of the other holiday gathering so.
We speak look forward to catching up and obviously everybody have a happy holidays upcoming.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.