U.S. markets close in 1 hour 54 minutes

Edited Transcript of RTLR.OQ earnings conference call or presentation 7-May-20 2:00pm GMT

Q1 2020 Rattler Midstream LP Earnings Call

May 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Rattler Midstream LP earnings conference call or presentation Thursday, May 7, 2020 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam T. Lawlis

Rattler Midstream LP - VP of IR

* Matthew Kaes Van’t Hof

Rattler Midstream LP - President & Director of Rattler Midstream GP LLC

* Travis D. Stice

Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC

================================================================================

Conference Call Participants

================================================================================

* James M. Kirby

JP Morgan Chase & Co, Research Division - Research Analyst

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Pearce Wheless Hammond

Piper Sandler & Co., Research Division - Research Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Ujjwal Pradhan

BofA Merrill Lynch, Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Rattler Midstream First Quarter 2020 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Mr. Adam Lawlis, Vice President of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Adam T. Lawlis, Rattler Midstream LP - VP of IR [2]

--------------------------------------------------------------------------------

Thank you. Good morning, and welcome to Rattler Midstream's First Quarter 2020 Conference Call. During our call today, we'll reference an updated investor presentation, which can be found on Rattler's website. Representing Rattler today are Travis Stice, CEO; and Kaes Van't Hof, President.

During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC.

In addition, we will make reference to certain non-GAAP measures. The reconciliation to the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

I'll now turn the call over to Travis Stice.

--------------------------------------------------------------------------------

Travis D. Stice, Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC [3]

--------------------------------------------------------------------------------

Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream's earnings conference call covering results for the first quarter 2020.

Before we get started, I would like to take a minute to extend our thoughts and prayers to all those affected by the COVID-19 pandemic. The challenges presented so far in 2020 are unprecedented, but our perseverance is evident in the decisive actions we have taken to preserve our strength through this cycle.

Turning to the results. Rattler's first quarter continued the previous trend of increasing volumes, earnings and cash flow since Rattler's IPO less than a year ago. Produced water volumes and gas gathering volumes were particularly strong in the first quarter, up 5% and 13% over the previous quarter, respectively, while oil gathering and sourced water volumes were down 1% and 7% over Q4 2019 due to the effect of Diamondback reducing completion activity in March.

First quarter financial results reflected the strong operational performance in the quarter as Rattler grew net income 6% quarter-over-quarter to $55 million, and adjusted EBITDA grew to over 14% quarter-over-quarter to $81 million in the first quarter. The company continued to build out our various systems, spending $52 million on midstream capital expenditures in the quarter, and contributing $33 million to equity method joint ventures. Both the Gray Oak and EPIC crude pipelines begin full commercial service in April and will contribute meaningfully to the cash flow and adjusted EBITDA going forward.

3 of our 5 equity investments are now operational with the Wink to Webster pipeline expected to come online in the first half of 2021. To conserve capital, we have delayed our Amarillo-Rattler gathering and processing joint venture to late 2021 based on the current outlook.

Rattler is focused on capital and cost control across the board as evidenced by our immediate reduction to operated CapEx spend when Diamondback pulled back its activity levels in March. We will continue to drive down operating costs and preserve capital wherever possible.

Although the forward outlook has weakened, we are very confident in the resiliency of the Rattler business model. Therefore, we announced a $0.29 per unit distribution for the first quarter, which is flat from the previous quarter and in line with previous and current guidance for 2020. The Board intends to review the distribution policy each quarter, but with peer-leading leverage, a core business that is expected to be free cash flow positive and differentiated visibility into Diamondback's future activity, Rattler is well positioned to maintain its current distribution policy.

Looking forward to the rest of the year, we are reiterating our previously announced guidance of adjusted EBITDA for March, which at the midpoint implies growth of 6% year-over-year even in a depressed commodity price environment. Furthermore, operated midstream CapEx guidance at the midpoint implies a decline of approximately 50% from 2019. Across our organization and our partners, we are evaluating ways to conserve capital as evidenced by the reduced equity method contribution guidance for 2020, which is roughly 20% down from the previous guidance. Most importantly, the net effect of our updated 2020 guidance shows the resiliency of Rattler's free cash flow profile as the decline in system volumes and EBITDA is more than offset by declines in operated midstream CapEx and contributions to equity method investments.

