Western Midstream Partners LP (WES) 2015 Q3 法說會逐字稿

Good day and welcome to the Western Gas third-quarter 2015 earnings conference call.

(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' third-quarter 2015 conference call.

I'd like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. Please 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 and the non-GAAP reconciliations we attached to last night's earnings release and to the slides that we will 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 third-quarter results for 2015.

WES increased its distribution to $0.775 per unit in the third quarter, a 15% increase over last year. WGP increased its distribution to $0.38125 per unit, which is a 31% increase over last year.

We have a number of recent highlights to discuss with you today, including the continued resiliency of the DJ and Delaware basins, announcement of an additional growth project in the Delaware basin, the raising of the midpoint of our full-year adjusted EBITDA guidance, our recent launch of a non-binding opening season for the Delaware Basin express pipeline, and our intention to extend our fixed price agreements for the DJ Basin complex and Hugoton system through 2016.

Yesterday, we reported adjusted EBITDA of $182.9 million and distributable cash flow of $152.8 million, both of which are in line with our expectations when adjusted for special items which I'll discuss in a moment. Our quarterly coverage ratio of 1.05 times brings our year-to-date distribution coverage to 1.13 times, which is in line with our long-term target.

Turning to slide 5, you will see that the majority of the sequential quarterly EBITDA variance can be attributed to the accounting change we discussed last quarter, our recently closed divestiture, and short-term operational outages that occurred within the quarter.

First, as we discussed last quarter, we are now accounting for the above-market component of the DJ basin fixed-price agreements as a capital contribution as post revenue. As you can see on this slide, this accounting change represented approximately $8 million of sequential adjusted EBITDA decline. Please note, this amount has been added back into our distributable cash flow calculation.

Second, we also had scheduled maintenance at the DBM complex, causing the system to be shut down for a week in July. We estimate the impact of the reduced volumes, as well as turnaround expenses, was approximately $4 million.

Third, we sold our Dew/Pinnacle assets in July. These assets contributed to our second quarter results, but only for one month in the third quarter. This divesture represented approximately $4 million of the sequential decline.

Finally, as many of you are aware, there was a small fire at our Lancaster facility in September. We are fortunate to report there were no injuries associated with this incident. I'd like to express my personal appreciation to all the Anadarko employees and contractors who handled this incident so professionally by getting our facilities back in line in a very efficient and safe manner. We estimate the financial impact of this minor event was approximately $2 million.

Adjusting for these events, the third quarter was in line with our expectations. While there was reduced drilling activity in several areas, as we expected, we do not believe there are any systemic issues that put our business model at risk. We believe the events of this quarter illustrate the resiliency of our portfolio and reflect the benefit of having a strong sponsor's support, as we were able to absorb the concurrent impact of a number of unrelated factors and yet still provide year-to-date coverage of 1.13 times without adjusting our 15% year-over-year distribution growth guidance.

Moving to our operating summary, approximately 44% of the sequential natural gas throughput decline was due to the Dew/Pinnacle divesture I previously mentioned. We also experienced throughput declines at our Marcellus and Chapita assets, while DJ basin throughput slightly increased. Delaware basin throughput was slightly down, due to the scheduled maintenance in July, but the DBM complex is currently running at full capacity, as we await the Ramsey four and five plants coming online in 2016. We also experienced sequential crude and NGL throughput growth, primarily due to increased Texas Express and Front Range pipeline volumes.

Our adjusted gross margin for natural gas assets was flat, at $0.69 per MCF, as the reduction driven by our accounting change was offset by the divestment of two lower margin dry gas assets. Our adjusted gross margin for crude and NGL assets slightly decreased by $0.04, to $1.76 per barrel, primarily driven by a lower distribution from the White Cliffs pipelines.

In yesterday's earnings release, we announced our plans to construct an additional 280 cubic feet per day train at our Ramsey complex. We expect the plant to cost approximately $115 million and are currently purchasing longer lead time items, with the intention of having the plant online by mid-2017. We have the capability to accelerate the construction of this plant, if necessary, and will make this determination once Ramsey four comes online in the second quarter of 2016. Our previously announced timetable for both Ramsey four and five are unchanged.

