Kinetik Holdings Inc (KNTK) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Altus Midstream Fourth Quarter 2018 Earnings Results Conference Call.

(Operator Instructions)

It is now my pleasure to turn the floor over to Patrick Cassidy, Director of Investor Relations, to begin.

Good evening and thank you for joining us on Altus Midstream Company's Fourth Quarter 2018 Financial and Operational Results Conference Call.

We will begin the call with an overview by Altus Midstream's CEO and President, Clay Bretches, and Ben Rodgers, CFO, will summarize our fourth quarter financial performance and provide and update to 2019. Also available on the call to answer question will be Jonathan Greenberg, Vice-President of Corporate Development for Altus Midstream, and Pete Kirsch, Region Manager Midstream Operations.

Our prepared remarks will be approximately 15 minutes in length with the remainder of this call allotted for Q&A. In conjunction with yesterday's press release, I hope you have had the opportunity to review Altus Midstream's updated investor presentation which can be found on our investor relations Web Site at altusmidstream.com/investors.

On today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the news release issues yesterday.

Finally, I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the investor presentation on our Web Site.

With that, I will turn the call over to Clay Bretches.

Thank you and good afternoon. We would like to spend some time today reviewing Altus Midstream's unprecedented opportunity to become the premiere midstream entity in the industry and how we will delivery value to our investors every step of the way. I use the term "premiere" purposely because by definition, it means first in importance, order or position. That is our intent as we focus our attention and efforts on delivering best-in-class performance to our upstream sponsor and anchored customer, Apache Corporation.

The unique relationship we have with Apache not only allows us to invest substantial capital into long-lived and economic and midstream infrastructure, but it also enables us to invest in additional midstream infrastructure downstream of our gathering and processing operations.

This is evidenced by the two Permian long-haul pipeline projects to which we have committed, Gulf Coast Express natural gas pipeline and the EPIC crude oil pipeline, as well as three other options for equity participation in Permian takeaway pipelines, Permian Highway natural gas, Salt Creek natural gas liquids and the Shin Oak natural gas liquid pipelines. All five of these pipelines in and of themselves are outstanding projects with sound economics.

The opportunity to combine these projects with our substantial gathering and processing asset base is truly unique and only made available because of the upstream commitment of Apache and the vast multi-zone, multi-phase resource play that we all know as Alpine High.

All of this, coupled with high potential growth stemming from third-party producers in the northern and eastern flanks of the Alpine High field, creates a first of its kind pure-play Permian Basin to Gulf Coast midstream Company. Altus is structured as a C-corporation without IDRs so that we can focus our financial resources on investment in a significant midstream system that will support decades of inventory centered around Alpine High.

As some of you are aware, I came over to lead Altus in mid-January of this year. I did so knowing that Altus has a bright future with tremendous running room. Prior to accepting this job, I was leading Sendero Midstream Partners, a private equity backed, Northern Delaware Basic midstream Company. We built a brand new gathering system and cryogenic processing plant that employed Ortloff's Supplemental Rectification Processing technology.

Altus is employing a similar and even more advanced Ortloff technology that places us in a leadership position compared to other processing technologies for recovering NGLs, not only in the Permian Basin, but across the world.

Before I discuss the path that led me here, let me recognize the exceptional job of my predecessor at Altus, Brian Freed. Brian and others poured the foundation for what is now a premiere pure-play Permian midstream C-Corp, setting Altus up for both near- and long-term success. I was brought in for a few key reasons to further build on the work of Altus' initial leadership team and exceptional operations staff.

First, I led a start-up gathering and processing Company in the Northern Delaware Basic that used a similar processing technology and was built on time and on budget. Second, I had the unique experience to help with the architecture and ultimately the development of Western Gas Partners, which was spun out of Anadarko Petroleum's midstream assets after acquisition of Kerr-McGee and Western Gas Resources in 2006.