In conclusion, I want to emphasize that Rattler was set up to be a sustainable, self-funding business to combat the inherent volatility in our business. While diversification of customers is often seen as a benefit, in the midstream space, we view Rattler's concentration with Diamondback as a clear positive. Diamondback's cost structure with low interest expense, low leverage, industry-leading low cash G&A, a full hedge book, strong midstream contracts and mineral ownership through Viper Energy Partners has prepared it to operate in a lower-for-longer oil price environment.

With these comments now complete, operator, please open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Jeremy, your line is open.

--------------------------------------------------------------------------------

James M. Kirby, JP Morgan Chase & Co, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

This is James on for Jeremy. I just wanted to start kind of a high-level question, just looking at the JV portfolio. How are you -- maybe if you can go just one by one in terms of the capital spend you expect this year and then also just focusing more on exiting Gray Oak, how you see those pipes progressing through 2Q here.

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [3]

--------------------------------------------------------------------------------

Yes. So in this case, I'll go through them one by one. The EPIC and the Gray Oak pipeline started up in April in full service. We have some small payments left to make on both of those, but not a meaningful number. So we should start seeing some EBITDA contribution and most likely some distributions from one or both of those pipelines this year.

We've already received a distribution from Gray Oak. So we certainly expect that to continue onward. Our Reliance JV, the OMOG JV with Oryx, we've already received a distribution out of that business and have cut capital at that business. So expect to see some free cash flow and returns up to the rapid level throughout the year. And then Wink to Webster, which is our third pipeline commitment, still on track. And we've spent about half the capital required for that pipeline to date. And we look forward to that pipeline coming on in the first half of the year of 2021.

And lastly, our Amarillo-Rattler gas gathering and processing JV, we've delayed all major capital spend there until at least the back half of 2021, if not the first half of 2020. So certainly put a lot of dollars to work here, and we look forward to receiving some cash back from these investments.

--------------------------------------------------------------------------------

James M. Kirby, JP Morgan Chase & Co, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Got it. And then just one more for me. I'm looking at the slides. On Slide 11, you guys talk about the kind of the savings initiatives with OpEx. Maybe if you could just provide any incremental color on, I guess, the surface royalties there. Maybe I'm just trying to better understand kind of what the savings are.

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [5]

--------------------------------------------------------------------------------

Yes. It's going to be tough to get major savings on surface royalties. It just depends on that particular area and the lease and what the lease says. In some cases, you are required to buy on lease water and in some cases, the opposite is true. So there's certainly going to be some optimization that we can do. You could -- if you're buying water at $0.30 a barrel from 1 section, but 2 sections over, it's $0.10 a barrel, makes sense to buy from the cheaper section. So now that everything's slowed down a little bit on the optimization front, we're certainly looking to buy cheaper water and also dispose water on leases or acreage that has a lower disposal rate. So I can't quantify the savings there. There's certainly going to be some optimization but I think the real savings is going to be on the true OpEx side of the equation where our service partners had reduced costs by anywhere from 15% to 25% across the board.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from the line of Jeff Grampp with Northland.

--------------------------------------------------------------------------------

Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [7]

--------------------------------------------------------------------------------

Just sticking on Slide 11 here. Kaes, I think you mentioned -- I guess, first I wanted to clarify the last comment, did you say kind of a 15% to 20% type of reduction is what you guys were targeting? And then could you clarify if any of that's kind of baked into the existing guidance you guys have put out?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [8]

--------------------------------------------------------------------------------

Yes, Jeff, and it's hard for us to bake in forward-looking cost reductions, similar to the Diamondback side, we just like to give you what we're seeing. I think we need to see this prove out in the numbers in Q2 and Q3. But certainly, across the board, all costs are on the table. So you have seen some reductions to date, particularly on the true service side of the equation, and we'll see it run through. And if it results in significantly higher margins, we'll update guidance accordingly.

