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Edited Transcript of CNXM earnings conference call or presentation 29-Oct-19 3:00pm GMT

Q3 2019 CNX Midstream Partners LP Earnings Call

Canonsburg Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of CNX Midstream Partners LP earnings conference call or presentation Tuesday, October 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad A. Griffith

CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC

* Nicholas J. DeIuliis

CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC

* Tyler Lewis

CNX Midstream Partners LP - VP – IR

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Conference Call Participants

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* Christopher Paul Tillett

Barclays Bank PLC, Research Division - Research Analyst

* David Meagher Amoss

Heikkinen Energy Advisors, LLC - Research Analyst

* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day and welcome to the CNX Midstream Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead, sir.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [2]

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Thank you, and good morning to everybody. Welcome to CNX Midstream's Third Quarter Conference Call. We have in the room today Nick DeIuliis, our CEO; Chad Griffith, President and COO; and Don Rush, our Chief Financial Officer.

Today, we will be discussing our third quarter results, and we have posted an updated slide presentation to our website.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick, followed by Chad, and then we will open the call up for Q&A, where Don will participate as well.

With that, let me turn the call over to you, Nick.

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [3]

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Thank you, Tyler. Good morning, everybody. I'm going to be brief, and then I'll turn it over to Chad. I did want to hit on a few key points. First, CNX Midstream continues to smoothly and efficiently execute our business plan day in and day out, and we do it in a safe and compliant manner. That ability is the prerequisite that sets up the strong financial performance that we've been posting quarter after quarter and that we expect to continue into the future. So hats off to the entire Midstream team.

Second, you can see this ability to execute manifests itself in the financial numbers both in results for the quarter as well as in 2019 and 2020 updated guidance. Cash flows and throughput are being raised for 2019 reflecting Midstream's smooth execution and, coupled with upstream producers, CNX being able to improve its performance for the year.

Cash flow guidance for 2020 and coverage ratio are unchanged from the last update despite upstream activity from CNX being streamlined and reduced as it adjusts with gas prices. And by the way, that streamlining of 2020 activity by CNX only builds inventory and runway for CNX Midstream into the future beyond 2020.

Third point, our build-out and capital spend associated with it, they're coming to a successful conclusion as we speak. That is going to allow us to double down on even more intense day-to-day operation, generate free cash flow and reduce leverage ratio, all things to look to and forward for in 2020 and beyond.

And then last, our 15% distribution growth forward path and 18 consecutive quarters of delivering on 15% distribution growth in the past, those things do not happen by accident. They're the results of a business philosophy of astute capital allocation and a focused team on execution, on executing that philosophy in action.

So with that now, I'm going to turn things over to Chad.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [4]

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Thanks, Nick. The company posted another strong quarter of results, highlighted on Slide 3. Average daily throughput, including volumes under high-pressure short-haul agreements, was 1,754 BBtus per day in the quarter, up around 1.4% when compared to the second quarter of 2019. We also posted the 18th consecutive quarterly cash distribution increase at our targeted 15% annual growth rate.

We have continued to focus on costs, which have helped drive up our adjusted EBITDA, which in the quarter was $56.5 million or $12 million higher than the third quarter of last year. Despite our leverage ratio remaining well within our targets and below the industry average, it did tick up slightly to 2.9x compared to 2.8x last quarter. As we have previously stated, we continue to expect that our leverage ratio will peak in the fourth quarter of 2019 at around 3x and then quickly come back down to around 2.7x by year-end 2020.

Moving on to Slide 4, we have provided updated guidance for 2019 and 2020. In 2019, we are ticking up our throughput volumes for the year as CNX accelerated some volumes from 2020 into 2019, and we are adjusting adjusted EBITDA and distributable cash flows as a result, which are up $15 million each based on the midpoints of the guidance ranges. For 2019, we are reaffirming the previous guidance. In 2020, we are reducing throughput volumes modestly by 50 BBtus per day. However, despite a lower volume range compared to the previous guidance, adjusted EBITDA and DCF remain unchanged due primarily to offsetting general and administrative cost reductions.

For capital, we are reaffirming the previous range of $80 million to $100 million as we continue to expect capital to decline substantially as we return to a more run rate construction program in 2020 after completing the handful of projects and system expansions that I will touch on shortly. The reduced capital in 2020 is helping to drive expected free cash flow in the year between $120 million to $140 million.

