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Edited Transcript of ALTM.OQ earnings conference call or presentation 31-Oct-19 6:00pm GMT

Q3 2019 Altus Midstream Co Earnings Call

HOUSTON Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Altus Midstream Co earnings conference call or presentation Thursday, October 31, 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Altus Midstream Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Patrick Cassidy, Director of Investor Relations. Thank you. 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 Third 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 financial performance and outlook.

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 investor presentation posted yesterday on the Investor Relations website previously noted.

Finally, I'd like to remind everyone that today's discussion 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. On our call today, we will review Altus Midstream's key accomplishments since our last call, provide an update on the company's operational and financial performance and briefly discuss our capital planning progress, including our guidance for this year and how we're looking at 2020.

During the third quarter, Altus achieved a number of significant milestones. We brought our second cryogenic processing plant online, meeting our schedule and budget expectations.

We exercise our option for the Shin Oak natural gas liquids pipeline. Shin Oak, which began operations earlier this year, completed the interconnection to Waha in June and began moving Y Grade barrels from that hub to Mont Belvieu.

At the end of September, Gulf Coast Express began full commercial service, delivering natural gas from the Permian Basin to the Gulf Coast. Looking ahead, we see reasons for optimism even with a lower commodity price environment and the lower upstream investment that can come from that. Financially, we have ample liquidity to fund our business through and past the start-up of the Permian Highway pipeline in early 2021.

The significant capital investments with our long-haul pipelines will be nearly complete by the end of next year. The combination of lower capital investments combined with increasing earnings contributions, primarily from our joint venture pipeline projects reinforces our confidence in the ability to generate distributable cash flow and pay a dividend as planned in 2021.

Moving on to the quarter. We are executing on the plan set out at the beginning of this year, building a foundation for future growth. Our first 2 cryo plants were completed on time and on budget and are now fully functional. Construction on our third cryo plant is complete, and we're commissioning the facilities awaiting utility hookups that we expect to be available late in the fourth quarter.

Much of the previously curtailed rich gas was brought online in Q3 with the 2 new cryogenic processing plants. Gathering and processing volumes for the third quarter were up 27% compared with the second quarter, and Apache noted in their call earlier today that volumes are expected to continue ramping up through the end of the year.

Altus continues to focus on third-party volumes in order to fill any excess capacity as soon as possible. And we have had meaningful conversations with numerous upstream operators and other midstream companies interested in our processing and transportation capabilities.

We possess distinct advantages in the Delaware Basin that we believe provide a number of benefits to operators who choose to process and move volumes with Altus. The SRX processing technology at our Diamond cryo complex offers superior recoveries of natural gas liquids, whether it is running in an ethane recovery or a rejection mode, and we can adjust recovery levels nearly in real-time in response to market conditions. We also have multiple interconnects on gas and NGL lines, providing additional optionality to our customers.

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 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 announced a full commercial in-service start-up of the Gulf Coast Express pipeline in late September 2019. The project came in on budget and slightly ahead of schedule and is now full and transporting 2 billion cubic feet per day of natural gas from the Permian Basin to Agua Dulce.

Altus owns a 16% interest in GCX. Altus should realize a full 3 months EBITDA contribution from GCX operating at capacity beginning in the fourth quarter.

Kinder Morgan also announced an early 2021 start for the Permian Highway gas pipeline as some delays with securing right-of-way and construction have pushed the start date back. Altus holds a 27% equity interest in PHP, a 2.1 Bcf per day pipeline connecting the Permian Basin to the Gulf Coast.

The Shin Oak NGL line, including the lateral to Waha was in service for the entire 3 months of third quarter. It is expected to reach its full 550,000 barrel per day capacity this quarter as new pumping stations come online. Altus holds a 33% equity interest in the pipeline effective July 31, 2019.

The EPIC crude oil pipeline began interim service on the converted NGL line in August. Permanent crude line service is expected in the first quarter of 2020.

We continue to monitor the performance of the regional Salt Creek NGL pipeline where we have an equity option that is exercisable through the end of January 2020.

In closing, from an execution and capital discipline perspective, Altus performed well in the third quarter. And we will continue to execute on our plan.

Our first 2 JV pipeline projects came on stream as expected and are beginning to make a significant contribution to the company.

I am pleased with our safety performance to date, particularly during the construction phase of our cryo plants where we completed more than 1.8 million man hours on-site without a recordable incident. And we are actively pursuing the full spectrum of third-party gathering and processing opportunities.

From a relative valuation standpoint, we recognize the disconnect between our stock price and the value we believe is inherent in our assets. We are looking at a full range of actions, strategic and tactical to realize this, and we'll update you at an appropriate time.

