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Edited Transcript of NBLX earnings conference call or presentation 7-Nov-19 5:30pm GMT

Q3 2019 Noble Midstream Partners LP Earnings Call

HOUSTON Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Noble Midstream Partners LP earnings conference call or presentation Thursday, November 7, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent J. Smolik

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

* Joseph Parkhill Carrere

Noble Midstream Partners LP - Manager of IR

* Thomas W. Christensen

Noble Midstream Partners LP - CFO of Noble Midstream GP LLC

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Conference Call Participants

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* Christopher Paul Tillett

Barclays Bank PLC, Research Division - Research Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Pearce Wheless Hammond

Piper Jaffray Companies, Research Division - Research Analyst

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Presentation

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Operator [1]

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

I would like to now turn the conference over to Park Carrere, Manager, Investor Relations. Please go ahead.

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Joseph Parkhill Carrere, Noble Midstream Partners LP - Manager of IR [2]

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Thank you, Jay. Good morning, everyone, and welcome to the Noble Midstream Partners Third Quarter 2019 Earnings Call. With me today to review our results is Brent Smolik, CEO; and Tom Christensen, CFO. Following our prepared remarks, we will hold a question-and-answer session. Here to participate in the question-and-answer session, we also have Chris Stavinoha, Director of Capital Projects; and Barry Guice, Director of Operations.

This morning, we announced third quarter 2019 results as well as fourth quarter and updated full year guidance. The press release and supplemental slides are on the Investors section of our website, nblmidstream.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 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 the forward-looking statements.

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

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [3]

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Thank you and good morning, everyone. My -- I apologize in advance. I've got something going on with my voice today, but I'll get you through it. And this is my first earnings call in the Midstream CEO role and the first call that Tom and I have hosted together. And I feel fortunate because we've got a really strong third quarter to update you on. You may have seen in the release, we made good progress on both operational and financial objectives during the quarter. We continue to focus on execution and cost management and we announced some new business development wins. And as planned, the second half ramp-up in throughput and in EBITDA began to show up in the third quarter, and we expect that momentum to continue into the fourth quarter.

So I'll give you a few more details beginning on Slide 3. For the third quarter in a row now, we've delivered record throughput volumes as our gathering business continued to grow and its connection cost per well continued to trend lower, which has resulted in capital spending that was below guidance as combination allowed NBLX to deliver higher-than-forecasted distributable cash flow and coverage for the quarter.

Oil and gas gathering throughput averaged 319,000 barrels of oil equivalent per day, up above the high end of guidance and up 8% versus the second quarter. Produced water volumes were consistent with guidance and up 10% versus Q2. Fresh water volumes of 135,000 barrels per day declined quarter-over-quarter, consistent with upstream activity. The Partnership delivered water to 2 frac crews during the third quarter compared to approximately 2.3 crews during the second quarter.

We continue to diversify our business with third-party expansions and the addition of services that provide benefits to customers further downstream from the DJ and Delaware Basins. These diversification efforts continued in the third quarter, and we secured an option for up to 20% equity interest in the Saddlehorn Pipeline expansion, which connects to our Black Diamond gathering system. In the quarter, we also expanded our Black Diamond acreage dedication by 53%, adding Verdad as a new customer.

Well connections increased in the third quarter, up as expected, nearly 30%, and we expect lower activity through the remainder of the year, again, as planned. As we move -- as we head into 2020, we have good visibility in [the tail] activity, along with a favorable mix shift between DevCos led by Blanco River in the Permian and Colorado River in the DJ Basin. Noble has indicated that the focus of 2020 activity will be in the Delaware and the DJ, and those assets are expected to grow to overcome Eagle Ford decline.

Momentum in throughput and EBITDA is happening in conjunction with these continued savings on the capital front. I'm focusing a lot on capital efficiency this morning since we expect this to be a longer-term benefit. But this year, we focused on cost efforts in 3 primary areas: more efficient standardized designs, better coordination with customers resulting in more efficient planning and scheduling and redesigning our contracting strategy focusing on a limited number of core contractors. These improvements have allowed us to reduce total capital expenditures and drive down our connection cost per well by 20% in the DJ Basin and by 50% in the Permian Basin.

