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Oasis Midstream Partners LP  (NYSE:OMP)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 12:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Allison and I will be your conference operator today. At this time, I'd like to welcome everyone to the fourth quarter 2018 earnings release and operations update for Oasis Midstream Partners. All participant will be in -- all participants will be in 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 Richard Robuck, Oasis Midstream's CFO, to begin the conference. Thank you. You may begin your conference.

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Thank you, Allison. Good morning, everyone. This is Richard Robuck. Today, we're reporting our fourth quarter and full year 2018 financial and operational results. We're delighted to have you on our call today. I'm joined by Taylor Reid and Michael Lou, as well as other members of the team.

Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions, includes statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we may also make reference to certain non-GAAP financial measures and reconciliations to applicable GAAP measures, which can be found in our earnings release on our website. We may reference our current investor presentation, which you can find on our website.

With that, I'll turn the call over to Taylor.

Taylor L. Reid -- Chief Executive Officer and Director

Good morning, everyone, and thanks for joining our call. We thought we would start today by highlighting a handful of key points. First, Oasis Midstream Partners' financial outlook remains quite strong and is proving resilient. Our sponsor's Wild Basin program in combination with additional third party deals provides a strong backdrop and gives us confidence we can hit our financial targets.

Second, OMP's new 200 million cubic foot per day plant came online in early December, making us the second largest natural gas processor in the Williston Basin. As we will discuss in greater detail, the new plant provides a strong financial tailwind and helps diversify our customer base. Congratulations to the team for their significant accomplishments here.

Third, our business development team has continued signing additional third-party contracts. We estimate, by the end of 2019, 30% to 40% of our new gas plant capacity will be filled by third parties.

Fourth, during the fourth quarter, we successfully closed the acquisition of additional interest in the Bobcat and Beartooth DevCos. This accretive deal puts OMP in a position to increase its scale, while simultaneously enhancing its coverage outlook. As we look to 2019, we have entered into an agreement with Oasis to increase our ownership in Bobcat further through a capital expenditure arrangement that Michael will discuss in more detail later.

Finally, OMP remains a compelling investment opportunity. Peer leading distribution growth and increasing coverage really separate us from the pack, and we look forward to executing our plan in 2019 and beyond.

In the fourth quarter, we reported distribution coverage of 1.21 times. Have we not done the drop, the coverage would have been 1.24 times versus our 1.2 guidance. However, adjusting for the new ownership interest and new units issued and the incremental debt for the full quarter, pro forma coverage would have been 1.43 times. We grew our distribution 5% versus the fourth quarter, keeping us on track to meet our targeted 20% annualized distribution growth rate.

At the Bighorn DevCo, in December OMP began processing natural gas at its new 200 million cubic foot facility. The plant operated intermittently through December as we work through a few ordinary start-up issues. Now, the plant is up and running. We briefly fought through some extreme cold earlier in February. The utilization has approximated 60% over the past two weeks consisting of mostly Oasis volumes and some third-party as well.

Following the incremental third-party deals we signed, we now expect utilization to be above 90% by year-end versus 80% at our November update. Natural gas processed in the Williston Basin remains tight. As of December, North Dakota gas production was 2.65 Bcf per day, while Basin processing is only 2.2 Bcf per day, which is actually up by 0.2 Bcf per day as a result of our new plant start-up. The team's combination of subsurface knowledge, strategic planning and overall desire to do the right thing by capturing gas to reduce flaring gave us a first-mover advantage in building processing to accommodate rising GORs and overall gas production across the core of the Williston Basin. We continue to remain active with multiple parties regarding additional opportunities as we seek to reduce overall flaring in the Williston while capitalizing on our strategic investments.

The ramp up in the second gas plant and growing third-party volumes across Bighorn and Bobcat are the major drivers behind our strong 2019 financial projections, which remain resilient despite the significant pullback in commodity prices and associated producer activity.

On that note, looking to 2019, OMP's growth will continue to be largely supported by our sponsor's development program in the Williston. While Oasis now plans to run two to three rigs in the Bakken this year versus five and oil prices were nearing $70 per barrel, activity is concentrated in Wild Basin, which as you know is where OMP's oil and gas gathering and processing assets are situated. The balance of our growth comes from third-party volumes and associated EBITDA.

As we look to the first quarter of 2019, we expect coverage of about 1.5 times. This is still expected to ramp up throughout the year ranging from 1.8 times to 2 times. 2018 was a phenomenal year for OMP. We exceeded expectations on virtually every front and put the Company in a strong position for 2019 and beyond.