These two experiences and their relevance to Altus' execution plan led to discussions and ultimately the decision to join and lead this exciting new Company. My initial impressions of the business strategy after about a month with the Company is that it is sound and the value proposition is compelling. The operations team is doing an excellent job of keeping the pipeline, compression and cryogenic plant construction on time and on budget, while simultaneously gathering and processing other 590 million cubic feet of gas per day.

Our current operation comprising lean gas compression and treating facilities processing approximately 260 million cubic feet of lean gas per day and mechanical refrigeration units processing another 330 million cubic feet of rich gas per day. We are delivering gas, natural gas liquids and condensate into local markets presently, but that will change once operations commence for Gulf Coast Express, Permian Highway, EPIC, Shin Oak and Salt Creek pipelines throughout 2019 and 2020.

Our principle near-term goal is to successfully transition from our present state of mechanical refrigeration processing to the use of three cryogenic gas plants by the end of this year. Each plant's nameplate processing capacity is 200 million cubic feet per day, equating to a total of 600 million cubic feet per day by year-end, although we ultimately expect to be able to process approximately 10% above nameplate, resulting in an effective capacity of 660 million cubic feet per day by year-end 2019.

Given Apache's announcement of reduced upstream activity, we have adjusted our forecast through 2021 relative to our prior guidance. However, we are being flexible and disciplined from a cost perspective in response to this change while still making sure we stay ahead of Apache production.

As an example of this cost discipline, we are planning to construct additional residue compression in 2020 which we expect will increase our overall cryogenic processing capacity to approximately 750 million cubic feet per day, thus deferring capital for additional cryogenic plants. As a result, we currently plan to have three cryogenic plants online by the end of 2020 versus our prior public disclosure of five plants.

While we are deferring the timing of our fourth and fifth cryo plants along with the associated capital based on our current forecast, we also have the flexibility to accelerate timing based on changing production forecasts from Apache and others. In total, we expect gathering and processing capital for the next three years to be reduced by over $400 million in aggregate relative to our prior guidance. Ben will provide more comments on guidance in his remarks.

We will continually optimize our operations within Alpine High. Once we have our pipe in the ground, compressor stations in place and cryogenic plants up and running, we will be well positioned to take advantage of value-added third party opportunities. We will work closely with Apache marketing and others to utilize significant firm transportation capacity that will be attractive to local producers in a clear system and strategic advantage.

Altus also has additional organic growth opportunities with Apache. These include ROFOs on both oil and water infrastructure at Alpine High, which we believe will have great value in the industries unfolding Delaware Basin, Wolf Camp and Bone Spring oil plays. We have a great deal of work to do this year and years ahead. Our efforts must be focused on execution with emphasis on reliability, capital efficiency, operating cost and outstanding customer service.

In so doing, safe and environmentally sound operations will be our top priority as we realize that our license to operate depends on this unbending principle -- our operations are only successful if the community, our contractors and our employees are safe and the environment is preserved and protected.

In closing, I circle back to the notion of Altus being a premiere midstream provider. We have the coveted position of being a provider of wellhead to water midstream services to one of the best oil and gas operators in the business. We have an enormous area of dedication in one of the most prolific unconventional basins in North America. We have access to multiple sources of capital to see our plans through and we have a motivated and talented group of professionals with eyes on the prize.

In short, all of the elements are in place to achieve excellence that will yield significant value to our investors. I will now turn the call over to Ben to cover in detail our financial performance for the last quarter and path forward for this year and the years thereafter.

Thank you, Clay. As noted in the press release issued last night under generally accepted accounting principles, Altus reported fourth quarter 2018 net income of $632,000 on revenues of $28 million. Gathering and processing volumes for the period averaged 471 million cubic feet per day, of which approximately 49% was rich gas.

Our fourth quarter 2018 adjusted EBITDA was approximately $8.2 million. Adjusted EBITDA for the quarter was adversely impacted by a field-wide shutdown for several days in October. Estimated lost revenue associated with this field-wide shutdown was approximately $900,000.

Capital investments in midstream infrastructure during the quarter were $274 million. This included $91 million for the exercise of our option for 15% equity ownership in Gulf Coast Express, the Kinder Morgan operated natural gas pipeline from Waha to Agua Dulce near the Texas Gulf Coast.

