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Edited Transcript of ALTM.OQ earnings conference call or presentation 1-Aug-19 6:00pm GMT

Q2 2019 Altus Midstream Co Earnings Call

HOUSTON Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Altus Midstream Co earnings conference call or presentation Thursday, August 1, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ben C. Rodgers

Altus Midstream Company - CFO, Treasurer & Director

* David Clay Bretches

Altus Midstream Company - CEO, President & Director

* Patrick Cassidy

Altus Midstream Company - Director of IR

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Conference Call Participants

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* James Eugene Carreker

U.S. Capital Advisors LLC, Research Division - Executive Director

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altus Midstream Second Quarter 2019 Earnings Call. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Patrick Cassidy, Director of Investor Relations. You may begin, sir.

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Patrick Cassidy, Altus Midstream Company - Director of IR [2]

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Good afternoon, and thank you for joining us on Altus Midstream Company's Second Quarter 2019 Financial and Operational Results Conference Call. We will begin the call with an overview by Altus Midstream's CEO and President, Clay Bretches; and Ben Rodgers, CFO, will summarize our second quarter financial performance and provide an update to 2019 activities.

Our prepared remarks will be approximately 15 minutes in length with the remainder of the call allotted for Q&A.

Remarks during the call may also refer to the Altus Midstream Investor presentation, which can be found on our Investor Relations website at altusmidstream.com/investors.

On today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the news release issued yesterday.

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.

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [3]

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Thank you, and good afternoon. Today, we are going to review Altus Midstream's key accomplishments since our last call, provide an update on the company's operational and financial performance and highlight selected activities underway to achieve future objectives as we pursue our goal of becoming the premier midstream company in the industry.

During the second quarter, Altus achieved a number of significant accomplishments. We brought our first cryogenic processing plant online, closed on our preferred equity financing and revolver amendment and exercised our option for the Permian Highway pipeline. In addition, in July, we brought our second cryogenic processing plant online and exercised our Shin Oak natural gas liquid pipeline option. We are executing on the plan set out at the beginning of this year, building a foundation for future growth.

As noted in our first quarter earnings, call, beginning in April, Apache deferred a portion of its gas volumes at Alpine High due to price weakness. Much of the previously curtailed rich gas was brought on line with the 2 new cryogenic processing plants. In as much, we are working with Apache on the potential for some continued rich gas curtailments in the third quarter. With the startup of Gulf Coast Express around the end of the third quarter, we expect all of both the rich gas and lean gas to be flowing into the system uncurtailed. We continue to monitor the operating performance both at Alpine High and on our JV pipeline projects that begin service this quarter. Ben will address our full year guidance in his remarks.

Since the beginning of the year, we have worked closely with our sponsor, Apache Corporation, to maintain our focus on building and operating infrastructure that adds value to production from Alpine High and delivers gathering and processing services timely and efficiently. We continue to look at our capital and cost structure to align our program with the needs of our primary customer as well as future third-party customers.

I am pleased with our progress thus far. We've built out a substantial gathering and processing system. We are streamlining our organization, shifting staff from decentralized, lower-recovery mechanical refrigeration operation to a centralized, high-volume cryogenic processing complex. This will allow us to optimize head count per unit of gas processed.

Altus has also taken a number of steps to strengthen its financial position since our last update. During the second quarter, we issued $625 million in preferred equity in a private placement and amended the Altus credit facility, which allows us to increase revolver capacity by $200 million during the initial period to $650 million. These proactive steps have created the financing capacity to invest in our infrastructure, exercise our JV pipeline options and focus on efficiently growing our business. Ben will provide additional detail in his remarks.

Our operations team has done an excellent job of managing the build-out of our cryo plants. The first cryo entered service in May, and the second cryo entered service earlier last month. Combined, the facilities can process more than 400 million cubic feet per day, levels they have achieved and exceeded as we commission and ramp production at the facilities. Our third cryo plant is currently under construction and on schedule to process gas around year-end when required gird power is available. Each plant has a nameplate capacity of 200 million cubic feet per day. The first plant demonstrated that it can recover more than 99% ethane in full recovery mode, with 100% recovery of propane, butanes and heavier liquids. The second cryo plant has begun operations and is on track to match the performance of cryo number 1. We have approached nameplate processing capacity with similar results and will continue to optimize the facilities with the lessons learned from the first cryo.

