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Edited Transcript of RTLR.OQ earnings conference call or presentation 7-Aug-19 3:00pm GMT

Q2 2019 Rattler Midstream LP Earnings Call

Jan 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Rattler Midstream LP earnings conference call or presentation Wednesday, August 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Lawlis

Rattler Midstream LP - VP of IR

* Travis Stice

Rattler Midstream LP - CEO

* Kaes Van't Hof

Rattler Midstream LP - President

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Conference Call Participants

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* Michael Lapides

Goldman Sachs - Analyst

* Pearce Hammond

Simmons Energy - Analyst

* Jeremy Tonet

JPMorgan - Analyst

* Tristan Richardson

SunTrust - Analyst

* Praneeth Satish

Wells Fargo - Analyst

* Phil Stuart

Scotia Howard Weil - Analyst

* John Mackay

Credit Suisse - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rattler Midstream second-quarter 2019 conference call. (Operator Instructions). Now it's my pleasure to turn the call to Adam Lawlis, Vice President of Investor Relations.

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

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Thank you, Carmen. Good morning and welcome to Rattler Midstream's second-quarter 2019 conference call. During our call today we will reference an updated investor presentation which can be found on Rattler's website. Representing Rattler today are Travis Stice, CEO; Tracy Dick, CFO; and Kaes Van't Hof, President.

During this conference call 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 reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Travis Stice.

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Travis Stice, Rattler Midstream LP - CEO [3]

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Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream's first earnings conference call covering results for the second quarter of 2019. To start, after our successful initial public offering in May, Rattler Midstream now represents the third publicly traded entity in the Diamondback family, which offers the only public midstream security with pure play exposure to the Permian basin.

Fundamentally, the pure play and sponsor backed model is ultimately dependent on the strength of the rock and its operator. And we believe that Diamondback's track record of growth and execution in the Permian basin differentiates Rattler from its competition and gives confidence to the long-term growth and free cash flow prospects of the Company.

Rattler's second-quarter results were a strong first step in demonstrating the quality of its relationship with Diamondback by showing robust quarter-over-quarter volume growth across all four revenue streams in the base business in our first-quarter as a public company. We also showcased this relationship via the commitment to invest in the Wink to Webster pipeline joint venture with high-caliber partners such as Exxon, Plains, Marathon, Delek and Lotus.

Rattler grew net income 19% quarter-over-quarter to $46 million and adjusted EBITDA over 11% quarter-over-quarter to over $66 million in the second quarter of 2019. The Company spent $51 million on capital expenditures in the quarter excluding one-time contributions to pipeline investments, implying that the core operated midstream business was free cash flow positive for the quarter.

Notably, Rattler provided full-year guidance for 2019, reiterating strong volume growth for the year and free cash flow excluding contributions to long-haul investments. Rattler's long-haul investments include equity and interest in the EPIC, Gray Oak and Wink to Webster pipelines.

These pipelines will, upon completion, transport crude oil from Diamondback and other Permian basin producers to the Gulf Coast crude markets around Corpus Christi and Houston. EPIC will begin interim crude service later this month with full service in early 2020. Gray Oak is on track to begin service in the fourth quarter of this year and Wink to Webster is anticipated to begin service in early 2021.

To conclude, Rattler will continue to execute on its business model of growing per share metrics and free cash flow to meet the needs of its long-term fixed fee contracts with Diamondback. Due to Rattler's concentration in the Delaware basin, Rattler will continue to grow in line or faster than Diamondback's expected production growth with the pipeline investments adding meaningful cash flow in 2020 along with expected production growth.

Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Michael Lapides, Goldman Sachs.

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Michael Lapides, Goldman Sachs - Analyst [2]

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Just curious, first thing on Wink to Webster, can you talk about your size and scale in this project and how we should think about either build multiples are what the EBITDA contribution or income contribution for this would be for you?

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Kaes Van't Hof, Rattler Midstream LP - President [3]

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Hey, Michael, out of respect to the larger partners in the project I can't disclose the exact numbers. I can say that our capital commitment is less than $100 million total for the project and we are somewhere in the low to mid-single digits on ownership. It's about all I can give right now.

