Western Midstream Partners LP (WES) 2014 Q3 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the Western Gas Third Quarter Earnings Call. (Operator Instructions). I would now like to turn the call over to Mr. Ben Fink. Please go ahead.

Thanks. Good morning everyone and I'm glad you could join us today for Western Gas' Third Quarter 2014 Conference Call.

I'd like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. Be aware that actual results could differ materially from what we discuss today, and I would encourage you to read our full disclosure on forward-looking statements in the non-GAAP reconciliations we've attached to last night's earnings release and attached to the slides that we'll reference on this call.

With that, I'll turn the call over to Don Sinclair, and following his remarks, we'll open it up for Q&A with Don and the rest of our executive team. Don?

Thanks, Ben. Good morning everyone and thank you for joining us today. Yesterday we announced the $1.5 billion acquisition of Nuevo Midstream as well as our third quarter earnings. First I will walk you through the quarterly results, and then I will share my thoughts about the Nuevo acquisition and what an important transaction this is for Western Gas.

WES increased its distribution to $0.675 per unit in the third quarter, which is a 16% increase over last year. WGP increased its distribution to $0.29125 per cent per unit, which is a 36% increase over last year. We reported adjusted EBITDA of $167.3 million and distributable cash flow of $136.7 million which are in line with our expectations.

Our healthy distribution coverage ratio of 1.23 times was also considerably higher than our long-term target of 1.1 times. While we experienced healthy throughput growth at our Crude and NGL assets, I'd like to discuss the throughput for our natural gas assets which was 3% lower than the second quarter.

We experienced throughput gains at our Brasada plant and at our DJ Basin and Granger facilities, while overcoming unscheduled downtime. The throughput gains at these higher margin systems were offset by declines at the following three lower margin assets.

First, our Bison treaters experienced a larger sequential throughput decline, but this had no impact on our EBITDA as 100% of the cash flows are supported by demand charges.

Second, we experienced a decline in volumes at our Granger straddle plant, which is one of the lowest margin assets in our portfolio; however, our gross margin at this asset actually increased by a $1 million over the second quarter despite the lower throughput.

Third, our Anadarko operating Marcellus volumes were sequentially lower as a result of Anadarko's reduced activity due to lower price realizations; however, throughput at our much larger non-operated Marcellus system was flat with the second quarter.

Next, I'd like to update you on how Train II at our Lancaster facility is proceeding. I'm pleased to report that we remain on schedule for our second quarter 2015 in service date. Construction is approximately 50% complete and all major skids for the amine mol sieve residue compressors and crawl units are on site and set.

Now I'd like to discuss our pending $1.5 billion acquisition of Nuevo Midstream, LLC, which is the largest acquisition in our history. As you read in the release, Nuevo provides gathering, treating and processing services in Culberson, Loving and Reeves Counties, Texas, and in Eddy and Lea Counties, New Mexico.

Nuevo was founded in 2011 and since that time the management team has done a great job in capitalizing on their first mover advantage to quickly and efficiently meet growing producer demand for midstream services. They secured considerable acreage dedications and volume commitments from high-quality producers, and we look forward to providing excellent service to existing and future customers in a safe and reliable manner.

Nuevo currently has 300 million a day of processing capacity and an additional 400 million a day scheduled to go in service in 2015. We believe based on current activity levels and our forecast for the basin even more capacity will be required which will enable these assets to grow significantly over the next several years.

Our confidence in this acquisition is due to two critical factors that are unique to Western Gas. First, Anadarko's proprietary knowledge of the Delaware Basin's potential gave us a distinct competitive advantage in evaluating these assets. Second, as you can see on the map on slide 7, the Nuevo system is in close proximity to over 600,000 gross acres controlled by Anadarko, as well as its existing midstream infrastructure that includes the Delaware Basin joint venture, their interest in the Bone Springs processing plant, the Lone Creek oil gathering system and our Haley gas gathering system. These assets represent a substantial midstream footprint that will create additional value and allow Anadarko to accelerate its production in the area.

The $1.5 billion purchase price represents an 8.5 times multiple of our current forecast for Nuevo's 2016 EBITDA. Given that, Nuevo is an early stage company with substantial capacity expected to be placed into service in the next year, we believe it is inappropriate to evaluate the acquisition based on our forecast performance after the current projects come online.

We expect this transaction to be accretive to distributable cash flow in 2015, primarily due to Anadarko's willingness to support the financing of this acquisition through the purchase of $750 million of Class C units, which will pay distributions in kind for up to three years. Since the Class C financing is a key component of this transaction, I'd like to ask Ben to walk through some of the terms associated with these units.

