Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Oasis Midstream Partners LP (NYSE:OMP)
Q1 2019 Earnings Call
May. 8, 2019, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Andrew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the first quarter 2019 earnings release and operations update for Oasis Midstream Partners. 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 will now turn the call 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, Andrew. Good morning, everyone. This is Richard Robuck. Today we are reporting our first quarter 2019 financial and operational results. We're delighted to have you on our call. And I'm joined today by Taylor Reid, Michael Lou as well as some other members of the team.

Please be advised that our remarks on both Oasis Petroleum as well as Oasis Midstream Partners including the answers to your questions include 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 our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K and our quarterly reports on the Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we'll make references to certain non-GAAP financial measures and reconciliations to those applicable GAAP measures can be found on our earnings release and on our website. We'll also 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'd start today by highlighting a handful of key points. First, OMP's financial outlook remains exceptional. We exceeded guidance once again and we raised our EBITDA and coverage expectations for 2019.

Second, the Boards of Oasis and of our general partner have approved the dedication by Oasis of a portion of its Delaware acreage to OMP for crude oil and produced water infrastructure development. As we will detail later in the call, this is a major win for OMP unitholders. This capital efficient project enhances the financial outlook for OMP while keeping our balance sheet strong. Oasis' highly economic position in the heart of the over-pressured oil window is a a coveted asset from both an upstream and a midstream perspective, and this new agreement accomplices each company's objectives, creating a win-win combination.

Third, OMP's new 200 million cubic feet per day gas plant continues to run well, creating a significant tailwind for 2019 and helping diversify our customer base. At times, we slightly exceeded nameplate capacity. Our business development team continues to work diligently signing additional third-party contracts. We estimate over 15% to 20% of our fourth quarter '19 EBITDA will come from third parties.

And finally, OMP remains an exceptional investment opportunity. Strong execution has driven peer-leading distribution growth and improving coverage while diversifying our customer base, which really makes us unique. We look forward to executing our plan in 2019 and beyond.

In the first quarter, we reported distribution coverage of 1.6 times, an improvement from the pro forma 1.43 times OMP produced in the fourth quarter. We grew our distribution 5% versus the prior quarter, consistent with our targeted 20% annualized distribution growth rate.

At the Bighorn DevCo, we continue to ramp up volumes at our new 200 million cubic feet per day plant. Utilization has generally been in line with our expectations and we exited March averaging around 70%. This impressive ramp-up reflects a strong combination of Oasis and third parties. Over the quarter, third-party volumes approximated 50% -- 15% of Bighorn's total volumes. We still expect utilization to be above 90% by year-end 2019.

Natural gas processing in the Williston remains tight. North Dakota gas production peaked in January at over 2.7 Bcf per day, while basin processing is only 2.2 Bcf per day, including our new plant. 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 investment. The quick ramp-up of our second gas plant and growing third-party volumes across Bighorn and Bobcat are the major drivers behind our strong 2019 financial projections.

As we look to the second quarter of 2019, we expect an improvement in coverage to about 1.7 to 1.9 times. Coverage is expected to improve further through 2019 and exit the fourth quarter at approximately 1.9 to 2 times. This is meaningful improvement from our February guidance, reflecting the incremental third-party contributions and early contributions from the Delaware dedication.

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'll dive into the quarterly details a bit more before giving a summary of the Delaware acreage dedication. At Bighorn, crude volume has exceeded midpoint guidance by 16% during the quarter while Q1 gas volumes were 10% above expectations, reflecting a stronger than anticipated ramp at Gas Plant II.

At the Bobcat DevCo, volumes exceeded expectations as well with crude 10% above midpoint guidance; natural gas, 5%, and water services, 6%. At Beartooth, water volumes were well above guidance, reflecting a continued strong contribution from our sponsor and unbudgeted third parties. Beartooth water volumes increased approximately 20% versus the first quarter of 2018 with approximately two-thirds of the increase related to produced water growth and approximately one-third associated with higher fresh water volumes for both Oasis and third parties. As you can see, we continue to execute well across all fronts in our legacy Williston asset.