I'll now turn the call over to Michael to go over a little more detail on our operations.

Michael H. Lou -- President and Director

Thanks, Taylor. I wanted to start with the fourth quarter review of volumes and then transition into plans for 2019. At Bighorn, crude volume exceeded midpoint guidance by 5% during the quarter. While Q4 gas volumes fell a bit short of expectations, this was largely a timing issue and when the gas plant came online.

At the Bobcat DevCo, crude volumes grew 3% sequentially, while natural gas grew 18% and water was about flat. At the Beartooth DevCo, water volumes were about flat with third quarter and remain at all-time high levels. Beartooth water volumes increased 53% versus fourth quarter of 2017 with approximately two-thirds of the increase related to produce water growth and approximately one-third associated with higher fresh water volumes for both the Oasis and third parties.

We are rolling out our 2019 capital plan which has a unique arrangement that is beneficial for both OMP and Oasis. Essentially OMP has agreed to fund Oasis portion of its interest in Bobcat's gross CapEx in the calendar year 2019 in exchange for an increasing ownership based on the capital contributed. As a result of this arrangement, OMP's ownership in Bobcat is expected to increase from 25% to approximately 35% by year-end. We would increase our ownership in Bobcat each month based on the normally scheduled capital call process.

In 2019, we expect total gross CapEx to approximate $142 million to $162 million with OMP funding 100% of Bighorn capital, 100% of Bobcat growth capital, and 70% of Beartooth's capital. Net to OMP, we are forecasting $131 million to $149 million. We outlined initial thoughts on 2019 capital in November on our call, and our updated forecasts are about $15 million below our initial thoughts after adjusting for the increased interest related to the drop in the capital expenditure arrangement.

In 2019, we now expect gross EBITDA for the three DevCos before public company expenses to approximate $258 million to $267 million. Net to OMP, our EBITDA estimate would remain unchanged from November after our drop using ownership of Bobcat at 25%, which was $143 million to $149 million, including about $2.5 million of public company expenses.

Taking into consideration the increasing ownership of Bobcat, our EBITDA net to OMP would increase by another $5 million to $8 million, taking our full-year EBITDA guide up to $148 million to $157 million in 2019. We think it is helpful to break EBITDA contribution by DevCo, but we're going to do it on a gross basis this time due to the changing interest in Bobcat throughout the year.

For 2019, we expect Bighorn to represent about 31%, Bobcat 50%, and Beartooth 19% of gross EBITDA of $258 million to $267 million. Bighorn is expected to deliver year-over-year growth of 135% to 144%, driven by volumes into the second plant from Oasis and third parties. We are targeting 57% to 60% growth for Bobcat, primarily related to increased gas volumes in 2019.

Lastly, as Oasis focus is about 60% of its completion activity in Wild Basin, less activity will be directed to Beartooth, resulting in about a 20% decline in EBITDA year-over-year.

In a similar fashion to last year, we're not baking in any incremental third-party freshwater volumes into our guidance. So, freshwater EBITDA is going to -- going from about 6% of gross EBITDA in 2018 to about 2.5% in 2019. That implies the balance of the decrease in Beartooth EBITDA, representing about $8 million to $9 million is related to produce water declines outside of Wild Basin.

With that, I'll hand the call over to Richard.

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Thanks, Michael. OMP continues to benefit from having assets concentrated in the core area of the Williston to generate very strong economics even at low prices. Third-party volumes are increasing as well, which diversifies our revenue stream and provides financial resiliency. We estimate third-party will approximate 15% to 20% of OMP net EBITDA by the fourth quarter of this year. We declared a distribution of $0.45 a unit in the fourth quarter of 2018, which was an increase of 5% versus the third quarter, and consistent with our 20% annualized distribution growth target.

The team continues to execute well and surpass expectations. For 2019 EBITDA is expected to be up about 115% to 127% from 2018 levels with rapidly improving coverage even with the 20% year-on-year distribution growth. And on an organic basis, that is if we were to exclude the impact of the November drop and the increasing Bobcat ownership, 2019 EBITDA would still be growing about 75%. During the fourth quarter, the three DevCos added together delivered $49.1 million of gross EBITDA and $22.1 million of net EBITDA, including public company expenses in the net EBITDA number. Distributable cash flow to OMP was $18.5 million.

