Western Midstream Partners LP (WES) 2015 Q2 法說會逐字稿

Good day and welcome to the Western Gas Second Quarter 2015 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.

I would now like to turn the conference over to Benjamin Fink, Senior Vice President, Chief Financial Officer and Treasurer. Please go ahead.

Thank you. Good morning, everyone and I'm glad you could join us today for Western Gas' Second Quarter 2015 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've discussed today and I would encourage you to read our full disclosure on forward-looking statements and the non-GAAP reconciliations we've attached to last night's earnings release as well as 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. Last night, we announced our second quarter results for 2015. WES increased its distribution to $0.75 per unit in the second quarter, its 25th consecutive quarterly increase. This is a 15% increase over last year. WGP increased its distribution to $0.36375 per unit, which is a 34% increase over last year.

Our quarter was highlighted by continued strong performance in the DJ and Delaware basins, the successful startup of Train II at our Lancaster plant and extension of our fixed price agreements for the DJ Basin Complex in Hugoton system.

Yesterday, we reported adjusted EBITDA of $205.5 million and distributable cash flow of $173.3 million, both of which are in line with our expectations. A resulting coverage ratio of 1.24 times was comfortably above our long-term target of 1.1 times and is a result of a combination of strong operating performance and the timing of maintenance capital expenditures.

Our second quarter natural gas throughput was marked by continued sequential growth in the DJ and Delaware basins as well as a slight increase at our Mountain Gas assets. This growth was partially offset by throughput declines in our Anadarko-Operated Marcellus system and at the Chipeta plant. We also experienced sequential crude and NGL throughput growth primarily due to increased Front Range Pipeline volumes.

Our adjusted gross margin for natural gas assets increased by $0.03 to $0.69 per Mcf, driven primarily by the start up of Lancaster Train II. Our adjusted gross margin for crude and NGL assets increased by $0.09 to $1.80 per barrel, primarily driven by increased distributions from the Texas Express Pipeline.

I want to share additional color on two other notable developments during the second quarter. The first relates to West Texas where we have now received our air permit which will allow us to construct and operate up to 900 million cubic feet of processing capacity at the DBM complex. Our existing capacity of 300 million cubic feet per day is currently full and we have begun construction of two additional 200 million cubic feet per day trains. Ramsey IV is scheduled to be in service in the beginning of the second quarter of 2016 and Ramsey V is scheduled to be in service in the middle of the year. Given current activity levels, we are in advanced planning stages for the construction of a third additional train at Ramsey and hope to have a final investment decision in the near future.

The second development relates to the extension of our DJ Basin and Hugoton fixed-price agreements with Anadarko through the end of the year. We believe these extensions represent yet another example of the support Anadarko has been willing to provide to WES. Since accounting of these extensions will be different from what you've seen previously, I would like to ask Ben to walk through how we will be treating these agreements going forward.

Thanks, Don. As you all know, our original DJ Basin and Hugoton fixed-price agreements had expiration dates of June 30 and September 30, 2015, respectively with both dates now being extended to December 31, 2015. The 2015 prices for residue gas and NGLs under these agreements have been previously disclosed.

As shown on slide 6, all sales under our fixed-price agreements were previously recorded as revenue, and we provide additional disclosure in our financial statements about the impact of these agreements on our net earnings. With respect to the extensions, because the fixed prices were significantly above the prevailing market prices at the time the extensions were executed, the above-market component of these sales will not be recorded as revenue.

Therefore, with respect to DJ Basin activity in the third and fourth quarters and Hugoton activity in the fourth quarter, we will record the net sales at the market prices revenue and we'll record net sales above the market price as a capital contribution from Anadarko. We will then add back this capital contribution for the purposes of calculating distributable cash flow or DCF, but it will be excluded from our adjusted EBITDA calculation. Note, there is no impact to our second quarter financial statements.

What all this means is that the DCF generated from commodity sales at the DJ Basin Complex in Hugoton system will be based on the actual price we receive under the fixed price agreements, while the adjusted EBITDA will only reflect sales at the prevailing market price. Put another way, we expect that the adjusted EBITDA generating during the extension period will be approximately the same as it would have been if we'd entered into new swaps at market prices.

