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Rattler Midstream LP (NASDAQ:RTLR)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen and welcome to the Rattler Midstream Third Quarter 2019 Conference Call. [Operator Instructions].

I would now like to turn the conference over to your host Mr. Adam Lawlis Vice President of Investor Relations. Please go ahead.

Adam Lawlis -- Vice President of Investor Relations

Thank you Celine your good morning and welcome to Rattler Midstream's Third Quarter 2019 Conference Call. During our call today we will reference an updated investor presentation which can be found on Rattler's website. Representing Rattler today are Travis Stice CEO; Tracy Dick CFO; and Kaes Van't Hof President. During this call the participants may make certain forward-looking statements relating to the company's financial condition result of operations plans objectives future performance and businesses. We caution you that actual results could differ mentally from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

I'll now turn the call over to Travis Stice.

Travis D. Stice -- Chief Executive Officer

Thank you Adam. Welcome everyone and thank you for listening to Rattler Midstream's earnings conference call covering results for the third quarter of 2019. To start Rattler's third quarter results were a continuation in exceeding the expectations presented at the time of IPO almost six months ago. We continue to execute on the core business while announcing the joint acquisition of a Reliance Gathering for $355 million with Oryx Midstream an opportunistic investment which increases our exposure to Diamondback and overall oil volumes while partnering with the top midstream operator to grow and manage the Reliance system.

This deal is expected to close eminently this quarter. Rattler grew net income 3% quarter-over-quarter to over $48 million and adjusted EBITDA over 1% quarter-over-quarter to over $67 million in the third quarter as a result of the outperformance of our oil gathering and saltwater disposal business lines. The company spent $85 million on midstream capital expenditures in the quarter and contributed $39 million to equity-method pipeline investments. This quarter we updated our 2019 guidance by raising the midpoint of our volume ranges across all 4 segments as well as adjusted EBITDA estimates for the year. Rattler also initiated its first distribution of $0.34 which is $1 annualized for the period from the IPO through Q3 of 2019. Looking forward to 2020 we provided initial guidance that implies 44% adjusted EBITDA growth including the base business EBITDA growth of over 25% year-over-year while reducing base business capex by 15% at the midpoint from 2019's guidance of $250 million.

Furthermore contributions to equity method investments are expected to be $100 million next year substantially completed our capital commitments to all 3 pipelines by the end of 2020. Rattler's long-haul investments include equity investments in the EPIC Gray Oak and the Wink to Webster pipelines. These pipelines will upon completion transport crude oil from Diamondback and other Permian basin producers to Gulf Coast crude markets around Corpus Christi in Houston. EPIC began interim crude service in August with full service in early 2020 and Gray Oak is on track to begin service this month. Wink to Webster will mark the completion of 3 pipelines when it begins service expected in early 2021. To conclude Rattler will continue to execute on its business model of growing per share metrics and free cash flow to meet the needs of its long-term fixed fee contracts with Diamondback. Rattler is expected to continue to grow in the fourth quarter of 2019 and significantly into 2020 while capital requirements for both the base business and onetime equity investments are expected to continue to decline. As Diamondback grows production in 2020 and beyond particularly in the Delaware Basin so will Rattler's earnings and free cash flow continue to grow with declining capital requirements to meet these growth forecasts.

With these comments now complete operator please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Jeremy Tonet with JPMorgan. Your line is open.

Rahul Krotthapalli -- JP Morgan Chase & Co Research Division -- Analyst

This is Rahul on for Jeremy. Firstly I just wanted to check on how we should read the FANG's equity to gassier wells at the Rattler level? Like how sensitive is this shift to Rattler's water guidance for 2020 or beyond?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Really there's no impact. I mean I think as you think about Rattler's water guidance as Diamondback does other zones like the Middle Sprayberry in the Midland Basin and the Bone Springs formation in the Delaware Basin. Those formations actually are -- have a higher water cut than the Wolfcamp formation. So while Diamondback is limited to more core development of multiple zones you shouldn't see a major impact to Rattler production. In fact you probably see a little bit of an uplift due to a higher water-to-well ratio companywide.

Rahul Krotthapalli -- JP Morgan Chase & Co Research Division -- Analyst

Understood. That's helpful. And then can you provide some cadence on the 2020 guidance you guys laid out yesterday in terms of like completions and how we should think about step up 1 hedged versus 2 hedged '20?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. It should be pretty consistent. Diamondback's is going to run 8 or 9 frac spreads for the full year should commodity prices cooperate and Diamondback gives toward the higher and of our projected completion cadence that should help you maybe the back half of the year but the way we're modeling right now is you see a pretty consistent growth through most of the year at Rattler. There's not a big swing one way or the other. Now certainly with the pipelines coming on through the fourth quarter that's going to help EBITDA in the first quarter step up a lot versus Q4. But the base business will see consistent growth.

Rahul Krotthapalli -- JP Morgan Chase & Co Research Division -- Analyst

Understood. That's helpful. And then one final one. In light of the guidance you guys provided yesterday at FANG and also the other third-party producer outlooks you have on the Reliance system do you see the multiple compression targets impact for 2020 on the longer term?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. We're really excited about this deal it's about to close. We've already worked with Reliance to dedicate some new acreage to -- sorry worked with Oryx to dedicate some new acreage to this system which should support the growth profile in 2020 and beyond. At Diamondback we're allocating rigs to this particular system. We're probably increasing our gross completions on this system as we look at 2020. And I think the other operators on the system have provided pretty visible growth targets particularly one of the other large operators on the system anticipates growing 7.5% or so CAGR the next few years. So for us this deal is an opportunity to acquire an oil gathering system where we had a lot of intimate knowledge about the quality of the acreage that underlies the system and the price paid. For us it felt like a deal that was once going to be very expensive came to us at a low potential multiple and we took advantage of that with our balance sheet. But I want to be clear that I think from a large acquisition standpoint that's probably it for Rattler. We're very focused on the free cash flow profile of the business and the promises we made at the IPO to not need to externally fund growth. So as you see in 2020 we've got a business that's going to do midpoint $375 million of EBITDA spend a little under -- a little over $200 million of capital and $100 million or so of onetime investments and be significantly free cash flow positive.

