Western Midstream Partners LP (WES) 2016 Q1 法說會逐字稿

Good day, and welcome to the Western Gas first-quarter 2016 results conference call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Mr. Benjamin Fink. Please go ahead, sir.

Thank you. I'm glad you could join us today to discuss Western Gas's first-quarter 2016 results. 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 and the non-GAAP reconciliations attached to last night's earnings release and 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, and happy birthday. Good morning, everyone, and thank you for joining us today. Last night, we announced our first-quarter results for 2016. Our quarter was highlighted by continued strong performance in the DJ Basin, the closing of the Springfield acquisition that we discussed on our last call, and the resumption of operations at our DBM complex.

Ramsey III came back online at the beginning of April, and we've made significant progress towards completion of Ramsey IV and V. Last month we also closed an overallotment option related to our convertible preferred offering, which brought in an additional $248 million of net proceeds. As previously announced, we raised the WES quarterly distribution to $0.815 per unit, which is a 12% increase over the first quarter of last year. We also raised the WGP quarterly distribution to $0.42375 per unit, which is a 24% increase over Q1 of 2015.

Turning to our quarterly results, we reported adjusted EBITDA of $231.1 million and distributable cash flow of $191.9 million, demonstrating yet another quarter of strong performance. As you saw in our earnings release, we're now providing supplemental information related to our distribution coverage ratio, and I'll have Ben walk you through that later in the call.

The drivers behind WES's first-quarter results were sequential natural gas throughput growth in the DJ Basin and an uptick in Marcellus volumes due to flush production related to wells coming back online. Delaware Basin gathering volumes were up sequentially, while Delaware processing volumes were significantly lower due to Ramsey being offline for the entire quarter. Both our gross margin per MCF and gross margin per barrel were higher than what we reported the previous quarter, due to the inclusion of the Springfield assets.

Now I'll ask Ben to talk about distribution coverage.

Thanks, Don. We will continue to report distribution coverage, as we always have. Using the traditional calculation, our first-quarter coverage ratio was 1.21 times. Note that due to recasting, Q1 included a full quarter of Springfield earnings but only 18 days of financing costs associated with the convertible preferred offering which closed on March 14.

This quarter, we have also provided our estimate of distribution coverage if we include expected reimbursements under our business interruption insurance policy. Our estimate of potential recoveries for the quarter is $11 million to $15 million. We then took the midpoint of this range and added it to distributable cash flow and divided that sum by total distributions. Using this methodology, the resulting ratio was 1.29 times.

We believe this supplemental ratio approximates what coverage would be if we were able to record accruals for our estimated recoveries. We will continue to provide this supplemental information every quarter until our business interruption claim is settled.

Now, I'll hand it back to Don.

Thanks, Ben. Our 2016 outlook is unchanged from what we provided in February, including all guidance related to the timing of our major capital projects. Note this outlook does not include the effect of any potential future acquisitions. Any acquisitions we pursue would be additive to this outlook. We would update guidance consistent with our past practice.

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

(Operator Instructions)

Our first question comes from Kristina Kazarian of Deutsche Bank.

Hey, guys, and happy birthday, Ben. I know that, given pricing is really volatile it's hard to have an outlook on volumes for this year and next, but can you guys talk regionally -- DJ, Eagle Ford, and then, easier, Delaware -- about what you guys are watching for and what price inflection points, where you see or get more comfort around volume growth go forward?

Kristina, this is Don. If you look at the portfolio, there's really only three places that've had any significant activity in recent past, that being South Texas, West Texas, and the DJ. Everything is driven by commodity prices and rig counts. That's what we focus on. I don't think we're going to see a whole lot of activity anywhere until you see an uptick in commodity prices from here, with the exception of West Texas.

And then is there a crude price inflection point? I've heard people generally talk more around like $50 range. Could you just tell me what your thoughts are on where you guys are thinking volumes get stronger?