As noted in Apache's conference call this morning, upstream capital investment at Alpine High is lower than its previous guidance update. WTI pricing trends have changed significantly from when we announced the formation of Altus in August and since Apache's initial 2019 CapEx program discussed in November. As a result, Altus is adjusting its guidance to this new operating environment. This includes 2019 gathering and processing volumes and the three-year outlook for capital investments and EBITDA.

Both rich and lean gas production in 2019 at Alpine High are guided lower with significant lean gas development being deferred. For 2019, we estimate that gathered volumes will average 525 million to 575 million cubic feet per day, of which approximately 65% is rich gas. While the product mix out of Alpine High is shifting to more rich gas production, we believe the opportunity for future lean gas volume growth still exists when Waha differentials return to more normalized, historical levels and natural gas pricing strengthens.

Over the 2019 to 2021 period, we're revising our gathering and processing capital program lower by approximately $400 million from previous guidance for that same period. Approximately 75% of our CapEx in 2019 and 2020 is related to our JV pipeline projects and capital spend for these projects is up approximately $100 million.

We view this as cash flow accretive given that it is attributable to our increased ownership in Kinder Morgan's fully subscribed Permian Highway natural gas pipeline from 24% to 27% and it also includes expansion projects on both Permian Highway and the EPIC crude oil pipeline.

Our capital program in 2019 will be focused on the exercise of our long-haul JV pipeline options. This includes our exercise of the EPIC crude option on February 1st, which we expect to close in March. The EPIC crude line is scheduled to come online in January of 2020. However, with the conversion of EPIC's NGL line to transport crude on an interim basis, EPIC expects to generate EBITDA from that project during the second half of 2019.

We have two other options that we expect to exercise this year. This includes an option for 33% ownership in the Shin Oak NGL line, an enterprise operated system that transports NGLs from Orla and Mont Belvieu. This pipeline is expected to be in service in the second quarter of 2019 and our option expires 60 days after the line enters service.

Our option for approximately 27% participation in the Permian Highway natural gas pipeline, which moves residue gas from West Texas to multiple takeaway points on the Gulf Coast, expires in September of 2019. The overall capital program this year is expected to range between approximately $1.6 billion and $1.7 billion with approximately 80% attributable to the JV pipeline projects.

As Clay noted, construction of the three cryo plants is proceeding and the first plant is expected in service by the end of the second quarter, with the remaining facilities coming online in Q3 and Q4 2019. In 2020, the midpoint of our expected capital program is $525 million with approximately two-thirds allocated to the joint venture pipeline projects. In 2021, our capital investments are expected to continue to trend downward ranging between $150 million and $250 million, which is 100% gathering and processing capital as all JV pipelines will be funded and cash flowing at that point.

Based on the current upstream environment in the Delaware Basin, we have also updated our guidance for EBITDA contributed from JV pipeline projects. Those changes, in combination with our updated gathering and processing forecast mentioned previously, result in a revised EBITDA guidance for 2019 to range from $75 million to $95 million, ramping to $260 million to $340 million in 2020.

In 2021, EBITDA is expected to range between $400 million to $500 million. Even though this is down from previous guidance, with the reduction in our capital program, our projected free cash flow is up by approximately $150 million for the year relative to prior guidance. Free cash flow here is defined as adjusted EBITDA, less CapEx.

Cash and debt capacity will be used to fund growth capital. While we currently have no debt, we plan to begin borrowing this year to finance growth and expect a leverage ratio of three to four times in 2021, though we continue to target the low end of the range.

In November, we entered into a five-year revolving credit facility with flexible terms and competitive pricing, including two one-year extension options. We also have access to other attractive sources of capital, such as preferred equity and asset level financing, to fund our future growth. We anticipate being able to execute our current growth plans without issuing common equity and staying comfortably below covenant levels in our revolver.

Given our focus on investing capital efficiently and managing our balance sheet appropriately, we still expect to be in a position to implement a sound dividend policy in 2021 assuming approval by the Board of Directors.