With respect to our plans for these agreements beyond December 31, we in conjunction with Anadarko will determine the best course of action later in the year when we have better insight into both the 2016 commodity price environment as well as our customers drilling plans. Now, I'll turn it back to Don to discuss our outlook for the rest of the year. Don?

Thanks, Ben. As you read in yesterday's release, we have slightly reduced our maintenance capital outlook for 2015 while leaving our other estimates unchanged. Note that our full-year adjusted EBITDA guidance of $725 million to $775 million implies that our quarterly adjusted EBITDA for the third and fourth quarters is expected to be slightly lower than what we reported in the second quarter. This is due to our expectation that we may experience throughput declines in several basins as well as accounting for the fixed-price agreement extensions that Ben discussed earlier.

Finally, as is our custom during our second quarter earnings call, I'd like to take a moment to reflect on how far we've come since WES' IPO in 2008. WES recently celebrated its seventh birthday and despite the recent underperformance in the sector, during this period, the unit price is up over 240%, the quarterly distribution is up 150% and we have completed over $5 billion of acquisitions and have invested over $2.5 billion in organic capital projects.

We remain confident that our portfolio is capable of delivering strong results even during challenging times for our industry. We remain extremely grateful to all of our unitholders and lenders for your support during these times and we look forward to continuing our relationship for years to come.

With that, operator, I'd like to open up the line for questions.

Thank you. We will now begin the question-and-answer session (Operator Instruction) Chad Mabry, MLV & Company.

Don, I think you might have addressed this a little bit but I was hoping to drill down and get a little additional color on the maintenance CapEx guidance revisions down to the 7% to 10%. Just curious if that was more a function of higher EBITDA in Q3, Q4 or just what your thoughts are on that?

Chad, that's a great question. If you don't mind, I'm going to let Jacky Dimpel address that since she is over our operations and has best feel for it.

There are three factors in addition to timing. We also have been focused on our cost control, using our lot of economies of scale both in our purchasing and contracting. And to your question on EBITDA, we did get some volumes from Ramsey though we didn't have a well connect capital. So that helps the ratio there. Those were the three main drivers.

The reason we don't have the well connect capital in those cases are that the producer actually ties to us as opposed to us tying to the producer.

One follow-up if I could. Just kind of looking from a macro perspective, given the depressed commodity price environment, how does that change your assessment of the M&A market right now? Do you see more opportunities to make some acquisitions as for instance companies such as your parent look to maybe monetize some of that midstream infrastructure?

So far, we haven't. I think those opportunities if you continue to stay in this current commodity range, you'll probably start seeing more of those opportunities in the third and fourth quarter and the first quarter of 2016. But so far, we haven't seen a lot of those. What little bit activity we've seen, value still continues to be high. There still seems to be adequate amount of capital chasing limited number of deals.

(Operator Instructions) Brandon Blossman, Tudor, Pickering, and Holt.

I think [a couple or three] just quick ones here. Book keeping Lancaster II, any specifics that you can provide as far as the startup timing and then what the ramp looks like?

I'm sorry Brandon. I'll answer it and then if you have another question on Lancaster II, we put it in service in June and started collecting fees across that skid. If you kind of think about, we look at the total Lancaster I and II, right now we think once everything is lined out, you run about 500 million a day through both of those skids and if you remember, we have about 470 million of protection of throughput guarantees for the existing skids as we know today. Now, what you don't know is activity level with third parties, we just look at that mainly as what Anadarko has committed.

Then, Don, bigger picture question. As you look forward over the next year or two and then maybe even further out, any thoughts about capital allocation amongst the basins and what you prefer and [don't] prefer?

Well, we're going to chase the drill bit if you will and everything that we've seen not only in Anadarko's activity but other producers has basically been in the Delaware Basin and the DJ Basin. So, unless something significantly changes somewhere else, my guess would be Del draw the biggest part of the capital and probably the biggest portion going to West Texas just because of the lacking infrastructure out there.

Yes, Brandon, those two basins that Don mentioned represented over two-thirds of our capital this year and I only see that going up.

As a percentage?

Of total. Yes.