--------------------------------------------------------------------------------

Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [9]

--------------------------------------------------------------------------------

Got it. Understood. And then for my follow-up, on the distribution, you guys kind of reiterated expectations to maintain that through the rest of the year. Just kind of curious, I guess, the sensitivity of that. And maybe if you look at the downside, to the extent prices don't firm up or maybe they get weaker through the year, presumably Diamondback make some economic decisions to maybe cut some capital and/or production, how comfortable in that type of environment are you guys maybe relying on the balance sheet to maintain the distribution? And maybe in general, what's kind of a general level where you may rethink things on the distribution side?

--------------------------------------------------------------------------------

Travis D. Stice, Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC [10]

--------------------------------------------------------------------------------

Yes. Jeff, I tried to outline in my prepared remarks that the Board intends to review the distribution policy every quarter. And if you look at just the macro view of it, Rattler has peer-leading leverage and a core business that's turned into free cash flow positive. So the future is hard to predict, but I can tell you right now that this is just what the Board has committed to is continue to evaluate how we're going to address the dividend or the distribution. But right now, we're proud to post the dividend for this quarter.

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [11]

--------------------------------------------------------------------------------

Yes. I think it goes across the board at all 3 companies, Jeff, that we're going to analyze each distribution, our return of capital every quarter based on the forward outlook today, which assumes some sort of return to work in the back half of the year. We're confident in the distribution today.

--------------------------------------------------------------------------------

Travis D. Stice, Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC [12]

--------------------------------------------------------------------------------

And I'll tell you, Jeff, just again, that relationship that Rattler has with Diamondback, we have more visibility into Diamondback's future activity than any relationship between a midstream -- with a midstream company. And so we'll utilize that as we try to understand how we're going to navigate the future. But that insight, that visibility is truly differential for the Rattler unit holders.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from the line of Spiro Dounis with Crédit Suisse.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [14]

--------------------------------------------------------------------------------

First question just on the volume guidance and focusing on salt water specifically here. It looks like guidance implies about a 13% volume stepdown for the rest of the year. I imagine that's heavily weighted to 2Q and 3Q. But I guess, anecdotally, we're hearing about 15% to 20% exit rates or declines in the Permian. And so it seems like you guys obviously plan on outperforming that. Is that -- just maybe help us reconcile that? Is that a water dynamic? Is that county specific, maybe science specific? Any help there?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [15]

--------------------------------------------------------------------------------

Yes, Spiro. I really can only talk to Diamondback, Rattler has 1 main customer. And Diamondback's released an exit rate oil guidance of 170,000 to 180,000 barrels of oil per day versus Q1 at a little over 2 0 1. So that's at the midpoint, a little less than 15% reduction. So that kind of ties to the Rattler numbers we're projecting. I think overall, on the disposal business, Q2 will be the weakest. Q3 will be flattish to that with a bit of a rebound in Q4 should we return to activity levels.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [16]

--------------------------------------------------------------------------------

Perfect. That's helpful. And then just thinking about CapEx here, good to see you all staying lean. But to the extent FANG commences activity again late in 2020, I guess, is that already predicated in the guidance? Or could we see it adjusted higher? And then as we think about next year, what's a good base level of CapEx to use if we go into something like a maintenance mode? I think your guidance for the rest of 2020 implies about $25 million a quarter, but it feels like that could be ratcheted down if we're truly in a no-growth scenario.

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [17]

--------------------------------------------------------------------------------

Yes. I think like we said in the prepared remarks, all costs are on the table. The midpoint of guidance implies $75 million of operated capital spend for the rest of the year. It's probably a little heavier weighted towards Q2 than Q3 and Q4. And I think -- and certainly, the base case Diamondback plan of going back to work in some respect is baked into that guidance. And I think you can use the Q3 and Q4 run rate for 2021, should we be in a maintenance mode through all of 2021.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Your next question comes from the line of Pearce Hammond with Simmons Energy.

--------------------------------------------------------------------------------

Pearce Wheless Hammond, Piper Sandler & Co., Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Kaes, given the attractive and robust debt market right now, would you consider doing an offering to pay down the revolver? And then what is the max drawn you'd want to be on your revolver?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [20]

--------------------------------------------------------------------------------

Yes. Pearce, it's a really good question you asked. While the debt market probably looks good for larger cap companies, I'm not very confident in that interest rate we would get at the Rattler level. So I think overall, our strategy has been to be patient, and we're working with our banks and making sure they're happy and getting everything they need, but they're certainly going through a lot of stress right now. And so I think, overall, for us, over time, I would like to have some sort of term on our revolver and lead the banks of the borrowings on the credit facility. I just don't think that's in the cards yet. Certainly, should the markets continue to heal, we'll be opportunistic and look at our opportunities in the debt markets.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from the line of Tristan Richardson with SunTrust.

