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Noble Midstream Partners LP (NYSE:NBLX)
Q4 2019 Earnings Call
Feb 12, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Noble Midstream's Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] After today's presentation, there'll be an opportunity to ask question. [Operator Instructions]

I would now like to turn the conference over to Park Carrere, Manager of Investor Relations. Please go ahead.

Park Carrere -- Manager of Investor Relations

Thank you, Kate. Good morning, everyone, and welcome to the Noble Midstream Partners fourth quarter 2019 earnings call. With me today to review our results is Brent Smolik, CEO; Robin Fielder, President and COO; and Tom Christensen, CFO. Following our prepared remarks, we will hold a question-and-answer session. Here to participate in the question-and-answer session, we also have John Reuwer, Vice President of Corporate Development.

This morning, we announced fourth quarter 2019 results as well as first quarter and full-year 2020 guidance. The press release and supplemental slides are on the Investors section of our website nblmidstream.com. Upon filing later today, our 10-K will be available in the same location.

As a reminder, today's discussion will contain forward-looking statements and certain non-GAAP financial measures. 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 will turn the call over to Brent.

Brent J. Smolik -- Chief Executive Officer and Director

Thank you, Park, and good morning, everyone. Before I get into prepared comments this morning, I'd like to welcome Robin Fielder to the team. [0:01:56.6] I suspect that many of you know her from her previous roles, and I suspect you understand why we're excited to have her on board. She's only been here for a few short weeks, but she is already having a positive impact on our organization and on our midstream business. So, welcome Robin.

I'll begin this morning at the fourth quarter results. I'm pleased to report another strong quarter performance from the Partnership to close out a successful year of operational execution, cost reductions, additions of new business, and progress on our equity investments. As we announced in back in November, Noble Energy concluded the strategic review, which highlighted the value and the synergies of aligned upstream and midstream businesses. And it is a reminder the outcome was the midstream acquisition of substantially all of Noble's remaining midstream DevCo interest, several wholly owned midstream assets, and the General Partner's Incentive Distribution Rights for $1.6 billion in total.

I'm pleased with the successful execution of the simplification and the drop transaction and the positive support of the deal by the equity markets. We've strengthened our core business, and we've put the Partnership on a path to deliver leading full-service midstream solutions into the next decade.

[0:03:15.1] At the close of the transaction, Noble Midstream gained exposure to essentially all of Noble Energy's DJ and Delaware production and [Phonetic] those two core areas, which supports a long-term organic growth runway and enables the Partnership to expand Noble and third-party customer throughput volumes.

In addition to that transaction, we delivered top-tier project execution and capital expense savings in 2019. Due to the year-over-year capital efficiency gains, the Partnership was able to reduce capital guidance twice during the year on a similar number of well connections. Overall, we decreased connection cost per well by about 50% over the last two years in both the Delaware and the DJ basins, and we believe that the efficiency gains are sustainable.

During the year, the Partnership also leveraged its previous operational successes and added new third-party customers. In the gathering segment, Noble Midstream added two new customers during the year, including the fourth quarter addition of Verdad Resources in the DJ, which increased our acreage dedicated to Black Diamond by about 50%. Additionally, our equity ownership in oil pipelines will provide some diversification to our gathering and processing business and generate higher quality, more stable cash flows. In a few minutes, Tom will provide some additional details on our business development efforts.

Turning to operational and financial results. First for the full year, in 2019, we gathered 322,000 [Phonetic] barrels a day of oil and gas, and 189,000 barrels a day of produced water in the DJ and the Delaware Basin, both at the high-end of our original guidance, while gross capital was $90 million below guidance. We grew throughput volumes four quarters in a row, and we delivered record oil and gas throughput of 355,000 barrels of oil equivalent per day for the DJ and the Delaware basins in Q4. We had record produced water, as Permian third-party connections picked up in the back half of the year, while executing the capital program below the low-end of guidance for Q4.