That makes perfect sense. And then just small, but maybe just curiosity more than anything else. You are non-op Marcellus position, any color available on throughput volumes kind of on a quarter-over-quarter basis?

Yes, for great detail, I was just asking the operator, but there was a little bit of sequential growth believe it or not. I think some of the producers were able to increase choke of the wells and we just saw a little bit of growth, nothing meaningful. I will remind you that we look at Marcellus as a whole and so there is an Anadarko operated piece of that as well and there were declines there and so on a net basis, we saw sequential declines in the Marcellus.

Jerren Holder, Goldman Sachs.

Just going back to the fixed-price agreement, given that I guess by the end of 2016 assuming like no new negotiations, some of that will be rolling off to market prices, do you guys still expect I guess the commodity exposed component could still be like less than 5% of gross margin in that scenario?

That is a metric that we've always managed to and intent to continue to manage to. I should point out that I believe they'll get less and less relevant over time when you think that virtually all of organic CapEx is being spent on fee-based activities, as well as virtually all the remaining Anadarko inventory is fee-based in nature. Those are going to be less and less relevant. I think Don already or I already spoke to our idea of we'll revisit them when we get closer to [2016] but that metric will be a key driver going forward.

The other thing, if you follow the theme of activity levels in DJ and West Texas, you will continue to pick up a bigger percentage of fee versus commodity based gross margin as well. So that should support that number.

And I guess any comments on the East Texas asset sale that happened earlier this year? Obviously, it's very small.

Yes, it was very small. These assets represent approximately 2% of our adjusted EBITDA. It was a process that started the Anadarko level and we decided to take bids, we liked the bids we got and we'll reinvest that capital in areas that actually have growth behind them. I should note, even though we have this divestiture, we did not change our EBITDA guidance in any way.

Kristina Kazarian, Deutsche Bank.

So, quick housekeeping question and then a bigger picture one after that. Can you guys provide a bit of color on the timing on Ramsey IV. Did I catch that you said 2Q16 now and then longer term, couple of questions about framing up the organic growth opportunities in West Texas? I know we talked a lot about the lack of infrastructure there but how big can it get for you guys? How do I think about that?

Well, I think -- Kristina, it's a great question. Obviously, we've got a lot of focus on West Texas as it is a huge growth area and probably got the least amount of infrastructure that the producers are going to need. We did say that Ramsey IV will be the second quarter of 2016 and then Ramsey V will follow it midyear. Those are both 200 million a day skids, which would get us up to 700 million a day capacity at the Ramsey complex. We are looking at the next train which would be another 200 million a day train that we would hope would be in service by mid-2017, kind of is a worst case date. So that should kind of give you some idea of what we think volume ramp is going to look like in the time period associated with that.

And then a quick follow-up on the last one. Then how should I be thinking about if there are any further portfolio optimization opportunities and I know that one was small but just generally?

You're talking about with respect to divestitures.

Yes.

I don't think you should ever think of WES proactively trying to divest something. That's not part of our business model. That's not what we do. To the extent we have the ability to react to something that perhaps our sponsors are doing, we're going to look at that, but it'll be just a function of the price we receive, but I wouldn't expect it to be part of WES's core business plan.

When we looked at, as Ben said, [we're in] auction process and I think also when you look at divestitures, you have to look at the asset, the characteristics around it, the resource plays, the remaining term on the contract, will there be residual operations in the general vicinity. There is a lot of variables that go into it but, as Ben said, from a just strategic point of view, normally we would not be a seller of assets.

Got it. Thanks, and nice job keeping the EBITDA without them.

Thank you.

Thank you.

Selman Akyol, Stifel.

Two quick ones from me. In terms of the Lancaster Train II coming online and you referenced it to the $0.69 as being beneficial. Does that fully reflect the [470] contribution or should we expect that to move higher as capacity utilization on Train II comes up as well?

