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Noble Midstream Partners LP (NBLX) Q4 2018 Earnings Conference Call Transcript

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Noble Midstream Partners LP  (NYSE: NBLX)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Noble Midstream Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Megan Repine. Please go ahead.

Megan Repine -- Investor Relations

Thank you, Allison. Good afternoon, and thank you for joining the Noble Midstream Partners' fourth quarter and full year 2018 earnings call. With me today to review our results is Terry Gerhardt, CEO; John Nicholson, COO; and John Bookout, CFO. Following our prepared remarks, we will open the call to questions from analysts.

This morning, we announced fourth quarter and year-end 2018 results as well as 2019 guidance. The press releases and supplemental slides are on the Investors section of our website noblemidstream.com. Upon filing later today, our 10-K will be available in the same location.

As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial measures. Please refer to our latest news releases for non-GAAP reconciliation as well as our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in our forward-looking statements.

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

Terry Gerhart -- Chief Executive Officer and Director

Thanks, Megan, and good afternoon, everyone. I'd like to start today by reinforcing Noble Midstream's strategy and investment proposition. At the center of our strategy is our long-term organic 20% distribution per unit growth target through 2022, and we've committed to doing this with a prudent approach to coverage and leverage. This outlook is very achievable in a $50 per barrel oil price environment.

Enhancing our already strong growth outlook, our team has done a fantastic job transforming the Company from a single customer gatherer to a more diverse multi-basin MLP, providing services to a growing customer base. This further increases our confidence in delivering on our promises to unitholders.

In the context of this overarching framework, 2018 was a great year for Noble Midstream. We delivered our major projects -- major growth projects in the DJ and Delaware, where(ph)2018 representing our busiest capital program year.

We successfully integrated our Black Diamond Gathering acquisition and made impressive early progress with the asset. Fourth quarter throughput was 94,000 barrels per day, and volume on the system exceeded our acquisition case for the year.

We increased our DJ Basin and Delaware Basin gathering dedications by 40% year-on-year, and we prioritized our target of 50% contribution from the Delaware Basin by the end of 2020.

Among our accomplishments, we commenced third-party gathering in the Delaware and also secured our Delaware Crossing and EPIC investment opportunities. Importantly, many of these items contributed to robust financial performance in 2018. This included a 43% annual increase in our net EBITDA, continuation of our 20% DPU growth and full year coverage ratio of approximately 2 times.

Looking ahead, 2019 is shaping up well. We anticipate net EBITDA growth 17% this year, at the midpoint prior to any contribution from the EPIC pipeline projects. This demonstrates the resiliency of our business as it incorporates our expectation for lower customer activity levels and the DevCos mix shift that is working against us year-on-year. Equally as important, this is capital efficient growth for our base business given our backbone infrastructure was largely put in place during 2017 and 2018.

I'll now turn the call over to John Nicholson for more details on operations and capital project outlook.

John C. Nicholson -- Chief Operating Officer

Thanks, Terry. Quickly on the fourth quarter, we ended the year on a high note. We posted record results in the gathering business across all product streams. Combined oil, gas and produced water gathering and sales throughput, was up 24% on a sequential basis. We saw significant contribution from the Green River and Laramie River DevCos in the DJ Basin and Blanco River in the Permian.

Freshwater delivery volumes of 180,000 barrels of water per day were down 8% from the third quarter and were at the low-end of guidance due to a more pronounced slowdown in completion activity at year-end.

Looking at 2019, we forecast significant gathering volume growth of over 40%. In the DJ Basin, Noble's activity ramp in Green River as well as third-party activity at Laramie River, will be the largest drivers of growth. This is somewhat offset by an anticipated decline in Colorado Rive,r driven by declines in East Pony.

Third-party processing expansions during the year, additional gas offload plant for Wells Ranch and delivery to multiple processors at Mustang support our volume projections. We have been and will continue to be conservative in modeling benefits from lower line pressures as new third-party processing capacity comes online.