And our wholly owned DJ Basin assets' overall gross oil and gas gathering volumes were up modestly from the third quarter of 2019, driven primarily by Noble midstream activity -- noble upstream activities in East Pony and Wells Ranch. Black Diamond volumes increased about 12% to 103,000 barrels of oil equivalent per day. The Mustang IDP areas did not have any new connections during the fourth quarter, but Noble was completing wells in Mustang. And we expect to see connections trend back up in early 2020.

In the Delaware Basin, we had another record quarter for gross oil and gas gathering volumes, which grew by 13% compared to the third quarter. Produced water was also set a record, growing more than 25% sequentially, primarily driven by Noble Energy activity. Additionally, the Partnership connected the first two wells from a new third-party customer in Q4, and then benefited from nine third-party wells that came online in literally the last day of the third quarter. Looking ahead, we expect this momentum to continue into 2020 also.

Before I hand off to Robin to talk about our 2020 outlook, I want to leave you with a few comments. We're not resting on our 2019 cost and execution successes. We're focused on additional savings in 2020, because improved capital efficiency brings multi-year benefits and it strengthens our opportunity to enhance return to our unitholders. We remain focused on leveraging our existing infrastructure and expanding our core business for both G&P and pipelines.

And then, this year will be an important inflection point in our capital and cash flow plan. We expect equity investments to be largely completed in the first half of 2020, and then expect growing contributions from our equity investments throughout the year, including the recently announced Saddlehorn investment. And then finally, we'll remain hyper-focused on customer service to ensure that we execute on our plans.

And I'll turn the call over to Robin.

Robin Fielder -- President and Chief Operating Officer

Thanks, Brent, and good morning, everyone. I'm happy to be part of the Noble Midstream team and look forward to continuing the strong operational momentum that Brent just highlighted.

As he mentioned, we ended the year on a high note with record results in gathering business across all product streams. Combined, oil, gas and produced water and gathering and sales throughput, was up 10% on an annual basis with significant contributions from both the DJ and Permian basins. The Partnership enjoyed significant success, reducing its cost structure in 2019. And we will remain focused on efforts to further drive down costs throughout 2020. And we're already off to a great start.

With the release this morning, we reduced our 2020 organic capital expectations by 25%, or $70 million from the midpoint of our November outlook. This decrease comes from continued improvement in our equipment design and contracting strategy, a reduction in pipeline installation costs, and the utilization of existing infrastructure. These efficiencies along with capital project deferral has allowed us to significantly reduce our organic capital budget. [0:08:26.4] [Indecipherable] connecting approximately the same number of wells year-on-year.

As Noble Energy focuses on row development in both basins in 2020, the Partnership expects roughly three quarters of the new well connect activity in the DJ Basin to be on adjacent section, and 75% of Permian laterals to be less than [0:08:44.5] a mile in length, as we leverage the infrastructure backbone already in place. This enables us to connect wells at minimal cost, improve returns and reduce per unit operating expense.

Our 2020 organic capital program is largely comprised of well connections in both basins as well as facility expansions. We plan to allocate a larger percentage of capital investments to the DJ Basin throughout the year, while both the DJ and Delaware Basin will continue to contribute to absolute gathering volume growth. In total, oil and gas gathering volumes are expected to grow more than 10% year-over-year. In the DJ Basin, we anticipate two to three completion crews on average across our dedicated acres.

Noble Energy has increased activity at its Mustang development, and now expects 80 to 90 new wells in the area in 2020 as well as 20 to 30 well connections in Wells Ranch. Third-party activity and volumes in the DJ Basin are forecasted to be slightly higher in 2020, led by the Black Diamond joint venture and the addition of Verdad crude volumes onto the gathering system. Our commanding presence in the basin and top tier execution make us a strong partner of choice, and we will continue to evaluate new backyard opportunities like this recent example.

In the freshwater segment, we anticipate gross volumes to increase 20% annually, with delivery to two DJ Basin completion crews on average during the year for Noble and a third-party customer. Also in 2020, we will see a positive impact from increase at our Wells Ranch minimum volume commitment, which transitions to 60,000 barrels a day this year.

