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Edited Transcript of OMP.N earnings conference call or presentation 6-Nov-19 5:30pm GMT

Q3 2019 Oasis Midstream Partners LP Earnings Call

HOUSTON Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Oasis Midstream Partners LP earnings conference call or presentation Wednesday, November 6, 2019 at 5:30:00pm 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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* Crawford Randall Kob

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research

* 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. My name is Allison, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Third 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 conference over to Richard Robuck, Oasis Midstream's CFO, to begin the conference. Thank you. 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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Thanks, Allison. Welcome, everyone. This is Richard Robuck. And today, we are reporting our third quarter 2019 financial and operational results. We're delighted to have you on the call. I'm joined today by Taylor Reid and Michael Lou as well as other members from the team.

Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions, include 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 than 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 on -- 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 will also make references to certain non-GAAP financial measures and reconciliations to these applicable GAAP measures can be found in 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 operational strength was demonstrated during the quarter as throughput was at or above guidance levels across most commodity stream. Water was particularly strong, fueled by our sponsor's activity as well as third party, which accounted for 15% of our Beartooth water volume. Coverage exceeded our guidance, and we remain on track to deliver our operational and financial guidance for 2019.

Second, the team continues to have success in signing third-party agreements in both the Williston and the Delaware. We recently signed a crude gathering deal in the Delaware and a water gathering and disposal deal in the Williston.

The team has done -- has really done an outstanding job securing attractive customers to leverage our footprint, improving our financial outlook and diversifying our revenue stream. We hit a huge milestone in the third quarter with approximately 20% of OMP EBITDA coming from third party. And we expect to see a similar level in the fourth quarter as well.

Third, OMP executed final agreements in November for the dedication of certain Delaware acreage from Oasis Petroleum to OMP for oil and water. This dedication in our Panther DevCo is a huge win for both parties and demonstrates our support of OMP unitholders.

And finally, OMP remains a uniquely attractive investment opportunity. The combination of peer-leading distribution growth, improving coverage and a double-digit yield represent a compelling value to investors. We've greatly exceeded expectations since going public and look forward to continued execution.

In the third quarter, we reported distribution coverage of 2x, a sequential improvement from the 1.7x OMP generated in the second quarter. We grew our distribution 5% versus the prior quarter, consistent with our targeted 20% annualized distribution growth rate.

Our gas complex has ramped up nicely over 2019, reflecting a strong combination of Oasis and third-party business. Over the third quarter, third-party volumes approximated 32% of Bighorn's total volume. We expect throughput to continue to increase in the fourth quarter.

As you've heard through various operators this year, natural gas processing in the Williston Basin remains tight. North Dakota gas production grew to a record 3 Bcf a day in August, while Basin gas processing at that time totaled about 2.7 Bcf per day.

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. In the Delaware, our position is situated in the heart of industry activity in close proximity to several regional oil hubs. We signed our first third-party deal this quarter and believe we have a great opportunity to do a lot more. As we look to the fourth quarter of 2019, we are maintaining our distribution coverage expectation of 1.9x to 2x.

With that, 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 remains focused on executing our plan and adding value to its unitholders. A significant amount of our sponsor's activity continues to be directed towards OMP-dedicated areas, which is expected to drive solid financial performance for the fourth quarter and beyond.

Additionally, as Taylor mentioned, we continue to bring on incremental third-party business, which is becoming a meaningful part of our cash flow. I'll give a bit more color on the third quarter before diving into fourth quarter projections.

At Bighorn, both crude and gas volumes were at the top end of guidance during the quarter, reflecting strong activity from our sponsor and third parties as well as high utilization at our gas complex. The team did a great job of getting the gas processing complex back up and running and positioned us for a great back half of 2019.

At the Bobcat DevCo, volumes were at or above guidance for natural gas and water. And 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 trimmed our 2019 budget about $7 million at the midpoint, even when including some addition of capital related to new third-party business. The reduction reflects strong cost control. Total CapEx net to OMP is now expected to range between $197 million to $206 million.

