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Edited Transcript of OMP.N earnings conference call or presentation 7-Aug-19 4:30pm GMT

Q2 2019 Oasis Midstream Partners LP Earnings Call

HOUSTON Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Oasis Midstream Partners LP earnings conference call or presentation Wednesday, August 7, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael H. Lou

Oasis Midstream Partners LP - President & Director of OMP GP LLC

* Richard N. Robuck

Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC

* Taylor L. Reid

Oasis Midstream Partners LP - CEO & Director of OMP GP LLC

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Conference Call Participants

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* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Pearce Wheless Hammond

Simmons & Company International, Research Division - MD & Senior Research 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 morning. My name is Sean, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter 2019 Earnings Release and Operations Update for Oasis Midstream Partners. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the call over to Richard Robuck, Oasis Midstream's CFO to begin the conference. You may begin your conference.

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [2]

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Thank you, Sean, good morning, everyone. Today, we're reporting our second quarter 2019 financial and operational results. We're delighted to have you on our call. I'm joined by Taylor Reid and Michael Lou, as well as some other members from the team. Please be advised that our remarks on Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions includes statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that we have described in our earnings release as well in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we'll also make references to certain non-GAAP financial measures and reconciliations to the applicable GAAP measures can be found on our earnings release and on our website. We will also reference our current investor presentation, which you can find on our website.

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

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [3]

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Good morning, everyone, and thanks for joining our call. We thought we'd start today by highlighting a handful of key points. First, OMP's financial outlook remains exceptional. The second quarter demonstrates the strength and resiliency of our portfolio as some temporary downtime at Bighorn was mostly offset by better-than-anticipated performance at Beartooth. Our coverage outlook for the second half of 2019 remains unchanged. We remain in a compelling position to simultaneously grow our distribution as well as our coverage.

Second, the Boards of Oasis and of our general partner continue to work towards executing final agreements for the dedication of certain Delaware acreage from Oasis Petroleum to OMP. As a reminder, this DevCo will be called Panther, with final agreements expected in the third quarter. This is a huge opportunity for OMP unitholders, which enhances the financial outlook for OMP while keeping the balance sheet strong.

Third, we continue to pursue third-party business in both the Williston and Delaware. Our business development team has done a tremendous job securing attractive customers to leverage our footprint. We estimate over 15% to 20% of our Q4 '19 EBITDA will come from third parties.

And finally, OMP remains an attractive investment opportunity. The combination of peer-leading distribution growth, improving coverage and a near double-digit yield represent a compelling value to investors. We look forward to executing our plan in 2019 and beyond.

In the second quarter, we reported distribution coverage of 1.7, a sequential improvement from the 1.63x OMP produced in the first quarter. Adjusting for the constraints in the gas plant coverage would have approximated 1.9x, above the top end of our guidance. We grew our distribution 5% versus the prior quarter consistent with our targeted 20% annualized distribution growth rate.

Gas volumes in both Bighorn and Bobcat were constrained during the second quarter, largely due to our plant downtime and a turnaround during the end of the second quarter and into early July. The net impact of volumes was approximately 40 million cubic feet per day at both DevCos, and we spent incremental OpEx during the second quarter. Altogether, EBITDA was adversely impacted by about $5 million for the second quarter. As it is related to the third quarter, Oasis announced in their press release that both oil and gas volumes were higher during the month of July. We are in the same boat with our gas volumes for the last few weeks at or above the high end of our third quarter ranges for both Bighorn and Bobcat.

This impressive ramp-up reflects a strong combination of Oasis and third parties. Over the second quarter, third-party volumes approximated 29% of Bighorn's total volumes. We still expect utilization to be above 90% by year-end 2019.

Natural gas processing in the Williston remains tight, as you have heard from numerous operators in the basin. North Dakota gas production grew to a record 2.8 Bcf per day in May, while basin processing is only 2.2 Bcf a day, including OMP's new plant.

We continue to remain active with multiple parties regarding additional opportunities as we seek to reduce overall flaring in the Williston, while capitalizing on our strategic investment.