In the Permian Basin, we expect Noble Energy to operate on average two to three completion crews and turn in line 50 to 60 wells in 2020. Our third-party business has continued to expand, and we anticipate at least one third-party crew on average and 10 to 15 well connects this year.

Our 2020 Delaware Basin gathering volumes will benefit from a full year of operations from all five central gathering facilities. Our three northern CGFs are connected via be a supersystem, which enables us to swing volumes and efficiently manage peak production from new well.

Finally, before I pass to Tom, I want to address the cadence of activity in 2020. We anticipate operator activity to trend similar to last year, with front-end weighted investments that generate second half volume growth. Noble Midstream will continue to allocate capital with a focus on returns, leverage the opportunity to further reduce our cost, basically optimize performance, and enhance transparency around our environmental stewardship efforts.

I will now turn it over to Tom.

Tom Christensen -- Chief Financial Officer and Chief Accounting Officer

Thanks, Robin. Starting with fourth quarter financials. Adjusted EBITDA was $73 million, up 22% sequentially, driven by the acquisition of Noble Energy's remaining DevCo interests in the DJ and Delaware basins. Our results reflect full ownership of these DevCos for half the quarter. EPIC's interim crude service impacted the Partnership's Q4 results with a larger-than-expected loss of $10 million. Excluding this impact, our business performed as expected. EPIC is positioned to begin full service late in the first quarter of 2020. We will still experience some softness during Q1 from interim service, but expect results to be significantly improved over the fourth quarter.

With the recent acquisitions digested, we are focused on maintaining healthy liquidity. We recently exercised the $350 million accordion feature in our revolver to bring the borrowing capacity up to $1.15 billion. We ended the year with $568 million in liquidity. As we move into 2020, we will focus on maintaining prudent leverage, while pursuing longer-term financing to enhance liquidity and extend near-term maturities.

2019 was a strong year for the Partnership on the business development front. Our Delaware Crossing asset, a JV between NBLX and Salt Creek Midstream, is nearing completion of the main line and has already begun transporting volumes. This asset further enhances our position in the Southern Delaware Basin by expanding the gathering footprint to the Wink Hub. This investment provides the Partnership with exposure to eight new third-party customers, spanning 165,000 dedicated acres.

We also made significant steps toward diversifying our cash flow profile in 2019 by exercising the 30% option in the EPIC Crude pipeline and the 15% option on the EPIC Y-Grade pipeline. We also recently announced the exercise of our 20% option in the Saddlehorn pipeline through our Black Diamond subsidiary. Saddlehorn is an operational pipeline backed by minimum volume commitments from investment-grade producers. Black Diamond acquired Saddlehorn for $155 million or $84 million, net to NBLX. This attractive valuation allowed us to utilize our revolving credit facility, while remaining leverage neutral for 2020.

As we continue to grow our business, these types of high-return investments will not only enhance the quality of our cash flows, but also allow the Partnership to participate further down the midstream value chain. NBLX can now offer services from wellhead to water in the Permian, as well as provide our DJ customers highly competitive transportation rates to Cushing. These capabilities differentiate us from many of our peers. We are proud of the team for their recent accomplishments, and are excited about how the Partnership is positioned for continued success.

Now on to 2020 guidance. 2020 net EBITDA is anticipated to be between $500 million and $540 million, slightly below the prior guidance midpoint, due to the higher -- the better line of sight on operator activity. We continue to see producers taking a more measured approach to developing their assets. This slowdown has been largely offset by additional customers added to the portfolio during 2019. The EPIC Crude pipeline is nearing completion, and line fill has begun. Once the Crude line is in full service, the Y-Grade line will undergo cleaning and picking before transitioning back to NGL service. We expect this transition to take about a month to accomplish.