OMP finalized the Panther DevCo arrangement with financial impacts beginning around November 1. Our CapEx range reflects a full year of Panther spending at OMP, including reimbursing our sponsor.

Looking to 2020, we would expect gross CapEx to drop by about 40% from 2019 levels without the inclusion of capital for incremental third-party deals. This means previous implied gross CapEx guidance of approximately $170 million moves down to approximately $130 million. Net to OMP, this could be in the $80 million range.

Lastly, execution against our capital arrangement with Oasis in Bobcat is proceeding as expected, as OMP increased its interest in the Bobcat DevCo to 34.4% at the -- versus 32.5% at the end of the second quarter. We have not decided to continue the Bobcat arrangement in 2020 yet, but Oasis and OMP will be in discussions in the coming months about extending that opportunity. 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's financial position remains compelling, and our cash generation continues to ramp up behind our sponsor's activity and third-party agreement. Closing of our Panther DevCo in the Permian enhances the financial outlook.

We made a minor adjustment to our full year EBITDA guidance range largely adjusting for the timing of Panther from September to November. We remain on track to deliver 20% annualized distribution growth target with the third quarter distribution being $0.515 per unit.

As of September 30, 2019, net debt to third quarter annualized EBITDA, 2.5x, and we continue to forecast maintaining a similar leverage ratio at year-end, particularly as 100% of the Panther CapEx hits OMP in the fourth quarter. Our revolving credit facility is currently $575 million committed with the ability to further increase commitments to $775 million.

In closing, we're happy about OMP's results this quarter and look forward to delivering strong performance into the future. With that, I'll hand the call back over to Allison 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 of 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 a distribution growth question here. Given that OMP has been yielding more than 10% for some time here and that Oasis doesn't seem to be growing a ton in the Bakken going forward from what we can see, just wondering if it still makes sense to grow at these levels? I mean, it seems like it really just benefits the IDRs and doesn't help the LP unit price at this point. Is there a situation where it makes sense to lower debt or to buy back units instead?

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [3]

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Yes, Jeremy. This is Richard. Yes, I think we've talked about that in the past and continue to think that it's actually been -- that growth rate has been on the back of the company doing a great job diversifying the revenue stream. So you've seen the company go from basically no third-party EBITDA to 20% at the end of the third quarter and being that out into the future as well.

And so the growth and the IDRs have been a compelling tool for OMP to do a -- to do what it set out to do. I think as we look out in the future, it is something where -- it is something that's not -- doesn't necessarily make a lot of sense when you're yielding where we're yielding and paying -- and growing the way we're growing. So I think we'll revisit that.

But I think the other thing I'd add is the balance sheet is really right where we're happy with it. There's -- we don't see any great need to start trying to delever through changing the growth rate. But I think the other piece is we continue to see growth into 2020 from an EBITDA perspective and see our ability to support that coverage or on the growth, if needed.

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Operator [4]

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Our next question today will come from Crawford Kob of Tudor, Pickering, and Holt.

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Crawford Randall Kob, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [5]

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So as Oasis increasingly directs activity outside of Wild Basin, can OMP leverage the existing processing build-out? Or is all non-Wild Basin processing spoken for by third parties?

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

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Yes, that's a great question. I think the way we think about it is we've got years of inventory remaining in Wild Basin. But you're seeing continued completions happening on the Beartooth footprint, which is obviously helpful as we continue to outperform on that piece of the business.

We do have the ability and we've actually kind of captured some of those as we've moved -- as we look forward in the future, the ability to capture an asset position that's south and to the east of the Wild Basin position and bring that into the gas plant.

