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Noble Midstream Partners LP (NBLX) Q1 2019 Earnings Call Transcript

By Motley Fool Transcribers – Updated May 4, 2019 at 3:45AM

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NBLX earnings call for the period ending March 31, 2019.

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Noble Midstream Partners LP  (NBLX)
Q1 2019 Earnings Call
May. 03, 2019, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the Noble Midstream First Quarter 2019 Earnings Conference Call. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Megan Repine. Please go ahead.

Megan Repine -- Investor Relations

Thank you, Gary. Good morning and thank you for joining the Noble Midstream Partners First Quarter 2019 Earnings Call. With me today to review our results is Terry Gerhart, CEO; John Nicholson, COO; and John Bookout, CFO. Following our prepared remarks, we will open the call to questions from analysts.

This morning we announced our first quarter 2019 results as well as second quarter and updated full-year guidance. The press release and supplemental slides are on the investor section of our website, Upon filing later today, our 10-Q will be available in the same location. As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial metrics. Please refer to our latest news releases for non-GAAP reconciliations as well as our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements. At this time, I'll turn the call over to Terry.

Terry Gerhart -- Chief Executive Officer and Director

Thanks, Megan and thank you everyone for joining. I'm very pleased with the results we posted earlier today, with the first quarter 2019 representing a strong start to an important and exciting year for Noble Midstream. We entered the year with a focus on driving significant organic capital efficiency and scale in our base business and progressing our Permian equity investment opportunities for sustainable long-term contribution. I'm excited to share with you our progress so far this year.

We delivered quarterly throughput and adjusted EBITDA according to plan in the first quarter on capital that was well below expectations. While we did see some shift in customer activity during the quarter, we are also seeing sustainable capital reductions from an intense focus from cost control and efficiencies. As I look at the accomplishments so far, I'm also proud of enhancements made to our platform, which is growing in scale, diversity and strength. We have been particularly focused on building our value chain across commodities, customers and further downstream in the Permian Basin. Closing our equity investments in the EPIC pipelines and Delaware Crossing intermediate gathering system in the first quarter was a critical milestone and puts us closer to our ultimate goal of 50% net adjusted EBITDA contribution from the Permian by the end of 2020.

Noble Midstream is now positioned to realize value across a crude oil value chain from wellhead to water, which is very differentiated for a small cap sponsored MLP. Given the growing capital efficiency in our base business and as our new equity investments begin contributing more meaningfully to the partnership, we are well-positioned to begin self-funding and delevering (ph) by the end of 2020.

In the DJ, Colorado passed new oil and gas legislation last month, a significant step in establishing a long-term energy framework for Colorado. The legislative process was another example of bipartisan support for the oil and gas industry in the state. We support safe and responsible oil and gas development and we're confident customer activity will continue as planned.

Lastly, you may have seen the 8-K filed by Noble Energy last week regarding an ongoing strategic review of their midstream assets. As they mentioned this morning on their earnings call, this is consistent with their earlier disclosures and their practice of continually evaluating all available options to create value. The midstream assets within Noble and Noble Midstream are very valuable, which today is not sufficiently reflected within the markets for either entity. As Noble evaluates potential scenarios, top of mind will be the changing investor sentiment around the MLP structure and IDRs. I won't speculate on the potential outcomes. However, I will remind you that Noble is the largest unit holder in Noble Midstream. As a matter of practice, we do not comment publicly on such deliberations and we do not intend to comment further today. I'll now turn the call over to John Nicholson for an update on our operations and capital plan.

John Nicholson -- Chief Operating Officer

Thanks, Terry. Our teams are doing a great job progressing our growth projects while maintaining a focus on efficient and reliable operations. With the added services and dedications over the past several years, we have significantly grown our asset base. Our infrastructure is well aligned to support our sponsor's focus areas and we've achieved considerable milestones in building out our third-party business over the last year.