Turning to the Delaware, we're excited to announce that the Boards of Oasis and our general partner have approved a dedication by Oasis of acreage for crude oil gathering and water gathering and disposal. Under this new arrangement, OMP will spend an additional $53 million to $57 million on building out midstream infrastructure, including the purchase of existing midstream assets in the Delaware from Oasis Petroleum.

OMP will form a new development company called Panther DevCo, which will be 100% owned by OMP. Final agreements have not been executed, but the Boards did approve the arrangements on similar terms to the existing commercial agreements between Oasis and OMP in the Williston Basin. We expect key features of the agreements to include fixed fee at market rate, 15-year terms, and overall balanced midstream terms and conditions between both parties. OMP expects 2019 EBITDA for Panther DevCo to range between $1 million and $3 million, which is included in our updated EBITDA estimate.

As you know, both Oasis and OMP have been working hard to create a mutually beneficial relationship that supports the development of the Delaware. The infrastructure development plan is extremely capital efficient for OMP as capital is spread out over time and produces very competitive build multiples in a few years as cash flows quickly ramp based on Oasis' drill schedule. The robust inventory life of the Oasis asset, coupled with the opportunity to capitalize on third-party business, makes this investment the right next step in the evolution and growth of OMP.

Turning to capital, the full year CapEx plan for the Williston Basin remains unchanged from February guidance, although capital is biased to the high end of the range due to incremental spend to capture third-party volumes. With the additional spend in the Panther DevCo, net CapEx attributable to OMP in 2019 is now expected to range between $184 million and $206 million, inclusive of the reimbursement for capital spent to-date on the asset by our sponsor.

OMP is expected to have ample debt capacity to finance the project build-out while exiting 2019 with leverage below 2.5 times debt to current annualized EBITDA.

Execution against our capital arrangement with Oasis in Bobcat are proceeding as expected, as OMP increased its interest in the Bobcat DevCo from 25% to 27.4% at the end of -- 25% at the end of '18 to 27.4% now. OMP's ownership in Bobcat is still expected to increase to approximately 34% to 36% by year-end.

As a result of strong execution, incremental third-party volumes and the Delaware announcement, OMP is increasing its 2019 EBITDA estimate by approximately $10 million to $158 million to $166 million compared to $148 million to $157 million as of the February update, and $65 million at the time of the OMP's IPO.

With that, I'll hand it over to Richard.

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

Thanks, Michael. OMP is executing well in the Williston where Oasis' core inventory drives strong volume resilient to commodity price fluctuations. Third-party volume contributions continue to increase as well, providing incremental cash flow and a diversification benefit. We estimate that third-party volumes and EBITDA will approximate about 15% to 20% of OMP's net EBITDA by the fourth quarter of 2019.

In the Delaware, EBITDA contributions are fairly small in '19, but will accelerate in 2020 and beyond, further improving our financial position. We declared a distribution of $0.47 per unit in the first quarter of 2019, a 5% increase versus the fourth quarter and consistent with our 20% annualized distribution growth target. As of March 31st 2019, the partnership had about $5 million of cash and $345 million drawn under our revolver. Debt to first quarter annualized EBITDA was 2.7 times and we see this dropping below 2.5 times by year-end. Subsequent to the first quarter, partnership entered into an amendment to its revolving credit facility to increase the aggregate amount of commitments from $400 million up to $475 million. The new facility also provides for the ability to further increase commitments to $675 million.

In closing, we are very excited about our financial performance and our go-forward outlook remains compelling. OMP offers peer growth and distribution coverage along with a discounted valuation to our peers. Our impressive success in adding third-party volumes and the recent addition of the Delaware only improve our outlook and stability.

So with that, I'll hand the call back over to Andrew for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Jeremy Tonet of J.P. Morgan. Please go ahead.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Good afternoon, guys. This is Rahul on for Jeremy and thanks for taking my question here. Following up from your comments on the -- earlier, like, can you share your thoughts on the potential for expansion at Gas Plant II? And just to follow up, do you see -- how do you see the third-party contribution to the processing volumes change over time as the plant ramps to above 90% utilization?