With respect to the non-binding open season for our proposed Delaware Basin Express pipeline, we are very encouraged by the interest shown and are beginning negotiations with interested shippers to execute binding agreements. It is still too early in the process to determine the size of the pipeline or the in-service date, but we are convinced that there is significant demand for additional residue takeaway out of the Northern Delaware basin to the Waha hub.

Now let's move on to our updated 2015 outlook. As you read in yesterday's release, we narrowed our range of our adjusted EBITDA guidance, while raising the midpoint by approximately $8 million. We lowered our total capital expenditure range to $580 million to $620 million through approximately $40 million of deferrals in 2016, as well as cost savings realized by our operating teams. We also further narrowed our maintenance capital outlook for 2015 to 7% to 9% of adjusted EBITDA, while leaving our distribution growth estimates unchanged.

We are currently working on our 2016 budget and will provide our outlook when we release next quarter's results. As stated in our earnings release, we and Anadarko do intend to extend the DJ Basin Hugoton fixed price agreements at current prices through the end of 2016 and expect to execute these agreements prior to year-end.

Also, while we continue to work diligently on our budgeting process and recognize that a lot can happen in a few months time, we currently forecast that total capital expenditures in 2016 will be reasonably close to what we will spend in 2015.

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

Thank you, sir.

(Operator Instructions)

Brandon Blossman, Tudor, Pickering, Holt and Company.

Just bookkeeping, the extension of the swap agreement, same accounting treatment? And just in terms of modeling it for 2016, same level of underlying commodity price?

The fixed price -- Brandon, this is Ben. Same accounting treatment. The fixed price will be the same. The market price on the day we extend will determine what goes through the P&L statement, and everything above that would be the above-market component.

Okay. That sounds pretty straightforward. The flexibility in bringing Ramsey six online, how wide of a range is that, as you see volumes progress?

Brandon, this is Don. As we think about it, once you add the air permit and the actual skids and the compression, it's about a six-month time window from start to finish to when you put it in service.

So we have all those components. So really, it's six months from when we say go. And so our thought process is get Ramsey four started, get way deep into Ramsey five, close to having it in service, and we should have a pretty clear line of sight on when we want to start six. And as I said, we'll announce it and you'll see it, hopefully, in service six months after that date.

Okay. That's very helpful. Thanks, Don.

And then bigger picture, just for fun, from your vantage point, what's the M&A A&B landscape look like currently?

So far for us, it's been minimal. As you know, we stayed focused where we have what we think are synergistic values associated with any type of transaction, whether it's APC or third parties. And so far, in areas that we have the highest levels of interest, we have not seen very much of any deal flow at all.

Okay. All right. That's interesting.

I'll leave it there. Thank you, guys.

Thanks, Brandon.

Elvira Scotto, RBC.

Hello. Good morning, Don and Ben. I'd like to start very high level.

Can you maybe talk about the sustainability of the drop down model and how the drop down model fits as a portion of your overall strategy now? Western Gas has executed well on the drop down strategy since its IPO in 2008. Have your views on the strategy or ability to execute on the strategy changed, given what's happening in the equity markets now and cost of capital?

Elvira, this is Don. I'll start and let Ben finish.

As I think about your question -- if you think about 2008, the number of levers, if you will, that WES had to utilize to manage the portfolio and get some form of sustainability or growth, it really was basically drop downs. And the luxury that we have today in scale and scope, and basins we're in, we have good organic growth still embedded in two of our largest producing areas, being DJ and Delaware Basin.

So we're not as dependent, if you will, to get the growth components from drop downs. But it's still a key component to our strategy and one of the tools that we will stay focused on as we try to determine what our level growth is and the sustainability of that growth and manage it over time. I'll let Ben answer, as well, about the capital markets.

And Elvira, our drop down inventory, we often refer to as a safety net. And 2015 is a good time where you're glad you have a safety net, and it looks like 2016 is going to be one of those years you're glad you have that safety net.

And we continue to believe, even in this kind of market environment, high-quality names with high-quality sponsors are going to be able to execute accretive drops. There's no evidence to support that they can't. And we've been at these type of equity yields before, and we've gotten drop downs financed accretively in those times. And based on where our stock price trades doesn't really affect how we view drop downs at all.