As the first quarter demonstrates, we are now in a great position to begin realizing the benefits of our backbone infrastructure, which is largely in place for the base gathering business. All first quarter gathering volumes were in line with guidance, while fresh water delivery volumes were ahead of expectations. Oil and gas gathering daily throughput averaged 287,000 barrels of oil equivalent per day, up over 73% versus first quarter 2018 volumes. In total, we connected approximately 117 wells during the quarter.

Produced water volumes were consistent with guidance, but 4% lower than the fourth quarter of 2018 due to fewer wells coming online during the quarter. However, volumes were still up over 200% on an annual basis. Freshwater delivery volumes of 220,000 barrels of water per day were up 22% from the fourth quarter and were ahead of guidance. The partnership delivered water to approximately four crews during the quarter.

In the Delaware Basin, we're hitting our stride having now connected close to 100 wells across five CGFs since the third quarter of 2017. We had another very strong quarter of CGF performance with our team achieving inlet availability of 99%. So far this year, the team's completed planned heater trigger upgrades as well as a produced water debottlenecking project in the Billy Miner area, ahead of a ramp up in facility utilization in the second half of the year.

In addition, the teams are on track to complete the plan trunk line connecting the two Billy Miner CGFs with the Jesse James facility in the second quarter. This super system will maximize production throughput potential and flexibility across Noble's Northern acreage footprint in the most capital efficient way possible.

With respect to our third-party business in Blanco River, the previously announced eight to 10 wells from our customer added last year will begin turning online late in the second quarter. In addition, we gained a new customer with Noble Energy's first quarter divestiture in the Southwest portion of their Reeves County position. We've received customer development plans, which we are reviewing to optimize economic and operational efficiency.

In the DJ basin, Green River was the primary driver of gathering volume growth during the quarter. We gathered 21 new wells for Noble Energy and wrote two of their Mustang development which drove a 36% increase in oil and gas gathering throughput sequentially. With connectivity to multiple third-party processors, Mustang has been largely protected from broader base and line pressure issues. Development drilling and road development in Mustang has driven very efficient capital deployment from the start. We expect this efficiency to accelerate in future years as activity has increasingly focused on sister sections of existing rows resulting in a materially lower capital per well connection through time.

In Laramie River, our third-party DJ DevCo gathering and sales volumes grew 2% compared to the fourth quarter. Fundamentals remain strong and we continue to expect meaningful growth in the second half of the year as new third-party processing capacity comes online. Growth in Green River and Laramie River was somewhat offset by declines in Colorado River with no new well connections in the first quarter. Looking ahead, we anticipate another quarter of sequential declines in Colorado River given lower levels of activity in the first half of the year. Our teams are planning for additional well connections in East Pony and Wells Ranch beginning midway through the second quarter. Gathering throughput is anticipated to be flat to up slightly beginning in the second half of the year in Colorado River.

A second gas offload in Wells Ranch is coming online ahead of those connections, which should help maximize performance on the ranch. We are getting closer to additional line pressure relief in the basin with DCP's O'Connor 2 plant becoming available late in the second quarter with the ramp to the full 200 million (ph) a day of capacity anticipated during the third quarter.

As Terry mentioned, our recent Permian equity investments are critical pieces to building a leading Permian platform. Delaware Crossing further enhances our position in the Southern Delaware by expanding our gathering footprint to the Wink Hub while the EPIC projects provide very unique scale and investment characteristics for NBLX. Delaware Crossing gathering will commence in the third quarter of 2019 with the trunk line to Wink still anticipated in the fourth quarter. The EPIC projects also remain on schedule for interim service in the third quarter of 2019 and permanent service for crude in January 2020. Permanent service for Y-Grade is expected shortly thereafter in the first quarter of 2020.