In the freshwater segment, we anticipate gross volumes to be down 3% at the midpoint with deliveries to approximately three crews on average during the year in the DJ Basin for Noble and our third-party customer.

Net volumes will be impacted by fewer completion crews running at Laramie River, a 100% own development company. We expect Noble to be active in Green River, San Juan River and Colorado River during the year.

In the Delaware Basin, gathering volumes benefit from a full year of operations at all five central gathering facilities. In 2019, we expect to gather nearly 95% of Noble Energy's Delaware volumes compared to just 70% on average during 2018.

In addition, we expect to gather between eight and 10 third-party wells at Blanco River during 2019. More details on gathering and freshwater throughput by DevCo can be found on slide 23.

Moving over to our capital budget. We anticipate base business capital attributable to the partnership of $180 million to $210 million in 2019, down nearly 30% year-over-year at the guidance midpoint. This excludes our equity investments in Delaware Crossing, the EPIC Crude oil pipeline and EPIC Y-Grade pipe pipeline, which are anticipated to total between $570 million and $615 million in 2019, prior to any asset level financing for the EPIC Crude pipeline.

Two-thirds of our base business capital will be for supporting customer well connections. Other projects include a trunk line in Blanco River connecting the Billy Miner and Jesse James CGFs to optimize the use of facility capacity and ensure high utilization rates.

At Laramie River, the expansion of freshwater and produced water infrastructure further sell(ph)on our wholly owned system to support customer activity in 2019 and 2020. And on Black Diamond, we plan to expand the Milton terminal to 360,000 barrels of storage to manage volume growth coming through the main DJ Long-haul hub.

As for our equity investments, we anticipate $75 million to $80 million in Delaware Crossing investment in 2019, primarily associated with Trunkline construction from Crane to Wink. Beyond 2019, organic capital for this asset will decrease significantly and will primarily be associated with gathering lines, supporting customer activity.

We also anticipate the vast majority of our $330 million to $350 million investment for the EPIC Crude oil pipeline to be spent in 2019. In addition, we expect to deploy $165 million to a $180 million in an investment capital for the EPIC Y-grade pipeline. The EPIC Y-Grade capital includes the long-haul pipeline and two fractionation plants with a total capacity of 180,000 barrels a day. As these projects commence permanent service, they will provide a high-quality cash flow stream with minimal follow on capital requirements.

I'll now turn the call over to John Bookout to provide more details on the EPIC and Delaware Crossing investments and our financial expectations for 2019.

John Bookout -- Chief Financial Officer

Thanks, John. I'm excited to talk to you today about the Delaware Basin cross -- Delaware Crossing and EPIC opportunities. These opportunities have been progressing for some time and are crucial pieces in building a leading Permian Basin midstream platform. I believe they are a reminder of our competitive advantages and they reinforce the unique value proposition we can bring as a sponsored MLP.

Importantly, the teams have been able to expand the platform in a very competitive environment without sacrificing returns, and while maintaining a prudent balance sheet.

The Delaware Crossing investment further enhances our position in the Southern Delaware, by expanding our gathering footprint to the Wink hub, while the EPIC projects provide very unique scale and investment characteristics for NBLX and new build takeaway pipelines to Gulf Coast markets. NBLX is now positioned to realize value across the crude oil value chain from wellhead to water, which is very differentiated for a small cap sponsored MLP.

We expect to generate a combined investment multiple of approximately $5.5 million to $6.5 million for Delaware crossing EPIC Crude and EPIC Y-Grade investments. This is before any asset level financing in the EPIC Crude pipeline. As you know, we have prioritize generating half of partnership net EBITDA from the Permian by the end of 2020. And I am proud of all the hard work and creativity from the corporate and business development teams.

Moving on to a review of our 2019 outlook and a 2020 preview. Our 2019 guidance assumes no impact from the EPIC projects to financials with the exception of incremental debt and interest expense from project investment. Both projects remain on schedule construction wise for interim and permanent service, and we anticipate providing full pro forma impacts following closing of the EPIC Crude investment and the finalization of any external financing specific to Noble Midstream's crude investment.