Okay, great. That's really helpful. And I agree. I've been following you guys since 2008.

So on the Delaware Basin Express pipeline, what's the timing of that project in terms of final investment decision?

Elvira, Don again. My guess is it'll be end of the year you'll have documents in front of all your potential shippers, and they will have made your commitments and you'll go back and relook the project relative to costs and overall economics and then make a decision from there relative to ordering pipe and securing right of way.

And we've already done some of that to date. But as I said, I think you'll be year-end when we have a clear line of sight to the project.

Great. Thanks. And then just my last one.

On the fixed-price agreement, the approximate $8 million impact to EBITDA here in the third quarter. In the fourth quarter, that should be slightly higher, right? Because I think you also have the Hugoton fixed price agreements coming on. Is that correct?

That is correct. You will see Hugoton in the fourth quarter.

I will say that Hugoton is not a particularly large system, and the only thing that's covered under there is some condensate that drips out of the system, as well as some residue gas. So it's not as fulsome as the DJ swamps. But that is correct.

Okay. Great. That's all I had. Thanks a lot.

Jeremy Tonet, JPMorgan.

Thanks for the color today. I was just hoping for a little bit more on the deferral of the CapEx, if there was any particular projects that would be moved back a little bit or anything else you could share with us there?

Jeremy, this is Don. If you think about -- the primary answer is, the majority of the deferrals are in West Texas.

And if you think about all the projects that we have going on there and trying to manage those projects, as well as contractors and all the other moving pieces, it's not significant for us to think -- for these deferrals to slip from one calendar year to another, especially with the holidays upon us, and the fact that we have construction of Ramsey four and five underway, as we speak. So to us, it's just kind of normal course of business and where the calendar year happened to end and where our numbers are set.

That's helpful. Thanks.

And as far as going back to the Delaware, I think APC just tested some Bone Spring acreage there, and the first well went pretty good. I'm just wondering that what that could mean for you guys as far as opportunities are concerned.

First, I'll agree with you. I think 1,000 barrels a day would be defined by any metric as a pretty good well.

This is all acreage that's dedicated to our existing footprint out there, whether it's DB JV or Haley. Every time that there's good results, whether it's APC or third parties, we're the beneficiary of that, because it seems to draw capital and rigs to that area. So we're excited about the activity in West Texas and the continued improvement and returns out there that we're seeing from APC and others.

Great, appreciate that. And realize it's probably a little bit premature to ask the question, but just wanted to get any thoughts you might be able to share on 2016 and distribution growth, the outlook there? And maybe just if you could remind us as far as your philosophy of growth versus coverage and if anything's changed in this environment, where there's a bit more volatility out there and just your thoughts?

Sure, Jeremy. It's Ben. I'll take a stab at that.

Philosophically, nothing has changed. We grow distributions as much as we can, while keeping three constraints in mind. One is you would never put the investment grade rating at risk. You would not lever up to achieve growth. So you want to keep your debt to run rate EBITDA south of 4 times.

We do like to keep a long-term coverage ratio of 1.1. We are achieving that this year and we're delighted. You may recall earlier this year, we guided that it might be closer to 1.0 times. And we've outperformed that, and it's been a testament to a really good year.

And then obviously, Anadarko always needs to get fair value for drop downs. You can't expect them to give WES assets for no consideration.

Historically, if you solve for X, you see where it's gotten to. It's been in the mid-teens.

I can't give anything more formal than that at this point. We cannot give any kind of formal guidance until our sponsor has completed its budgeting process. I hope you can understand that. But hopefully, the philosophy will be helpful.

That's all very helpful. Congratulations on very solid results in very difficult times out there.

Thank you, Jeremy.

Sunil Sibal, Seaport Global Securities.

Good morning, guys, and congratulations on a good, solid quarter. A couple of questions from me. First, I think your indication of 2016 CapEx being closer to 2015 -- does that include the development Express pipeline project?

No, it does not. Since we haven't reached FID, that's not in our forecast at this time.

Okay. So that could be additive and we will know by year end?

Correct.

Okay. That's helpful.