I'll shift now to our joint-venture pipeline business, in which Altus now has ownership in all 4 long-haul pipelines. We own equity interest in 2 premier long-haul natural gas pipeline projects that are being constructed and operated by Kinder Morgan, Gulf Coast Express and Permian Highway, both of which are fully subscribed by long-term binding agreements with creditworthy counterparties. Kinder Morgan recently brought forward its start date for the Gulf Coast Express pipeline to late September 2019. The project is designed to transport approximately 2 billion cubic feet per day of natural gas from the Permian basin to Agua Dulce. Altus owns a 16% interest in Gulf Coast Express.

Kinder Morgan also reiterated an expected October 2020 start for the Permian gas pipeline, a 2.1 billion cubic feet per day pipeline connecting the Permian basin to the Gulf Coast. Construction is planned to begin this fall. In May, Altus exercised its option and acquired an approximate 27% equity interest in Permian Highway pipeline.

We are also pleased to partner with Enterprise on the Shin Oak natural gas liquids pipeline. Enterprise noted during its analyst conference that the Shin Oak NGL mainline is in service with the initial 250,000-barrel per day capacity of the line effectively full on day 1. The lateral connecting Shin Oak to Waha was completed at the end of June, and Altus exercised and closed this option in July, making it a 33% owner in the pipeline. Shin Oak is integrated with Enterprise's existing gas pipelines and gas processing plants, which provide supply from multiple basins. This integration, along with connectivity to Enterprise's fractionation complex in Mont Belvieu, drives substantial volumes through the pipeline and provides superior flow assurance for customers, which is a significant competitive advantage for attracting additional third-party business.

During the first quarter, we exercised our equity option on the EPIC crude oil pipeline. Permanent crude line service is expected in January 2020, with the interim service using the EPIC Y Grade line commencing this month.

As mentioned on the prior quarter call, we had 3 goals for 2019: one, to successfully transition from mechanical refrigeration processing to the use of 3 cryogenic gas plants by the end of this year; two, secure financing to meet our capital needs through such time that we are self-funding; and three, continue to execute on our plan with the JV pipeline projects. We are successfully executing on all of these goals and continue to progress toward building the premier Permian basin midstream company.

We are continually optimizing our operations within Alpine High in the context of Apache's capital budget, with a goal of minimizing time to free cash flow generation. We are also continuing to build our portfolio of potential organic growth opportunities to diversify our customer and commodity footprint within the basin. Our efforts are focused on execution with an emphasis on reliability, capital efficiency, operating cost and outstanding customer service.

Safe and environmentally sound operations remain our top priority. Our operations are only successful if the community, our contractors and our employees are safe and the environment is preserved and protected.

From an execution and capital discipline perspective, Altus performed well in the first half of 2019, and we will continue to execute on our plan.

I will now turn the call over to Ben to cover in detail our financial performance for the last quarter and the path forward for this year.

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [4]

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Thank you, Clay. As noted in the press release issued yesterday, Altus reported a second quarter net loss, including noncontrolling interest, of $5.5 million. On a non-GAAP basis, adjusted EBITDA was approximately $4.1 million on revenues of $24.1 million.

Gathering and processing volumes for the period averaged 363 million cubic feet per day. Approximately 65% of second quarter volumes were rich gas. Volumes declined approximately 36% from the preceding quarter as Apache deferred production beginning in April, in response to price weakness at the Waha Hub. The impact of lower volumes was partially offset by cost savings resulting from the company's disciplined cost management during this period of temporary lower throughput.

Capital investments in midstream infrastructure during the quarter were $417 million. This includes $320 million for the JV pipelines, which comprises the exercise of the Permian Highway natural gas pipeline option in May, continued capital calls for our ownership in GCX and EPIC and $97 million for gathering and processing infrastructure. Our capital program, in 2019, remains focused on the exercise of our long-haul JV pipeline options. Approximately 75% of our growth capital investments in 2019 and 2020 is related to our JV pipeline projects.

In addition to the Permian Highway pipeline, we announced yesterday that we exercised and closed our option in Enterprise's Shin Oak NGL line. As a result, we now hold equity interest in 4 premier long-haul Permian takeaway pipeline projects, with the option to acquire a 50% equity interest in the Salt Creek NGL line. These were highly economic projects that diversify Altus' asset base.

In order to fund 2019 through 2020 growth capital needs, of which the exercise of Shin Oak and Permian Highway options comprised a significant portion, we issued $625 million of preferred equity in a private placement and expanded our initial period revolving credit facility capacity to $650 million. The capital raise supports the investment merits of our assets and solidifies our financing outlook by funding our growth capital without issuing additional common equity. In addition, these financings provide us with significant incremental liquidity at flexible terms in a very attractive weighted average cost to capital in the single digits.