2019 net EBITDA is anticipated at $245 million to $270 million. The core gathering business is anticipated to grow year-on-year and will represent over 80% of total net EBITDA in 2019 . We anticipate strong distribution coverage of between 1.5 times to 1.7 times. The coverage figures we have provided assume the continuation of the 4.7% quarterly distribution increase that translates to our 20% annual DPU growth objective.

As we evaluate in investments in the EPIC pipelines and Delaware Crossing projects, a key consideration was the ability to prudently fund our capital commitments. Given the strength of our balance sheet, we've chosen to fund the Y-Grade line on our revolver. For the Crude pipeline, financing will be a combination of the revolver and a potential $200 million direct financing at the investment level.

Assuming the financing moves forward, leverage would temporarily increase to between 4 and 4.25 times at year end 2019. We see a clear pathway to approximately 3.5 times by the end of 2020, with a long-term target of approximately 3 times as these projects begin contributing meaningfully to the partnership.

Looking beyond 2019, we anticipate net EBITDA of at least $300 million in 2020, again prior to the EPIC projects. This would represent 17% growth to our 2019 guidance at the midpoint.

In addition to the base business, the Crude and Y-Grade pipelines are expected to enter permanent service in the first quarter of 2020. We anticipate Noble Midstream share of EPIC project equity cash flows to total between $50 million and $70 million on an annualized basis exiting 2020, with further growth anticipated in 2021 and beyond.

In summary, our base business is performing extremely well and our new Permian joint ventures further add to our diversification and resilience. With our announcement this morning, we feel we have provided some detail on a differentiated to your plans with significant cash flow growth exiting 2020. We've accomplished a lot and in a short period of time. I would like to acknowledge our employees for their contributions to the Company over the last year.

Our strategy remains disciplined and focused, and we are committed to delivering strong but prudent growth through investing in premier midstream infrastructure opportunities and some of the best basins in the country.

With that, I will turn the call over for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions).

Our first question today will come from Spiro Dounis of Credit Suisse. Please go ahead.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, good afternoon, everyone. Maybe start off with the 2019 guidance, I was wondering, if you guys could talk through maybe some of the conservativism you've built into it, it seems like you've built at around $50 crude environment. And I guess if we look at that today, it already looks low. And so where do you think there's maybe headroom in the guidance later on this year if Crude maintains these levels and maybe it moves higher?

John C. Nicholson -- Chief Operating Officer

Yeah, good question. This is John Nicholson. I think we've built our business really from the start in kind of a $50 to $55 world. So I don't think this is anything new, as far as our forecast on activity.

What I will say is probably, any upside to guidance is probably around plant timing in the DJ and potentially what that could do to kind of the base business, but we took our best shot at what we think customers are going to do in 2019, including our sponsor with we're fairly comfortable with. And so we don't expect there to be a tremendous amount of upside unless that activity set changes.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. And just around the EPIC Crude investments. Could you provide a little bit more color on the external financing, specifically, I guess what form does that take and then how should we think about the timing around locking that up?

John Bookout -- Chief Financial Officer

Sure. This is John Bookout. There are two financings mentioned in the materials that we put out. I think we're going to be limited on our commentary to what we've put in those materials. There's a project level debt financing that's in the market right now. And then, we're clearly exploring a financing at our investment level, which would be not impactful to guide(ph)the partnership in terms of IDRs and the way that the partnership is capitalized, look forward to providing an update once that firms up.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. I appreciate that. Last one if I could, it looks like you're guiding the Advantage Pipeline down a little bit versus 2018 levels. Just curious what's driving that? Is it just increased competition in the basin or is there something else there?