Rahul Krotthapalli -- JP Morgan Chase & Co Research Division -- Analyst

Understood. That's really helpful, guys. Thanks for taking my question. That's it for me.

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Thank you.

Operator

Your next question comes from the line of Michael Lapides with Goldman Sachs. Your line is open.

Michael Jay Lapides -- Goldman Sachs -- Analyst

Couple of questions. First of all how should we think about the EBITDA contribution of Reliance? I mean is it basically kind of in that $25 million to $30 million range? Or is it something that's on either side of that? That's question one. Question two if you're not thinking about other material kind of a M&A how do you think about utilizing the balance sheet and the capital structure right? You're going to be really under levered relative to peers if you deliver on kind of 2020 and '21 just curious how you're think about utilizing that balance sheet strength?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. Michael I think we've kind of said since the get-go that 2x leverage is our limit. It's not a target it's a limit because we think about leverage on a consolidated basis at the parent company. I know that's not traditional for a midstream company but it's just how we've run our business in the past. So we do anticipate the capital needs particularly in the base business to continue to decline as we mentioned at the time of offering. And that's just going to result in more free cash flow and more free cash flow is going to get paid back to shareholders and Diamondback who is the largest shareholder. So I think the focus of the Board is to grow this distribution and probably address that early in 2020 because of the free cash flow profile we expect.

Michael Jay Lapides -- Goldman Sachs -- Analyst

Got it. And just curious can you remind me how much of the volume that flows through Reliance comes from Diamondback versus other producers?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. Today it's about 35% 40% Diamondback. Over time that probably increases closer to 50% Diamondback just because of our growth plans in that area. The Spanish Trail North area or the area we acquired from Ajax and ExL last year probably has the most undeveloped inventory in the Diamondback portfolio and is the least developed. So over the next five to 10 years we're going to consistently developing and growing in that particular area.

Michael Jay Lapides -- Goldman Sachs -- Analyst

Okay. And then therefore what are the other producers who are on Reliance what have they been saying about production levels and how does that impact the expected value of Reliance? And the world has kind of changed over the last three to five months so just curious how are you thinking about that.

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. The largest contributor outside of Diamondback they've publicly stated a high single-digit growth rate over the next couple of years and I anticipate them to keep that. And then the other operator is a large Permian operator. So the Reliance piece is a smaller piece of their total but recognizing that they've been active in the area and will probably continue to be somewhat active. I don't have as much visibility on their growth rate as I do Diamondback's and that other -- the other operator.

Michael Jay Lapides -- Goldman Sachs -- Analyst

Thank you.

Operator

Your next question comes from the line of Ujjwal Pradhan with Bank of America Merrill Lynch. Your line is open.

Ujjwal Pradhan -- BofA Merrill Lynch Research Division -- Analyst

First one I just wanted to quickly clarify on the 2019 EBITDA guidance which you tightened yesterday. At the midpoint it seems like it implies a decline in 4Q '19 is there anything to note there operationally? Or does that exclude the long-haul pipeline equity earnings?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. We're essentially excluding any contribution from them in the fourth quarter. And I think we expect to see some growth off of the Q3 number from a consolidated adjusted EBITDA perspective.

Ujjwal Pradhan -- BofA Merrill Lynch Research Division -- Analyst

Got you. And with regards to the long-haul capex contributions that went up for 2019. And I think the 2020 number is also a little higher than what you had mentioned before. Can you discuss what that increase is? Or previously you just had -- that previous that was not the final number?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. I think the previous one was not the final number no. It's a little bit of a mix shift right? Because Wink to Webster is spending some money in 2019 so that -- it hit 2019 up a little bit and then 2020. The majority of the $100 million is linked to Webster but the rest is completing EPIC and Gray Oak.

Ujjwal Pradhan -- BofA Merrill Lynch Research Division -- Analyst

Got it. And if I may one more. Yesterday in the release you had a comment about how the equity investments that you had recently weren't continuing in the same manner in a meaningful way. Would you be able to unpack that a little further and maybe discuss what sort of new M&A we could expect in support of Diamondback's activities?

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Yes. I don't think there's a lot of M&A required to continue to grow this business. I think there's enough infrastructure we need to build on Diamondback's properties to grow for a long period of time. I was trying to be clear that we spend a lot of time money on Wink to Webster we spend a lot of money on Reliance and those are great investment. But we're not actively seeking out more large-scale investments to put on Rattler's balance sheet. Instead we are going to make sure we have the capital to grow the needs of the dedications for the next few years and get to full-field development and therefore harvest that free cash flow.

Operator

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mr. Travis Stice.

Travis D. Stice -- Chief Executive Officer

Thanks again to everyone participating in today's call. If you have any questions please contact us using the contact information provided.

Operator

[Operator Closing Remarks].

Duration: 16 minutes

Call participants:

Adam Lawlis -- Vice President of Investor Relations

Travis D. Stice -- Chief Executive Officer

Matthew Kaes Vant Hof -- President and Director of Rattler Midstream GP LLC

Rahul Krotthapalli -- JP Morgan Chase & Co Research Division -- Analyst

Michael Jay Lapides -- Goldman Sachs -- Analyst

Ujjwal Pradhan -- BofA Merrill Lynch Research Division -- Analyst

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