With regards to 2019 guidance, we are updating our adjusted EBITDA range to $70 million to $85 million compared with the previous guidance of $75 million to $95 million, and reduction in the midpoint of $7.5 million. This change reflects a lower-than-expected adjusted EBITDA contribution from EPIC and the gathering and processing business, partially offset by expected outperformance from Shin Oak. Of note, the midpoint of our adjusted EBITDA guidance would have been unchanged at $85 million, were it not for an approximate $7 million lease expense net to Altus' ownership interest in EPIC crude related to a capital reimbursement to EPIC Y Grade for interim crude service. We had originally anticipated that this $7 million expense would be included in capital investments. Consequently, capital investments for the year will be reduced correspondingly. This lease payment is solely related to interim service, and our current outlook for EPIC crude for 2020 and beyond remains positive and consistent with our prior expectations.

We are also updating our guidance for growth capital investments this year to range between $1.575 billion and $1.625 billion, which represents a $25 million midpoint reduction relative to our prior guidance range. We expect to realize capital savings this year associated with our JV pipelines, largely driven by the previously mentioned shift of the EPIC capital reimbursement out of capital investments and into adjusted EBITDA, along with the lower expected capital charge associated with Permian Highway from exercising our option early. We also expect to realize savings in our gathering and processing business, primarily associated with lower-than-expected capital investments on certain gathering projects and the deferral of other projects into 2020.

With regards to our 2020 outlook, we are maintaining a close dialogue with Apache, as it works through its planning process for next year at Alpine High. If current depressed commodity prices persist, we could see reduced activity at Alpine High next year relative to our existing guidance for 2020. Regardless, Altus is taking proactive steps to optimize its current gathering and processing footprint in light of the challenging commodity price environment.

It is worth noting that, per our existing guidance, our JV pipelines represent a significant portion of our adjusted EBITDA in the coming years, and we expect that our JV pipeline business will be largely unimpacted by reduction in upstream activity at Alpine High.

We are focusing on additional business development opportunities with third parties, including producers and other midstream companies. In addition, we have multiple avenues of potential growth with Apache. We are also emphasizing capital discipline and preserving liquidity by carefully assessing future gathering and processing capital investments and by evaluating sales of unutilized assets. Our existing guidance assumes that a fourth cryo, along with associated compression, is completed in late 2021. To the extent we are able to meet Apache's processing needs solely through the expansion of our 3 existing cryo facilities, it will result in a $150 million to $200 million of estimated aggregate capital savings in 2020 and 2021.

With regards to sales of unutilized assets, which would include our mechanical refrigeration units, spare compressor units and spare pipe, we could receive aggregate proceeds to Altus of $40 million to $50 million. The deferral of the fourth cryo provides potential upside to our 2020 and 2021 capital guide, and the sale of dormant assets provides additional liquidity. To conclude, while Altus faces potential challenges with the current commodity price environment and the resulting impact on activity at Alpine High, we believe the core investment merits for Altus remain intact.

As Clay mentioned earlier, we have been doing what we said we were going to do in 2019. We brought 2 cryos in service on time, safely and on budget, raised the growth capital we needed without issuing common equity and exercised and closed our 4 largest equity options in Permian basin takeaway pipelines. In addition, due to our recent preferred equity issuance and revolver amendment, we believe we have ample liquidity and are adequately funded to meet Alpine High's gathering and processing needs for the foreseeable future. We continue to expect that we will exit the initial period of our revolving credit facility by the end of this year, which would increase our revolver capacity to $800 million.

Lastly, with free cash flow defined as adjusted EBITDA minus capital investments, we expect to be free cash flow positive by late 2020, when Permian Highway comes online, enabling us to pay an attractive dividend to shareholders beginning in 2021.

I will now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Spiro Dounis with Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [2]

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Maybe just starting with the outlook, if we could. Encouraging to see that Apache's production exit run rate is still kind of more or less intact as we get to the end of the year here. But, I guess, as we think about next year, with all 3 cryos on: Shin Oak online; GCX online; the third, let's say that there may be any temporary deferral in 2020, wouldn't necessarily mean a decline for Altus, but may be more of a cap on growth, while volumes are curtailed. And I guess the point being, I guess, Apache's netbacks are going to be vastly improved with all those pipelines online. And so it seem like the fourth quarter run rate should, at least, create a volume floor. Is that fair?