I will now turn the call over to the operator for Q&A.

(Operator Instructions)

[Merrick Vack] of Citigroup.

Hi. Good afternoon, everyone. Just first off, can you update us on the updated guidance from 2019 to 2021? Can you provide more color around how much is driven by updated gathering and processing volume expectations versus, perhaps, expectations around contributions from the JV investments? And if expectations around the JV contributions has been updated, kind of what's changed there?

Hey, Merrick. It's Ben. So just want to make sure I understand your question. Are you -- you're talking about the EBITDA guidance that we put out, more clarity around the breakdown there?

Correct.

Yes. So a lot of that's outlined in our investor presentation. You can see the percentage of the EBITDA similar to how we showed it previously and the drop is predominantly around the G&P business because of the deferral of the -- of cryos four and five with -- as in Clay's remarks, he talked about and what we talked about on the road, as you may recall, by the end of 2020, we were planning to have five cryos online and now we have three.

So the deferral of those -- you defer the CapEx, you obviously defer the EBITDA associated with those as well and that's the majority of the -- of the EBITDA when you look out into 2020 and 2021 associated with the gathering and processing side. And again, just to reiterate a point that Clay made, we were -- those are definitely flexible. We can accelerate those if we need to. The lead time on those is anywhere from 12 to 15 months and we feel confident that if there are any changes on the expected gathering volume side, that we could accelerate those as needed.

Right. But for 2019, is the bulk of the reduction in your -- or is the entire reduction in your EBITDA guidance for 2019 the result of the lower expectations of gathering volumes or was there a change on the JV contribution expectations there?

It's predominantly on the G&P side.

Okay. And can you comment on your thoughts around financing the $1.6 billion or so of capital budget for 2019 such as potential magnitude of possible external financing you might be looking at or when you'll actually have the full $800 million of revolver capacity and possibly $1.5 billion of capacity available to you?

Yes. So we're continuing to assess multiple markets and feel very confident in the financeability of our business and when you look at the diversity of our cash flow stream into 2020 and 2021 associated with the G&P business and the JV pipelines, believe that there are plenty of investors out there in different markets, whether it's on the -- on the debt side or on the asset level financing side and even on the preferred equity side, that value those cash flows and the investment in infrastructure.

Those are very liquid and very competitive markets and so we're assessing what those markets are. The mix of that capital spend is something that we're going to be very efficient with as we look at from a cost of capital and liquidity perspective. So we're assessing all that right now and we'll update the market when something is firm.

Okay. And that Mont Belvieu capacity and Accordion feature, I mean when do those become available to you?

Yes. Yes. So in the initial period of the $450 million to $800 million, we have to meet two thresholds. One is $175 million of annualized EBITDA on a preceding three-month basis. So it doesn't have to be at the end of a quarter and then the other is that raising $250 million of additional capital that's effectively junior to the revolver. And so we believe that those are both achievable milestones and we're going to consider those as we continue to build out our -- sorry -- as we continue to finance the business this year.

Okay. Great. Thank you. I'll jump back into queue.

Chris Tillett of Barclays.

Hey. Good afternoon, guys. I guess first, for me, I was wondering, if you -- if you wouldn't mind, can you reconcile the updated Apache guidance for Alpine High to your own outlook from last evening? I mean, I think Apache's 2019 guidance for Alpine High was still within the original 85 to 100 MBOE range that had been put out there late last year. So just curious as to why the updated volume range for Altus is so much lower than kind of that original outlook.

Yes. So Apache revised the range for 2019 to be between 85,000 and 90,000 BOEs per day versus the previous guidance that they had mentioned, which reflected the upper end of a range of 85,000 to 100,000 MBOEs per day. And so when you -- when you look at our expectations, we have revised ours commensurate within the 85,000 to 90,000 that Apache set for 2019.

Okay. I mean, I guess just a little curious there because I think the top end of your new range is below the low end of your old range and the Apache range, the updated one, sort of is within the original one. So I guess was there anything else driving that or is it -- is it purely just kind of a mark-to-market on those numbers?