I think it's going to be a great project. I think you've seen some of the partners talk about the returns of the project. I think it is somewhere in the 6 times build multiple range. And I think it's a coup for Rattler to be involved in such a prestigious project since it's so early in our Company's history.

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Michael Lapides, Goldman Sachs - Analyst [4]

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Got it. And then how are you thinking about the utilization? You have such a strong balance sheet and it's going to get stronger over the next couple years given the cash flow profile. How are you thinking about utilization of the balance sheet?

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Kaes Van't Hof, Rattler Midstream LP - President [5]

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Yes, we really want to be clear that this business doesn't need external funding to meet the needs of the dedications that are in place with Diamondback. I think Rattler is still spending a good amount of money developing midstream assets, particularly in the Delaware basin, as we add saltwater disposal capacity and continue to build out our oil gathering system.

So, this business, the CapEx profile of the business should tail off over time on this asset base and the free cash flow profile will improve. Now in some cases we are looking at systems that would accelerate that CapEx or get us more capacity sooner to meet the needs of Diamondback's growth plans.

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Operator [6]

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Pearce Hammond, Simmons Energy.

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Pearce Hammond, Simmons Energy - Analyst [7]

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Congratulations on a successful first quarter as a public company. My first question pertains to the guidance. Relative to my modeling expectations, produced water the volume guidance for 2019 is a lot higher. Oil is just slightly lower. Is there anything worth commenting on that? It just looks like the produced water is pretty strong.

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Kaes Van't Hof, Rattler Midstream LP - President [8]

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I think there's a bit of conservatism for us with our first-quarter as a public company and coming out with our guidance for the year. Clearly Q2 exceeded our expectations with freshwater and disposal beating our internal projections. I think oil is going to grow into the back half of the year as Spanish Trail production grows through Q3 and Q4. We've also hooked up some of the legacy Energen position to our ReWard position in Reeves County, so that should drive some growth on the oil side.

With respect to the forward guide, I think you think about this business growing in lockstep or a little bit higher than Diamondback's projected growth through the back half of the year.

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Pearce Hammond, Simmons Energy - Analyst [9]

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Great and then a follow-up question. I know third-party business isn't a focus for you right now. But as you look out a few years, could you see that becoming more of a focus? Are you seeing more opportunities within the Permian to maybe handle water for other companies?

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Kaes Van't Hof, Rattler Midstream LP - President [10]

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Yes, we certainly pick up the phone and we've gotten a lot more phone calls now that we are a public company and people know what we have in particular areas. So, our third-party business is growing. It's a small piece of the overall pie.

I'd say what's most important for us is out of our 750,000 barrels a day of produced water production, about 10% of that goes to third parties today. So we are trying to remove that from the equation for us which will drive incremental EBITDA growth at Rattler.

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Operator [11]

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Jeremy Tonet, JPMorgan.

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Jeremy Tonet, JPMorgan - Analyst [12]

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Just wanted to start off with the long-haul pipeline there. Congratulations on Wink to Webster. Was wondering, do you see opportunities to enter JV interests in other long-haul pipelines and other hydrocarbons be it NGLs or natural gas or any other, I guess, desire or thoughts on achieving more full downstream integration there?

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Kaes Van't Hof, Rattler Midstream LP - President [13]

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I think for us the focus has been oil because Diamondback is so heavily weighted towards oil. This relationship is a perfect example of using Diamondback's size and scale and contribution to a pipeline to get equity in that pipeline.

Now I just don't think we have the size and scale on the gas for the NGL side or enough take in kind rights to exercise those to contribute to a pipeline. So, I'd expect our pipeline investments to be limited to these three, but we'll continue to look at deals inside the basin. I think this is probably our biggest outside the basin contribution.

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Jeremy Tonet, JPMorgan - Analyst [14]

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That makes sense. That's helpful. Just turning to the dividend, just wondering now that you have a first-quarter under your belt here, could you provide any updated thoughts as far as what you think the growth could be? If that could be a quarterly event, an annual event or waiting to see past certain, I guess, hurdles before starting to grow? Any thoughts you could share there?