As we look to the third quarter of 2019, we expect an improvement in coverage to about 1.8 to 1.9. Additionally, we expect to exit the year even stronger with fourth quarter coverage of 1.9 to 2x. The stated ramp-up and coverage reflects strong contributions from our new gas complex in Bighorn, including third-party volumes, continued execution across Bobcat and Beartooth as well as the addition of the Panther DevCo.

I'll now turn the call over to Michael to go over a little more detail on our operations.

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [4]

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Thanks, Taylor. OMP continues to add incremental value for its unitholders. We updated 2019 EBITDA guidance to account for second quarter performance and our updated projections by DevCo. Our sponsor continues to direct a substantial portion of its drilling to OMP dedicated areas, supporting our financial outlook for 2019 and beyond.

Additionally, as Taylor mentioned, we won a significant amount of third-party business and this is becoming a more significant portion of our cash flow stream. We provided guidance for volumes in the third and fourth quarter of 2019 last night. Our forecast volumes and improved gross margins from our new gas plant drive solid EBITDA growth through the remainder of the year.

I'll dive into quarterly details a bit before giving more color on our 2019 guidance. At Bighorn, crude volumes exceeded the top end of guidance during the quarter, while gas volumes were below expectations due to the gas plant downtime we discussed. At the Bobcat DevCo, with the exception of water, volumes were below expectations reflecting the same downtime. At Beartooth, water volumes significantly exceeded the top end of guidance, reflecting a continued strong contribution from our sponsor and incremental third-party volumes.

Turning to capital, we've adjusted our budget about 8% higher largely reflecting capturing third-party business, incremental plant costs and an acceleration of certain gathering infrastructure from 2020 into 2019. Total CapEx net to OMP is expected to range $203 million to $214 million. OMP expects the Panther DevCo arrangement to be finalized in the third quarter, with financial impacts beginning around September 1.

Our CapEx range reflects a full year of Panther spending at OMP, including reimbursing our sponsor for Panther capital spent to date.

Execution against our capital arrangement with Oasis and Bobcat are proceeding as expected as OMP increased its interest in the Bobcat DevCo to 32.5% from 27.4% at the end of the first quarter. OMP's ownership in Bobcat is still expected to increase to approximately 34% to 36% by year-end.

With that, I'll hand the call over to Richard.

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [5]

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Thanks, Michael. OMP is benefiting from a strong program by our sponsor coupled with new and highly accretive third-party volumes. Given the amount of third-party business we capture, aggregate economics, including both sponsor and third-party volumes yield sub-4x build multiples. We remain on track this quarter with our 20% annualized distribution growth target with the second quarter distribution being $0.49 a unit.

As of June 30, 2019, the partnership had cash outstanding at $6 million and $408 million drawn under its revolving credit facility. Debt to second quarter annualized EBITDA was about 2.8x and it will be driven down throughout the rest of the year, exiting around 2.5x. Our revolving credit facility remains at $475 million committed with the ability to further increase commitments to $675 million.

In closing, we're very excited about executing on our plan and continuing to drive strong results at OMP.

I'll now hand the call back over to Sean 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 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 want to start with some commentary on the Oasis call. With regards to Wild Basin and the strategic importance there on a go-forward basis, seems like there could be some change rotating away. I'm just wondering how we should be thinking about that as it relates to OMP?

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [3]

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Yes, first, I'll begin and Mike and Richard can jump in. But really we expected this being a change as really what we stated as being consistent with what we've been talking about. And that we backed up all the way to 2015, 2016 and throughout the life of the midstream business, we've been open around financing alternatives and then value proposition. Now the strategic nature of the asset for gas capture was -- getting all that infrastructure built was super strategic upfront. As Tommy talked about, there's still a strategic nature of that component from a gas capture standpoint, but not probably at the same level as it was in the early days. But this -- the idea for the upstream and their ownership and that we've always been kind of open to alternatives.

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [4]

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Is that what you were asking, Jeremy?

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

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Yes. And just one quick follow-up here as far as, I appreciate the distribution coverage as that's quite a high level and it gives you a lot of flexibility, but with the yield kind of standing where it is in the double-digit range, was there a consideration to unit repurchases entering the mix as far as returning capital to unitholders at this point?