Lastly, we are reaffirming our 15% annual distribution growth as the target through 2023. As already stated, the third quarter was our 18th consecutive quarterly cash distribution increase at the targeted 15% annual growth rate.

Slide 5 is an update of our major capital projects. On the facilities side, we've reached major milestones on 2 large-scale projects, turning the new Dry Ridge Station into service and completing the Morris Station expansion, resulting in the commissioning of 7 new compressors in the quarter. In the fourth quarter of 2019, we will install the Buckland Station discharge line and see first volumes flow soon after. We expect our major 2019 projects to reach mechanical completion in fourth quarter with some level of project closeout during the first half of 2020.

Slide 6 is one that we've shown in the past. A quick summary. Per the amended gas gathering agreements, we have a total of 192 total well commitments, of which 180 are CNX's responsibility, with the remaining 12 coming from HG. The easiest way to think of these commitments is that there are approximately 40 wells per year.

We also have a minimum volume commitment from CNX in their Shirley-Pennsboro area of operation for approximately 130 BBtus per day this year, which amount -- that amount increases slightly over the next couple of years, but the commitment amounts to roughly 1 pad per year. CNX is currently producing above that minimum commitment.

And with that, I'm going to turn it back over to Tyler.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [5]

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Thanks, Chad. Operator, if you can open the line up for Q&A at this time, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeremy Tonet with JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Given that CNXM has been yielding more than 10% for the past several quarters here and CNX is lowering their targeted 2020 production, does it make sense to still grow the distribution at 15% here instead of do some level of buybacks? It seems like distribution growth seems to only really benefit the GP IDRs at this juncture as opposed to the LP unit price?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [3]

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Yes. As we've stated, whenever we did kind of consolidate the other half that GP got bought, and it reconfigured the gathering agreements and put in the well commitments in place, we like to take the long approach on how we manage the capital structure of the company and the policies going forward. So we've spent a lot of time, energy and effort building a business that is suited for this plan. I think your -- it's appropriately acknowledged that the MLP market has been challenging for everybody really, frankly, not just CNX Midstream. Net net, we've done well versus a lot of different peers and such over time. So we're trying to take thea long view on here, trying to be disciplined, trying to be prudent and thoughtful as we continue to run the company.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Got you. I mean I was just curious, with CNXM yielding over 10% for almost all the year, at what point would buybacks start to make sense, I guess?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [5]

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Yes. We've -- this is part of the evaluation we run. Obviously, on the CNX upstream side, it is part of the playbook. When we did some of the amendments and pieces in place, we've provided some optionality in regards to thinking about those things. Obviously, there's complexities involved with how that mechanically would work versus other uses of the cash versus how IDRs are situated. So it is something that is part of the capital allocation playbook that we look at at CNX Midstream, and no particulars on exactly what thresholds matter or not. It's just one of the areas that you look to to put cash flow to work that you have.

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [6]

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And at this stage and at this point in time, the 15% distribution growth is what you should be assuming.

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Operator [7]

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(Operator Instructions) our next question comes from David Amoss from Heikkinen Energy.

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David Meagher Amoss, Heikkinen Energy Advisors, LLC - Research Analyst [8]

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I just wanted to clarify whether or not your 15% distribution growth guidance through 2023 included any assumption of drop-down during that period?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [9]

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It does not include any assumption of drops. Our plan and the structure that we've put into place, we believe, gets us there through 2023 without performing any drops or really raising any additional capital.

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David Meagher Amoss, Heikkinen Energy Advisors, LLC - Research Analyst [10]

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Okay. And then I just wanted to get you all's view as management about just generally how you're thinking about the IDR structure, which is clearly an overhang for every small-cap MLP at this point that continues to have it? And then more specifically, if you wouldn't mind just kind of talking about how you view the Hess deal that was recently announced, which seems to have worked for both the upstream sponsor and the midstream company?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [11]

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Yes. It's something we've talked to in the past around recognizing and reinforcing that, hey, the business works with them in place but recognizing the IDRs are something that MLP investors aren't interested in companies having at this juncture. So similar to how things changed, it's continued to change, and the thought around there is really the same as it's been, is looking for these types of a win-win type of a situation between the two. I think in the Hess transaction, without getting into specifics, it was a nice way to couple a couple of things together and officially get that situated. So as we've shown in the past with all the things we've done with the GGA and Utica dedication and the Shirley-Pennsboro drop and the well commitments that we've put in place, we do look at these things to create win-win scenarios and understand that IDRs are going to need to be addressed. And we have time to sort them out, but that doesn't mean that we are not trying to figure out something sooner rather than later. So understand sentiment and working hard on thinking about the right approach.