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Kaes Van't Hof, Rattler Midstream LP - President [15]

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Yes, Jeremy, the dividend was set at $1 a unit. I think the Board will certainly review the dividend on a quarterly basis. Our expectation right now is to increase it on an annual basis. And really the goal for us is to maximize that dividend as quickly as possible while making sure we stay below 2 times leverage at the Rattler level as the dividend is going to be the main way Diamondback gets capital out of this business over the next few years.

So, I think it's an annual review process, but we are certainly looking to push that dividend especially if the free cash flow profile is in excess of what we originally expected.

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Operator [16]

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Tristan Richardson, SunTrust.

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Tristan Richardson, SunTrust - Analyst [17]

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Just a quick clarification. Thinking about your ownership interest in Wink to Webster, is it fair conceptually to think that Rattler's ownership interest will generally resemble Diamondback's level of commitment?

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Kaes Van't Hof, Rattler Midstream LP - President [18]

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It should be a little bit smaller. I will just stay with the low to mid-single digits as our percentage interest. Diamondback has committed 100,000 barrels a day of capacity -- or has 100,000 barrels a day of capacity on the pipe, half of which is take or pay in conjunction with similar structures to our EPIC and Gray Oak commitments.

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Operator [19]

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Praneeth Satish, Wells Fargo.

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Praneeth Satish, Wells Fargo - Analyst [20]

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Just two quick ones from me. I guess, one, in terms of the EBITDA guidance, can you just break out how much of that is coming from the JV pipelines?

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Kaes Van't Hof, Rattler Midstream LP - President [21]

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We have very little, if any, contribution in that guidance from the JV pipeline. So, EPIC is doing early in-service. We are not making bets on what that project is going to make on early in-service. So, really the 245 to 265 is the base business for 2019.

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Praneeth Satish, Wells Fargo - Analyst [22]

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Got it. And then in terms of the assumptions around the, I guess, water to crude ratio in the guidance, is it still in the 5 times range for the Delaware and 1.54 for Midland? And how is that compared to, I guess, how it's been trending?

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Kaes Van't Hof, Rattler Midstream LP - President [23]

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Yes, those are fair numbers. We're drilling a lot of Wolfcamp in the Delaware at the moment, especially in the Southern Delaware the Wolfcamp is in the 4 to 5 to 1 range. Now as you move up zone in the Delaware into the Bone Springs zones, the water to oil ratio increases, and also as you move up into Reeves County our Vermejo area, the water to oil ratio increases.

So, I think 5 to 1 is a fair number for now. The Midland basin continues to average about 1.5 to 1. A similar story in the Midland basin. If you go up into the Spraberry zones you probably get a little more water than Wolfcamp.

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Praneeth Satish, Wells Fargo - Analyst [24]

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Got it. And then just last question for me. In the slide deck on page 11 there's a page there showing the economics of an SWD well. And it looks really good, but I guess one of the assumptions that it's based on a utilization level of 80%. So, I guess I'm just wondering -- what is the confidence level that you'll be able to keep your wells utilized at such a high level?

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Kaes Van't Hof, Rattler Midstream LP - President [25]

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Yes, that line of sight between us and Diamondback is pretty clear; there is not going to be wasted capital at Rattler. If we are not going to fully utilize an SWD at the Rattler level then we just won't spend the money. The teams work together on the forecast on what's needed in a particular area. And if we're not going to be able to fully utilize that SWD we won't drill it.

So, we have a lot of excess capacity today. It is not all connected appropriately. We are working to connect to all of that capacity, which is a good amount of the capital that we are spending at Rattler. So, hopefully we can get increased utilization without having to drill too many more SWDs.

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Operator [26]

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Phil Stuart, Scotia Howard Weil.

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Phil Stuart, Scotia Howard Weil - Analyst [27]

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Congrats on a good start as a public company. I wonder if we could circle back to the guidance again on the freshwater gathering side. Obviously there was a big uptick in volumes there in 2Q. And if we just looked at the high-end of guidance that would imply flattish volumes in the second half of the year.