We have reason to believe that those capital efficiency gains are sustainable. For example, in the DJ Basin, we've got clear operational synergies with Noble. With row development and Noble's [econo] design, we're now able to gather up to 16 wells at a single receipt point. This approach will be utilized again in 2020. We'll be able to leverage existing Mustang row infrastructure built in 2018 and 2019, which will result again in lower average connection capital per well.

In the Permian, we've seen even greater success in increasing capital efficiency. By recently interconnecting the 3 northern CGFs, we can efficiently move volumes across the system, extending the utility of our installed CGF capacity. With this infrastructure in place, our capital program in 2020 should be primarily focused on well connections and driving costs down further.

In the DJ Basin, overall gross gathering volumes were up 9% from the third quarter of 2019 primarily driven by Noble upstream activities. Oil and gas gathering throughput continued to set records in the Green River DevCo while Colorado River also experienced growth in the quarter from new well connections in Wells Ranch.

In Laramie River, that's our third-party DJ customer DevCo, gathering and sales volumes declined quarter-over-quarter as we expected. But we still expect full year Black Diamond volumes to exceed 90,000 barrels per day. In addition, we expect a benefit in Q4 as DCP's O'Connor 2 plant continues to increase its capacity through year-end, and we see more NGL capacity relief through the White Cliffs and Front Range pipelines.

In the Delaware Basin, gross gathering volumes grew 15% compared to the second quarter. Third quarter gathering activity increased with 9 well connections during the period. And looking ahead, we expect this momentum to continue with another 9 wells on -- fairly early in Q4. We currently expect third-party gathering customers in the Permian Basin to average around that 1 rig average through 2020.

Moving to our equity investments. Our Permian projects are critical to extending or expanding our Permian Basin and our Texas platforms. The projects had high-quality stable cash flows to the portfolio, and they provide another source of growth beyond field gathering.

One of our initial investments in the basin, the Advantage Pipeline, continues to provide those benefits, and it remains a high return project for the company. During 2019, the pipeline continued to see lower throughput due primarily to a key shipper temporarily utilizing volume credits that were earned in 2018. Those credits are expected to expire by year-end 2019, and we expect the customer resume volume matching and the throughput to exceed 80,000 barrels per day.

As you all probably know, interim crude service through EPIC Y-Grade line commenced in mid-August with several downstream destinations in Corpus Christi completed during the quarter. Regarding the EPIC Crude line, all of the 30-inch pipe has now been delivered and construction of the mainline is about 75% complete. Line fill for the permanent service -- crude service is expected to begin by year-end and continue into the early part of 2020.

And finally, Delaware construction -- Delaware Crossing construction is going well. The Wink terminal is complete, and the truck line from Crane to Wink in the Liberty terminal are expected to be online by year-end and contribute cash flow in 2020.

Before turning the call over to Tom and -- I'd like to say a few words on the Noble strategic review, the current macro environment and our response to those. Noble Energy is nearing the conclusion of the strategic review process, and we expect resolution by year-end. In the meantime, NBLX and Noble Energy continue to collaborate on synergistic opportunities like the Saddlehorn Pipeline project and in daily operations with things like collaboration on an interesting electrification project in the Delaware, and we'll continue to work together to identify additional synergies.

As we look into 2020 and beyond, we'll continue to plan for a $50 to $60 oil price environment and continued capital discipline by the producers. Therefore, we'll remain hyper-focused on customer service, cost control and execution. Through 2019, we've lowered our DJ and Delaware connection cost, and we believe we can maintain those levels in 2020 and beyond. We've also increased gathering throughput, strengthened our platform, driven capital efficiency improvements and captured additional growth opportunities. We expect to maintain that strategic focus and that operational momentum into 2020.

With that, I'll now turn the call over to our CFO, Tom Christensen.

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Thomas W. Christensen, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [4]

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Thanks, Brent. I am proud of our team's third quarter financial performance. Third quarter adjusted EBITDA to the Partnership was $60 million, up 7% sequentially, driven by more customer well connections in both the second and the third quarters. We recorded a larger-than-expected combined loss of $8.4 million on our EPIC Crude, EPIC Y-Grade and Delaware Crossing investments during the quarter. This was primarily driven by EPIC's start-up of interim crude service. Excluding this impact, our base business performed exceptionally well.

