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Edited Transcript of NBLX earnings conference call or presentation 1-Nov-18 6:00pm GMT

Q3 2018 Noble Midstream Partners LP Earnings Call

HOUSTON Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Noble Midstream Partners LP earnings conference call or presentation Thursday, November 1, 2018 at 6:00:00pm 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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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* David Meagher Amoss

Heikkinen Energy Advisors, LLC - Research Analyst

* Douglas Baker Irwin

Crédit Suisse AG, Research Division - 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 Noble Midstream Third Quarter 2018 Earnings Call. All participants will be in a listen-only mode. (Operator Instructions) Please note that this event is being recorded. I would now 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, Sean. Good afternoon, and thank you for joining the Noble Midstream Partners' third quarter 2018 earnings call. With me today to review our results is Terry Gerhardt, 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 third quarter 2018 results as well as fourth quarter guidance. The press release and supplemental slides are on the Investors section of our website noblemidstream.com. Upon filing later today, our 10-Q 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 see our earnings release for our full disclosure on forward-looking statements and reconciliations to GAAP measures.

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 thanks to all of you for your interest in Noble Midstream. I'm pleased to report another great quarter, highlighted by operational and financial results that were in line or ahead of our expectations. I'm also excited to discuss the enhancements we continue to make to our portfolio, extending our top-tier growth capabilities.

To give you a few third quarter highlights, we reported significant throughput growth across both the DJ and Delaware basins. This included 18% oil throughput growth in the DJ Basin. And in the Delaware Basin oil, gas and produced water gathering throughput grew more than 50% from the second quarter. We declared a 4.7% distribution per unit increase compared to the second quarter and a 20% versus the third quarter of 2017 and maintained strong DCF coverage of 2.1x.

Our business development team had another busy quarter, delivering progress on our continuous goal of customer and geographic diversification. In early October, we announced a letter of intent with Salt Creek Midstream to jointly develop our Permian gathering and pipeline system, commenced gathering for a third-party customer at Blanco River, and also announced a meaningful long-term contract for the Advantage Pipeline system. These additions in the Delaware are meaningful steps towards our long-term objective of generating approximately half of our net EBITDA from the Delaware Basin by the year -- by the end of 2020.

Before turning the call over to John Nicholson, I would like to take a moment to address the upcoming election in Colorado, specifically Proposition 112, which is top of mind for us, and I'm sure everyone on the call today. The Noble complex in industry has spent years preparing to file such an initiative with the strategic campaign. This includes a vigorous effort in educating the communities on the massive long-term economic impacts Proposition 112 would have on the State of Colorado. Neither Governor candidates supports Prop. 112 and we are confident that Coloradans will not support a long-term tracking ban in the state.

In the case of Proposition 112 pass scenario, there are a number of mitigating factors. We will not be providing specifics on customer permit counts and DUC inventory. However, I can assure you that we have done rigorous stress testing and have a plan in place if necessary. The recent unit price performance related to Proposition 112 in Colorado, does not reflect the resiliency and flexibility of the Noble Midstream portfolio. This includes our sponsors' differentiated acreage position in the DJ Basin, our growing Permian business, and an enviable balance sheet and distribution coverage. These factors give me confidence in Noble Midstream's ability to deliver our long-term MLP growth and financial objectives.

I'll now turn the call over to John Nicholson for further details on our capital projects and operations. John?

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

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Thanks, Terry. Combined oil, gas and produced water gathering throughput was up 25% compared to the second quarter. Produced water volume growth led the way, up 41% on a sequential basis. This was driven by the uptick in new well activity from customers over the past few quarters, particularly in the Permian. Oil and gas gathering daily throughput averaged 225,000 barrels of oil and gas equivalent in the quarter and throughput for both oil and gas exceeded the high end of guidance. We reported robust growth on our new infrastructure in the Blanco River, Green River and Laramie River development companies.

Gross fresh water delivery volumes were up 22% from the second quarter and were within guidance, averaging 195,000 barrels of water per day. We continued to benefit from customer use of higher intensity completions. Five completion crews ran on dedicated acreage during the quarter compared to four in the second quarter of this year.

