Western Midstream Partners LP (WES) 2016 Q2 法說會逐字稿

Good day and welcome to the Western Gas second-quarter 2016 conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Jon VandenBrand, Director of Investor Relations.

Thank you. I'm glad you could join us today for Western Gas' second-quarter 2016 conference call.

I would 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. I would encourage you to read our full disclosure on forward-looking statements as well as the non-GAAP reconciliations that are attached to last night's earnings release and to the slides that we will reference on this call.

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

Good morning, everyone. Thank you for joining us today.

Last night we announced our second-quarter results for 2016. Our quarter was highlighted by the return of Ramsey III to full service and the completion of Ramsey IV. Additionally, we successfully accessed the fixed income market to lock in a very attractive cost-of-debt capital through our issuance of $500 million of 4.65% 10-year notes.

As previously announced, we raised the WES quarterly distribution to $0.83 per unit, which is an 11% increase over the second quarter of last year. We also raised the WGP quarterly distribution to $0.43375 per unit, which is a 19% increase over the second quarter of last year.

Turning to our quarterly results, we reported adjusted EBITDA of $250.6 million and distributable cash flow of $199.3 million demonstrating another quarter of excellent performance. We delivered a healthy coverage ratio of 1.22 times, which includes the receipt of $2.6 million of business interruption proceeds in the second quarter. If we were able to include all the expected business interruption recoveries attributable to second quarter, our coverage ratio would've been 1.29 times.

To date, we estimate our total business interruption loss to be $21 million to $31 million. In addition to the $2.6 million received in the second quarter, we received $13.7 million in July, which will be included in our third-quarter adjusted EBITDA.

The drivers behind WES' first-quarter results were sequential natural gas through quick growth at the DJ, Delaware and Eagle Ford assets as well as our Granger Strata plant, partially offset by declines at Marcellus and Chipeta. Our growth in crude and natural gas liquid throughput was largely driven by additional volumes flowing through the Mont Belvieu factionators.

Our gross margin per Mcf for natural gas assets of $0.84 was $0.04 higher than the first quarter, primarily driven by a significant sequential increase at our DBM complex as Ramsey came back online. Our gross margin per barrel for crude and NGL assets of $2.03 was $0.04 lower than the first quarter, driven by changes in our throughput mix.

I am pleased to report that Ramsey V and the related facilities both on schedule to be placed in service no later than the end of the third quarter. We continue to evaluate when we will start construction on Ramsey VI, and now believe the earliest the plant will be online is in the first quarter of 2018.

Turning to our 2016 outlook, we are increasing our full-year adjusted EBITDA expectation to $930 million to $970 million as a result of our strong year-to-date performance. While there is a possibility of yet another partial business interruption payment 2016, our updated guidance assumes no additional insurance proceeds this year beyond what we received in July.

We are also raising our total capital expenditures range to $490 million to $530 million as a result of increased capital requirements associated with incremental activity in the Delaware Basin. The portfolios excellent performance year to date has reduced WES' need for additional equity, and any future WES issuances in 2016 would therefore be strictly opportunistic. WGP's 2016 distribution growth rate will be 19% to 21% depending on the size and timing of additional WES equity issuances if any.

Finally, as is customary during our second-quarter earnings call we will reflect back on WES' growth and successful business model. Over the past eight years WES has at times experienced economic uncertainly, operational issues, incredibly rare weather events and multiple commodity price cycles, including the one we're in now. Yet through it all we have been able to generate the results our investors expected and we're extremely proud of this accomplishment.

WES just delivered is 29th consecutive quarterly distribution increase and our annual EBITDA has grown to almost $1 billion. This performance across multiple cycles demonstrates that WES has a unique combination of an outstanding sponsor, scale and a resilient portfolio of quality assets that continue to perform at a very high level. We truly appreciate our long-term investors' continued support.

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

(Operator Instructions)

Jeremy Tonet, JPMorgan.

This is Jeremy Tonet from JPMorgan. Good morning. Congratulations on the really strong quarter.

Thanks, Jeremy.