I will now turn the call over to Ben Rodgers 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 third quarter net loss including noncontrolling interest of $8.2 million. This comprises a number of GAAP reporting items that can affect comparability of results.

In the third quarter, this included $9 million for impairments associated with the cancellation of a compression project and $4 million for an unrealized embedded derivative loss related to the preferred equity.

Excluding those and other items, Altus generated adjusted EBITDA of approximately $18 million on revenues of $34 million. This is more than a fourfold increase from second quarter adjusted EBITDA of $4 million on revenues of $24 million.

Gathering and processing volumes for the period averaged 467 million cubic feet per day compared with 363 million cubic feet per day in the preceding period. Approximately 73% of third quarter volumes were rich gas.

Volumes increased as deferred production from Apache's Alpine High field was brought back online, coinciding with linefill at Gulf Coast Express and the start of our second facility at the Diamond cryo complex. Capital investments in midstream infrastructure during the quarter were $610 million. This included $570 million for our JV pipeline projects which comprises the exercise of the Shin Oak Natural gas liquids pipeline option in July and capital calls for our ownership in all 4 long-haul JV pipeline projects.

Capital for gathering and processing infrastructure for the third quarter came in at $40 million. Year-to-date, our capital investments totaled $1.3 billion, $1 billion for the JV pipeline projects and $276 million for gathering and processing.

We continue to focus on costs including actively managing headcount, which has been reduced by 1/3 since the beginning of the year to align the organization with more centralized operations.

Moving on to our financial outlook. We don't see the need to go to any debt or equity capital markets to meet current growth objectives. By the end of this year, we expect to exit the initial period of our revolver as defined by credit agreement. This enhances our liquidity by $150 million, bringing our revolver commitments to $800 million. Liquidity may be further enhanced as Altus evaluates and executes additional asset sales.

We have identified an estimated $40 million to $50 million in assets for potential sale. This quarter, we have closed or have pending about $18 million in asset sales, with the remaining assets on the market.

Moving on to guidance. For 2019, we are reiterating our adjusted EBITDA range of $70 million to $85 million and revising our gathered volumes forecast for the year to 475 million to 500 million cubic feet per day.

Operational cost-cutting efforts have been effectively implemented and our equity pipeline interests currently in service are performing ahead of plan. This is offsetting lower G&P volumes and the $7 million lease expense associated with the interim crude service on EPIC's Y-grade line.

Our guidance range for growth capital investments this year of $1.575 billion to $1.625 billion is unchanged. With regards to our 2020 outlook, we are maintaining a close dialogue with Apache as it works through its planning process for next year.

The final Altus 2020 capital program will be reviewed and approved by our Board of Directors and disclosed in February with our fourth quarter and full year 2019 results.

While our plans are still in progress based on an assumption that the lower commodity price environment today persists into next year, we have updated our guidance for 2020 and 2021.

Adjusted EBITDA has been revised to a range of $200 million to $250 million. At the midpoint, this is a 25% decrease compared with the previous guide of $260 million to $340 million, reflecting assumed lower G&P volumes next year, deferral of PHP into 2021 and modest downward revisions on expected adjusted EBITDA contributions from EPIC.

The midpoint of 2021 adjusted EBITDA is now $300 million. In this scenario, our revised guidance for 2020 growth capital is reduced considerably to $325 million to $375 million. At the midpoint, this represents a 33% decrease from $525 million in our previous guide, with the vast majority coming from a reduction in G&P capital.

Our revised guidance assumes that Apache's processing needs can be met through the 3 existing plants at the Diamond cryo complex, which provides a savings of $150 million to $200 million from the deferred construction of a fourth cryo facility.

As a result of this significant G&P capital reduction, our growth capital next year is predominantly attributable to the Permian Highway pipeline.

We anticipate substantially lower capital requirements in 2021. We will have essentially completed our investments in the JV pipeline projects, and our G&P capital will be at a similar level to 2020. 2021 growth capital is now guided to a midpoint of $30 million.

Altus continues to execute at a high level. While the company and the industry face challenges with the current commodity price environment and the resulting impact on activity in the Permian Basin, we believe the core investment merits for Altus remain intact. Our ability to generate cash is underpinned by the strength of our JV pipelines.

In our investor presentation posted to our website yesterday, we included a new guidance metric, distributable cash flow to highlight this capability. The midpoint of our guidance for DCF in 2019 is $50 million, which increases to $125 million in 2020 and $200 million in 2021. As a result, Altus should be well positioned to pay a dividend in 2021, as we've noted previously.