Michael H. Lou -- President and Director

Yeah. The plant should be -- we should, really as a company, kind of be called around that 20% third-party by the end of the year and a lot of that's going to be certainly on the gas side, but really it's split pretty evenly gas, water and oil overall. So think about kind of third-party volumes growing to that 20% by the end of the year. And then, can you repeat the first part of your question?

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

Your question on expanding the second gas plant and our thoughts on that, and -- right now, it's definitely not something that we have contemplated. It's something that, as we continue to expand volumes and if we continue to capture incremental contracts from third-parties and we can get contracts that are solid and long-term, we would think about something like that. But in the near-term, without that in hand, we're not going to count on the future without contracts in hand. So I think we'll be prudent and continue to do things like we did where we have visibility into cash flow. So that's why we took our next incremental step down into Delaware and can get attractive, let' say, very kind of sure, locked in long-term returns for the partnership.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Got you. That's helpful. Thanks for that. And then given the increased organic growth runway now you have with the Panther DevCo, how should we think about the drop-downs going forward? Can we expect like a similar CapEx agreement as executed with the Bobcat DevCo relatable drop over time? Is it something which you would look into it going forward?

Taylor L. Reid -- Chief Executive Officer and Director

That Bobcat arrangement that we were able to get done in February is really helpful for 2019 plan and we'll look at doing things like that in the future. It'll be -- it'll basically be done kind of on an annual basis between Oasis and OMP, and so it has to be mutually agreed upon by both entities for that to go forth. The reality is that you'll be spending less capital year-over-year in OMP up in the Williston Basin, so feel good about not having a big overhang from that perspective. But I think we'll definitely look at that as a way to do drops over time. There's obviously a remaining interest in the Beartooth asset as well and we'll evaluate opportunities over time to get that down. Obviously if you look at the financial profile going forward, we've got great coverage, we've got a great balance sheet, and we have good longevity and view into our ability to grow distributions over time. So we'll just continue to monitor all that together and see if a drop again is mutually benefit -- beneficial to both companies.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Got you. That's helpful color, guys. And just final one from me. How should we think about the organic CapEx in the Bakken or Wild Basin going forward across pre-dev costs now that you have quite a bigger chunk in the -- till date from the IPO?

Taylor L. Reid -- Chief Executive Officer and Director

Obviously from the time of the IPO until 2019, CapEx grew as gas volumes grew and we were able to capture that and bring those -- that value to our unitholders. In 2019, you're spending a fair amount of capital to finish the last bit on Bighorn on the second plant and some of the last pieces there, and then also on Bobcat, spending a fair amount -- more money, but you see Bighorn next year with no plans for another plant drop dramatically. It's really primarily maintenance CapEx by that point in time. And then we continue to have assets that we're building to because we have a great runway of remaining inventory in the Wild Basin. So capital in Bobcat could fall in half kind of year-over-year and we still have incremental capital even the following year because we're continuing to develop that asset over time.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Got it. That's helpful, guys. Thanks. That's it from me.

Taylor L. Reid -- Chief Executive Officer and Director

All right. Thank you.

Operator

The next question comes from Mirek Zak of Citigroup. Please go ahead.

Mirek Zak -- Citigroup -- Analyst

Hi, good afternoon. So the acreage dedication in the Delaware, are there other third parties operating in those areas today or will you be able to serve any non-operated OAS wells as well? And what are your expectations of what percentage of volumes will come from third parties in the Delaware once you're up and running after this year and if that was in your capital and build multiples provided?

Michael H. Lou -- President and Director

Yeah. So the build multiples that we're talking about are going to be based on kind of anchored volumes from Oasis and it's similar to the way we've always guided in the Williston, is we really haven't guided to third-party deals until we get them signed up. Currently we don't have third-party deals signed up today, but we do think there are -- there's quite a bit of opportunity. Obviously, the Permian area is very competitive from a midstream perspective, gas, water and oil, but we think that there are -- there continue to be some opportunities for OMP to continue to grow on that side, specifically on the water and crude side. So we think that we will continue to expand upon the system to serve third-parties in the future, but none of that's in our kind of forecast in terms of build multiples et cetera.