First quarter organic capital expenditures came in well below guidance on both a gross and net basis due to a combination of sustainable cost savings from cost reduction efforts, design optimization and some timing shifts in customer activity. While it is still early, we are well-positioned for the full-year. We are currently tracking toward the low-end or below our 2019 organic capital budget of $335 million to $375 million or $180 million to $210 million attributable to the partnership. This provides the partnership flexibility for any capital associated with additional commercial success or increases in customer activity levels as we move through the year.

In addition, our equity investments in the Delaware Crossing, EPIC Crude oil pipeline and EPIC Y-Grade projects are anticipated to total between $570 million and $615 million in 2019, prior to the preferred investment in the EPIC Crude pipeline. $265 million was contributed in the first quarter with the bulk of the remaining spend coming in the second and third quarter of 2019. With that, I'll turn the call over to John Bookout.

John Bookout -- Chief Financial Officer

Thanks, John. I'm pleased with our financial results for the first quarter of 2019. This was highlighted by a 7% sequential increase in net adjusted EBITDA and distribution coverage of 1.9 times. Our financial strategy has been focused on maintaining healthy liquidity and prudent leverage through the construction period for the EPIC and Delaware Crossing investments.

With that in mind, we secured and closed preferred equity investment in the EPIC Crude pipeline with favorable terms. This includes the ability to pay in time (ph) for the first two years. The first $100 million tranche closed at the end of the first quarter with the second $100 million available for a one-year period following the close of the financing.

We ended the first quarter with $580 million in liquidity including $570 million remaining on a revolver capacity. We also have access to a $350 million accordion and our Q1 annualized leverage ratio was 2.9 times. While our leverage is ticking up this year, we believe expected year-end leverage of 4 times to 4.25 times is manageable, particularly in light of our strong distribution coverage.

I will reemphasize that we are in the early stages of meaningful capital efficiencies in our base business and as the business stands today, we expect to be self-funding by the end of 2020 as the EPIC and Delaware Crossing projects begin contributing meaningfully to the partnership. Long-term, we continue to believe three times leverage is the appropriate level for the partnership through cycles.

Moving on to Q2 guidance. As planned and similar to 2018, the second quarter is anticipated to be the lowest quarter for both volumes and financial results. We expect adjusted EBITDA attributable to the partnership of $55 million to $61 million with coverage expected to be 1.3 times to 1.5 times. Softness in Q2 is driven by a decline in fresh water volumes with expected deliveries to just two crews during the second quarter, down from four in the first quarter. We also anticipate softness in Colorado River given lower levels of activities in the first half of the year. Throughput is anticipated to recover in the second half.

For our 2019 full-year outlook, we now incorporate a small contribution from our EPIC equity investments in our 2019 forecast. This contribution is anticipated to ramp significantly with permanent service in 2020. We continue to anticipate Noble Midstream's share of EPIC project equity cash flows to total between $50 million and $70 million on an annualized basis exiting 2020. Further growth is anticipated in 2021 and beyond. Overall, EPIC early service is on the horizon and given the second half ramp, we believe it is prudent to maintain our guidance for adjusted EBITDA attributable to the partnership of $245 million to $270 million. Distributable cash flow is now forecasted between $190 million and $205 million. This yields coverage of 1.5 times to 1.6 times for the full-year.

Our full-year gathering throughput volume guidance for combined oil and gas gathering as well as produced water remain unchanged and represent more than a 40% and 70% increase in throughput compared to 2018 respectively. The partnership expects volume growth acceleration in second half of the year with the highest number of well connections during the third quarter. This is supported by third-party processing additions in the DJ Basin and with the start-up of additional oil takeaway capacity in the Delaware Basin both providing upside to the plan. We've had a busy start to the year and have progressed our differentiated plan with significant multi-year cash flow growth and the ability to begin self-funding exiting 2020. Our strategy remains disciplined and focused and we are committed to delivering strong, but prudent growth through investing in premier midstream infrastructure opportunities in some of the best basins in the country. With that, I will turn the call over for questions.

