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Edited Transcript of NBLX earnings conference call or presentation 19-Feb-19 7:00pm GMT

Q4 2018 Noble Midstream Partners LP Earnings Call

HOUSTON Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Noble Midstream Partners LP earnings conference call or presentation Tuesday, February 19, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John C. Nicholson

Noble Midstream Partners LP - COO of Noble Midstream GP LLC

* John F. Bookout

Noble Midstream Partners LP - CFO of Noble Midstream GP LLC

* Megan Elizabeth Repine

Noble Midstream Partners LP - Manager, IR

* Terry R. Gerhart

Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC

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Conference Call Participants

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* Ethan Heyward Bellamy

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

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Mirek Zak

Citigroup Inc, Research Division - Senior Associate

* Praneeth Satish

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* 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 day, and welcome to the Noble Midstream Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. At this time, I'd like to turn the conference over to Megan Repine. Please go ahead.

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Megan Elizabeth Repine, Noble Midstream Partners LP - Manager, IR [2]

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Thank you, Allison. Good afternoon, and thank for joining the Noble Midstream Partners fourth quarter and full year 2018 earnings call. With me today to review our results is Terry Gerhart, CEO; John Nicholson, COO; and John Bookout, CFO. Following our prepared remarks, we will open the call to questions from analysts.

This morning, we announced fourth quarter and year-end 2018 results as well as 2019 guidance. The press releases and supplemental slides are on the Investors section of our website, noblemidstream.com. Upon filing later today, our 10-K will be available in the same location. As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial measures. Please refer to our latest news releases for non-GAAP reconciliations as well as our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in our forward-looking statements.

At this time, I'll turn the call over to Terry.

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Terry R. Gerhart, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [3]

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Thanks, Megan, and good afternoon, everyone. I'd like to start today by reinforcing Noble Midstream's strategy and investment proposition. At the center of our strategy is our long-term organic 20% distribution per unit growth target through 2022. And we've committed to doing this with a prudent approach to coverage and leverage.

This outlook is very achievable in a $50 per barrel oil price environment. Enhancing our already strong growth outlook, our team has done a fantastic job transforming the company from a single customer gatherer to a more diverse multi-basin MLP, providing services to our growing customer base. This further increases our confidence in delivering on our promises to unitholders.

In the context of this overarching framework, 2018 was a great year for Noble Midstream. We delivered our major projects -- major growth projects in the DJ and Delaware, with 2018 representing our busiest capital program yet. We successfully integrated our Black Diamond Gathering acquisition and made impressive early progress with the asset.

Fourth quarter throughput was 94,000 barrels per day and volume on the system exceeded our acquisition case for the year. We increased our DJ Basin and Delaware Basin gathering dedications by 40% year-on-year, and we prioritized our target of 50% contribution from the Delaware Basin by the end of 2020.

Among our accomplishments, we commenced third-party gathering in the Delaware and also secured our Delaware Crossing and EPIC investment opportunities. Importantly, many of these items contributed to robust financial performance in 2018. This included a 43% annual increase in our net EBITDA, continuation of our 20% DPU growth and full year coverage ratio of approximately 2x.

Looking ahead, 2019 is shaping up well. We anticipate net EBITDA growth 17% this year, at the midpoint prior to any contribution from the EPIC pipeline projects. This demonstrates the resiliency of our business as it incorporates our expectation for lower customer activity levels and the DevCos mix shift that is working against us year-on-year.

Equally as important, this is capital-efficient growth for our base business, given our backbone infrastructure was largely put in place during 2017 and 2018. I'll now turn the call over to John Nicholson for more details on operations and capital project outlook.

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John C. Nicholson, Noble Midstream Partners LP - COO of Noble Midstream GP LLC [4]

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Thanks, Terry. Quickly on the fourth quarter, we ended the year on a high note. We posted record results in the gathering business across all product streams. Combined oil, gas and produced water gathering and sales throughput was up 24% on a sequential basis. We saw significant contribution from the Green River and Laramie River DevCos in the DJ Basin and Blanco River in the Permian. Freshwater delivery volumes of 180,000 barrels of water per day were down 8% from the third quarter and were at the low end of guidance due to a more pronounced slowdown in completion activity at year-end.

Looking at 2019, we forecast significant gathering volume growth of over 40%. In the DJ Basin, Noble's activity ramp in Green River as well as third-party activity at Laramie River will be the largest drivers of growth. This is somewhat offset by an anticipated decline in Colorado River, driven by declines in East Pony.

Third-party processing expansions during the year, additional gas offload planned for Wells Ranch and delivery of multiple processors at Mustang support our volume projections. We have been, and will continue to be conservative in modeling benefits from lower line pressures as new third-party processing capacity comes online.

