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Edited Transcript of NBLX earnings conference call or presentation 2-Aug-19 3:00pm GMT

Q2 2019 Noble Midstream Partners LP Earnings Call

HOUSTON Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Noble Midstream Partners LP earnings conference call or presentation Friday, August 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Nicholson;Chief Operating Officer of Noble Midstream GP LLC

* Megan Elizabeth Repine

Noble Midstream Partners LP - Manager, IR

* Terry Gerhart;CEO & Director of Noble Midstream GP LLC

* Thomas W. Christensen

Noble Midstream Partners LP - Interim CFO & CAO of Noble Midstream GP LLC

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Conference Call Participants

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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* 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 morning, everyone, and welcome to Noble Midstream Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. 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, Jamie. Good morning, and thank you for joining the Noble Midstream Partners Second Quarter 2019 Earnings Call.

With me today to review our results is Terry Gerhart, CEO; John Nicholson, COO; and Tom Christensen, who serves as CFO.

Following prepared remarks, we will open the call to questions from analysts. This morning, we announced second quarter 2019 results as well as third quarter and updated full year guidance. The press releases and supplemental slides are on the Investors section of our website, noblemidstream.com. Upon filing later today, our 10-Q will be available on 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 Gerhart;CEO & Director of Noble Midstream GP LLC, [3]

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Thanks, Megan, and thank you, everyone, for joining. I'm glad to report on another quarter results that largely fell in line or ahead of our expectations. We achieved several significant milestones so far in 2019, both operationally and financially. We entered the year with a focus on driving significant capital efficiency in our base business, and successfully progressing our Permian equity investment opportunities, which will deliver sustainable long-term earnings and cash contributions to the partnership.

The progress is evident, for the second quarter in a row, we delivered throughput and adjusted EBITDA according to our plan, and this was on capital spending that was well below expectations. With a consistent cost focus, our teams have done a great job driving sustainable capital reductions, positioning us to lower our full year 2019 net organic capital guidance this morning by 23%.

As we moved through the second half of the year, a number of catalysts gave me confidence in the business outlook beyond better capital efficiency. We are anticipating oil and gas gathering throughput up 9%, and produced water up 22% in the second half of the year compared to the first. We have significant visibility into this growth with the second and third quarters representing the periods with the most well connections for the partnership this year.

In addition, these well connections are more heavily weighted to the Wells Ranch in East Pony, relative to earlier in the year. Given the partnerships 100% ownership in the Colorado River Development Company, this provides a meaningful mix tailwind. And finally, we are another quarter closer to significant long-term contribution from our new Permian equity investments. Construction of EPIC Crude, EPIC Y-Grade and Delaware Crossing projects is well underway, and we've now funded nearly 2/3 of our anticipated equity investments for 2019.

These investments will grow our platform and scale diversity and cash generation strength. The EPIC and Delaware Crossing joint ventures put us closer to our ultimate goal of 50% net adjusted EBITDA contribution from the Permian Basin by the end of 2020. NBLX is now positioned to realize value across the crude oil value chain from well head to water, which is very differentiated for a small-cap sponsored MLP. Given the accelerating capital efficiency in our base business and with growing contributions from our new equity investments, we are well on track for multiyear double-digit cash flow growth.

With that, I'll turn it over to John.

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [4]

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Thanks, Terry. Our team is doing a great job progressing our growth projects while maintaining a focus on efficient and reliable operations. In the first half of the year, we began realizing the benefits of our backbone infrastructure, which is largely in place for the base gathering business. About 2/3 of our capital this year is on efficient well connections, and our per well connection cost in 2019 is anticipated to be 20% lower compared to 2018.

I expect this trend to continue through time as our customers focus on multi-well pad and sister section development. Organic capital expenditures came in well below guidance on both the gross and net basis for the second quarter in a row. While we have seen a few changes to customer activity timing, the lower capital is largely driven by sustainable cost savings from reduction efforts. I'm extremely proud of what we have delivered so far this year, and these efficiency gains and commitment to continuous improvement will benefit us well into the future.

Some of the changes include optimizing infrastructure designs in our construction process as well as enhancing our contracting strategy. In addition, our equity investments in the Delaware Crossing, EPIC Crude oil pipeline and EPIC Y-Grade project are still anticipated to total between $570 million and $615 million in 2019. $408 million was contributed year-to-date with the bulk of the remaining spend coming third quarter of 2019. All second quarter gathering volumes were in line with guidance while fresh water delivery volumes were ahead of expectations.