And you're talking about the range of the EBITDA for 2019?

No, the volume guidance. Specifically the volume.

Really the only change for 2019 is that we're not assuming any third-party for this year and besides that, these volumes are reflected to be within the range that Apache's provided for 2019.

Okay. Okay. And then, lastly from me, the two, I guess, financial metrics you had just mentioned around the credit covenant, the $250 million of additional capital and the $175 million of annualized EBITDA, is that -- is that an either-or situation or do you have to achieve both of those goals?

We have to achieve both.

Both. Okay. That's it from me, guys. Thank you.

Yes. Thanks.

Colin Crosby of U.S. Capital Advisors.

Hey, guys. Just one question on CapEx and kind of the timing of that and the financing associated with it. When do you expect to have to start drawing on the revolver and kind of when do you think you start getting close to that $450 million?

Hey, Colin. We expect to start drawing the revolver kind of in the second quarter of this year and we don't expect to reach the limits of that until definitely the latter half of 2019. So we've got -- we've got runway, definitely, to get us through the second quarter here and even into the third quarter.

As you know, we've talked about in the past the lumpiness of our capital and this year is commensurate with the exercise of the JV pipes. So we've got the -- namely the Shin Oak and PHP pipes in the second half of this year and we're assessing different financing alternatives right now. Like I said before and definitely will update folks on not only the financing if and when that is announced, but also our expected liquidity and financing moving forward.

Okay. Thanks, Ben. That's it for me.

Thanks.

Merrick Vack of Citigroup.

Hi, guys. Just a couple of quick follow-ups. So does your current three-year forecast assume a flat five rig program from Apache throughout that time or does it assume some sort of rig increases in the next couple of years?

Merrick, this is Clay Bretches and just to address that, when we came up with our forecast, clearly we were using the 2019 guidance that we received from Apache, but when we go forward, obviously Apache didn't provide guidance in 2020 and 2021. So we're having to make some assumptions here based on conversations that we've had with our principal partners and customers, as well as our own assessments. So what you see here is an assessment by Altus, not anything forward-looking from Apache. Does that help?

Yes. Can you comment as to what type of drilling activity you're expecting there for 2020 and 2021?

No, we're not going to get into the details, Merrick, in terms of rig count and frac crews and all of that. Apache did say this morning on their call that they're expecting to run, or it's in the disclosure at least that was posted, planning to run five rigs this year at Alpine High and I believe that there was a well count associated with those in the materials.

And so, listen, we know that the environment has changed in the $50 to $55 environment. We believe that this is a conservative view and that Alpine High is going to continue to attract capital from Apache and, to Clay's point, we use those assumptions to come up with our forecast.

Okay. Great. And understood. And just one quick one on the Shin Oak option. When you exercise that option, are you going to start receiving the contributions from the day you exercise that option or will there be some sort of a retroactive agreement where you would receive contributions starting from when it comes online today and would there be some sort of incremental spend to get that benefit?

No, there's no incremental spend. We're going to pay our portion of the capital for the entire project and expect to receive our proportionate share of that EBITDA fairly shortly after exercising.

As you recall, we can exercise -- it's going to be 60 days after in-service and so there will be volumes flowing through the pipe and that's one of the options that we talked about. It's nice to be able to write a check and have EBITDA contributions show up shortly thereafter.

So if you exercise it, let's say, 60 days from now, you would get the benefit from the pipe already running starting today then. Is that how to think about it?

No. Well, no, my point was so that it's going to be producing for 60 days and at the time we exercise, moving forward, we will get our EBITDA contribution.

Okay. Okay. Understood. Okay. Thank you so much.

I will now return the call to Patrick Cassidy for any additional or closing comments.

Thank you for your participation in today's call. A webcast replay will be posted on the Altus Web Site after 6:00 P.M. Central time today. If you have any further questions or comments, please contact the investor relations group.

Thank you. That does conclude the Altus Midstream Fourth Quarter 2018 Earnings Conference Call. You may now disconnect.