As Michael mentioned, OMP's net CapEx is expected to range from $131 million to $149 million with maintenance CapEx representing about 6% to 8% of EBITDA. Our capital program reflects our assumption that we will pick up 100% of Bobcat's growth capital. As of December 31st, 2018, the partnership had cash outstanding of $6.5 million and $318 million of borrowing under its $400 million revolving credit facility, resulting in borrowing capacity of $82 million. We retained the flexibility to increase our borrowing capacity up to $600 million under certain conditions. As we grow volumes and cash flows through the year, our leverage will continue to improve. Debt to fourth quarter 2018 annualized EBITDA, pro forma or the drop as if it has occurred at the beginning of the quarter was about 3 times, and we expect that number to fall to below 2.3 times exiting 2019.

In closing, it has been an exceptionally strong year at Oasis Midstream Partners. We are proud of the team for all of its achievements and are looking forward to delivering another year of strong execution in 2019. Despite superior distribution growth and coverage, OMP still trades at a discounted valuation to peers that have similar or even less impressive growth and distribution profiles.

Additionally, exceeding our lofty expectation since the IPO has further strengthened the financial and risk profile of the Company. We believe the combination of strategic, operating and financial qualities make OMP a compelling investment opportunity at this juncture.

I'll now hand the call over to Allison to open up the line for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Crawford Kob of Tudor, Pickering & Holt. Please go ahead.

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

Hey, guys. So, starting off from the Delaware, any update to how you're thinking about a potential participation there? And if so, would that primarily be on the produced water side or could it extend to natural gas or crude gathering?

Taylor L. Reid -- Chief Executive Officer and Director

Yes, on the Delaware side, the parent is still considering options on what they're doing, obviously, with a bit of a change in kind of program. They're going to take a little bit more time to figure out full options. That can range from doing third party to allowing OMP to do it. We don't know exactly where that is. We do see a big opportunity however in the Permian and it can be in all the products. We think there's some opportunity on the oil, gas and water side. We just need a little bit more time to flesh that out. But that should be coming and we think that the opportunity will be at the OMP side.

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

All right. Got it, that's helpful. And then next on the capital expenditure agreement announced last night, do you see this type of agreement extending beyond 2019? So in other words, maybe shifting to more ratable shifts in DevCo ownership versus larger discreet dropdowns?

Taylor L. Reid -- Chief Executive Officer and Director

Yeah, we think this is a -- we think this is a great structure for OMP. It continues to bring in that DevCo ownership. It allows us to use a lot of the excess coverage that we're seeing on top of distributions for levels that are pretty darn close to build multiples and so we really like this structure from an OMP standpoint. And I think it's good for the parent as well. This agreement is only signed for 2019. We'll kind of see how it works this year. If it works along with expectations, it's something that obviously we'll continue to work with the parent on in terms of whether or not we continue that going forward or not.

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

Got it. And with the increase in the 2019 capital budget is the expectation that the extra $80 million will be funded at the credit facility?

Michael H. Lou -- President and Director

Yes, that's the plan. To fund that under the credit facility, but with increasing coverage through the year, you're obviously also offsetting the increase to the overall revolver through the year. So we feel like we still will have below $400 million under the credit facility exiting the year.

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

Okay, got it. That's helpful. And last one for me. So, with Oasis slowing down their Williston net production growth in 2019, how does that impact how you are thinking about the previous guidance of the organic 20% distribution per unit growth beyond year end 2021?

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Yeah, I think that that's a great question. The reality is the kind of crux of the OMP asset base is right in the heart of Wild Basin, right, and that is where there's a bunch of rig activity and work being done not by just Oasis, but other folks as well. And so with high GORs in the area, with Oasis' activity, we continue to see our ability to grow cash flow kind of year-over-year with that strategic asset position in Wild Basin. And the reality is we still have all that inventory from the Beartooth inventory as well and we'll be completing a handful of wells there this year. So it's probably 30 of the 70 will be outside of Wild Basin. So that'll continue to support growth on Beartooth, and then as we look further out in time, I think you'll actually start to see Beartooth start to climb back up and then kind of offset the declines we had in 2019.

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

Okay, that's helpful. That's it from me. Thanks for taking my question.

Taylor L. Reid -- Chief Executive Officer and Director

Thank you.

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

The next question will come from David Amoss of Heikkinen Energy. Please go ahead.

David Amoss -- Heikkinen Energy -- Analyst

Hey, guys. Good morning.

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Good morning.

David Amoss -- Heikkinen Energy -- Analyst

Similar question, but -- and I appreciate the information you've given on 2019 on the call, and I don't want you to think they were ignoring that but if you think about '20 and the drivers that you have for growth there at the LMP level, I see like maybe five avenues, the sponsored Williston outlook, the third-party potential versus your capacity in that basin, and the Delaware Basin opportunity, the potential dropdown and a continuation of this CapEx agreement that you just announced. So high-level, how should we be thinking about where you guys are strategically focused for growth in 2020 within kind of that broader view?