Oil and gas gathering daily throughput averaged 295,000 barrels of oil equivalent per day, up over 3% versus first quarter 2019 volumes. Produced water volumes were consistent with guidance and 16% higher than the first quarter. Fresh water delivery volumes of 179,000 barrels of water per day were down 19% from the first quarter but were ahead of guidance.

The partnership delivered water to 2.3 crews during the quarter compared to approximately 4 crews during the first quarter. In the Delaware Basin, gross oil and gas gathering volumes grew 16% compared to the first quarter, ahead of the plant ramp and customer activity in the second half of the year. We had another very strong quarter of CGF performance with our team achieving inlet ability of 98%.

During the quarter, the team completed the trunk line connecting the 2 Billy Miner CGFs with the Jesse James facility. The infield connection will support peak production for road development, mitigate downtime and increase operating efficiency across our northern acreage footprint.

Looking at the second half of the year, Blanco River oil and gas gathering throughput is anticipated to grow more than 30% over the first half. Third quarter gathering activity is accelerating -- third-party gathering activity is accelerating with 10 to 15 well connections planned for the back half of the year. In addition, the third quarter will be another busy quarter for Noble in the Permian, which is supported by additional takeaway capacity coming in line.

In fact, EPIC interim crude service is anticipated to commence in mid-August with multiple connections in Corpus Christi nearly complete.

In the DJ Basin, record gathering volumes in the Green River DevCo were offset by the planned decline in Colorado River and Laramie River. We gathered 20 new wells for Noble Energy in road 2 of their Mustang development, which drove an impressive 41% increase in oil and gas gathering throughput sequentially.

Development drilling and road development in Mustang has driven very efficient capital deployment from the start. We expect this efficiency to accelerate in future years as activity is increasingly focused on sister sections of existing roads.

In Laramie River, our third-party customer DJ Basin DevCo, gathering and sales volumes declined quarter-over-quarter with fewer well connections in the first half of the year and some unplanned third-party downtime. Fundamentals remained strong, and with full year Black Diamond volumes anticipated to exceed 90,000 barrels per day.

As expected, Colorado River DevCo oil and gas gathering throughput declined during the second quarter, with an increase in East Pony volumes offset by a decline in Wells Ranch due to fewer well connections and planned central gathering facility maintenance. A second gas offload in Wells Ranch came online during the quarter, which should help maximize performance on the Ranch as connection activity accelerates in the back half of the year.

As Terry mentioned, our recent Permian equity investments are critical pieces to building a leading Permian platform. Milestones for EPIC Crude permanent service in January continue to be met with construction of the 30-inch mainline now 50% complete.

Permanent Y-grade service is on track for start-up in 1Q 2020, following the turnaround once interim's crude service ends. The Delaware Crossing terminal work is going well with the Wink station about 75% complete, and we recently broke ground on the Liberty station. Completion of the main trunk line to Wink is still anticipated by year-end.

With that, I'll turn the call over to Tom.

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Thomas W. Christensen, Noble Midstream Partners LP - Interim CFO & CAO of Noble Midstream GP LLC [5]

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Thanks, John. The business performed well in the second quarter relative to plan. Consist with guidance and similar to 2018, the second quarter of 2019 will mark the lowest quarter of the year for both volumes and EBITDA. The sequential decline in net EBITDA was driven by a $4 million credit issued to Noble related to the Wells Ranch fresh water MVC, and a decline in gathering volumes in the Colorado River DevCo due to lower activity levels during the first half of the year.

Our financial strategy continues to be focused on maintaining healthy liquidity and prudent leverage through the construction period for the EPIC and Delaware Crossing investments. With that in mind, we ended the second quarter with $439 million in liquidity, including $430 million of borrowing capacity on our revolver.

Additionally, we have access to $350 million accordion feature within our revolver and optionality to draw an -- the remaining $100 million preferred equity commitment for the EPIC Crude pipeline.

Our Q2 annualized leverage ratio increased to 3.9x as expected. While our leverage is ticking up this year, we believe year-end leverage of 3.9 to 4.2x is manageable, especially in light of the strong -- of our strong distribution coverage. In addition, our long-haul crude and Y-grade joint ventures will be online early next year and will require minimal follow-on capital investment.

And as mentioned, we are in the early stages of achieving meaningful capital efficiencies in our base business. And as the business stands today, we expect to be self-funding by the end of 2020 as the Epic and Delaware Crossing projects begin to contribute meaningfully to the partnership. Long term, we continue to believe that 3x leverage is the appropriate level for the partnerships through business cycles.