I was just wondering if you could help walk us through, a little bit, some of the drivers for the increased Q2 over Q1 this year. Springfield obviously was a part of the step-up, but you guys really kind of beat us to the upside. So just wondering if you could break down any of the other -- the larger components to [beat]?

Systemically -- this is Ben, Jeremy. Systemically its growth in the DJ, Delaware and Eagle Ford, everything else kind of flat to declining. The real growth is, obviously, the Ramsey complex.

Sequentially you had virtually no volumes going through it in the first. Now we're back in business in the second, and what you will see not only is the increase in volumes but obviously an increase in gross margin per Mcf sequentially.

That's great. That leads to next question as far as we've seen the margin per unit mix shift really kind of lift, and I'm guessing that this is due to the makeshift changing from dry to wet gas. I'm just wondering, the unit margin we saw in the quarter, is that more of a steady rate, or is there more mix shift where you can get a uplift quarter over quarter for the rate you're getting there?

Well, you are correct, Jeremy, that the biggest driver of our blended gross margin per Mcf is our throughput mix. I will remind you that we previously guided that we do expect declines at Springfield, and so that's a very high margin asset that we do expect to start declining next quarter. However, keep in mind that probably the biggest driver this quarter was that increase in margin per Mcf at Ramsey.

When you have virtually no volumes going through a plant and you're still incurring cost you actually have negative margins, right? So that swung from negative to positive. And as we continue to ramp up the plant, hopefully, that margin will even improve a little bit.

So when you look at our 2Q versus 1Q, Ramsey is the key driver. When you move out beyond that is going to really be throughput mix. Hopefully, you'll see some benefit at Ramsey, but you will see declines in Springfield.

Great. Thanks for that. Just looking at the guidance that you guys outlied there, it seems like the back half of 2016 implies a lower run rate than if you just annualized 2Q. Appreciate that there's going to be some declines in Springfield as you noted, but it seems like there's a lot of action with the Ramsey ramp up there.

Just wondering, what drives the lower end versus the higher end? Is there a lot of conservatism baked in here?

We did try to be prudent when setting the initial range. When we looked at this year, we were trying to predict the timing of the start-up of two processing planes and two new processing planes coming online that were damaged, and so we needed to have a lot of conservatism since the timing will impact our results. So far, knock on wood, things have been going as planned.

Between now and year end, I think you are right, drivers are kind of timing and speed of Ramsey volumes, significance of Springfield declines. Obviously, we saw growth in Springfield this quarter, as Anadarko got efficient with this capital brought 40 wells online which is a real benefit to us. So those are the things that I think could really drive low end versus high end of the range.

That's helpful. Thank you for all the color. One very last one if I could?

I'm just wondering with regards to all the activity in the Permian and Delaware, I keep hearing a lot about growth there with Anadarko and others. I'm just wondering if you could provide any thoughts for us as far as what that could mean on the water business opportunities that you guys see, having a leading position in the area that you operate there.

Jeremy, this is Don. Obviously, we look at the water business as a perfect bolt-on to our existing midstream business in gas and crude. If you think about it today, Anadarko is already in the water business.

They are having to dispose the barrels from the wells being produce today, and so that business exists within APC, it's just not been started in WES. We're in the middle of the process of putting that business model together and getting it in place where we can go put out and offer additional service to the producers that are behind our existing assets today. As you mentioned, obviously, having APC and being able to build infrastructure on their behalf as well as third parties is a huge benefit to us.

Great. That's it for me. Thank you very much.

You're welcome, Jeremy. Thank you.

Kristina Kazarian, Deutsche Bank.

Hey, guys, how are you?

Morning.

Quick question on my side. Don, I know the press really talked about the CapEx increase and you mentioned increased activity associated with the Delaware, can you maybe talk and give a little more color around what you're seeing here, any particulars or thoughts?

I think there's a couple things, Kristina, that at least we've looked at as far as how we've continued to expend capital in West Texas. One is, as Anadarko mentioned on our call today, they have six rigs standing up. So that's an activity level that we continue to put midstream gathering and compression infrastructure in for, as well as we've been successful in third-party side of the business and signed some new contracts out there. So along with those new contracts come CapEx. So those of really been our drivers as far as the increased CapEx in West Texas so far.