Noble Energy resumed completion activity at Wells Ranch and the partnership also continued to provide fresh water services for the Mustang development through the Green River development company. In the fourth quarter, Noble Energy fresh water delivery will once again be focused in the Mustang development. John Bookout will talk a bit more on the mix impact a bit later.

Moving on to the DevCo specific highlights at Colorado River Gathering, throughput declined with no new wells coming online during the third quarter. Noble Energy resumed completion activity at Wells Ranch, preparing for approximately 25 well connections in the fourth quarter. Also in the DJ Basin, we saw material growth throughout the quarter in Noble Energy's Mustang area. Oil and gas gathering at Mustang exited the third quarter at over 20,000 barrels of oil equivalent per day.

Today, 30 wells are online with 25 well connections occurring last quarter. Despite no wells coming online at Mustang in the fourth quarter, we anticipate throughput momentum to continue through year-end as the new wells continue to clean up and as many of the wells coming online in September provide a full quarter of contribution. As a reminder, our system at Mustang will have the ability to deliver to 3 third-party gas processing providers, with multiple offload points.

Water infrastructure for the second row of development at Mustang was completed during the quarter and we anticipate continued fresh water delivery for completions between now and year-end, ahead of well connections anticipated in 2019. Mustang covers 75,000 net acres and has similar geological characteristics as Wells Ranch, which should provide significant multi-year throughput growth for the partnership.

On our third-party systems in the DJ, oil gathering volumes were up 20% compared to the second quarter of 2018. Results in the Laramie River development company include our wholly-owned third-party system as well as our 54% interest in Black Diamond Gathering, which contributed 71,000 barrels of oil per day of average throughput for the quarter. This compares to 58,000 barrels of oil per day during the second quarter. New well activity was timed with the ramp-up of DCP's new 200 million cubic feet per day gas processing plant.

Black Diamond Gathering throughput remained strong in the fourth quarter, coming in at over 80,000 barrels of oil per day for October. This level of throughput is consistent with our guided 2018 exit rate of 80,000 to 90,000 barrels of oil per day. In the Delaware, we benefited from the completion of all 5 central gathering facilities and gathered nearly all new well connections for Noble Energy during the quarter.

Average availability at the CGF inlet was a very solid 98% for the second quarter in a row. We expect to drive additional scale and efficiency, benefits over the long term as throughput ramps. Of note, we commenced third-party gathering at Blanco River during the quarter, connecting one well. We are encouraged by the results in the long-term potential of this opportunity, and we anticipate additional activity on the customers' 13,000 acre position during 2019.

On the Advantage Pipeline, third quarter oil throughput averaged 106,000 barrels per day, flat from strong second quarter levels and 3.5x greater than throughput at the time of acquisition. During the quarter, we also expanded pipeline capacity, increasing throughput by over 30% to 200,000 barrels of oil per day to accommodate future growth. This additional capacity will help as we continue marketing efforts to secure long-term transportation arrangements.

We are already seeing the benefit, announcing a multi-year contract with a major producer in the Southern Delaware during the quarter. We began servicing the customers' facilities across an estimated 20,000 acres this week. Overall for the quarter, gross capital was in line with guidance and net capital was at the low end of the range.

Capital was down over 40% on both the gross and net basis as we finished our major DJ and Delaware projects in the first half of this year. Capital should continue to run at lower levels during the fourth quarter as we focus on efficient well connects. For the full-year 2018, we are bringing down the high end of our net capital guidance to reflect third quarter underspend. We now anticipate net capital of between $270 million and $275 million. On a gross basis, we are adjusting our full-year gross capital guidance to between $538 million and $550 million. The midpoint is up, reflecting higher spending levels in Blanco River and Green River, supporting Noble Energy's growth and development plans.

We have adjusted the allocation of our capital between the development companies, which you can find on Slide 8. To summarize, we continue to provide safe and reliable midstream service to our customers and saw an inflection point in our gathering throughput this quarter, as our growth projects began contributing meaningfully to the partnership.

