Western Midstream Partners LP (WES) 2016 Q3 法說會逐字稿

Good morning and welcome to the Western Gas Partners third-quarter 2016 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to Jon VandenBrand, Director of Investor Relation. Please go ahead.

Thank you. I am glad you could join us today for Western Gas third-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 your full disclosure on forward-looking statements as well as the non-GAAP reconciliations that are attached to last nights 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 it up for Q&A with Don and the rest of the Executive team. Don?

Thank, Jon. Good morning, everyone, and thank you for joining us today. Last night, we announced our third-quarter results for 2016. Our strong quarter was highlighted by continued growth in Delaware Basin where Ramsey IV is currently running at capacity and Ramsey V was put into service this past week.

Other recent highlights include beginning the buildout of our first two Delaware Basin water disposal systems and our successful issuance of $200 million of 2044 senior notes at a very attractive yield of maturity of 5.3%. As previously announced, we raised the WES quarterly distribution to $0.845 per unit, which is a 9% increase over the third quarter of last year and our 30th consecutive quarterly increased. We also raised the WGP quarterly distribution to $0.4475 per unit, which is a 17% increase over the third quarter of last year.

Turning to our quarterly results, we reported record adjusted EBITDA and distributable cash flow of $278.2 million and $237.3 million respectively. Our strong coverage ratio of 1.42 times includes a $13.7 million of business interruption insurance proceeds received during the quarter. Please see the appendix to our slides for an updated summary of our business interruption insurance claim.

WES's third quarter results were driven by sequential natural gas throughput growth at the Delaware, Marcellus, Mountain Gas and DJ assets, partially offset by declines at Chipeta. Our gross margin per mcf for natural gas assets of $0.82 was $0.02 lower than second quarter due to increased volumes at lower margin systems, offset by significant margin improvement at our DBM complex.

Crude and NGL throughput decreased slightly as growth on the Texas Express Pipeline was offset by declines at the Mont Belvieu fractionators. Our crude and NGL margin increased by $0.17 to $2.20 per barrel as we received an additional distribution for the Mont Belvieu fractionators in September.

I would now like to take a moment and discuss WES's position in the Delaware Basin. Our Delaware Basin assets are the fastest growing in our portfolio and represent the overwhelming majority of the 2016 capital program. We believe our footprint, as outlined on slide 6, gives us a competitive advantage in providing integrated services to both Anadarko and third-party producers. When Ramsey II returns to service later this year, we will have 700 million cubic feet per day of operational processing capacity and we are now planning to have Ramsey VI in service in the fourth quarter of 2017.

The 2014 purchase of the Nuevo Midstream assets put us in a great position to serve the growing needs of the Delaware Basin producers. Since that time, our commercial operations and engineering teams have done a remarkable job of working with the original Nuevo producers as well as those we have since added. This work has resulted in us now having over 400 million cubic feet per day of third-party volume metric commitments along with significant acreage dedications in the basin. These commitments and dedications not only support our process and capacity additions, but also our pipeline system, which now consists of over 1,000 miles of pipe and over 200,000 horsepower of operating compression.

In addition to the robust third party activity in west Texas, Anadarko has continued to increase its rig count in the Delaware Basin, and is currently running eight rigs. Anadarko is forecasting over 130,000 net barrels of oil production per day by 2021, and we believe this will result in over 500 million cubic feet per day of natural gas production and in excess of 500,000 barrels per day of produced water as shown on slide 7.

As water volumes increase in the basin, significant additional pipeline infrastructure will be needed. We believe this activity will create a substantial opportunity for WES, and as previously noted, we have started working on our first two water disposal systems and expect to spend between $20 million and $25 million on them in 2016. Please note that WES will only provide water disposal services and does not intend to be in the fresh water delivery business.

Now, let's turn to our updated 2016 outlook. As you saw in yesterday's release, we are increasing our full year adjusted EBITDA guidance range to $980 million to $1 billion as a result of our strong year-to-date performance. Our 2016 outlook also reflects the recent divesture of our Hugoton assets, which we sold in conjunction with Anadarko's sale of the associated upstream assets. Please note that Hugoton only represented approximately 1% of our run-rate adjusted EBITDA.

In line with our improved performance, we are revising our maintenance CapEx guidance range to 6% to 8% of adjusted EBITDA. Also, because WES has not needed to issue any additional common units this year, WGP's full year distribution growth is now forecasted to be 19%.

We are currently working on our 2017 budget and look forward to sharing it with you when we release our 2016 fourth quarter and full-year results. We anticipate that our 2017 capital budget will continue to be highly focused on the Delaware and DJ Basins with those assets together estimated to represent over 90% of our 2017 capital.

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

(Operator Instructions)

Kristina Kazarian, Deutsche Bank.

Good morning, guys.

Good morning, Kristina.

So a quick question, thanks for the announcement this morning on starting work on a water disposal system. So it sounds like two systems, $20 million to $25 million in 2016. Can you maybe talk about -- great announcement for this year -- can you talk about longer-term opportunity and how you guys are thinking about framing that up as well, meaning looking into 2017?