Then on the third-party side, thoughts on further being able to capture this business? Can we be expecting more here or --?

We hope so.

All right.

Not to -- it's very competitive out there. We think our footprint and the quality of infrastructure we have as well as our relationships and performance even with the incident at Ramsey give us a distinct advantage. So we continue to pursue that business and continue to have a very high level of success.

Perfect. Can you guys provide an update and status of the Delaware Basin express pipeline? Remind me what I should be thinking here in terms of timing and general thoughts.

I'll start with how we look at the project. We still believe -- we collectively -- I think that's WES, Anadarko and the producers out in West Texas that Waha is can be a superior pricing hub and a quality market have interconnectivity with. And so, to us, as we said before, it's not if, it's when.

Right now, in the short term perspective, producers have ample capacity to move the gas, so there's no short-term issues that are driving long-term decisions. The long-term decisions are really being driven on strategic development of the resources.

So if you think about kind of the process producers go through, I think that the key is going to be when they set their 2017 budgets and then they're going to start forecasting from there, which is going to be the first time in quite some time that they have had a higher price. We believe they have a higher price than they did the prior the year, and we think that's going to start driving the activity in the decisions. In the meantime, we continue to aggressively work on the project.

Perfect. One last quick housekeeping item for me. Can you talk about the remaining timing -- or the timing of the remaining payments you're expecting from the business interruption insurance? I know you gave me a July number, it looks like. But how do I think about the remainder of third Q, and if I am expecting anything in fourth Q?

Okay. This is Ben. As Don stated in his remarks, we are not putting any more payments in the guidance above and beyond what we've received in June and July. It's really hard to predict the timing of actually receiving a cash payment.

I think an additional payment, whether it's a full payment or partial, is possible. Most likely in the fourth, but I wouldn't be surprised if that got pushed into the first quarter either. It's almost a 50/50 call at this point.

As we mentioned, our total claim to date is $21 million to $30 million, is the range. It's possible that might increase a little bit in the third quarter; we will see about that. But it would be the delta between the $16.3 million we've received and whatever that final claim number is, is what we would expect at a later date.

Perfect. Thanks for the color there. Nice job on volumes also, guys.

Thank you.

Brandon Blossman, Tudor, Pickering, Holt & Company.

Good morning, guys.

Morning, Brandon.

Let me start with a CapEx question. The $40 million of incremental CapEx, is that mostly related to the third-party contracts or is that kind of the shared between Anadarko and third party?

It's shared.

Okay. Related to that, Don, you've suggested and others have as well that Delaware, in particular, is getting to be a pretty competitive space for midstream. Are you seeing a per unit margin erosion, or is it just a little bit more work to capture that incremental business?

We haven't seen the margin erosion. It just people trying to decide if they want to go out and put infrastructure in place without contracts. So you have that as a backdrop, but you continue to see -- producers -- understand that when you look at WES we have over $3 billion invested, just ourselves, in West Texas.

We are investment grade and they can see that we have a sustainable business model out there, and that really has helped us significantly in differentiating ourselves from some of the other competitors.

Okay. That sounds like good news, and that's useful color. And then I'll just -- final question, more of an open question.

You guys, operationally, look like you're pretty close to nailing all of the goals for 2016. You got your Springfield drop done early, or late last year, so full-year 2016 almost, in terms of EBITDA growth there. Is there any other goals that you have on your plate for 2016 that you are looking to execute against, or are we turning our attention to 2017?

Well, I think we're a little more superstitious than you, Brandon, so I'm not sure you never hear us say that we've nailed it. Obviously, we're feeling very good about 2016, given that we've adjusted our outlook. Around this time we will be in the budgeting process pretty soon and our focus will be on next year.

Okay. Fair enough. That's it for me. Thanks, guys.

Selman Akyol, Stifel.

Thank you, kindly. Good morning, guys.

Morning, Selman.

Couple quick questions here. In the Anadarko call this morning they talked about record production up in the DJ, LOE expense down by 15%. Are you guys seeing an acceleration there?