Thanks Don. The Class C units that we will issue to Anadarko will look like our common units with two important exceptions. First, these units will pay distributions in the form of additional Class C units until the end of 2017, after which time they will convert into common units on a one-for-one basis. To maximize flexibility, Western Gas has the right to convert any or all of the units prior to the end of 2017 and Anadarko has the right to delay conversion of any or all of the units past the end of 2017 if it so chooses.

The second important distinction is that these units will be disregarded for purposes of calculating cash distributions and no incentive distributions will be paid in connection with the Class C units until they convert into common units. The pricing in terms of the Class C units have been approved by the special committee of our Board of Directors.

We believe that Anadarko's willingness to purchase $750 million of paid-in-kind units provides strong evidence of their confidence in the potential of the Delaware Basin and the attractiveness of this transaction.

In addition, the Class C units when combined with the available borrowing capacity under our credit facility provide us with the flexibility to continue our practice of being opportunistic in deciding when to access the capital markets.

Now I'll turn it back to Don to discuss the Nuevo acquisition further.

Thanks, Ben. As we mentioned in last night's release, Anadarko is the operator of a 50/50 midstream joint venture with an area of mutual interest that covers some of the counties where Nuevo has operations.

Since WES is subject to this agreement as Anadarko's affiliate, we have offered the JV partner the right to purchase 50% of Nuevo. The JV partner will have 30 days to decide whether it wants to acquire that 50% interest and another 30 days to fund its share of the purchase price. I want to emphasize that we're fully prepared to purchase 100% of Nuevo if the JV partner declines to participate.

Notwithstanding the Nuevo acquisition, we will continue to pursue drop-down transactions at Anadarko and organic growth projects in order to execute our sustainable distribution model. The Nuevo acquisition improves our basin customer diversity and will allow us to extend the rising of our distribution growth while preserving the inventory of midstream assets at Anadarko.

I've always said that Western Gas would not execute a third-party acquisition unless it was strategic, accretive and would not put our business model at risk. We believe the Nuevo acquisition meets all these criteria. This is a very exciting day for Western Gas, and I hope you share our excitement about what this represents for our future.

Let me take this opportunity to discuss our revised full year outlook for 2014, which does not include any results from the Nuevo acquisition. We believe adjusted EBITDA will be between $625 million and $650 million and our maintenance capital will be between 7% and 10% of adjusted EBITDA. We also believe our total capital expenditures, including equity investments, will be $670 million to $720 million due to lower capital in DJ Basin and updated information we received on our non-operated Marcellus assets.

In addition, we believe WES and WGP will exceed the previously announced distribution growth guidance of 15% and 34% respectively. Furthermore, based on our preliminary outlook, we estimate that WES will achieve at least 15% distribution growth in 2015. Our annual budgeting process is ongoing, and when it is complete, we will give full year 2015 guidance for EBITDA and CapEx, including CapEx associated with the Nuevo assets.

I would like to thank each of you for your continued support of both our team and our business model. And with that, I would now like to open up the line for questions, Operator.

Thank you. (Operator Instructions). Your first question comes from Shneur Gershuni from UBS. Your line is open.

Good afternoon guys. Just a couple of quick questions if you don't mind. Just starting with the Nuevo transaction, you've highlighted the accretion that's expected in 2016 and so forth. I was wondering if you have any initial thoughts with respect to kind of the CapEx investment outlook in 2015 for the Nuevo assets, and possibly how are you thinking about the run rate of EBITDA for 2015, I am not sure if that's available at this time but figured I'd ask?

Hey, Shneur, this is Ben. And I do appreciate the question. On the CapEx side, what I would ask is if you could just give us one quarter and we will give full guidance at the beginning of 2015.

This is a very fluid time right now. Both Anadarko and all the other major producers are undergoing their budgeting process. That's going to directly impact the level of CapEx in 2015. That will impact the well connection capital as well as how much additional processing capacity we actually plan on building. So one more quarter and we will give not just full CapEx for WES, but CapEx for West Texas as well.

As far as the 2015 EBITDA, I also appreciate the question. I certainly don't hold it against you. But from our standpoint, it's not particularly relevant. This is a very early stage asset with another 400 a day of capacity coming online and 2015 cash flow wasn't particularly important in our view of the overall transaction.

So we are disclosing the EBITDA once all that additional capacity that's coming into service comes on line and I hope we can appreciate that. I'll just remind you that it will be accretive in 2015 and we've also reiterated our distribution guidance for 2015 of no less than 15%.