In the freshwater segment, we anticipate gross volumes to be down 3% at the midpoint, with deliveries to approximately 3 crews on average during the year in the DJ Basin for Noble and our third-party customer. Net volumes will be impacted by fewer completion crews running at Laramie River, a 100% owned development company. We expect Noble to be active in Green River, San Juan River and Colorado River during the year.

In the Delaware Basin, gathering volumes benefit from a full year of operations at all 5 central gathering facilities. In 2019, we expect to gather nearly 95% of Noble Energy's Delaware volumes compared to just 70% on average during 2018. In addition, we expect to gather between 8 and 10 third-party wells at Blanco River during 2019. More details on gathering and freshwater throughput by DevCo can be found on Slide 23.

Moving over to our capital budget. We anticipate base business capital attributable to the partnership of $180 million to $210 million in 2019, down nearly 30% year-over-year at the guidance midpoint. This excludes our equity investments in Delaware Crossing, the EPIC Crude oil pipeline and EPIC Y-Grade pipeline, which are anticipated to total between $570 million and $615 million in 2019 prior to any asset level financing for the EPIC Crude pipeline.

2/3 of our base business capital will be for supporting customer well connections. Other projects include a trunk line in Blanco River, connecting the Billy Miner and Jesse James CGFs to optimize the use of facility capacity and ensure high utilization rates. At Laramie River, the expansion of freshwater and produced water infrastructure further south on our wholly-owned system to support customer activity in 2019 and 2020. And on Black Diamond, we plan to expand the Milton Terminal to 360,000 barrels of storage to manage volume growth coming through the main DJ long-haul hub.

As for our equity investments, we anticipate $75 million to $80 million in Delaware Crossing investment in 2019, primarily associated with trunk line construction from Crane to Wink. Beyond 2019, organic capital for this asset will decrease significantly and will primarily be associated with gathering lines supporting customer activity. We also anticipate the vast majority of our $330 million to $350 million investment for the EPIC Crude oil pipeline to be spent in 2019. In addition, we expect to deploy $165 million to $180 million in investment capital for the EPIC Y-Grade pipeline.

The EPIC Y-Grade capital includes the long haul pipeline and 2 fractionation plants with a total capacity of 180,000 barrels a day. As these projects commence permanent service, they will provide a high-quality cash flow stream with minimal follow-on capital requirements.

I'll now turn the call over to John Bookout to provide more details on the EPIC and Delaware Crossing investments and our financial expectations for 2019.

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [5]

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Thanks, John. I'm excited to talk to you today about the Delaware Basin -- the Delaware Crossing and EPIC opportunities. These opportunities have been progressing for some time and are crucial pieces in building a leading Permian Basin midstream platform. I believe they are a reminder of our competitive advantages, and they reinforce the unique value proposition we can bring as a sponsor to MLP.

Importantly, the teams have been able to expand the platform in a very competitive environment without sacrificing returns and while maintaining a prudent balance sheet. The Delaware Crossing investment further enhances our position in the Southern Delaware, by expanding our gathering footprint to the Wink hub, while the EPIC projects provide very unique scale and investment characteristics for NBLX and newbuild takeaway pipelines to build post markets.

NBLX is now positioned to realize value across the crude oil value chain from wellhead to water, which is very differentiated for a small cap-sponsored MLP. We expect to generate a combined investment multiple of approximately 5.5% to 6.5% for Delaware Crossing, EPIC Crude and EPIC Y-Grade investments. This is before any asset-level financings in the EPIC Crude pipeline. As you know, we have prioritized generating half of partnership net EBITDA from the Permian by the end of 2020, and I'm proud of all the hard work and creativity from the corporate and business development teams.

Moving on to a review of our 2019 outlook and a 2020 preview. Our 2019 guidance assumes no impact from the EPIC projects to financials, with the exception of incremental debt and interest expense from project investment. Both projects remain on schedule construction wise for interim and permanent service, and we anticipate providing full pro forma impacts following closing of the EPIC Crude investment and the finalization of any external financing specific to Noble Midstream's crude investment.

2019 net EBITDA is anticipated at $245 million to $270 million. The core gathering business is anticipated to grow year-on-year and will represent over 80% of total net EBITDA in 2019. We anticipate strong distribution coverage of between 1.5 to 1.7x. The coverage figures we have provided assume the continuation of the 4.7% quarterly distribution increase that translates to our 20% annual DPU growth objective.

As we evaluated investments in the EPIC pipelines and Delaware Crossing projects, a key consideration was the ability to prudently fund our capital commitments. Given the strength of our balance sheet, we've chosen to fund the Y-Grade line on our revolver. For the crude pipeline, financing will be a combination of the revolver and a potential $200 million direct financing at the investment level.