What we're seeing, Selman -- this is Don. We are the beneficiary of Anadarko continuing to increase their already, what we think, industry standard performance, from a high level to even a higher level. They're basically getting better performance out of the wells and the capital and so we are the beneficiary of that.

As far as any other forecast of increase, I think it will be dependent on what APC does. As they said earlier, they feel like they have a clear line of sight to a $60 crude market. With that, as they generate incremental cash from divestitures in that commodity strip, it will be deployed in the DJ and the Delaware as well as the Gulf of Mexico.

So we're cautiously optimistic of those events, but feel good about our position.

Okay. Previously, when we talked about Springfield, you mentioned that it was aided by Anadarko bringing on 40 wells. Can you just discuss sort of what your assumption in guidance there for the remainder of the year what they do within the Eagle Ford?

In the guidance that we gave at the time of the drop, which was the multiple of 2016 EBITDA, 2017 EBITDA, et cetera, we assume that they would complete a few more wells and then activity with stop and then activity would stop and you would start decline. That's what's still in their model.

Okay. Appreciate the color there.

Anything additional that they do will be upside to our forecast.

Got you. I know you talked about starting in the Delaware third-party -- trying to sign up additional third parties there. And I know they're partnered with Shell down there.

Can you say if that is one of the potentials that you're dealing with down there? (multiple speakers) -- do they have their own gathering processing? Can they --?

They do not. They utilize third parties, mainly ourselves. We have existing contracts with Shell. We're always continuing to try to improve and extend our commercial relationship with them, and now it's not any different than before.

All right. Thank you for all the color.

John Edwards, Credit Suisse.

Good morning, everybody. Congrats on a nice quarter. Don, you were talking about in your prepared remarks about there's a Ramsey VI on the way, so naturally question given the opportunity to expand, how many Ramseys do you see coming?

That's hard to forecast on a good day. Here is how we kind of look at it today. As Ben stated, we've seen increased in volumes as we brought Ramsey III and IV up, and we will see increased volumes as V comes on.

Our thought is relative, specifically, to Ramsey VI, and I mentioned it in the remarks, we are looking at possibly Q1 2018. The thought around that is, is you will have producers starting to set their capital budgets for 2017. They will start giving us new and updated forecasts.

You remember from previous conversations, we can put that plant in service in roughly 12 months from when we start construction. So we think, relative to the sequential line we are looking at of installing plants at Ramsey that, that will be the right time to look at it, which will bring on an incremental [term B] today in the first quarter of 2018. Beyond that, it really is a function of what commodity strip does and do the producers continue to see improved performance across resource development.

Okay. Thank you for that. Just tacking back to the drivers behind the higher CapEx. I just want to ask about it in a little different way because you've already made some comments there.

And that is, that the Anadarko CapEx was actually down for Q2 toward the -- I think either at or below the low end of their guidance, and then they've left the 2016 guidance unchanged. But you've raised your guidance. Can you just give us a contextual comment regarding that against what Anadarko is doing?

I don't think Anadarko is the only producer that is able to do more with less. Our CapEx at the WES level is driven by the volumes we get. As we get incremental volumes relative to our forecast, whether it's from Anadarko or third parties, that means more capital for us, hooking them up and maybe additional gathering on a trunk line, et cetera.

And so more volumes for us, more capital. It's that simple.

Okay. Great. All right. Can you explain a little -- I mean you have some footnotes and things, and there is -- on the accounting on the lower interest expense, I think it was down sequentially 60%.

Then there was this add-back comment. Can you just re-enlighten us? O if it's too opaque or detailed, we can take it off-line, but I just thought I'd ask the question.

I'd rather talk about online; I think it's an important question, and it deserves an explanation. Big picture, interest expense would have been $28.3 million, and then we had a $15.4 million reduction to that figure which is our revision and accretion expense. So what does that relate to?

It all relates to our early 2015 drop down of Delaware Basin joint venture assets. Where if you remember the structure that we utilized, we don't make a payment until 2020. So we have an estimated payment on the books that we thought we were going to make in 2020, and the present value of that is booked as a liability today.