Great. And thanks for that Ben. And a follow-up question. The upward revisions in the 2014 EBITDA guidance, I was just wondering if you can sort of walk through the drivers on how you arrive there. Just sort of given the adjusted gross margins for the natural gas assets and for the crude and NGL assets declined in third quarter relative to second quarter. Should we expect that to tick back up or is it going to come more from the throughput side? I was just wondering if you can give a little bit of color on that.

Absolutely, Shneur and again, I appreciate the question. What we did for our 2014 outlook is we really narrowed a range. We took a $50 million range and narrowed it to $25 million. Our holistic outlook really hasn't changed from the beginning of the quarter or rather from the beginning of the year. We just have more certainty around it since now we have three quarters of actuals.

Gross margin per Mcf for natural gas assets are going up. As you mentioned, that's change of the throughput mix. You have growth in higher margin assets, some decline in lower margin assets, so it tends to go up. And what I've said repeatedly about the gross margin for crude and NGL assets is that most of these assets are assets that have just recently come into service.

And what you have is for the first few quarters, the gross margin tends to bump around as you kind of build your processes in place. Some quarters, you may receive two distributions and then get none the next quarter. Sometimes, you'll experience what we just had this quarter, which was a previous distribution was reclassified by the operator as a return of capital.

And so it's going to take a few quarters to have a really good trend line. And so that number is going to bounce around probably until those assets have been serviced for at least a year. Does that make sense?

Yes, it does. And thank you very much for taking my questions.

Sure.

Your next question comes from Gabe Moreen from Bank of America Merrill Lynch. Your line is open.

Hi everyone. Let me try to approach the question a little differently. In terms of the 2016 run rate that you've got out there in multiple, does that contemplate any sizable additions to the assets at Nuevo beyond that other processing plant that's coming on line in 2015? And I guess I'm talking additional processing plants, maybe some additional trunk lines?

Gabe, this is Don. As far as incremental plants, it does not have anything in it beyond what we've already disclosed. Obviously, we have pipeline projects that we will work on in the fourth quarter 2014 and 2015 and they are embedded in there. As far as processing capacity, it doesn't have any incremental capacity above what we've already announced.

Great. Thanks. Don. I guess just following up on that. Can you talk a little bit more about whether there's any NVCs here? I know Ben mentioned sort of the fluidity of Anadarko and likely other producers' drilling budgets. So I'm just kind of wondering in terms of NVCs and sort of the confidence in the ramp, does that play any role in that?

Hey, Gabe. This is Ben. There are NVCs but it's less than a 100 a day, so it's not meaningful. The growth really comes from the acreage dedications. And to be clear, we feel the existing acreage dedications will fill up that additional 400 and that doesn't include what we have with the Anadarko acreage behind it.

The other variable, Gabe, relative to the volume commitments is, some of the producers, as they get a better feel for their development, the third-party producers get better development plan in front of them, they have the right to exercise incremental capacity. So we'll obviously monitor those options as well as what Ben said about the development on the acreage and make determinations from there.

Okay. Thanks guys. And then last one for me, just I don't know, Ben, if you hit on this and I missed it. If the 50% third-party interest gets exercised, does that $750 million commitment from Anadarko get downscaled or does that stay at $750 million?

Stays at $750 million.

Great. Thanks guys.

Thanks Gabe.

Your next question comes from Jerren Holder from Goldman Sachs. Your line is open.

Good morning or good afternoon. Just wanted to start off with, can you guys maybe go over the volume assumptions and maybe the commodity price assumptions around the 8.5 times EBITDA multiple in 2016?

What we did relative to the commodity is we just looked at the forward market. There is an investment deck that we have at Anadarko as well, that suggested based on forward-market assumptions and that was what was put in there, what we used.

In terms of volumes, the additional 400 comes in towards the end of 2015 and fills up over time.

Okay. And going back down to the drop down trajectory, does this third-party acquisition change the timeframes? I know you guys usually do every six to nine months, maybe a drop down happens. Does this delay it to replace drop down that we could have been expecting in the near-term maybe?

Well I think, how I think about it, you have to kind of put drop downs in perspective and have a little bit of a historical look back. When you think about the role the drop downs played for us, call it three years ago, that was our major vehicle to allow us to reconfigure the portfolio and get to a growing portfolio at WES.

Now post all those decisions and the capital that's been spent on organic growth projects, we now have more components in the existing portfolio for growth. So now instead of drop downs being the only lever, if you will, that we could pull for growth, we now have other levers to look at. So we evaluate drops just as we always have and then determine where we think we need them to make sure that we stay within the execution of the distribution growth model that we're looking at.