Assuming that financing moves forward, leverage would temporarily increase to between 4 and 4.25x at year-end 2019. We see a clear pathway to approximately 3.5x by the end of 2020, with a long-term target of approximately 3x as these projects begin contributing meaningfully to the partnership.

Looking beyond 2019, we anticipate net EBITDA of at least $300 million in 2020 -- again, prior to the EPIC projects. This would represent 17% growth to our 2019 guidance at the midpoint. In addition to the base business, the crude and Y-Grade pipelines are expected to enter permanent service in the first quarter of 2020. We anticipate Noble Midstream's share of EPIC projects equity cash flows to total between $50 million and $70 million on an annualized basis, exiting 2020, with further growth anticipated in 2021 and beyond.

In summary, our base business is performing extremely well and our new Permian joint ventures further add to our diversification and resilience. With our announcement this morning, we feel we have provided some detail on a differentiated 2-year plan with significant cash flow growth exiting 2020.

We've accomplished a lot and in a short period of time. I would like to acknowledge our employees for their contributions to the company over the last year. Our strategy remains disciplined and focused, and we are committed to delivering strong but prudent growth through investing in premier midstream infrastructure opportunities in some of the best basins in the country.

With that, I will turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Spiro Dounis of Crédit Suisse.

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

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Maybe to start off with the 2019 guidance. Was wondering if you guys could talk maybe some of the conservativism you've built into it. It seems like you've built it around a $50 crude environment. And I guess, if you look at that today, it already looks low. And so where do you think there's maybe headroom in the guidance later on this year if crude maintains these levels and maybe even moves higher?

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John C. Nicholson, Noble Midstream Partners LP - COO of Noble Midstream GP LLC [3]

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Yes, good question. This is John Nicholson. I think we've built our business really from the start in kind of a $50 to $55 world. So I didn't think this is anything new as far as our forecast on activity. What I will say is probably any upside to guidance is probably around plant, timing in the DJ, and potentially what that could do to kind of the base business. But we took our best shot at what we think customers are going to do in 2019, including our sponsor, which we're fairly comfortable with. And so we don't expect there to be a tremendous amount of upside unless that activity set changes.

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

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Got it. And just around the EPIC Crude investments. Could you provide a little bit more color around the external financing, specifically, I guess, what form does that take, and then how should we think about the timing around locking that up?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [5]

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Sure, this is John Bookout. There are 2 financings mentioned in the materials that we put out. I think we're going to be limited on our commentary to what we put in those materials. There is a project level debt financing that's in the market right now. And then we're clearly exploring a financing at our investment level, which would be nonimpactful to the partnership in terms of IDRs and the way that the partnership is capitalized. We look forward to providing an update once that firms up.

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

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Got it. Appreciate that. Last one if I could. It looks like you're guiding the Advantage Pipeline down a little bit versus 2018 levels. Just curious what's driving that. Is it just increased competition in the basin, or is there something else there?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [7]

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It's a good question. John Bookout, again. I think there's really 2 drivers there. The first is with the Delaware Crossing announcement. What's central to that investment is a dedication of the Clayton Williams portion of the Noble position to that JV. So we've made an assumption in the 2019 numbers that those volumes will rotate off of Advantage and onto Delaware Crossing.

And then the second is probably more macro within the basin. We benefited in 2018 in terms of our volumes from some of the in-basin constraints that I think that you saw in the Permian in general but in the Southern Delaware. And so we haven't assumed that those continue going forward. So I think there is some upside to those figures depending on execution and how the dynamics in basin play out through the balance of the year.

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Operator [8]

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The next question will come from Ethan Bellamy of Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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What's your latest assessment of the Colorado political environment? And how if at all is that influencing your capital deployment?

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Terry R. Gerhart, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [10]

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Ethan, this is Terry. I guess you're keenly aware that the Coloradans fully supported us in the oil and gas industry during the election. We're confident that they continue to support us. Obviously, it's going through a legislative process now to develop this energy framework for all of them and our sponsor, Noble has a strong track record of working with the communities and the elected officials, and we're confident that they'll come out with something that benefits all the stakeholders.

What I would say as far as Noble Midstream though, we're positioned differentially relative to several of the others, with our sponsors positioned in Weld County being rural, and also, with the recent CDP that they had been able to pull together they have now over 400 permits that would provide many years of drilling, along with the 6-year exploration window on that. Not to mention that the majority of all of our dedicated acreage from the others is in Weld County as well.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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That's helpful, Terry. And how should we think about the change in, if any, third-party business that may arise in the DJ?

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Terry R. Gerhart, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [12]

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For what we've seen on our systems, we don't really anticipate any. They're continuing on; there's probably been a bigger impact relative to the oil price than anything, Ethan. Just kind of -- slight moderation in that, but we factored that into our quarterly results.