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [6]

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Yes, at this point, we have not thought about doing unit repurchases. Yes, I think that right now, we have leverage in the area we'd like it, that 2, 2.5x. And so our goal is to march it down this year and even further decrease it into 2020 neighborhood. And so we think managing a conservative balance sheet is prudent at this time, and have not foreseen a desire to buy back units at this time.

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Operator [7]

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Our next question will come from Spiro Dounis with Crédit Suisse.

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

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Great. I just wanted to ask a question surrounding the sponsor and the free cash flow revision. I guess how we should think about the impact to OMP? I'm just trying to think through it, could we see an accelerated drop-downs to drive cash back up to the sponsor? And then maybe in that vein, I believe there has been some talk about monetization of some of the position. Any color around that would be helpful?

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [9]

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Yes. So in terms of free cash flow to parent, what you'll see is that there is actually still a significant amount of free cash flow at the parent. So the adjustments at the parent level that they talked about on the call revolved around the amount of deflation between the $50 and $60 case and because of the excess free cash flow generation and the ability to do a little bit more in the Delaware to keep efficiencies going. And so that's kind of the thought process around the parent. It really doesn't change activity in a great way at the partnership level in terms of the different areas and how that will work.

In terms of importance, Taylor kind of mentioned the strategic nature of Wild Basin may be changing a little bit for the parent in terms of availability of service, and what you're seeing in the basin as a whole is not all producers have the same access to infrastructure that our sponsor enjoys through OMP. And so that part of it obviously is still massively important, and there's still a lot of inventory in the Wild Basin area. With acquisitions that were done at the E&P Level a few years back, it increased and further dedicated more acreage to the partnership. So there is still a lot of running room in the Wild Basin and that's still going to be a core part of the business. In fact, there's -- it looks like they're going to continue to keep things full in that Wild Basin asset.

There also continues to be other areas we think at the sponsor level that aren't currently dedicated that could become very interesting for the partnership and where we can really make a difference for the sponsor in terms of [painted words] and maybe some other areas where contracts are rolling off or where there is not current dedications where we can at the partnership level really support the parent.

In terms of strategic alternatives, don't know exactly how that will play out. What you've heard the parent say is that there is a focus on how to get value, the true value of this asset, which we think is quite large and how they can get that value. And like you said, it could be in the form of further drop-downs, where they're still holding a significant amount of assets at the sponsor level that eventually could come down and it could be through some other broader initiative on that front. So those are kind of the spectrum of things that I think we talked about on the sponsor call.

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

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Got it. That's very helpful. Second one just around Panther. Just trying to get a sense for maybe how critical or important this could be to the sponsor? And I guess I want to be specifically getting at is with respect to the sponsor's LOEs in the basin, your ability to sort of do water internally and maybe build out pipeline and recycling infrastructure, what does that do to the LOE for the sponsor?

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [11]

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It's -- it is definitely, as we've talked about in all the shale plays, water is the #1 cost in terms of lease operating expense. And so having an efficient pipeline network where you can eliminate the trucks, you take them off the road, put everything into the pipeline and then inject it down the well is the most efficient way to handle it. So it is important to the sponsor to have that infrastructure built out and efficiently run because it really drives that LOE down.

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [12]

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And we saw that in a huge way over the years in the Williston Basin, where especially in kind of weather times where roads are closed, if you can't move your water consistently, that can impact your production volumes. And you see people with constraints on the infrastructure side across the basin not only on the gas side, but across kind of all -- water and oil as well. In the Delaware, not too dissimilar, you may not have the weather fluctuations in the same manner that you have in the Williston, but I think it's fairly well documented, the congestion on the roads in the Delaware and the need for kind of a build-out of infrastructure there as well. So while roads are getting built, it's certainly better to get this water moved by pipeline and certainly a lot cheaper and more reliable too. So we think in both basins, it makes a lot of sense and can really impact LOE for the parent.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [13]

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Got it. And in terms of timing, I think Panther will contribute a little bit to 2019, but ultimately, how should we think about timing around when that hits like critical mass?

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [14]

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Yes, I mean you will see that continue to slowly ramp-up over the next couple of years. I think we have a slide on our investor deck that kind of talks about capital spend over time and build multiples. As they relate to that capital spend, clearly the implication is growing EBITDA over time for Panther. So that's on Slide 8. So for that 2022-2023 time frame, you would have spent on a cumulative basis $150 million of capital, so you just divide that by 4 -- or divide that by 4 to get to the EBITDA levels in that time frame. So it's really starting to get material as you march through time.