All right. That's it for me. Thanks Don.

Thanks Jerren.

Your next question comes from Sunil Sibal from Seaport Global. Your line is open.

Hi. Good morning guys and congratulations on the transaction.

Thank you.

A couple of questions from me and going back to transaction, especially now through your discussions with Anadarko. I was wondering if you could talk a little bit about what is -- what do you believe is Anadarko's breakeven oil price for ramping up activity in those areas?

And also as you ramp up the processing capacity do you have adequate NGL takeaway capacity there or we could see something on the lines of what happened in the DJ Basin with regards to your participation in other parts of the value chain?

I probably didn't get a chance to listen to Anadarko's earnings call today. They did not discuss a specific breakeven price and associated rate of return for Delaware basin or the DJ or any other onshore plays that they are looking at. I'm sure they will provide that information in their Investor Conference in March.

But what they did say is in the current commodity environment, you can still look at the DJ as well as the Delaware basin and they are both economic and we'll still draw capital out of the portfolio to continue to keep rigs running.

As far as, the plants and are there any what I think of as downstream pinch points, Nuevo is in the process of getting an incremental NGL connection to the facility today. As far as capacity is concerned, it will be in service in first quarter of 2015. So from an NGL takeaway, pure hydraulics, those issues will be resolved by then.

As far as -- the other takeaway issue is gas. They have existing connections. We are currently looking at as they were before we stepped into their shoes and signed the merger agreement and moved forward with the close, looking at a line to another interstate pipeline. So we're in the middle of -- they're in the middle of acquiring that right away. And so we will make sure that we, when the plants come into service that we don't have any downstream pinch points.

Okay. That's helpful. And then just lastly on your CapEx guidance for 2014, it seems like you made some adjustments. I was wondering if you could talk a little about that, is it mainly a timing issue or there were other factors which played into that?

Hi Sunil. It's Ben, three primary things. One, remember we're the non-operator of a large interest in the Marcellus. And we got some additional information from the operator in the third quarter, brought that down. And then in the DJ, it looks like we're going to spend a little less on pipe than we thought and we also had a little pushed into 2015.

Okay. That's very helpful. Thanks guys and congrats again on the transaction.

Thank you.

Your next question comes from Helen Rayu from Barclays. Your line is open.

Good afternoon. Congratulations on the deal. Just some clarifications, regarding the timing of the JV partner exercising the option, did you say it's 30 days from closing or 30 days from now?

30 days from notice, and we provided notice to them yesterday.

Okay. Got it. And then the commodity exposure at the Nuevo System today is 70%. As you add additional 400 capacity next year is that expected -- and that capacity ramps up, is that expected to stay around 70%?

It actually, Helen, it improves. From a commodity point of view it will increase -- the percentage that's not driven by commodity price and will increase as you bring this incremental acreage on and it's developed and it comes to the plant.

So in another words, on a lot of the new gas that's going to come into fill in that new capacity will be more fee mixed, fee-based mixed?

That is the way it is forecasted.

Okay. Got it. That's all I had. Thank you very much.

Thank you.

Your next question comes from Andy Gupta from HITE Hedge. Your line is open.

Hi, good afternoon guys. Congratulations, I've just got a couple of question. One is to clarify that $1.5 billion CapEx includes any CapEx you're spending for this new processing plan coming online in 2015; is that right?

No. $1.5 billion is the purchase price, that's all (multiple speakers).

How much should we assume for incremental CapEx for this new processing plant in 2015?

As I mentioned to Sunil earlier, just give us one quarter to get through the budgeting process with all the producers and then we'll give full CapEx details for all of WES in our West Texas asset.

Understood. Thanks. And my second question is on Brasada. So in the Eagle Ford presumably your plant is operating at capacity. Would love to see if you can confirm that. And two, is there an opportunity that you see with increasing production in the Eagle Ford from Anadarko that there might be an opportunity to expand capacity?

You are correct. Brasada is full today and has been. As far as another plant, Brasada II, we talked about it in previous quarters. That opportunity still exists. Valuation is going on at the APC level. Obviously, it's their production and their decision. They have the options of looking at third party capacity in the area or of us constructing a plant.

We have looked at different feed studies relative to the capacity of that plant, would it involve other partners and other production, and those decisions and information is being evaluated as we speak.

Great. Thank you.

Your next question comes from Selman Akyol from Stifel. Your line is open.

Thank you. Congratulations.

Thanks, Selman.

Just couple quick questions. Could you guys talk about any of the producers behind the system for Nuevo?