On one of the items that you had on the variance from second quarter to third quarter was the portfolio performance. I was wondering if you could talk a little bit about that, especially as you think about what you are seeing from the producer customers in some of the basins like Marcellus or Uinta, et cetera.

Yes, I appreciate the question. A good other way to refer to portfolio performance is everything else. What we did in that waterfall slide is tried to isolate the identifiable items in the quarter that will hopefully not be recurring. And then the net impact of everything else is what we call portfolio performance.

And we've seen declines in Marcellus. Marcellus is, I think, an area of longer term interest for Anadarko. But at these price levels, it doesn't compete for capital with the DJ and Delaware. So you've seen rigs move away.

Same with the Uinta basin. A good asset, not really competitive for capital with DJ, Delaware, Eagle Ford. And so we've seen declines there.

We should see protection over the longer-term in the Uinta basin, because we do have a throughput commitment for 500 a day. So at some point, a deficiency fee will kick in there. But it's really the net of this portfolio reallocation is how you get to that slight decline in our run rate business.

The good news is in areas where we have growth tend to be the areas where we make the most money. And so while you will see net reductions in throughput from time to time, as you've seen historically, you could still see cash flow growth during those times. Is that helpful?

That's really helpful. And then just as a follow-up on that, especially considering the third-party M&A environment, you did one transaction this year, selling a few assets, which was opportunistic, but helped you prune your portfolio of assets. How do you think about situations like that as you go forward?

We've always found it to stay focused on a very strict discipline that we're not going to put our model at risk. We're going to make sure that all transactions are accretive and don't, based on the initial performance of the assets, and we don't want to change our risk profile significantly. And so as long as you keep those metrics, we haven't seen anything that's either in our zip code or in a resource play that would make us have interest in stepping out there.

Now will it happen? I think that is probably the question a lot of people wonder about as you move through the fourth quarter of 2015 and 2016, and probably more assets will come to market and need to be monetized. But we haven't seen anything that we think that's where we want to allocate our capital to, because we still have, in our mind, better places to spend it.

I'll just add to that. Just keep in mind, the one divestiture this year was a situation where our sponsor had decided to monetize the upstream, and so we had the option of participating in that process or not.

All right. That's very helpful. And that's all I had. Thanks, guys.

Thank you.

Jeff Birnbaum, Wunderlich.

Good morning, guys. Don, you mentioned earlier that with Ramsey back online that DBM is full today. And I know that you've said in the past that overall the system has volume commitments. So knowing what you know now, what are your thoughts on how quickly four and five are likely to fill up and maybe how that might influence your decision on six?

The answer is, we've got a mix of agreements out there that are not only volume commitments but acreage dedication. On the acreage dedication, we have various sundries agreements that some is interruptible and some isn't. There's been good activity levels across all those contracts. And so we really don't look at it as a specific contract mix of how a plant will fill up.

We just think our overall portfolio of agreements and producers and activity levels associated with those give us a high level of comfort, obviously, in four and five. And it gives us comfort to go to the Board to get approval for six, as well.

So I think that should give the market some insight as to how we look at the overall stack, if you will. And we think that regardless of contracts, we're always going to have solid returns around those assets, and we don't see anything today in the portfolio that tells us any different.

Okay. Thanks.

And then Don, Ben, as you look to 2016 -- not to put the cart before the horse here -- but is there anything you can share about some of the discussions going on with Western and Anadarko about how the structure drops and financing those drops that neither party is left cash constrained or hitting the capital markets perhaps more than preferred?

Obviously, Anadarko has been a very supportive sponsor over the years. But I know that that is something that investors think about at these times. Anything you can share with regard to the flexibility of the tools that you still see at your disposal?

Jeff, this is Ben. I think that the innovative structure that we used this year was a special circumstance, and that was probably the exception rather than the rule. And in our preliminary conversations, we're just talking about the tried-and-true structure that's worked very well for us for the past seven years.

Thanks very much, guys. Very helpful.

This concludes our question-and-answer session. I would like to turn the conference back over to our speakers for any final remarks.

Rocco, thank you. I would like to thank everyone for joining us today and we appreciate your interest in Western Gas. We look forward to speaking with you again in the near future.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.