As we indicated on our last conference call, these project start-ups are creating more noise and variability in the second -- in our second half results. This noise should only have a short-term impact as the EPIC Crude mainline begins full service in the first quarter of 2020. Additionally, we are still on pace with the Delaware Crossing commencing crude service on its mainline during the fourth quarter. Together, these investments are expected to generate meaningful EBITDA into 2020.

We remain focused on maintaining healthy liquidity as a company and prudent leverage throughout the construction period for EPIC and Delaware Crossing projects. In August, we secured additional financial flexibility with a new 3-year $400 million term loan, which was used to repay the outstanding borrowings on the Partnership's $800 million revolving line of credit. This term loan is repayable at any time at no cost and was priced inside of our existing facilities, resulting in annual cash cost savings of $1.5 million. We ended the third quarter with $767 million in liquidity, including $750 million available on our revolver. We also have access to a $350 million accordion feature in our revolver.

For Q3, we continued our 20% annual distribution growth cadence and maintained strong distribution coverage at 1.6x. As planned, our Q3 annualized leverage ratio increased to just over 3.9x. As Brent mentioned, we are closely monitoring our capital program. And as a result, we are approaching an inflection point in generating -- in cash flow generation, positioning us to begin delevering next year.

Looking ahead to the fourth quarter, we anticipate net EBITDA of $64 million to $69 million. This is below our prior implied guidance due to EPIC's early service performance. Our gathering and fresh water assumptions are unchanged as we continue to expect solid gathering throughput and net EBITDA momentum into the fourth quarter.

We've been prudent in our assumptions around activity levels and in completion intensity given our customers have historically evaluated their capital programs near year-end. We've also added some optionality heading into 2020 with our recently announced Saddlehorn deal.

Saddlehorn is the natural extension of Black Diamond's strategic footprint and a win-win for Noble Midstream and our customers. This is consistent with our strategy of focusing on backyard opportunities, adding services around existing customer equity barrels and expanding further downstream. At the same time, we are enhancing the all-in value proposition for our customers by providing low-cost access to the Cushing market.

As part of this arrangement, Black Diamond received an option to purchase 20% ownership of Saddlehorn at highly competitive multiple. This is a unique opportunity to invest in an operational and committed pipeline. The option expires in April of next year, and we will evaluate this investment relative to the others in our portfolio as we move through the 2020 budgeting cycle.

Additionally, during the third quarter, Black Diamond added another long-term oil gathering dedication across approximately 85,000 acres in the DJ Basin. We've been able to absorb the incremental 2019 capital within our existing budget given the capital savings Brent mentioned earlier. The first wells on the acreage are anticipated in early 2020. In total, we now have approximately 243,000 dedicated acres on the Black Diamond system, more than doubling since the time of acquisition.

Our strong asset footprint and customer relationships in the areas we operate have repeatedly produced incremental backyard and expansion opportunities for the Partnership. Our team is energized by our recent commercial successes and are excited about the opportunity set in front of us. As usual, we will continue to take a measured approach towards additional opportunities to expand our portfolio.

Finally, Brent and I wanted to thank our operations and business support teams for the capital discipline and diligence this quarter. We -- which resulted in such strong quarterly performance for the Partnership. 2020 will be an exciting year for NBLX as our people continue to execute and as our recent investments begin to generate material cash flows to the Partnership.

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) The 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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Just wanted to start off with distribution growth here. And seeing how NBLX has been yielding more than 10% for some time, negative year-to-date performance and NBL's not growing at the same rate in the DJ and the Delaware as they were before, it seems like growing the IDRs at 20% really only benefits the IDRs at this point. So I'm just wondering at what juncture it would make sense to kind of stop the distribution growth? Or any thoughts there?

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [3]

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Yes. We're considering the same things you're talking about, Jeremy. I think that's -- I mean clearly, that's -- we've got plenty of distribution coverage today. But also, clearly, we're not getting full credit for the distribution growth and evaluation. So it's something that we've got on radar.