Selman, there is a couple things. We're always kind of cautious in this arena, especially because we haven't closed yet. I would like to tell you this; I think there is a tremendous amount of publicly available information relative to the Delaware Basin.

A lot of the -- what we think of as quality producers that are public have information out there that I think is easily available to you. And I'd ask for you to go look there until we do close. We want to make sure that we are cautious in how we talk about the asset until it's closed and funded and we own and operate it.

Very good. In terms of the units and the conversion, can you just talk a little bit about what might drive an early conversion, or what might drive a delayed conversion of the units?

Coverage, I mean plain and simple in terms of, if we could manage it, so there is not a shall we call a shock to the system in 2018 and do a more staged conversion over time, if our distribution coverage would allow that, that would be the optimal outcome.

But we structured this for maximum flexibility to give us the flexibility to ramp up, add capacity as needed and not have to worry about distribution coverage pressure during that time of the pick. And that's what will drive the delay as well.

Got it. And then lastly, you talked about 8.5 times multiple for 2016, but can you talk about capacity utilization assumptions that are behind that?

Well, as Ben said, Selman, the plant, obviously it won't start full. We don't have anywhere -- the gas and production will have to ramp up over time. But we see a solid ramp relative to the capacity and utilization, so we think those plants will be full in pretty short order and give us the opportunity to look at further expansions.

All right. Thank you very much.

Your next question comes from John Edwards from Credit Suisse. Your line is open.

Good morning, everybody and congrats on the transaction. Just a couple clarifying ones. So on the commodity exposure then the mix there post expansion, I think you said it's about 70% now. I didn't catch what you said post expansion what that would end up being?

70% fee based now. It's going to migrate to around 80% over time.

Okay.

But more importantly, John is how we look at it as just what is WES' gross margin and how much of that is commodity exposed. At all points in time it'll be 5% or less.

Okay. That's helpful. And I was just curious, how long was the transaction in discussion?

It seems like about 25 dog years, John. But I think there were quite a few people involved. It kicked off in the second quarter and it was a standard three round auction process.

Okay. That's helpful. And then, I'm just curious with the weakening commodity price environment, are you seeing any impacts to producer budgets at this point or are things staying pretty stable?

So far we haven't, but as Ben said, the fourth quarter is really where the rubber meets the road with budgets for 2015. So if there are changes, I think we will start to see them during that time period. As far as in West Texas, I think everyone is pretty comfortable and there is publicly available knowledge out there that resource development will continue even in this commodity environment.

Okay, great. Thank you.

Your next question comes from Sharon Lui from Wells Fargo. Your line is open.

Hi, good afternoon and congrats.

Thanks, Sharon.

Maybe if you could just touch on some of the longer-term organic growth opportunities. I think that Nuevo had indicated that capacity could -- processing capacity could ramp up to 900 by 2016, and they also talked about maybe investments in crude oil gathering?

Sharon, they had a lot of different horizons and opportunities out there. And we've looked at all of them. The ones that they had available to them were not dissimilar to ones that we had available to us, relative to our existing assets and footprint out there, which include building incremental processing.

I think how I would think about it from an investment community and for those who didn't get to listen to Al Walker's opening remarks this morning, I would suggest you go to his script. He talked about the DJ Basin and it being a template for how Anadarko looks at Midstream, what your growth opportunities will be there.

I think that we look at that template knowing that you're going to have a great opportunity around Anadarko's existing acreage position. The contracts that you have, there's a lot of great third-party quality producers out there, they have great development plans that we look forward to providing those services.

So to put a number of is it 900 million a day and how much pipeline capacity, I think does everyone a disservice at this stage.

Okay. Thank you.

Next question comes from Brian Lasky from Morgan Stanley. Your line is open.

Just one -- good afternoon and congratulations by the way. Just one quick follow-up. I was wondering, Ben, can you talk to kind of the incremental EBIDTA contribution from an incremental processing plant? Is that something you could provide -- just kind of ballpark numbers?

It depends on how large the plant is. So if it's 200, 300, 400 a day and there is just no way to speculate. There is no average contribution. I mean you can go back and look at history and look at the contribution of our Brasada and Lancaster plants, they were very different. So there is just no way to answer in a vacuum. I'm sorry.

All right. No problem. That's it. Thank you.

At this time, I have no further questions. Thank you. I'll turn the call back over to presenters for closing remarks.

I'd like to thank everyone for joining us today and for your interest in Western Gas and the newly acquired and announced Nuevo assets. Ben and I look forward to seeing each of you and speaking to you soon. Thank you.

Thank you, everyone. This concludes today's conference call. You may now disconnect.