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

I think one of the core tenets of the business is just stable cash flows that are also able to grow. And so again that Wild Basin construct supported by sponsor's volumes is fantastic year-over-year. The services that we provide Oasis continued to support growth from that perspective. Secondly, the third-party opportunity remains and I think you've seen us every quarter increase our guide and our thoughts on third-party activity. That's been largely driven on the gas side as we've got this new gas plant up and running, but there's also opportunities for freshwater deals as well as saltwater and crude deals. So we think that the location of the asset in and around other operators in the basin will provide us incremental growth opportunities. I think, like Michael said about the capital arrangement, we'll just do that and think about it on a year-to-year basis. It's only for one year, it was -- there was a great arrangement for this year, and we'll reevaluate it as we enter next year.

And then you asked about drops as well. I think, we will continue to monitor our ability to do that. This is definitely akin to a drop on the capital arrangement side, so I would think about that, those two opportunities the capital arrangement and drops as pretty synonymous and we will -- there might be an event for a larger drop later but that's not in our current plans for the next 12 to 18 months. And then you asked about the Delaware as well and as we get clarity on how that's going to play out and who is going to be building that infrastructure, I think, if we do or like to do it at OMP it's going to be a big win really a long-term, growth engine for our business. And, I think that if we do get that business, we'd be really lucky to have it as it supports the future of OMP.

David Amoss -- Heikkinen Energy -- Analyst

Thanks, Richard. That's helpful. And just to follow up on that point in the Delaware, any indication you can give us on schedule or timing or what are the governors for that decision where the build out of the Delaware ultimately goes and who gets to do it? Do you think that's a near-term decision at the Oasis level or could this be as long dated as a 2020 decision?

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Yeah, the decision was, we had talked about that we would have made a decision at the parent level by the end of the year. We kind of talked about that middle of 2018. What we're saying is that at the parent level, that's going to be pushed a little bit obviously with the change in oil price at the end of the year and changing programs. And we just talked a little bit about that changing program in the Delaware for us. We were going to go to a third rig at the parent level in the middle of 2019. That's actually going to get pushed off a little bit. So just trying to see and understand where all that goes is going to be important from the parent side.

And the asset is such a consolidated operated block and the best part of the Delaware that it's absolutely where you want to be in terms of having infrastructure, it set up well for broad basin takeaway being close to wink as well as being close to Waha and the gas side, and so it's a great place to put in this gathering system on water, gas and oil. So OMP definitely wants to be a part of that. What we have to continue to prove and this goes back to your earlier question a little bit too, I mean, we've got to continue to prove at the OMP level that we can get to a cost of service that's obviously competitive and better than a lot of the other options that the parent has, but then offer a quality of service and a certainty of service that is superior to third-party options. Right? And so, we've been able to do that on the Williston side and we think we continue to drive that on the Williston side of it, not only for Oasis but for all of our customers in the Williston this third-party deals and customers are obviously growing. And so we will focus on certainty, quality and cost of service for all of our customers.

And then, as we continue to prove that for Oasis, we hope that we can move into the Delaware with them and build that out for them. But they've got to do the right thing and make sure that they're getting the best -- the best deal for all of their partners, but we certainly think from an OMP perspective that we hope it's at this level too.

David Amoss -- Heikkinen Energy -- Analyst

That's really helpful. Thanks for the look at how you guys are thinking about the strategy, I appreciate that.

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Taylor Reid for any closing remarks.

Taylor L. Reid -- Chief Executive Officer and Director

Thanks Alison. In closing, 2019 will be a year of harvesting for OMP as we complete major capital projects and benefit from strong financial tailwinds. OMP remains in a great competitive position. The team's dedication to capital efficient growth coupled with a strong sponsor with exceptional subsurface expertise is a recipe for value creation. We greatly exceeded expectations and look forward to continue delivering for our investors in the future. Thanks again for joining the call today. And as always, we will definitely make ourselves available for any follow-up questions you might have. Thank you.

Operator

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Duration: 28 minutes

Call participants:

Richard N. Robuck -- Senior Vice President and Chief Financial Officer

Taylor L. Reid -- Chief Executive Officer and Director

Michael H. Lou -- President and Director

Crawford Kob -- Tudor, Pickering & Holt -- Analyst

David Amoss -- Heikkinen Energy -- Analyst

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