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Operator [15]

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Our next question will come from Pearce Hammond with Simmons Energy.

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Pearce Wheless Hammond, Simmons & Company International, Research Division - MD & Senior Research Analyst [16]

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My first question, given the steep decline in the unit price today for Oasis Midstream Partners, what do you think investors do not fully understand or appreciate about the story given this significant drop today?

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [17]

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Yes, I think the initial reaction was just, in our, I would say, humble opinion, a little bit overdone, mainly because as I look out into the third and fourth quarter and into 2020, the plan really hasn't changed and the team is doing a great job in terms of not only capturing Oasis' volumes but also others' volumes. So if you look at EBITDA and leverage levels, and coverage and distribution growth, everything is definitely intact. I think the other thing, and Michael said it on the earlier call, that's super important is that Oasis was able to bring this plant on in December of 2018. And the team did a heroic job getting it done quickly and allowing OMP to get the value of those cash flows really as soon as safely a budget-constrained world could do. And that accreted to the OMP shareholders for the first 6 months of the year and will continue going forward. There is other folks who look to bring in gas processing into the basin. It took them well over 7 to 9 months longer and some are still waiting on it. And I think the ability to move quickly, make good decisions like that and bring that value to our unitholders, and frankly, building it at OMP and not upstairs and dropping it later is super accretive. And so yes, we did have some downtime. We articulated that in the earlier call, and then earlier for you guys, and a little bit of EBITDA for a short period of time are kind of the normal kinks that you have in a gas plant versus not having a plant for 6 to 9 months is a trade we make all day long and we think the future is definitely intact and -- as the ability get better from here.

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Pearce Wheless Hammond, Simmons & Company International, Research Division - MD & Senior Research Analyst [18]

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That's helpful. And then as a follow-up, do you see opportunities to maybe even accelerate third-party business and maybe reduce some of the reliance on the sponsor?

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [19]

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Yes, and I think the goal of OMP is not to only service the sponsor, the goal is actually to go diversify in order to add incremental value. I think the way we've thought about this business is by bringing it to public in 2017 is that, if you were just going to capture Oasis volumes, it wasn't necessarily going to be all that compelling, but if we could bring incremental capital to help fund the initial build-out to capture third-party volumes on all 3 commodities, then that would be a whole lot more compelling. Now we've got a -- I think as evidenced by what we've done life-to-date, we've got one of the top BD teams out there, out working to grow our volumes and increase EBITDA related to third-party as a percent of the total faster than most sponsor-backed MLPs out there.

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [20]

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Pearce, just to add a little bit more, we talked a little bit about this on our IPO that for a number of years we focused primarily on the sponsor, and we think the team did an incredible job from an operating standpoint just keeping up with the growth that the parent had. We -- at the IPO, we said, hey, look, we've never really looked for that third-party growth, but we're going to start focusing on it. And what you've seen is that we've gone from at the beginning of this year where it was pretty minimal third party to where by the end of the year it's going to be 20%, pretty significant move. Like Richard said, the team is doing a great job of continuing to reduce, like you said, that reliance upon the sponsor and fill that with third parties. I would say that in the Delaware, we're on the front end of that as well.

And so as we talked about in the last question, some of those projections those are all sponsor-based and we think that, that asset actually sits in, in one of the best parts of the Delaware in terms of from an infrastructure perspective. And there is a huge need in that area that we think that we can play in and really add some third-party volumes to that system as well. So not only can we continue to grow the Bakken side, but I think there is a lot of opportunity in the Delaware.

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Operator [21]

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This will conclude today's question-and-answer session. I would like to turn the conference back over to Taylor Reid for any closing remarks.

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [22]

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Thanks, operator. In closing, second quarter results demonstrate the strength and resiliency of the OMP portfolio. Our financial outlook and specifically, our growth and coverage profile remain an attractive proposition to investors. Thanks again for joining the call today. As always, we will definitely make ourselves available for any follow-up questions that you might have. Thank you.

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Operator [23]

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