--------------------------------------------------------------------------------

Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [22]

--------------------------------------------------------------------------------

Just a quick question. I appreciate the commentary on the cadence of the year at Rattler. With regard to the sponsor call, you guys talked about your rig schedule for the rest of the year as well as the 150 DUCs exiting '20. Can you talk about either the rig schedule or the DUC inventory and break out how much of each of these are behind Rattler's footprint?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [23]

--------------------------------------------------------------------------------

Yes. Good question, Tristan. I think the majority of them have -- certainly, have Rattler water exposure whether it's water -- freshwater or disposal. So you'll see 100% of those DUCs go to those -- go to Rattler there. Most of our DUCs are going to be in the Midland Basin, probably 2/3 to 3/4 of them. So you probably have less oil exposure and less gas exposure. But nearly 100% on the water -- the freshwater side, which is the majority of the cash flow of the business. I'll add from a capital perspective, we spend capital in preparation before those wells are completed. And so we're prepared from a Rattler perspective to draw down DUCs at Diamondback and not have to spend many incremental dollars on capital at Rattler.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Your next question comes from the line of Ujjwal Pradhan with Bank of America.

--------------------------------------------------------------------------------

Ujjwal Pradhan, BofA Merrill Lynch, Research Division - Associate [25]

--------------------------------------------------------------------------------

This is Ujjwal. First one, on your expectation for remaining free cash flow positive from here. That's great. I really wanted to get at what sort of commodity price assumptions and maybe FANG's baseline drilling and completion plans is baked in there?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [26]

--------------------------------------------------------------------------------

Yes. I think the base case is some sort of return to activity in the third or the fourth quarter. It's certainly not going to be a major return to activity. I think we're running scenarios from 2 to 4 frac-throughs at the Diamondback level today. And that's baked into the Rattler guidance going forward. I think as we look into 2021, we can go 1 of 2 ways. Things can stay weak and we'll be drawing down DUCs at Diamondback and spending very few capital dollars at Rattler. Or the world starts to heal and oil price starts to heal, and those activity levels remain constant through 2021. So I think our order right now at the parent is: one, return our curtailed production, which we're going to curtail 10% to 15% of production in May; two, get back to work in a small way back half of the year; and then third, keep production flat.

--------------------------------------------------------------------------------

Travis D. Stice, Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC [27]

--------------------------------------------------------------------------------

I can tell you just from a Rattler perspective, Diamondback is going to want to focus on doing activity that benefits Rattler because Diamondback still owns 71% of Rattler. So we're going to be naturally motivated to do work that benefits Rattler.

--------------------------------------------------------------------------------

Ujjwal Pradhan, BofA Merrill Lynch, Research Division - Associate [28]

--------------------------------------------------------------------------------

Got it. That's helpful. And secondly, nice cash distribution, up around $10 million from your equity method investments. Is that -- would you say that's repeatable from here in the subsequent quarters?

--------------------------------------------------------------------------------

Matthew Kaes Van’t Hof, Rattler Midstream LP - President & Director of Rattler Midstream GP LLC [29]

--------------------------------------------------------------------------------

Some of that was a little onetime with the OMOG JV, returning some cash early after the close. But with the 2 pipelines starting up and the OMOG JV in full steam ahead, I think that number is probably a fair number, starting Q2 or Q3 to consistently receive back cash from these investments that we spent so much on.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

I am showing no further questions. I will now turn the call over to Travis Stice, CEO, for closing remarks.

--------------------------------------------------------------------------------

Travis D. Stice, Rattler Midstream LP - CEO & Director of Rattler Midstream GP LLC [31]

--------------------------------------------------------------------------------

Thanks again for everyone participating in today's call. If you've got any questions, please reach out using the contact information provided.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.