Kristina, as we said in the script, we think there's a significant amount of activity that is going to be around the water disposal business in west Texas, and as more and more infrastructure is put in relative to pipe versus trucks, we think that will create quite an opportunity for WES. I think we will be able to give you a lot better guidance as we see the producers determine what their 2017 CapEx budgets look like, and so when we give you our guidance for 2017, we will probably be able to give you a lot more color around that.

Okay. And then, these two sites, would this just be able to primarily help out on APC side, or how do I think about capacity out of these two sites?

Sure. They're solely for APCs and their working interest owners.

Perfect. And then my follow-up is, we've had a lot of conversations about residue gas takeaway within the region as well, and the growing needs for that. Can you maybe give me an update on what you guys are thinking in terms of the pipeline you were thinking about doing, and any incremental color you have there?

Okay. Kristina, it is kind of the same story as we've told in the past. How we look at it is we know, ourselves along with the producers in Reeves and Loving county in the western Delaware Basin, that we need more residue takeaway.

We also recognize that Waha is a premium natural gas hub for North America. So those two facts should generate a project. We're going to go through the same process that we have continued to work on since 2015, which is to evaluate interest, and we think that will be able to happen in the first quarter of 2017.

A lot of it will be not different from water where we see producers set up their 2017 CapEx, and then make a determination for exactly what they're going to need for residue takeaway. So our focus to try to have a project we can work with in early 2017.

Perfect. Thank you for the updates, and I am looking forward to 2017.

Jeremy Tonet, JPMorgan.

Good morning.

Morning, Jeremy.

Just wanted to touch base on the new guidance for 2016. It seems like it is implying a step down in 4Q, so I was just wondering if you could provide a little more color on what might be some of the drivers there?

Sure, Jeremy. Good morning, this is Ben. You're right. That does imply a sequential quarter over quarter decrease. I would say the two key drivers behind that are the lack of any additional BI, we don't expect to receive any more proceeds this year.

Then we saw a pretty decent pop in sequential volumes in the Marcellus, about 10% quarter over quarter. That had to do with some pricing dynamics in July, early August, and has since gone away. And so we are expecting that asset to go back into sequential decline.

That's helpful. Thanks. And then if I look a bit further out in the Delaware, great to see the Ramsey plant being pulled forward there, but just wondering, if there's need for further expansion, do you see that at Ramsey or do you see that at other locations? Do you see the possibility of creating a header system or any color you can provide there would be helpful?

Jeremy, as we've talked about in the past, and talked about even in today's script, we are moving forward with Ramsey VI. So when it is complete, that will give us 900 million a day of processing capacity at the Ramsey complex.

As we look forward beyond that capacity, we will build in another area other than the Ramsey plant. And we have worked -- if you think about when we bought the Nuevo system and how we've looked at it since the very beginning is, we wanted to have a hydraulic loop that allows to get back and forth across the river and to have appropriate interconnects with the facilities we're going to own and operate. So that loop is in place, so header loop, whatever phrase you want to use, I think we have already started that work. And then we will start looking towards doing an evaluation feed study for the next facility and where it is going to be located.

That's helpful. That's it for me. Thank you.

Thank, Jeremy.

Noah Lerner, Hartz Capital.

Good morning, everyone.

Good morning.

Just wondering if you could talk a little bit about Anadarko's plan or thinking about doing some asset divestitures that I have read about. And I am just curious as to what you might think the impact, good or bad, could be on Western Gas.

Sure. I will take a stab at that, Noah. I think Anadarko has been clear that there are some assets that are noncore to them that they're looking to divest.

Last year was a very good example of that, where they divested the upstream, behind our Dew/Pinnacle system and we chose to tag along with that. And we recently did that on the Hugoton system as well. I think if you were to get -- theoretically if they're doing anything besides some of our larger assets, we would be less likely to do that.

What we have divested has been more of noncore, a very small percentage of our EBITDA, and theoretically if they were to divest to a party for which that asset competed for capital more favorably than it did within Anadarko, that could be a real positive for WES. Anadarko has some wonderful asset that generate good economics on an absolute basis, but when you look at those economics relative to a DJ or Delaware, they just don't complete. So if that asset were to change hands with someone who thought it competed great with whatever was in that party's portfolio, that could be a real upside to our model.

So, you're feel would be -- and I am not trying to put words in your mouth, Ben, if there was a hypothetical divestment of their Eagle Ford acreage, more likely than not, you would hold on to the related infrastructure and that would be a good thing for WES and its unit holders?

I think that's a fair summary.

Okay. Great. Thank, guys.

Thank you.

Selman Akyol, Stifel Nicolaus.

Thank you. Good morning.

Good morning.

First of all as it relates to Ramsey VI, did APC take 100% of that capacity.

No, but they have stepped up in their capacity commitments to the Ramsey complex. So, they did not take 100%, but they are a significant portion of that capacity.

Okay. And then, on the two water disposal wells, what do you think the average daily volumes could be there? I guess what would be capacity there for those?

If you think about the hydraulics of disposal, you look at about -- the industry thought is around 30,000 barrels a day of injection, and so you will have three wells associated with these two sets of facilities.