Now our estimate is based on forecasts. In case you don't remember, it's based on a formula, which is 8 times the average of 2018 and 2019 EBITDA less the aggregate CapEx you spend between early 2015 and February of 2020. So all the inputs to the formula our forecast driven.

As those variables change, that liability is going to change. First and most importantly, the important thing to remember is that this is going to change multiple times between now and 2020 because all forecasts change as you get new information from your customers.

So what happened this time that caused the liability to go down? Very simply the new forecast we received actually had a bigger ramp in the back half of the agreement, so we actually had steeper volumetric growth in the 2020 to 2025 range.

That has two impacts on the formula, as I described. One, more capital, especially in 2018 through 2020 to get that steeper ramp. But also two, if you're familiar with how cost of service agreements were, you will be getting a slightly lower rate in those earlier years because you're getting more volume in those outer years, which gets you to your agreed-upon return on invested capital.

So when you put all that together, the net effect on our deferred purchase price allocation that's gone down. And I will stress once again that this will not be the last time you see adjustments in that estimate because it's all forecast driven. Was that helpful?

Yes, it was very helpful. That reminded me, you had warned us about that. Typically, I had forgotten about that, but you had warned as it was going to come.

So I guess logically then this is going to go up, this is going to go down, it just depends on the data inputs that you're going to be given.

That's correct, John.

Okay. Great. Are there any updates on fixed price extension agreements with Anadarko? It could be nothing, but I thought I'd ask to be thorough here.

No, but in fairness those decisions are always made in the quarter before they expire. So it's just a normal course of business.

Okay. Great. Anything on counterparty risk, any updates there?

I think our counterparty risk is in line with what we disclosed -- I believe it was last quarter, two quarters ago, where we showed the credit party -- the credit rating breakdown of our major upstream customers. No big changes.

Okay. Great. All right. Thank you very much.

Richard Verdi, Ladenburg.

Hi. Thank you for taking my call and nice quarter. I wanted to follow up on something. Earlier when addressing one of the prior caller's inquiries, I think it was [then] maybe. You had mentioned that it was gross margin per Mcf was up because of the Springfield and bringing Ramsey online where the revenue is now covering the cost.

But on the throughput revenue per Mcf, can you please share with me what drove that in Q2? Because it meaningfully outperformed my estimate and was up nicely sequentially and year over year, and I'm wondering if that's sustainable moving forward for modeling purposes?

Okay. Just to be clear, are you referring to the gross margin for natural gas assets of $0.84? Is that your question?

No, throughput revenue per Mcf is $1.22. You talked about gross margins earlier. I'm looking at $1.22 for throughput revenue per Mcf.

Okay. Revenue per Mcf, what you must have calculated on your own, is driven by changes in the mix.

You get more revenue per Mcf in wet gas areas than you do dry gas areas because you're providing more services. You're providing gathering and processing as opposed to just gathering. The state of the market right now is that if you have growth anywhere, it's in wet gas areas because people are drilling for crude.

Therefore, that should trend up over time because you're just seeing your higher revenue assets grow, such as us in the DJ and the Delaware, and our lower revenue per Mcf assets decline. I would caution you that revenue can be misleading, and I would encourage you to focus on gross margin per Mcf, only because that seems to be more indicative of profitability of those Mcfs.

Okay. Great. Thank you. That's great color, Ben. Just one last question, it's also kind of a follow up on one of the earlier caller's inquiries, on the water business. That can be something that's really significant.

There's a lot of avenues that could be played. You can dispose of the water, you could either gather the water, treat it and then transport it back to Anadarko. Could you maybe just give us a little bit of color of what you guys are thinking here, if you were to move down that -- into that field, where would you start and would you stay there?

Or would it be something that could really evolve into gathering water, treating and then bringing it back, something big over the next 10 years maybe?

Richard, the water business is still in very infant stage in West Texas. How we have looked at our initial steps is, we are going to look at disposing of produced water. So we do not see going into the freshwater delivery businesses, it's going to be disposal of produced water, which will also have some treatment component to it but it won't be significant.