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John C. Nicholson, Noble Midstream Partners LP - COO of Noble Midstream GP LLC [13]

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Yes, Ethan, 95% to 98% of our dedications on Black Diamond are within Weld County.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Okay. That's good to hear. And then lastly, we've seen a nice recovery in crude here. How if at all has that changed? I'm just looking for -- like the latest as of today thinking on potential drop downs?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [15]

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Ethan, it's John Bookout. I think if you look at the materials we put out today, we've clearly been very busy on some pretty significant investments at NBLX, mostly in the Permian, which I think you -- probably relates to your prior question. We've been repositioning the business a bit quicker than we previously had anticipated. I think with those behind us, I think, top of mind, and we've been vocal at conferences and with you throughout last year, top of mind is working with our sponsor to figure out what the strategy is going forward in terms of addressing some of the structural implications that exist in NBLX.

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Operator [16]

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The next question will come from Mirek Zak of Citigroup.

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Mirek Zak, Citigroup Inc, Research Division - Senior Associate [17]

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Can you provide any thoughts on any potential benefits you might be getting from potentially the EPIC NGL line running as interim crude service in the second half of the year and maybe cost or investments required there if any to benefit from that?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [18]

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Zak, it's John Bookout. I think in terms of the detail around early service, we see it being a equity holder in both pipelines, the economic benefit to an early service concept, obviously, with differentials moving around over the last 6 to 9 months. I think further discussion needs to occur in terms of what the final construct looks like, but I think we certainly feel like there's a win-win-win for both pipelines and then also for shippers with kind of more detail forthcoming around that. And I will say that the Y-Grade pipeline will, the main line will be in service well before the first newbuild fractionation unit. So that's added incentivization to come up with a structure of the deal that works for everyone. And then obviously, the crude line is receiving benefits from following the construction pathway of the Y-Grade line. So all of it's very synergistic, and we're certainly excited about what early service would mean for our investments in both pipelines.

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Operator [19]

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Our next question will come from Praneeth Satish of Wells Fargo. Our next question will come from Jeremy Tonet of JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Appreciate you giving us some color on how EPIC would look to actually 2020 here, but I was wondering without giving us the full guide if you could give us any more color on just the trajectory of the ramp there. Anything that we can -- guideposts we can work off within our model here?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [21]

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Jeremy, John Bookout. I think what we've tried to do is lay out kind of a 2-year story here with the base business growth in both '19 and then providing context in terms of a floor number on 2020. And then recognizing that big infrastructure like this does take some time to ramp. We've positioned this as kind of providing color as an exit rate in 2020. We don't think we'll provide detail in terms of what it looks like in Q2 and Q3, but we certainly feel confident in kind of that 50 to 70 kind of equity cash flow contribution, our share being 50 to 70 ending 2020, and we expect it to continue to ramp into 2021. We've taken a, what we feel to be, a conservative approach with contributions from EPIC to kind of a 2-year view if that makes sense.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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That does make sense. And just want to pivot towards distribution growth for a minute here. It seems like the marketplace, in general, is kind of pivoted toward a preference for lower leverage and more financial flexibility and seeing that the leverage is kind of ticking up here a bit over the construction period. So just wondering is there a scenario where it makes sense to kind of grow a little bit slower, seeing that's kind of what has been talked about in the marketplace, given kind of where the yield sits today.

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Terry R. Gerhart, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [23]

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Jeremy -- I was just going to say a couple of things on that Jeremy. Our business outlook continues to support the 20% growth. It's a very strong coverage. We do not believe like you had indicated, we're getting a credit for the 20% in the marketplace today, but we believe we'd need to see a little more prolonged evidence that would need to justify that before we'd make the decision to alter the distribution.

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [24]

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Yes, Jeremy, it's John Bookout. We review distribution policy every quarter with our Board, and it's disappointing to see that you're not getting rewarded for a top-tier growth rate. It's been central to our thesis, since being -- since going public and that really was -- if you think about the environment the last couple of years, we analyze that growth rate for the business really through cycles, clearly. Right now, we're in a period of time where it's apparent that growth isn't the most important characteristic for an MLP. So we're cognizant of that, but -- yet changes to the something that's so fundamental to our thesis, we take very seriously. But right now, no anticipation that we would change or revisit that growth objective.

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Operator [25]

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And our next question will come from Praneeth Satish of Wells Fargo.

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Praneeth Satish, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [26]

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My questions have been answered.

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Operator [27]

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And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back to Megan Repine for any closing remarks.

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Megan Elizabeth Repine, Noble Midstream Partners LP - Manager, IR [28]

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Thanks, everyone, for your interest and participation today. I'll be available this afternoon for any follow-up questions you may have. Thanks, and have a great afternoon.

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Operator [29]

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Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.