And just to clarify some, it is not two wells. It is two systems.

I apologize.

And water throughput in the core part of the basin we're seeing water to crude volumes at about 4 to 1.

Okay. Helpful. Thank you. And then, didn't Anadarko say it was increasing the number of rigs it would be running in the Delaware going into next year? Moving it up from eight to --

They said they're going to add another one, up to nine, yesterday in their call.

Okay.

Between now and the end of 2016.

All right. I think that does it for me.

All right. Thanks.

John Edwards, Credit Suisse.

Good morning, everybody, and congrats on a great quarter. Just following up an earlier question on the water business potential, how should we think about the returns there in terms of how -- it sounds like they do compete well for capital within your hurdle rates.

Does it do a little better than your plants, about the same? If you can giver us any kind of insight there it would be helpful.

John, if you think about it, capital doesn't know what it is going to be deployed on. So we know that we have to manage a certain return on capital employed, adjusted for the amount of risk we're taking, and water is not going to be any different to that.

So it will be like the rest of your portfolio, you will have opportunities to increment your rate of return in certain areas, and there will be certain places where you will have less risk and lower return. So it is not going look a whole lot different than anything else in portfolio does.

In general, John, we're not interested in a project unless we can earn at least mid-teens unlevered on it.

Okay. And then, how do you -- I don't know the technology that well, how should we think about the risks? Is it similar to just a pipeline, similar to a gas plant operationally? Is it basically water disposal doesn't go down much? How should we think about that business?

John, it is kind of -- it is a loaded question, obviously. There's a difference in when you are managing volatile hydrocarbons versus disposal of a nonhydrocarbon fluid. So it is completely different, but you have different issue you deal with, whether corrosion or what you can do relative to injection rates and how you manage that.

So it is going to -- you are going to have regulatory risk around it like we do the rest of our business. So I see the risk being different, but not significant relative to the amount of risk to this business versus what we already do today.

Okay. That's helpful. And then, do you envision, in terms of potential, any change to the water ratios that you are speaking of?

I think you were saying it's about 4 to 1 in terms of barrels of water to barrels of crude? Is there -- do you see that staying constant, or could that move around?

Well, John, the 4 to 1 is basically everyone's looking at relative to Bone Springs and Avalon and Wolfcamp. So, as other reservoirs are developed, that ratio could change, and we will know at the time when they start developing the wells and we see the production from them. So for what we've seen in the field and what has been developed today, 4 to 1 seems to be a good ratio to use.

Okay. And then, just a little bit, what was behind the acceleration of Ramsey VI and then what -- how many more Ramsey's do you envision?

Ramsey VI will be the end, as I stated earlier, it will get us to 900 million a day. And we stated from the very beginning we were going to build Ramsey VI, it was just a function of when. And so when you saw the continued lower for longer model you wanted to make sure the producers were comfortable with their drilling programs and their CapEx in west Texas as we have seen that has been the case, and that allowed us to go ahead and move it back up in queue and get started with it based on the commitments we have.

And, John, since our last call, Anadarko has had a material acquisition which has freed up some free cash flow and has accelerated their needs for capacity as well.

Okay. Great. All right. Thanks, that's it for me.

Thank, John.

Charles Marshall, Capital One.

Hey, good morning, everyone.

Morning, Charles.

Sorry if I missed this, but in terms of going back to the water assets, can you tell us what the projected timing is to start receiving cash flows for the two system that are currently being developed?

It will be mid next year.

Okay. And then how should I think about the contracts with Anadarko? Is this purely a fee-based margin business? Will there be any minimum volumes associated with these contracts?

It will with same typical contract structure we look at. 10-years, it will be fee-based and it will have some volume commitments to it.

Okay. And the interim, do you anticipate any other logistical needs in terms of moving water ahead of the system? I.e. like trucking assets, et cetera, or will this strictly be a pipe business?

These two projects are strictly pipe. As we continue to build out our water infrastructure and look at -- start bringing third-parties into this portfolio, we may need trucking on the front, as an interim process to us getting our facilities in place to facilitate the contracts we're looking at, but it won't be a critical part of our business model.

Okay. That's it for me, guys. Thank you.

Thanks.

Jerren Holder, Goldman Sachs.

Hi, good morning. Just wanted to touch on the DJ Basin. Can you guys remind us of the processing capacity sharing agreement that you have and to the degree that expansions need to take place by either you or your partner, do you guys share in that as well?

Did you mean Delaware Basin?

DJ.

Well, we don't have a partner in the DJ. So, all the facilities are owned by us. We have, I will do the quick math.

In WES, we have a little over 700 million a day of cryo capacity and we have, call it, 150 million a day of refridge capacity. So just within WES, there's over 850 million a day in capacity that we own and operate. Then Anadarko has facilities, the Wattenberg plant, that is 200 million-plus an incremental 100 million refridge on the front end of it. So, we have -- the way our forecast sets up today, we believe between us and APC we have adequate processing capacity.

Okay. Thank you.

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

Thanks, Rocko. I want to thank everyone again for joining us today and for your interest in Western Gas. We look forward to speaking with you again soon. Have a good day.

Thank you, sir. The 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.