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [3]

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Yes. So Spiro, Clay Bretches here. And I think one of the things you really need to take a look at is the GX -- the Gulf Coast Express pipeline coming online, and that's really going to improve the netbacks for Apache, not to mention that the NGLs are coming in full stream, and we're looking at 100% recovery. One of the great things about this technology that we're using, this SRX technology, is even if we were to go into ethane rejection, we'll still be seeing maximum recoveries even on propane. Clearly, butane is plus, but your propane would be at a 100%, even if you were to go into something as low as 10% on your ethane recovery. So I think that's going to allow for a much better economics for Apache in the field and any other customers that we may be able to pick up in that area.

But as far as the cap on growth, we need to really be thinking about, and we are thinking about this as a team, is we're looking for other commercial activity in the area, in and around that Southern Delaware basin area of operation. We see other producers. We see other third-party midstream companies that we can do business with. Clearly, want to expand not only in the number of customers that we have of -- Apache is a great base customer, but there are other customers out there, but we also look at other commodities. And so we're looking at water opportunities, we're looking at oil opportunities. Nothing that we're ready to announce right now, but as far as a cap on growth, we don't believe that there is a cap on growth. We believe that what we have and having the steel in the ground and boots on the ground and a real operating center down there just allows us to grow and if that's the nucleus for that growth, we think there's a lot of upside in the area.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [4]

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Okay. That's interesting. That's great color. Second question, maybe just with respect to the CapEx guidance range, could you just maybe walk us through some of the variables that get you to the high and the low end of the range?

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [5]

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Spiro, it's Ben Rodgers. Sure, so the -- we tightened it from -- it was $100 million, and now it's $50 million. I think the #1 driver that could swing the $50 million range we have now is any acceleration or it could be a deceleration, but we would expect an acceleration on any capital investments on PHP.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [6]

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Okay. Got it. That's clear. Last quick one, just a point of clarification. Ben, I think you mentioned with cryo 4, I guess, potentially being delayed and potentially selling some of the equipment there for, one, I think you said $40 million to $50 million? And then two, is that a decision that's already been made? Or you're saying that's sort of an option you guys have right now?

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [7]

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It is an option. There are some -- we've mentioned this before. As we look at the mechanical refrigeration units, recall that those really come as a kit with 2 primary components, the actual processing piece of it and then the compression. And we have plenty of needs in the field for the compression, and so we would be selling the processing piece of that. And we're in discussions for those, but now we just don't have anything to talk about as well as some of the other spare inventory that we have. And so we're in discussions with other folks about buying that inventory, just don't have anything to print yet on that.

And on the capital savings for that fourth cryo, we've talked about that before as well. It kind of spanned over 2020 into 2021. It takes approximately 5 quarters from kind of the go button to get that cryo operational. And so, if there were a need to defer that outside of our guidance period, that would be upside to our guidance right now. And the $150 million to $200 million is the cost of the train as well as cost of further compression and gathering associated with a fourth cryo.

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Operator [8]

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(Operator Instructions) Your next question is from the line of James Carreker with U.S. Capital Advisors.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [9]

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Would it be possible to quantify exactly what type of activity levels you need to see from Apache in 2020 to hit the previously disclosed 2020 EBITDA guidance?

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [10]

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James, it's a good question. It's really going to be dynamic. Apache has not put out production estimates for 2020 with any of their assets, including Alpine High. And so right now, we're in close discussions with them and believe that there is a need for the third cryo that's coming on. And when we have more information, we'll be able to disclose that. But right now, we're -- we haven't -- we're just now getting into the planning process for 2020.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [11]

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No, understand -- I guess, I understand that the projections for Apache aren't out, but, I guess, what would you need in order to hit your guidance in terms of either well connects or rig activities? I mean, that should be fairly independent from what they actually do, right?

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [12]

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Well, I mean, it is, but again, we can't front run what their plans are. We may have assumptions on our side. And like I said, there is a -- we expect that there's a need for the third cryo, hence the reason that we are finishing the construction and planning for that to be online this year. But we have not talked about rig rates -- I'm sorry, we have not talked about rig count and activity before, and it's not really our place to estimate what that is. We've got -- I still think that we'll have the land within the expected ranges for our JV pipes next year. It's a very large portion of our EBITDA. And through the end of 2019, we'll have the right amount of EBITDA from the cryos and the JV pipes to exit the initial period. So -- but -- so we will have plenty of liquidity to enter into 2020. And as we plan for how full or less so the cryos are, would impact other opportunities that we look at.

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Operator [13]

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There are no further questions. Are there any closing remarks?

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [14]

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No. No closing remarks. Just want to say thank you, everyone, and have a great day.

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Operator [15]

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This concludes today's earnings call. Thank you for your participation. You may now disconnect.