John Bookout -- Chief Financial Officer

Yeah, it's a good question, John Bookout, again. I think there's really two drivers there. The first is with the Delaware Crossing announcement. What's essential to that investment is a dedication of the Clayton Williams portion of the Noble position to that JV. So we've made an assumption in the 2019 numbers that, that those volumes will rotate off of Advantage and onto Delaware crossing.

And then the second is probably more macro within the basin we benefited in 2018 in terms of our volumes from some of the in-basin constraints, that I think that you saw in the Permian in general, but in the Southern Delaware. And so we haven't assumed those continue going forward. So I think there is some upside to those figures depending on execution and how the dynamics in-basin play out through the balance of the year.

Spiro Dounis -- Credit Suisse -- Analyst

Great. Appreciate all the color. Thanks, guys.

Operator

The next question will come from Ethan Bellamy of Baird. Please go ahead.

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

Hey guys. Good morning. What's your latest assessment of the Colorado political environment, and how if at all, is that influencing your capital deployment?

Terry Gerhart -- Chief Executive Officer and Director

Hey, Ethan. This is Terry. I guess you're keenly aware that the Coloradans fully supported us in the oil and gas industry during the election. We're confident that they continue to support us, obviously, it's going through a legislative process now and to develop this energy framework for all of them, and our sponsor Noble has a strong track record of working with the communities and the elected officials and we're confident that they'll come out with something that benefits, all the stakeholders.

What I would say, as far as Noble Midstream now, we're positioned differentially relative to several of the others with our sponsors position in Weld County we enroll and also with the recent CDP that they had been able to pull together, they have now over 400 permits that would provide many years of drilling along with the secure exploration window on that. Not to mention that the majority of all of our dedicated acreage from the others is in Weld County as well.

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

That's helpful, Terry. And how should we think about the change in if any third party business that may arise in DJ?

Terry Gerhart -- Chief Executive Officer and Director

For what we've seen on our systems, we don't really anticipate any, they're continuing on there's probably been a bigger impact relative to the oil price than anything Ethan.

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

Okay.

Terry Gerhart -- Chief Executive Officer and Director

Just a slight moderation in that we've factored that into our forecast.

John C. Nicholson -- Chief Operating Officer

Yeah, Ethan. 95% to 98% of our dedications are in Black Diamond or within Weld County.

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

Okay, that's good to hear. And then lastly, we've seen a nice recovery in Crude here. How, if at all has that changed. I'm just looking for the latest as of today thinking on potential dropdowns?

John Bookout -- Chief Financial Officer

Yeah, Ethan, it's John Bookout. I think if you look at the materials we put out today, we've clearly been very busy on some pretty significant investments at NBLX mostly in the Permian, which I think is -- probably relates to your prior question, we've been repositioning the business a bit quicker than we previously anticipated. I think with those behind us, I think top of mind, and we've been vocal at conferences and with you throughout last year, that top of mind is working with our sponsor to figure out what the strategy is going forward in terms of addressing some of the structural implications that exist in NBLX.

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

Alright right. Thank you, gentlemen. Appreciate it.

Terry Gerhart -- Chief Executive Officer and Director

Thanks, Ethan.

Operator

The next question will come from Eric Zach(ph)of Citigroup. Please go ahead. Mr. Zach, your line is open.

Eric Zach -- Citigroup -- Analyst

Sorry about that. Hey, good afternoon, everyone. Can you provide any thoughts on any potential benefits you might be getting from potentially the EPIC NGL line running as interim Crude service in the second half of the year and maybe cost or investments required there if any to benefit from that?

John Bookout -- Chief Financial Officer

Zach, this is John Bookout. Yeah. I think in terms of the detail around early service, -- we see it being a equity holder in both pipelines, the economic benefit to an early service concept, obviously with differentials moving around over the last six to nine months. I think further discussion needs to occur in terms of what the final construct looks like, but I think we certainly feel like there is a win-win-win for both pipelines, and then also for shippers with kind of more detailed forthcoming around that.