Is there anything operationally in terms of where Diamondback is completing their wells within their footprint that would cause those volumes to not grow in the second half of the year? Is that maybe just some conservatism because 2Q outperformed so much?

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Kaes Van't Hof, Rattler Midstream LP - President [28]

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Yes, I think it's a couple things. As you think about Rattler's freshwater business, the legacy Energen position is not dedicated to Rattler and those assets do not sit in Rattler today. So, as Diamondback's frac spreads move around our position, if the frac spreads are working on legacy Diamondback acreage that number increases.

So, Q2 was especially good for how many crews were working on legacy Diamondback acreage. And just looking at the back half of the year we are not -- Diamondback is not accelerating. We're still going to use eight crews, it's just the mix of those crews are going to be spread a little more evenly between the Diamondback properties and Energen properties.

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Operator [29]

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Dennis Coleman, Bank of America Merrill Lynch.

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Unidentified Analyst [30]

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This is Jason on for Dennis. I wanted to touch on Wink to Webster for another question or two. Was there any sort of upfront payment to join the group? And can you say if there was any promote paid to the founders as well?

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Kaes Van't Hof, Rattler Midstream LP - President [31]

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I can't comment on the promote. I think we're going to have to pay a little less than $20 million this year total, both to join and to fund the CapEx contributions for the rest of the year.

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Unidentified Analyst [32]

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Okay, great. And then on CapEx, you mentioned it would be about $100 million in total. And so, can you maybe talk about the cadence of the implied $80 million in 2020 or would that be all -- within the first half?

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Kaes Van't Hof, Rattler Midstream LP - President [33]

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I think our best guess is that it's going to be pretty ratable throughout the year today. We just signed the paperwork last week, so we'll be following up with our partners on projected spend in 2020.

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Unidentified Analyst [34]

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And then maybe on the Vermejo region, it's clearly an important one for Diamondback and, by most measures, it looks like Rattler has a strong presence there. But could you maybe talk about the overlap in the alignment there and if there's any other third parties in the region?

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Kaes Van't Hof, Rattler Midstream LP - President [35]

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Yes, there's certainly some third parties in the region and we have a lot of capacity in that Vermejo area. So, we are taking calls from other operators who need overload capacity in that particular area if they're bringing on a big pad.

So, Vermejo is going to be a big growth area for Diamondback over the next few years. Rattler is certainly long capacity. We've just got to make sure all that disposal capacity is connected appropriately so we can flow barrels throughout the system.

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Operator [36]

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(Operator Instructions). Spiro Dounis, Credit Suisse.

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John Mackay, Credit Suisse - Analyst [37]

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It's John McKay Mackay on for Spiro. Just wanted to follow up on maybe 2020 CapEx in general. I know you haven't given a specific number, but I'm just wondering if you could talk generally about what your G&P side CapEx could look like and what sort of smaller projects that could comprise.

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Kaes Van't Hof, Rattler Midstream LP - President [38]

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Yes, it's going to be pretty mixed between the four fee streams. SWD will take the lion's share of CapEx in 2020. Oil is starting to tail off because our systems are almost fully built. There are certain little extensions that need to be made to new batteries, but most of our oil systems are in areas where Diamondback has now been operating for at least two or three years.

So, we're not building a ton of new batteries, so you are not having to spend a lot of money on the oil or gas side. Really the lion's share is going to be on the SWD disposal capacity, but also on the gathering piece to make sure we are connecting legacy Energen systems and Diamondback systems and being smart with our capital to maximize utilization.

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John Mackay, Credit Suisse - Analyst [39]

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And then just last quick one. With EPIC and Gray Oak largely done this year do you have CapEx budgeted for either in 2020?

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Kaes Van't Hof, Rattler Midstream LP - President [40]

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I think we have a small amount budgeted at the beginning of 2020 to finish the projects, but it would be exhausted by the end of Q1.

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Operator [41]

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Thank you. And this ends our Q&A session for today. I would like to turn the call back to Travis Stice, CEO, for his final remarks.

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Travis Stice, Rattler Midstream LP - CEO [42]

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

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Operator [43]

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And ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.