Questions and Answers:


(Operator Instructions). Our first question comes from Jeremy Tonet with J.P. Morgan. Please go ahead.

Jeremy Tonet -- J.P. Morgan -- Analyst

Good morning.

Terry Gerhart -- Chief Executive Officer and Director

Good morning, Jeremy.

Jeremy Tonet -- J.P. Morgan -- Analyst

The news about a strategic review has weighed on NBLX and these situations have sometimes led to sub-optimal outcomes for other LPs in the past historically. What can you say to bring closure to this issue to remove uncertainty overhang to put those fears at ease right now?

Terry Gerhart -- Chief Executive Officer and Director

We're not going to comment on the timing or the outcome of the strategic review that Noble's engaged in Jeremy, not at this time.

Jeremy Tonet -- J.P. Morgan -- Analyst

Okay. Thanks for taking my question.


(Operator Instructions). The next question comes from Christopher Tillett with Barclays. Please go ahead.

Christopher Tillett -- Barclays -- Analyst

Hey guys, good morning. First for me, I guess on -- appreciate the color on the updated guidance. You guys are now including some contribution from the JV interests for 2019, but the total range for this year remains unchanged. I guess just curious to know if maybe there was some kind of shift elsewhere in the business or if the range is sort of large enough to accommodate any contribution you expect there for this year?

John Bookout -- Chief Financial Officer

This is John Bookout. It's a good question. A couple things on 2019. As we discussed, we have included a small amount of EPIC even at contribution. It's really two components there. On the Y-Grade side, there is an operational frac that was acquired last year called the Robstown Fractionation Unit, which is operating and cash flowing. So that has a very small incremental contribution to our range and then we've chosen to take a conservative approach on early service impacts to both projects given that project is still being brought on line, differentials still are moving around. So we've taken a conservative approach in terms of how we've incorporated into the range and then we kept our range consistent really because similar to 2018, it's the second half ramp sort of story for our business this year and we'd like to see some of that de-risk before revisiting our expectations for the full-year.

Christopher Tillett -- Barclays -- Analyst

Okay. Makes sense. Thank you. And then, I guess, maybe if you could just -- we could dig deeper a little bit into some of the comments in the release about volumes on the advantage pipe and the -- one of the shippers taking some credit there. I guess, is that a result of poor pricing in the region during the period or did the volumes move elsewhere or just kind of maybe what's going on there?

John Bookout -- Chief Financial Officer

This is John Bookout again. So, if you think back to our acquisition and there's some information out there, we're also happy to provide additional color offline. We structured a kind of volume match that tracked with throughput that Noble provided on to the pipeline to create alignment through the JV. Through that construct, there is a feature that allows volume credits to be banked if that's the right word. So I think this is more temporary for this year where we saw the benefit of much higher volumes last year above and beyond that contractual match or -- and so the bank is being taken this year.

The pipeline continues to perform very well versus acquisition case and expectations and then we think it's well-positioned to be a important part going into early service for EPIC Crude.

Christopher Tillett -- Barclays -- Analyst

Perfect, thank you. Just I guess last for me, the additional $100 million preferred. Are you guys able to draw on that sort of opportunistically as you need it or is that kind of an all at once activity?

Terry Gerhart -- Chief Executive Officer and Director

For the second $100 million we would -- if we were to draw on that, we would anticipate drawing the full $100 million.

Christopher Tillett -- Barclays -- Analyst

Okay, all right. That's it for me. Thanks guys.


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

Megan Repine -- Investor Relations

Thanks for your interest and participation today. I'll be available this afternoon for any follow up questions you may have. Thank you.


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

Duration: 20 minutes

Call participants:

Megan Repine -- Investor Relations

Terry Gerhart -- Chief Executive Officer and Director

John Nicholson -- Chief Operating Officer

John Bookout -- Chief Financial Officer

Jeremy Tonet -- J.P. Morgan -- Analyst

Christopher Tillett -- Barclays -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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