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

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Would it make sense under any circumstances to start kind of buying back NBLX units to support the unit price out here?

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [5]

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It's possible. I wouldn't say it's our highest priority today, but it's something we'd consider but lower priority.

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Operator [6]

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The next question comes from Pearce Hammond with Simmons Energy.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [7]

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First question pertains to 2020. And if you peer out to 2020 and you think about CapEx, is it fair to say it could be lower or should be lower year-over-year because you've had a lot of success this year on capital expenditures trending materially lower?

You highlight on Slide 6 in the investor deck 20% reduction in per well connection capital in the DJ Basin and a 50% reduction in the Delaware Basin. So I just want to see if you think that sort of continues into next year? And -- or what are some guardrails around like 2020 CapEx?

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [8]

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Yes. Pearce, the thing that we're benefiting a lot from is that we've built out the major backbone infrastructure in the Delaware, and then Noble is doing a lot of their development in and around that infrastructure to fill it up. And I think we'll be in that posture.

They have not yet finalized the budget and the plan yet for the Noble side, but I think that will be the behavior that we've got signal from them. So we're going to be basically doing well connects into existing infrastructure and the well connect capital is down. And so I think we'll have -- that benefit will be sustainable.

And in the DJ, it's similar because we've drilled -- the upstream companies drilled out these long row developments in Mustang and Wells Ranch. And as we come back in and develop the next row, then we'll benefit from a lot of the existing infrastructure that's in place. And so it will be, again, well connect heavy in 2020. So we'll definitely have that -- those are the sustainable parts of the capital. So we should be lower on that basis alone.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [9]

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Okay. And then my follow-up pertains to Jeremy's question just a few minutes ago. But -- and I understand obviously all these things in the table and you're giving them thought. But if you were to prioritize, would the priority be more on debt reduction or would it be on equity buybacks at this point?

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [10]

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It's interesting because I think what we're experiencing in the midstream company is not unlike what Noble is experiencing, is that our leverage statistics are higher at the end of this year because of the equity pipeline build-out that we've got in the program. That's largely behind us this year, early next, and we'll start to delever naturally as we go through next year.

So we are focused on leverage, and we'll stay focused on it, but I think it's going to naturally happen as we go through the second half of next year. And that's not unlike Noble's situation, if you're familiar with the Leviathan project where they've -- 3 years of spending capital in that project has pushed up leverage a bit. And as soon as it comes online in December, it will naturally delever.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [11]

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Great. And then last one for me. It looks like Green River DevCo in the quarter, fresh water delivery volumes were 0. Just making sure I see that correctly. Or was there something going on in the quarter in the Green River DevCo?

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [12]

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Yes. Where do you see that? We're scratching our head because...

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [13]

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Yes. I'll follow-up with a phone call afterwards.

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Brent J. Smolik, Noble Midstream Partners LP - CEO & Director of Noble Midstream GP LLC [14]

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Okay. I think maybe we missed -- we've -- something is a little misleading maybe.

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Operator [15]

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The next question comes from Chris Tillett with Barclays.

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Christopher Paul Tillett, Barclays Bank PLC, Research Division - Research Analyst [16]

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Just a quick one for me. On the Saddlehorn option that you guys announced a couple of weeks ago, I know that the option price itself has not been disclosed. But could you provide any comments around how you would expect exercising that option to impact the balance sheet, if at all, if you choose to exercise it?

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Thomas W. Christensen, Noble Midstream Partners LP - CFO of Noble Midstream GP LLC [17]

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Yes. The option pricing largely reflects some of the value that was brought to the anchor shippers that we brought to the line. So it is a very competitive project. And it's immediately accretive to our cash flows at the cost that you're seeing. So you'll see that it's a pretty highly attractive option.

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Operator [18]

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

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Joseph Parkhill Carrere, Noble Midstream Partners LP - Manager of IR [19]

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Thanks, Jay. Thank you all for listening to the Noble Midstream third quarter earnings call. If you have any further questions, we'll be around. Please reach out to Tom or I. Thank you all.

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Operator [20]

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