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

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

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Thanks, John. Given our solid volume performance across the Board, we had another strong quarter and set new quarterly records for almost every key financial metrics, including gross and net EBITDA. We continued our path of 20% distribution growth, reflecting our continued confidence in the business. After maintenance capital and interest, the partnership recorded $49 million of distributable cash flow in the quarter, up $10 million compared to the second quarter. This resulted in peer-leading coverage of 2.1x. We expect to cover our wholly-owned distribution for 2018 in excess of 2x, consistent with 2017, which is impressive given our distribution growth rate.

Contribution from the gathering segment remained strong and comprised approximately 75% of EBITDA, net to the partnership during the quarter. Coverage excluding the freshwater segment was a very healthy 1.4x. We ended the quarter with over $750 million of liquidity with only $50 million drawn on our $800 million revolver. With a material reduction in capital compared to the second quarter and our strong cash generation, our leverage ratio declined to 2.3x during the quarter, below our annual target of 2.8x.

Complementing the robust underlying fundamentals of our organic business, in early October, we announced a letter of intent to jointly develop a Permian Basin gathering and pipeline system with Salt Creek Midstream. We remain on track to close on the joint venture during the fourth quarter and look forward to working with our new partners in Salt Creek.

We believe that this system, combined with the Advantage Pipeline, positions us strongly in the Southern Delaware. Advantage continues to perform well, with October volumes averaging 120,000 barrels of oil per day and with expectations for a 115,000 to 125,000 barrels of oil per day for the fourth quarter. Additionally, progress continues to be made on the EPIC pipeline projects and critical milestones continue to be met prior to option exercise dates in February of next year.

We look forward to providing additional information on these significant Permian opportunities in both Salt Creek and EPIC. I continue to be very proud of our corporate and business development team's success in enhancing our Permian Basin platform despite a very competitive backdrop.

Looking ahead to the fourth quarter, we anticipate net EBITDA of $57 million to $62 million, consistent with prior guidance. We expect solid gathering net EBITDA growth compared to the third quarter. This will be somewhat offset by a sequential decline in freshwater net EBITDA to the tune of nearly $10 million. At the midpoint, this would still translate to 24% growth in net EBITDA compared to the same period last year. Despite strong volume growth delivered in Q3 and expected in Q4, we remain cautious with fourth quarter guidance, given activity shifts that our customers have historically made closing out the year.

To conclude, we reported a strong quarter. Fundamentals remained very robust and we continue to further strengthen our outlook heading into 2019. 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 comes from Barrett Blaschke with MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [2]

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Could you give a little more color around the comment you just made about seeing kind of year-end volume shifts from some of your producers? And could you give us any color around your thoughts on -- not so much when dropdowns would occur, but how you're thinking about them today, are they more of a supplement and you're trying to push on more of an organic front for growth?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [3]

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In terms of your question on producer plans is typically focus on capital and a full year, 3 quarters of volume performance. Historically, we've seen some changes going into the end of the year. And so we're guiding the fourth quarter conservatively because we've seen that historically. In terms of dropdowns, our thinking there hasn't really changed.

We love the fact that we have the inventory, it can act as offensive and defensive. But our thinking and game plan really hasn't changed from prior commentary. Going back to the first quarter of this year, specifically that we'd like to own these assets through time, but we don't necessarily have to own them in a certain sequence or at certain time and that (inaudible) will always be prudent with it.

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Operator [4]

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

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Just wanted to expand a bit more and update -- get your update thoughts as far as the Permian 50% target for 2020 there. Was wondering how much of that is really just NBL, really accelerating activity as EPIC comes online 3Q19, which coincides with road development there? Or how much of it depends on kind of some of the dropdowns with Blanco River and the EPIC interest? And how much of it is kind of like the Salt Creek third party -- and third-party business as well? Just wondering if you could dive in a little bit deeper there, which of those levers are needed to hit that target.

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [6]

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We've never provided the breakout. Going back to when we first set this target, we said it was aggressive, but the right one in the right milestone, externally as well as internally to drive focus. I think there are many pathways that you can get there. We've laid out a couple of the further downstream potential opportunities and some of the JVs that have been announced over time, the Advantage and Salt Creek that certainly contribute to that. We have more work to do and have many pathways to get it done, but of course Noble is always going to be a very important part of hitting that milestone.