Mirek Zak -- Citigroup -- Analyst

Okay. Understood. And with the entry into the Delaware and increased capital program going forward and increased cash flow growth, have there been increased conversations around the IDR structure? Or any updates around -- for your thinking is around those would be helpful.

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

I think that's obviously a conversation that we've had internally and externally with folks and something that we continue to evaluate. Obviously, we're very low in the splits right now, and we continue to believe it's been -- the IDR structure and the incentive for us to grow, it's been a huge win for the unitholders. That's the whole reason these things are designed to begin with, is to incent folks to grow. And so our ability to deliver growth that's, I guess, versus our IPO forecast, 150% higher than expectations is really because that type of structure is out there so that we're not just sitting on a business where we're only serving Oasis and their volumes alone. And so we continue to believe it's a great incentive structure. We also acknowledge that it's something that sits out there and people are going to continue to talk about over time. And I think -- at the right time we will try to figure out something that's again mutually beneficial to both Oasis and OMP on that front.

Mirek Zak -- Citigroup -- Analyst

Okay. And if I could just, one more quick one here. Considering you have to be cognizant of your financial structure and leverage due to the implications on (inaudible) consolidation, but do you have an idea of how much leverage your business could sustain or you'd be comfortable running with if you didn't have that constraint?

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

On OMP on a stand-alone basis, I think this is an environment where you really want to make sure that you have financial flexibility for your midstream business, and so I think because we have been conservative on that front since day one, it's allowed us to do the gas plant, it's allowed us to do drops, it's allowed us to do this Delaware opportunity and bring value to the unitholders that they might not have otherwise had if we would have started this business day one with 4 times leverage and didn't have much flexibility. So the way we think about it is we want to have firepower from debt capacity at OMP to take advantage of the right opportunities, but if we do take advantage of the opportunities, we want to see visibility into delevering so that we can build up that firepower once again in the future. And so I don't think that you'll see us trying to get too far levered to juice returns for the near-term projects because I think we want to always have that flexibility to bring in something that will allow us to grow and extend the runway of growth for the business.

Mirek Zak -- Citigroup -- Analyst

Okay. Great. Thanks for the color. That's all for me.

Operator

The next question comes from Praneeth Satish of Wells Fargo. Please go ahead.

Praneeth Satish -- Wells Fargo Securities -- Analyst

Hi, thanks. Just two questions on the water business in the Delaware. I guess one, are there plans to recycle any of the water or will it all be disposal? And then secondly, can you tell us roughly what the water to crude ratio looks like on the acreage that's being dedicated? Thanks.

Michael H. Lou -- President and Director

From a recycle basis, I think that you will see there will be some recycle and that's certainly part of this opportunity as well. The water here is actually, we think, very usable in terms of the completions with kind of small amount of modifications to it or filtering et cetera. So we do think there is a big reuse component there and we think that's a big opportunity from an OMP perspective.

In terms of water-oil ratio, it is a little bit different across the acreage and across zones. What you're seeing in this area right now is kind of a, call it, a 4 to 6 to 1 type ratio. So you obviously are producing quite a bit of water compared to every barrel of oil that comes out. So once again, you're moving a lot of fluids and the nice thing is we'll be responsible for both moving the crude in and the water and making sure that that works well for the parent.

Praneeth Satish -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

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

Taylor L. Reid -- Chief Executive Officer and Director

Thanks. In closing, OMP continues to exceed expectations. Since the IPO in the fall of 2017, we've clearly demonstrated that OMP is dedicated to unitholders and creating value. The team looks forward to continued execution and delivering for our investors. 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. Thank you for attending today's presentation. You may now disconnect.

Duration: 26 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

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Mirek Zak -- Citigroup -- Analyst

Praneeth Satish -- Wells Fargo Securities -- Analyst

More OMP analysis

All earnings call transcripts

AlphaStreet Logo