I think that you're right. You only had one month of Lancaster impact. So as you get a full quarter of Lancaster impact, that will be beneficial to gross margin per Mcf. Obviously, there is a lot of other factors that drive it, most importantly throughput mix, what is happening in the growth of your higher margin assets versus your lower margin assets. Every quarter, there is going to be one-off type things like, for example, at a very small system, our Fort Union system this quarter, we received an annual fee that we only receive once a year and so that boost the gross margin of that small asset a little bit. But I think you're right in terms of the overall trend but there will be a net benefit to that. Now, keep in mind however due to the accounting for the fixed price agreements, that's going to impact gross margin per Mcf as well.

And then, CapEx still in the range of [$640 million to $700 million], excluding acquisitions?

Correct.

Jeff Birnbaum, Wunderlich Securities.

A couple of questions. Kind of broadly on the DJ and really the whole Rocky Mountain region in general, I guess, what are you seeing in terms of throughput, not just from Anadarko but from some of the smaller customers you have there? I guess, when you talk to them, do you get the sense that a lot of them are kind of in a wait and see mode on production, whether that be rich gas or crude? I think Anadarko had spoken yesterday perhaps Wartenberg production plateauing in the second half and they certainly have among them the strongest economics in that region. So, I guess, [not to] jump the gun too much on later in the year and then 2016, I guess kind of any color on what you're hearing would be helpful?

Jeff, there is couple of things that when I look at DJ that I think about. One is Anadarko referenced their call yesterday the fact they'll have 200 drilled but uncompleted wells in the DJ in 2015 by the end of the year. So, my guess is, they're not the only producer in the general vicinity that's doing that. We've seen everyone is active. Obviously, Anadarko has an advantage because of land grant but we haven't seen a significant difference between their activity levels and other producers. So, I think everyone's as they should be in a commodity environment like this cautious in how they deploy capital, but we haven't seen any dramatic changes between Anadarko and the other producers that we gather and process for.

And then, just kind of then a quick question on the balance sheet, just wondering how you're thinking about that right here. Kind of any -- you think about any equity needs kind of in the second half absent drop-downs or do you think kind of internal cash flow in the proceeds from the East Texas sale effectively get you where you want to be on the leverage side by the end of the year?

That's right. As you know, Jeff, maintaining the investment grade ratings are sacrosanct. So, we like to keep below four times on a run rate basis and that will determine any activity that we take in the capital markets, but I think you're thinking about it the right way.

Faisel Khan, Citigroup.

Just one quick question. I guess there were some comments in the press about Anadarko talking about funding its investment in Mozambique and some of those comments were around Western Gas and the ability to I guess raise capital by the sale of Western Gas to fund its wells at Mozambique. Can you talk a little bit about that and talk about more units in WES or WGP?

That's a great question. I appreciate. Few things to say about that. Obviously, the people on this call are not decision makers about the size of any offering, the timing of any offering. So, on that aspect, I have to route you to Anadarko. But in terms of the announcement, what I heard on the call yesterday was the potential to do more of these tangible equity units. They did link it to the equity portion of Mozambique, [not] Mozambique itself. Mozambique is a largely project-financed project at this point in time. And I think the key thing to remember, if you look at what happened a quarter ago, is that they raised approximately $575 million by selling in a fully diluted basis a 4% stake. So, they can raise significant sums without what I would call a meaningful impacting the ownership percentage. So, I would expect, no matter what their funding plans are that, that ownership would be significant. Does that answer your questions?

Yes, it does. I got you.

The other thing I'll add is, I was happy to hear that announcement, because given the specific use of proceeds, I think it creates strategic alignment and Anadarko wanting to preserve value in those securities.

Jeremy Tonet, JPMorgan.

Good morning. Congratulations on the strong quarter.

Thanks, Jeremy.

Just wanted to follow up on tangible equity units that you mentioned there. I was curious if you guys had seen new investor interest in the Western Gas story? Do you see any broadening of the investor base with this new securities?

Absolutely. It's a great question, Jeremy. I think one of the attractive features of the TEU that it's not a K-1 security and it appeals to a whole new investor base, namely convertible and structured products funds that invest in this type of security. So, it's a very healthy mix between names that were completely new to us, as well as tried and true friends.

This concludes the question-and-answer session. I'd like to turn the conference back over to Don Sinclair for any closing remarks.

Thank you. I'd like to thank everyone for joining us today and for your interest in Western Gas and Ben and I look forward to speaking to you again soon. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.