And then as we look further to the west, we actually believe there's an opportunity to bring incremental acreage and activity out into the future, back into the processing plant. And we feel like there's -- with -- on a nameplate basis, at 320 a day of capacity, we feel like there's an ability to continue to add from where we are now to the gas processing complex. And so there actually is the ability to supplement volumes with incremental Oasis volumes as well as third party as the team continues to try to attract new customers.

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Crawford Randall Kob, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Analyst of Midstream Research [7]

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Okay, got it. That's helpful. And a last one from me. If Oasis production growth moderates more towards a flat volume profile outside of the Delaware, how should we think about OMP growth CapEx going forward? Would it maybe trend closer to a maintenance CapEx level?

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Richard N. Robuck, Oasis Midstream Partners LP - Senior VP & CFO of OMP GP LLC [8]

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Yes, I think as you get into a couple years from now, I think you'll see our -- like Michael articulated on the prepared remarks that you'll see capital coming down dramatically year-over-year. I think you'll see a 2021 step down as well.

And if Oasis starts to move into other areas, you might see the Beartooth capital tick up a bit, where some of the Wild Basin-type capital would come off a bit. And then obviously, like you understand, you'll have a pretty steady, similar capital program as you march through time in the Delaware as we capture that volume growth.

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Operator [9]

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And our next question today will come from Pearce Hammond of Simmons Energy.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [10]

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First question, it seems like you're having good success on the third-party front. Is the -- and now it's about 20% of EBITDA. Is that happening at a faster pace than what you had expected? And then furthermore, as you look out beyond 2020, do you think that this could become even more meaningful over time?

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Michael H. Lou, Oasis Midstream Partners LP - President & Director of OMP GP LLC [11]

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Yes, Pearce, thanks for the question. I think that what we've seen since our IPO in '17, what we talked about was that we hadn't focused much on the third-party side. Our commercial team has done an incredible job signing up customers across all commodities in the Williston and getting us to this 20% number.

It's in line with what we expected at the beginning of the year. We're continuing to have really good momentum to continue to grow that over time. And as we are just starting up with the Panther DevCo now in the Delaware, we're starting to gain some traction on opportunities there as well. So we feel really good about the commercial side and how we're continuing to grow third-party volumes across both basins.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [12]

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Great. And then my follow-up might be a harder one to answer, but last quarter, Taylor kind of talked about that maybe OMP is not quite as strategic to OAS as it had been more so at its formation. And so accordingly, you all might have been looking at some opportunities for a JV or maybe sell a DevCo or whatnot.

And then obviously, NCAP has become a bit more active as it pertains to OAS. So what does all of that mean? Does that mean there's options on the table for JVs and things like that for the year ahead?

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Taylor L. Reid, Oasis Midstream Partners LP - CEO & Director of OMP GP LLC [13]

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Just the front part about the strategic nature, the comments we made were really focused more around Wild Basin. And obviously, that's a huge part of the asset base at this point. And getting the processing in place to capture all that gas plus the third-party gas was of huge strategic importance with this -- with all the flaring laws in North Dakota.

I would say that that is in place, is fulfilled, but it also has some strategic imprint on the other parts of the basin that Richard talked about as we move out. Now all that being said, yes, we're -- as we talked about during the last call, we're considering a range of options on the business, and it could be in the form of a JV, it could be all the way to an outright sale, but it could be continuing to operate this and grow this business on a go-forward basis.

So there's really a range of opportunities, but the great news for us is that we grew it from a fledgling business in 2015 to one on a gross basis now that that's going to generate a $260 million range of EBITDA this year. So it's turned into a huge part of our business, both for OMP outright but also in supporting the parent as well.

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Operator [14]

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Ladies and gentlemen, this will conclude our question-and-answer session. And at this time, I'd 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 [15]

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Thanks, Allison. In closing, third quarter results were strong across the board, and our financial outlook remains solid. We've exceeded expectations since our IPO, and the outlook remains attractive. Thanks again for joining the call today. As always, we will make ourselves available for any follow-up questions you may have.

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Operator [16]

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The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.