It really will be driven by transportation disposal, and so that will be our first step. Then we will see where the market and the opportunities take us from there.

So would it be fair maybe, Don, if I could take that as if that business is successful then we're going to look to try to really build upon that and that makes -- further exploit that opportunity?

You'd like to think so, Richard. (laughter) That's always our objective, to find commercial opportunities that we think we are pretty good at and expand on them, and so we don't see water being an exception to that rule.

Okay. Great. Thank you for the time, guys, and congrats again on a good quarter.

Thank you.

Helen Ryoo, Barclays.

Thank you. Just a couple of quick questions. Related to your explanation on the DB JV, the change in -- for the forecasted growth on that asset, just wondering, what's your assumptions -- based on the new forecast on that asset, what do you expect to spend going forward?

I think at the time of the drop down you had indicated some spending opportunity every year. I wonder if that has changed quite a bit, given the more backend loaded nature of that growth between now and let's say 2018, 2019 time frame, what do you see CapEx there?

I think relative to the initial forecast, Helen, remember that initial forecast was early 2015. We're probably spending a little less in 2016, given what happened in commodity prices earlier this year, but more now in the 2018, 2019, 2020. So that aggregate CapEx over the five years has gone up.

Right here, right now that aggravated CapEx increases about $100 million over the five-year period. But I can't stress this enough, it's going to keep changing, just because it's forecast driven.

Okay. Great. So the aggregate number is up, but in terms of the timing is much more closer to 2020 versus near-term?

That's right.

Okay. Now Anadarko has six rigs running in Delaware, is it all behind your asset, and is there anything running behind DB JV at this point?

They're all behind DB JV.

They are all behind DB JV or Haley, all six.

So Ramsey is all third-party then?

Yes.

Okay. Got it.

There is third-party behind DB JV as well.

Okay. Great. On the Springfield, I guess when you announced that acquisition, the [MVC] was set at 75%. Are you running at that level currently?

We're well above it, because we're it basically forecasted volumes and the MVC was set at 75% of forecasted volumes.

Okay. Got it. So that's why there's some downside. But I guess the downside, there is a protection at some point.

That's correct.

Okay. Great Then just lastly, big picture. When I think about your appetite for M&A, I guess you have some JV assets -- JV interest that is owned by third parties.

When you think about a third-party asset acquisitions versus buying in your JV interest, is that -- do you have as much appetite in doing some of that versus just going out and buying a third-party asset?

Helen, to us, every asset transaction starts with the thing, you have got to have a willing seller. So we'll look for the willing seller, whether it's in a JV asset or in third-party and determine if fits the portfolio and if we think it's a good solid accretive acquisition for us.

Thank you very much.

Thank you.

David Amoss, Heikkinen Energy Advisors.

Morning, guys. Trying to get a feel for the ramp in EBITDA at Ramsey over the next couple of quarters, so a month of train IV in the second quarter and then train V coming on in the third quarter. If we look at 4Q 2016 at sort of the run rate, or when all of your capacity is online, can you talk about the ramp in EBITDA between 2Q and 4Q for that facility?

You're just going to have to wait and see, David. The reason we have such a large range in our outlook is exactly that question. When you turn a plant online, you don't know the volumes you are going to get until you actually get them. And so, as we get closer to the date maybe we can give you a little more color.

Okay. Fair enough. On the Springfield asset, given that Anadarko brought on 40 wells in the second quarter, it seems like -- in the guidance that, that's a lot of the activity that you have model for this year. Is there a base decline assumption that you can give us, if say that Anadarko was not to really have any more activity for the rest of the year?

Just refer you to the guidance we already gave. When you look at the guidance we gave in terms of multiples of 2016 and 2017 purchase price, you have a good idea of the declines.

Okay. Thank you very much. Appreciate it.

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

I would like to thank everyone for joining us today.

I'd also like to welcome Jon VandenBrand to the team at WES. As far as you see him, this is his foray into WES, but he's been associated with this asset, specifically in West Texas for quite some time. We talked about some of our commercial successes in West Texas, they're directly correlated to Jon's previous job.

With that, we all look forward to seeing you again soon. Thank you.

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