And I will say that the Y-Grade pipeline will -- the main line will be in service well before the first newbuild fractionation unit. So that's added in utilization(ph)to come up with a structure to deal that works for everyone. And then obviously, the crude line is receiving benefits from following the construction pathway of the Y-Grade line. So all of it's very synergistic, and we're certainly excited about what early service would mean for our investments in both pipelines.

Eric Zach -- Citigroup -- Analyst

Okay, great. Thank you. That's all from me.

Operator

Our next question will come from Praneeth Satish with Wells Fargo. Please go ahead. One moment please.

Our next question will come from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet -- JPMorgan -- Analyst

Good afternoon. I appreciate you given us some color on how EPIC would look to exit 2020 here. But I was wondering, without giving us a full guide, if you could give us any more color on just the trajectory of the ramp there, anything that we can guidepost, we can work off within our model here?

John Bookout -- Chief Financial Officer

Jeremy, good afternoon, John Bookout. I think what we've tried to do is layout kind of a two-year story here with the base business growth in both '19, and then providing context in terms of a floor number on 2020. And then, recognizing that, that big infrastructure like this does take some time to ramp. We've positioned this as a kind of providing color as an exit rate in 2020. You don't think we'll provide detail in terms of what it looks like in Q2 and Q3, but we certainly feel confident in kind of that $50 million to $70 million kind of equity cash flow contribution -- our share has being $50 million to $70 million ending 2020 and we expect it to continue to ramp into 2021. We've taken what we feel to be a conservative approach with contributions from EPIC to kind of a two-year view, if that makes sense.

Jeremy Tonet -- JPMorgan -- Analyst

That does make sense. Thanks. And just want to pivot toward distribution growth for a minute here. It seems like the marketplace in general is kind of pivoted toward -- a preference for lower leverage and more financial flexibility and seeing that the leverage is kind of ticking up here a bit over the construction period. I'm just wondering, is there a scenario where it makes sense to kind of grow a little bit slower seeing that's kind of how the -- what -- there's been talk about in the marketplace given kind of where the yield sits today?

Terry Gerhart -- Chief Executive Officer and Director

Jeremy, I was just going to say a couple of things on that Jeremy. Our business outlook continues to support the 20% growth. It's a very strong coverage. We do not believe -- like you've indicated, we're getting a credit for the 20% in the marketplace today, but we believe we'd need to sell(ph)a more prolonged dividends that would need to -- just for that flow(ph)and make the decision to alter the distribution.

John Bookout -- Chief Financial Officer

Yeah, Jeremy, it's John Bookout. We review distribution policy every quarter with our Board, and it's disappointing to see that you're not getting rewarded for a top tier growth rate. It's been central(ph)to our thesis since being -- since going public, and that really was -- if you think about the environment in the last couple of years, we analyze that growth rate for the business really through cycles. Clearly, right now, we're in a period of time where it's apparent that growth isn't the most important characteristic for MLP.

So we're cognizant of that, but it changes to something that's so fundamental to our thesis we take very seriously, but right now, no anticipation that we would change or revisit that growth objective.

Jeremy Tonet -- JPMorgan -- Analyst

Great. That's all from me. Thanks for taking my question.

Operator

And our next question will come from Praneeth Satish of Wells Fargo. Please go ahead.

Praneeth Satish -- Wells Fargo -- Analyst

Hi. My questions have been answered. Thank you.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back to Megan Repine for any closing remarks.

Megan Repine -- Investor Relations

Thanks, everyone for your interest and participation today. I'll be available this afternoon for any follow-up questions you may have. Thanks, and have a good afternoon.

Operator

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 27 minutes

Call participants:

Megan Repine -- Investor Relations

Terry Gerhart -- Chief Executive Officer and Director

John C. Nicholson -- Chief Operating Officer

John Bookout -- Chief Financial Officer

Spiro Dounis -- Credit Suisse -- Analyst

Ethan Heyward Bellamy -- Robert W. Baird -- Analyst

Eric Zach -- Citigroup -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

Praneeth Satish -- Wells Fargo -- Analyst

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