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Operator [7]

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[Operator Instruction] Our next question comes from David Amoss with Heikkinen Energy.

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

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Just trying to think about the decision whether or not to exercise your options on the two EPIC pipelines and the fact that in February they probably won't be complete. So can you just kind of help us think through the decision criteria and how you will make that decision not knowing the ultimate cost of the pipeline?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [9]

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In terms of -- I'll split it by pipeline. The Y-Grade option is 15% option for that pipeline, which includes some downstream facilities. That option sits at the Noble Midstream level and then the 30% crude option sits with the family currently. We continue to work with Noble on what's the right strategy with that potential investment. I think in terms of the decision-making process, we've been very pleased with the progress made both commercially, but also execution on the project, and especially on the Y-Grade line, which recently was announced, would be converted to early crude service. That construction started several, several months ago.

So we've seen a fair amount of the project execution play out and have been pleased with what we've seen. And really we'll -- over the next several months, we'll get to see a lot more of the build of the main line. So come February, I think just at the highest public (inaudible), who takes what option. I think we'll have a lot of information on project execution, but at the least we're very pleased with where these sit commercially.

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

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And then just to clarify on the Y-Grade option, does that also include an option to own a piece of the fractionation that they're planning? And if so, is that just one train or all of the trains that have been talked about in the past?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [11]

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The Y-Grade line, it's a scalable platform, so the fractionation capacity that's installed by EPIC in the Corpus area, the consortium would have the right on a proportionate basis to participate in those projects and I think the base case calls for two fractionation units and there is -- look into the details, but there's kind of investment criteria and approval process for incremental facilities that would be needed down there.

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Operator [12]

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Our next question comes from Spiro Dounis with Credit Suisse.

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Douglas Baker Irwin, Crédit Suisse AG, Research Division - Research Analyst [13]

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This is Doug on for Spiro. I just wanted to touch on Advantage real quick. I guess it was flat volumes in the quarter and then jumping all the way up to 120,000 in October. Just kind of curious what's driving that, is that all from the new contract that you announced recently, or is there something else going into that? Just thinking about how to think about that volume ramp going forward into 2019?

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Terry R. Gerhart, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [14]

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None of the October volumes include the new third-party, that's just customer movements on -- prior customer movements on the system, as well as Noble volumes. You should see the -- or you will see the new third-party in November and December.

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Douglas Baker Irwin, Crédit Suisse AG, Research Division - Research Analyst [15]

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And then just one more, if I can on the Salt Creek JV. I think you mentioned a potential -- some potential additional dedications there. Just curious if you could give an update kind on what potential timing could be around that?

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John F. Bookout, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [16]

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I think we're happy with the progress that's been made on definitive agreements, and that JV remains well positioned to be executed and closed in the fourth quarter. One of the items that's being worked during that time is wrapping up some of the incremental commercial opportunities that we highlighted previously, given where we are in that process between sign and close, probably not going to comment further on the incremental dedications, but looking forward to providing additional color once we have the transaction closed.

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Operator [17]

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Our next question is a follow-up from Barrett Blaschke with MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [18]

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Just one housekeeping item. Is there any kind of a breakout you can give us a little bit on the volumes for sale versus the gathered volumes on Laramie?

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Unidentified Company Representative, [19]

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I think there's still -- there will be live information provided in the Q that's filed shortly after this call. In terms of -- if you're looking at in terms of total oil volumes gathered for NBLX, it's very minimal, less than 10%. If you're looking at in comparison to Laramie River, it's a bit higher than that. It's around historically between 4,000 and 8,000 barrels a day in terms of sales volumes.

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Operator [20]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Megan Repine for any closing remarks.

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Megan Elizabeth Repine, Noble Midstream Partners LP - Manager, IR [21]

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Thanks for your interest and participation today. I will be available this afternoon for any follow-up questions you may have. Thank you.

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Operator [22]

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