Looking ahead to the full year, our gathering volume guidance remains largely unchanged with sequential growth anticipated in both the third and fourth quarters. For oil and gas gathering, we've seen good performance year-to-date, and the second half ramp is materializing as planned so far in the third quarter. July throughput is already up compared to the second quarter average, and planning and construction is well underway for more than 100 wells that are anticipated to come online in the third quarter.

Water-to-oil ratios have also been very close to forecast, providing a predictable and high-quality stream of gathering cash flows. Full year fresh water delivery volumes are anticipated to be 145,000 to 170,000 barrels of water per day. Although we've outperformed forecast in the first half of the year, we've been prudent on our assumptions around activity levels and completion intensity, especially as we move towards year-end.

Based on our year-to-date performance and our updated outlook for third-party gathering volumes in the DJ as well as our equity investment and fresh water expectations, we are tightening our net EBITDA range for the year to $245 million to $255 million from $245 million to $270 million.

As we move through the third quarter and into the fourth, we will be able to provide more insight into Epic's interim service performance as the timing and magnitude of -- and the timing of magnitude and line pressure relief in the DJ Basin as well as customer activity plans into year-end. We have attempted to capture these items in the guidance we just published, but they could create a bit of noise and variability in the second half of the year relative to historical periods.

Our updated guidance reflects net EBITDA growth of approximately 11% second half over first half. We are also lowering the high end of our DCF guidance with an updated range of $190 million to $195 million. This results in a very healthy DCF coverage of 1.5x to 1.6x, which is within original guidance.

To conclude, we expect to have robust growth in the second half of this year as capital efficiencies in our base business continue to improve and as our joint venture investment requirements wind down. This provides a lot of visibility into our differentiated long-term outlook, which includes significant multiyear cash flow growth and value creation.

With that, I'll 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) And our first question today comes from Spiro Dounis from Crédit Suisse.

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

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Maybe just starting off with CapEx. Pretty healthy decline suggests maybe efficiencies are better than expected when you guys guided lower to the low end last quarter. So just 2 questions around that. First, are you (inaudible) when you said you're in the early stages of these efficiency gains and so there's potential for maybe another downward revision? And then second, how much of this current CapEx reduction is due to slower customer activity versus efficiencies?

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [3]

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Yes. Good questions. This is John Nicholson. So your first question, I do think we're in the early stages of it. Some of it is, as I mentioned on the call, around just our strategy of execution and a good bit of it as well is also on just utilizing the infrastructure we have, right? If you look at something like Mustang, that's a very well thought out infrastructure development alongside our sponsor, and so we're certainly seeing the benefits of the forethought there, right? I think we'll continue to do that. Some of it in addition, as you saw in the Permian, is utilizing the facility infrastructure that we have. Connecting those central facilities will allow us to use the capacity that we've installed today to the best of our ability. The -- what was the second question?

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

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Just in terms of how much I guess the current CapEx reduction is maybe a portion to slowdown in customer activity versus efficiency gains?

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [5]

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Sure. Some of it is certainly due to changes in timing. I don't want to characterize it as a slowdown, more of a shift of timing of when things are occurring. But the good portion of it, I would say 60% to 70%, is efficiency gains that we expect to continue into 2020.

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

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Okay. That's helpful. On the $4 million credit issued to Noble, was that anticipated in your guidance? And should we expect that to continue throughout the year? Or was it really just a 2Q impact?

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Thomas W. Christensen, Noble Midstream Partners LP - Interim CFO & CAO of Noble Midstream GP LLC [7]

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Yes. Effectively, you'll end up seeing that, that MVC with Noble smooth out a good deal of how we'll recognize revenue and build Noble over the -- effectively decoupling it from the field-level activity.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [8]

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Okay. And so that was anticipated, I guess?

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Thomas W. Christensen, Noble Midstream Partners LP - Interim CFO & CAO of Noble Midstream GP LLC [9]

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Yes. It was. And included in guidance.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [10]

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Okay. Perfect. Last one, just on the advantage system. Can you walk through the nature of why the key contract or key customer is utilizing those volume credits? And are you or your JV partners will utilize that spare capacity in some way? Or does it just have to sort of sit empty for now? And then just as a follow-on to that, is there any sort of cash flow impact or is this really just volumetric?