It's hard to tell because all these plays -- and I think Anadarko talked about it yesterday -- these plays aren't uniform. You have some portions of the plays, specifically to West Texas, that are a lot gassier than they are crude impact. So, it really does depend on where they stand up the rigs and where people have acreage. For us to forecast commodity prices doesn't seem like something that seems to be in our wheelhouse. We're just waiting to see where capital gets deployed and where rigs are stood up.

Kristina, the only thing I'll add to that is some of our largest producers, as I said, it's not only a price decision. They will need to see price plus stability on the demand side.

That's helpful.

Yes. It's not just a tick in the prop month contract.

Okay. And then a follow-up for me. I know you reiterated guidance in the press release. You still have two plants that are coming online in the near term that are going to drive positive cash flow. Should I think about the reiteration of guidance as you guys just being prudent and waiting for one of these assets to come on line, or am I missing something here?

Kristina, it's Ben again. You're not missing anything. I think that's exactly how we're thinking about it. It's just in the spirit of prudence we didn't do anything after first quarter.

Perfect. Thanks, guys, I appreciate the updates.

Our next question comes from Brandon Blossman of Tudor, Pickering, Holt & Co.

Good morning, gentlemen. I'm going to ask both of those questions in a slightly different way. One, a volume question but specifically for Ramsey III, and then IV and V, how do you see those ramping over time? And then, for Ramsey III, online now but partial service. Just mechanically what does that mean?

Basically, Brandon, it's Ramsey III is running about 125 million a day through it today. That's driven by the amount of gas that we can aggregate in the field that fits the plant without us having our front end operational. So that really is the driver.

Ram IV is mechanically complete and dried out. We're just waiting for the completion of our slug catcher and the start up of the [aiming] plant, which we expect that to happen around the end of this month, and we'll start commissioning from there. So, that gives you a pretty clear line of sight to Ramsey III and IV because you'll be able to bring more volumes back into III as the front end goes into service. And then you're really down to the stabilizer and Ram V being complete and start up of that in the third quarter.

Okay, perfect. That's what I was looking for. And then, relative to where you were full year -- or where you are full-year 2016 guidance, was Q1 an upside surprise? And was that driven by DJ and Marcellus volumes or something else?

No, I wouldn't say it was a material surprise from our own internal expectations.

Okay, that's it for me then. Thank you.

Our next question comes from Jeremy Tonet of JPMorgan.

Happy birthday, Ben. I think the good questions have been asked so far so I'm going to try something a little bit different, more of a generic as far as what you're seeing in the industry out there in M&A opportunities and how you think about those these days, and if the bid-ask spread has come in or it's still a matter of you have a great opportunity set in front of you as far as organic growth and dropdowns from APC, so not really much of a need to look into that market right now. Thanks.

Jeremy, our past discipline hasn't changed. We try to look at all transactions that we think that make sense at WES. What you've seen is probably more focused in the industry, I think everybody recognizes, around restructuring. The M&A you've seen has been driven a lot by balance sheet clean up. And where we struggle with some of those assets, it's not necessarily the value but the quality of the customer you ended up with after the transaction.

So, I think you'll see increased M&A. I think you'll see it in the back half of this year. Things seem to be setting up that way so that's how we see it. We'll continue to be engaged in the process and look for the assets that we think fit our model.

And then, you're right, we have organic growth. We're very fortunate to have organic growth in West Texas and good sustainable growth long term in the DJ, as well, and still inventory at APC. So, that's how we see the market today.

Jeremy, the one thing that I'll remind you is that the market continues to be awash in private capital. We used that to our advantage with the convertibles for last quarter but that's also bidding up asset prices for the assets that have been clearing.

That makes sense. Thanks for the color.

Our next question comes from John Edwards of Credit Suisse.

Happy birthday, Ben. Maybe you mentioned this and I just missed it and my brain zoned off. Did you say what the ramp-up expectation was for the Ramsey plants coming on? You may have said and I just missed it, if you don't mind repeating that.