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Operator [12]

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Our next question comes from Chris Tillet with Barclays.

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Christopher Paul Tillett, Barclays Bank PLC, Research Division - Research Analyst [13]

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Just a quick one for me here. There was a mention actually in the CNX press release this morning that CNX saw some increased transportation gathering fees in the quarter due to higher CNXM fees. Just sort of curious if you could maybe expound on that a little bit. Was that just sort of routine contractual increases, or is there something else going on there? And then how should we think about that going forward?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [14]

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Yes. So, Chris, that is in relation to the Q3 2018 comparison. So that would adjust for the 2.5% annual escalation that we see with those contracts.

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Operator [15]

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Our next question comes from Ethan Bellamy with Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Would CNXM be better off as a C-corp? Or is the partnership format the best way to go for the business?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [17]

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Yes. Again, looking at what the appropriate capital structure is and how to have that work is something that is things that you look at and consider. I do think that right now, especially with CNX being the biggest and largest customer for the business and how those 2 are inter-related in some of the synergies and things we talked about with flattening the organization and combining teams, there's a lot of benefits in how we have it structured right now. But we're always looking at different things and how folks have addressed things.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay. Obviously, a lot of pain in your contiguous footprint of your assets from some of your peers. Are there any third-party opportunities out there right now? Or are you focused on the parent?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [19]

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Well, it's a mix. We, of course, are continuing to increase the integration between CNX upstream and CNX Midstream. As we noted on both the upstream call and just noted in my prepared commentary, we've integrated the operating teams and so those guys are totally in sync and really focused on maximizing the value from the CNX opportunity. But that doesn't mean we're ignoring third-party opportunity, right? So your point is valid. Our -- the other operators in the space are sort of slowing down a little bit and have been announcing slowdowns. But we are continuing to talk to them or continuing to have discussions. We're continuing to look ways to position ourselves to take advantage of when those guys get back to the drill bit. I think that opportunity really presents itself in CPA, in like the Westmoreland, Indiana, Armstrong County areas of Pennsylvania. It's a lot of -- a lot of those volumes are unspoken for, and that's really a jump off for a midstream operator to get out there and grab that and add that to our portfolio. SWPA is a little bit more challenged because there's a lot of existing dedications already, but to the extent that every dollar is becoming more and more critical, so more and more that we're all going to have to sort of work together to find ways of sharing capital projects and keeping capital as efficient as possible. And that's where some of the third-party opportunity in SWPA can come from.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Okay. And then just to carry on that theme, are there any specific third-party capital projects, whether it be pipes, [GMP], crackers, et cetera., that could catalyze, let's say, pre-hedge realizations at CNX that we should care about on the CNXM side?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [21]

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At CNX -- CNX took a little bit of a different approach to marketing our gas than most of their peers, right? So they avoided a lot of the long-haul transport. They avoided signing up for a lot of long-haul FTs. So a lot of their exposure is really that local market. And then they protect the volatility of that local market with their hedge book, right? And so that's why, at the CNX level, you're seeing a lot of the benefit at the sort of after-hedge realization, [I think] -- continuing to operate on go forward.

As far as like step change events in the basin that will help them, certainly we're looking for continued expansion -- pipeline expansion projects to get gas out of the basin, and we're looking at our peers as they change their capital programs and their availability to access capital and what their drill programs end up looking like, is -- creates an opportunity for CNX and their healthy balance sheet to step in and fill some of that space as their peers slow down.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [22]

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And there are folks looking to add additional crackers in the facilities, now that Shell is up and running. So there is -- from the demand side, there are components that I think will help, call it slowly and over time, build more demand.

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Operator [23]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Lewis for any closing remarks.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [24]

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Thank you all again for joining us here today, and we look forward to speaking with you again next quarter. Thank you.

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Operator [25]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.