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) Your first question comes from the line of James Carreker from U.S. Capital Advisors.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [2]

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Just kind of looking at your revised guidance, you kind of have attributions of EBITDA between JV pipes and G&P. I guess, my back-of-the-envelope math kind of showed that your expectations for G&P EBITDA in 2021 are roughly flat with 2019. So is it -- is -- am I reading that right? And I guess, as a follow-up to that, what type of rig count is the G&P outlook based on from Apache?

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

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Yes, James. So this is Clay Bretches. Thanks for your question. And let me address the rig count question. That's not something that we typically disclose. But I will say this, on the EBITDA that you're looking at, we are being extremely conservative with that EBITDA number that we're putting out there. And we're taking this at a bare minimum look, and we're focusing on -- primarily on our 1 customer being Apache. So we're not dialing in third-party upside, which we believe there is. And if you listen to our comments earlier, we're actively pursuing third-party business, not only with area producers, but also with other third -- midstream companies in the area. So we're looking at that. But the numbers that you see in terms of the EBITDA on the G&P side of the business are very conservative. So you don't see -- you won't see any fluff whatsoever. And Ben, you may want to comment as well.

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

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That's right, Clay.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [5]

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And then, I guess, with the new metric of DCF coming out in the slides, is that something we'll start seeing in the earnings release on a quarterly basis so we can kind of keep track with that updated guidance?

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Ben C. Rodgers, Altus Midstream Company - CFO, Treasurer & Director [6]

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Yes, when we roll forward in previous quarters and start to capture that metric, obviously, it's a non-GAAP item so we'd have to reconcile it. We can't reconcile the future because of our inability to forecast certain items but that's something that we hope to provide soon. We wanted to put it out there to really just show the cash generation power from our diverse asset base. And show that we will be in a position to pay a dividend as -- into 2021 and have the ability, if our board and others choose so, to even accelerate that into 2020, but we recognize that, that's not in our quarterly financials, and we'll address that in future quarters.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [7]

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So I guess following up then on some of the third-party conversations you've had, I mean, what's the potential upside there either in terms of number of contracts? Or what's -- what kind of production is out there that's available, is it going to be meaningful relative to Apache? Is it kind of -- if you can put together a bunch of singles, maybe it adds up to something meaningful. I mean, any color around that, with those discussions.

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [8]

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Right. So just as a reminder, James, when we talk about additional midstream business, we can start right with Apache to begin with because, recall, we have a right of first offer for oil and for water within Alpine High, starting with Apache. But we're looking at other opportunities, gas, oil, water with Apache in other areas of the basin as well in terms of additional business. Outside of that, in terms of third-party producers or third-party midstream opportunities, we believe that there are some meaningful opportunities out there and we're actively pursuing those right now, and we're seeing some good potential. And it's something that we hope to be able to comment on in the future. We do believe it will be impactful, and we'll just have to see to what degree of success we have on that front in order to make a comparison to our principal customer that we have with Apache right now in Alpine High, which is substantial. And it's not to be overlooked. I mean when you think about it in terms of anchor customers to have that much dedicated acreage from a producer and that kind of support, it's really unprecedented and unprecedented in the basin. So it really is a great start for us, and it puts some great assets on the ground in order for us to utilize and to capture some value from. So more to come in calls ahead, but, again, we do believe that there's good potential out there, and we believe it will be impactful and meaningful.

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

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I appreciate the color. If I can fit in 1 more. You guys did mention in your prepared remarks that there is a disconnect between the value of your JV pipe interest and the stock price. And I was wondering if you could talk a little bit about some of the options out there that you're contemplating that would maybe unlock a little bit of that?

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [10]

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Thanks, James. And that's a great question. At this point in time, it's not something that we want to go into detail. I will just say this, we're looking at any and all options, as we stated in our comments, both tactical and strategic. So again, more to come in calls ahead, and we hope to be able to announce something in the future. But suffice it to say, our job is to make sure that we're providing maximum value for our investors. And so we're looking at all options that are available to us in order to get that share price up.

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Operator [11]

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(Operator Instructions)

There are no further questions at this time. I turn the call back over to management for any closing remarks.

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David Clay Bretches, Altus Midstream Company - CEO, President & Director [12]

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Okay. That concludes our remarks. Thanks very much for your participation in the call today. Have a great day and a great week.

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Operator [13]

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Thank you. Ladies and gentlemen, this concludes the Altus Midstream Third Quarter 2019 Earnings Call. Thank you for participating. You may now disconnect.