John, let me walk you through the stack. Ramsey III is a 200-million-a-day plant, so it's running 125 million. Obviously it will move up to 200 million with the completion of our front-end facilities. Ramsey IV is a 200-million-a-day plant, so that adds another 200 million to it, as well. So, that gets you to 400 million.

Ramsey V is another 200 million that we have scheduled to go into service end of the third quarter. It gets you to another 600 million. And then it takes you back to Ramsey II, which was the plant that had the most damage to it with the incident in December. So, it will be the last train we bring on in fourth quarter this year.

Okay. And then, you mentioned in your opening comments about margin being strong. Is it stronger in one area over another? Or just any granularity. And that's all I had.

Yes, John, this is Ben. The key driver for gross margin in the quarter is the addition of Springfield. Springfield is both a gas system and an oil system. And for both of those systems the margin on each is higher than our portfolio average. So, it's bringing both the gas assets and the crude NGL asset gross margin up.

Okay, great. Thank you.

Our next question comes from Selman Akyol of Stifel.

Thank you, good morning, congratulations. I just wanted to follow-up on the margin question there. With Springfield being located down in the Eagle Ford and not a lot of additional drilling going on there, should we expect to see these margins taper through the rest of the year if there's not additional rigs and additional volumes down there? Or should we look at this now as a low for the year?

I think you're on to something. One of the things that changes gross margin over time if there's not an acquisition is the throughput mix. Springfield is a higher-than-average gross margin asset that, as we said last quarter, is expected to decline into 2017. So that's going to impact the throughput mix. I'd also ask that you keep in mind that we had no Ramsey this quarter, and Ramsey is also higher than portfolio average. So, as that comes back that's going to offset that impact a little bit.

All right. And then, longer term, as you think about your coverage, and certainly on an adjusted basis at 1.3 times, is there -- what's the right coverage ratio for WES longer term?

Certainly if it were to go below 1.1 on a full-year basis we would get nervous and feel the need to inform people if that ever should happen. I don't believe it ever has for a full year. And that's -- our guidance is unchanged, 10% growth at WES with no less than a 1.1 coverage.

All right, thank you very much.

Our next question comes from Helen Ryoo of Barclays.

Thank you, good morning. I just wanted to get an update on the drop-down asset. Could you maybe talk about -- you still have quite a bit of discrete assets at the Anadarko level. Could you maybe talk a little bit about how those assets are performing, where you're still seeing growth in this environment versus maybe some of the assets may be declining? And then, just in terms of your updated thoughts on what would dictate the timing and the order of what to expect as these assets come down to Western Gas.

Sure. And nice try on the order question. (laughter) But I'll answer on the rest. Run rate EBITDA we've said is in the $150 million to $200 million range on a full-year run-rate basis right now. That's post-Springfield. A subset of that is pretty immature. You have Saddlehorn Pipeline that hasn't come on line yet, you have Panola Pipeline that hasn't come on line yet.

I would say the highest growth in what's left are on the crude systems. You still have all the crude system in West Texas and the DJ still sitting in Anadarko. You have an additional plant still sitting in Anadarko. So there's definitely -- because of the immaturity of some of that portfolio, there's a segment of that portfolio that's growing faster than WES is just because it's so young.

Helen, another way just to cut the information is, if you think about what Ben mentioned, a lot of your assets are still in the DJ and the Delaware Basin. You have the Wattenberg plant, you have the equity plants in West Texas. If you look at it by region, you still have a portion of that portfolio that's in West Texas and DJ, and we think that's a good place to be, as well.

That's very helpful. And then, just order of magnitude, how much is Anadarko spending this year to -- on these midstream assets that are being developed at this point?

If you look at their capital program from their investor book they have this midstream and other wedge, which looks like it's around $200 million.

$200 million. Okay, great. Thank you very much.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Thank you. I'd like to thank everyone for joining us today and for your interest in western Gas. And we look forward to speaking with you again soon. Have a good day.

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