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [11]

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Yes. So this John Nicholson again. We have a match -- our third-party partner has a match. They have to kind of match the Noble volumes off of the Rosetta acreage to a certain degree. Late last year and early this year, as the -- as infrastructure got tight in the basin, they over delivered relative to that match and built up a bank. The back half of this year starting kind of in the second quarter, they had some additional pipe come online and we're able to move those volumes off of our system on to other systems. And thus, they are under-delivering, and we expect that match to kick back in kind of November, December of this year. That capacity is unused, so to speak, we could use it if we so choose, if we had a customer that wanted to walk up and use that space. It does have and did have an impact to our back half of the year guidance, we did not anticipate in our original 2019 guidance the decline in our partners' volumes.

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Operator [12]

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Our next question comes from Barrett Blaschke from MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [13]

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Just a housekeeping question, I feel like we sort of have to ask these days on any considerations on IDRs and removing and now that you're in the top tiers list?

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Terry Gerhart;CEO & Director of Noble Midstream GP LLC, [14]

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Yes, Barrick. I'll go ahead and cover that one. I think that's part of the consideration that Noble's going through on their strategic review. I'm not really able to comment any further on it at this point.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [15]

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Well, you actually set me up for my next question, which was, any additional clarity you can give us? The Reuters piece I think put bit of a ceiling on the stock price the last quarter, which is the uncertainty around that strategic review and Noble's intent for the midstream entity. Any additional clarity you can give us there on sort of what the plan is? Or should we just be reading this as you guys are constantly reviewing and it's just a normal process? Or is this a special review?

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Terry Gerhart;CEO & Director of Noble Midstream GP LLC, [16]

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No. It's not an ongoing process. It's a process that they're working through, and it remains a priority for Noble. The -- I don't think they're going to talk anymore about the details until that process is complete. I think what's driving it is that the Noble ex franchise is very valuable and they're not seeing the value reflected neither in the Noble stock or we recognize it's certainly not being reflected in the Noble ex unit price as well. But it does remain a priority for Noble, they're working it hard. And in due course and when the time's appropriate, they'll come forward with their findings and how they're going to proceed.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [17]

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Okay. I mean is part of the reason we're not realizing value on the stock price though, ironically related to the lack of clarity around this review process?

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Terry Gerhart;CEO & Director of Noble Midstream GP LLC, [18]

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Well, I wouldn't get into answering what's driving the unit price, you all probably know that better than I do. But I'll leave it at that.

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Operator [19]

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(Operator Instructions) Our next question comes from Dennis Coleman from Bank of America Merrill Lynch.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [20]

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I guess if I could just start with the cost reductions on the well connects. We paid a little bit on this but how much -- is this sort of -- does the benefit accrues just to Noble Midstream? Is there any cost sharing that would accrue to the customer? And maybe if you can just remind me what kind of contracts, are these cost of service contracts, I don't think they are but if you can just remind me?

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [21]

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Yes. Dennis, this is John Nicholson again. No, we have fixed-fee contract. So in theory, the cost savings do not impact the customer or benefit the customer, if you will. I mean, obviously, if we can reduce our cost, that should make us more competitive as we pursue things, which is always a benefit, right? Because we want to earn good returns, and so they improve our returns and should make us more competitive as we pursue business, organic business.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [22]

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Got it. And John, you mentioned in your comments enhance contracting strategy. Can you expand on that a little bit?

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John Nicholson;Chief Operating Officer of Noble Midstream GP LLC, [23]

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Yes. I'm not going to get into too much of the details of our contract, but it's really partnering with some of our big service providers, specifically on the construction side. And you can certainly -- when you have visibility into level-loading work, which we do, given our sponsor's activity set and some of our third-party customers in the DJ, we're able to commit to longer cycles of work and more continuous work, which gives us kind of preferred pricing. In addition to that, we've made a few changes that share risks differently through the contract, which benefit us as well.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [24]

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Okay. Okay. That's helpful. And then Terry, if I could. I know it's difficult to comment on the outcomes of the parent process, but is it possible that at some point, is one of the outcomes that they just come out and say, we're done with the process, and because of valuations that you just discussed, we're just going to leave things the way they are. Is no action one of the options?

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Terry Gerhart;CEO & Director of Noble Midstream GP LLC, [25]

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I'd say that would be one of the options. It could be.

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Operator [26]

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And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Ms. Repine for any closing remarks.

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Megan Elizabeth Repine, Noble Midstream Partners LP - Manager, IR [27]

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Thanks, everybody, for joining us today and for your participation. I'll be available this afternoon for any follow-up questions you might have. Have a good day.

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Operator [28]

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And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.