With the addition of our recent Saddlehorn acquisition, we anticipate approximately 15% to 20% of our 2020 EBITDA to come from our investments. We currently are not forecasting any distributions from EPIC in our 2020 DCF guidance. We have also updated our 2020 investment capital guidance. We are now anticipating equity investment of $220 million to $260 million, an increase of $100 million from the midpoint of our previous guidance. This increase was driven by three factors. First, approximately $30 million in [0:15:51.7] planned 2019 investment was delayed to early 2020 for Delaware Crossing and EPIC Y-Grade projects. Second, recent commercial successes on EPIC Y-Grade have resulted in the FID of the second frac and a propane project to Sweeney, both of which are scheduled to be funded during 2020. And third, due to the increased cost of the EPIC Crude build-out and the results of interim service.

Our distribution coverage was 1.1 times during the fourth quarter. Pro forma for this transaction, our distribution coverage was 1.3 times. We anticipate our distribution coverage for 2020 to be between 1.2 times and 1.4 times. We also recently reduced our distribution coverage rate -- distribution growth rate from 20% to 10% to better align with the current market conditions and to exercise continued capital discipline. We felt that 10% growth was appropriate for the underlying business, and we remain committed to the long-term return of capital to unitholders. We will continue to reevaluate the form of this capital return, including the combination of distribution growth and unit buybacks. For 2020, we expect to average 3.3 times to 3.7 times net debt to trailing 12-month EBITDA.

Looking ahead to the first quarter, we anticipate net EBITDA of $94 million to $101 million. We expect less gathering volumes in the first quarter, resulting from lower customer activity during the fourth quarter. Conversely, we expect to see a step-up in freshwater delivery volumes in the first quarter, as customers have hit the ground running in the new year.

Moving through 2020, we expect to see gathering throughput and EBITDA momentum. We've been cautious in our assumptions around customer activity levels and assumed completion intensity.

In summary, our base business continues to perform very well and our Permian joint ventures are getting ready to significantly contribute to the Partnership. Our business development team has experienced several recent successes and are excited about the opportunity set in front of us. [0:18:00.5] Even still we don't aspire to grow at any cost. We will remain focused on capital discipline and achieving high project level returns. You will see us look to grow only where we are uniquely positioned to achieve outsized returns on our investments, primarily leveraging the existing assets and customer relationships. We can be selective due to our competitive positioning in two of the best basins in the country. It will be an exciting year for NBLX. We are on path to grow EBITDA, reduce both organic and equity investment capital, and improve leverage and distributions. And not a lot of midstream companies can say that.

With that, I will turn the call over for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Phil Stuart from Scotiabank. Please go ahead.

Phil Stuart -- Scotiabank -- Analyst

Good morning, everyone. Robin, congrats on your new role.

Robin Fielder -- President and Chief Operating Officer

Thank you.

Phil Stuart -- Scotiabank -- Analyst

Brent, I think this question is probably for you. And you obviously -- you've touched on it in the prepared remarks. But given that you all are currently projecting to hit your target leverage ratio in 2020, just kind of curious how you're thinking about the distribution growth now with the stock yielding close to 13%. It doesn't seem like you all are getting paid for that future growth. I'm just kind of curious if you could maybe discuss in a little bit more detail how you all are thinking about the different options, whether it'd be distribution growth longer term or potentially repaying additional debt below the leverage [Phonetic] target or as you've mentioned in the prepared remarks, a unit repurchase program.

Brent J. Smolik -- Chief Executive Officer and Director

Yeah. There is a lot in there, Phil, that at a high level, as we roll through the investment phase on these equity investments and our capital program being front loaded and then growing EBITDA through the year, we're going to naturally delever first of all. And so, I don't think we'll be in a position [0:20:25.5] where we'll compelled to have to pay down debt.

So then, the second part of your question I think on the distribution growth rate is [Phonetic]. We set that rate, as Tom mentioned on the call, when we did the job simplification because we thought the business supported it. And we still do. I mean, we've got -- we're pretty close to the plan we rolled out at that time. And so, we still think the business supports that growth rate, but if over time, [0:20:53.4] from the market and the market doesn't want to support it, then we will look at a different path. Right now, we're sticking to it though. We're staying with the growth rate.

Phil Stuart -- Scotiabank -- Analyst

Okay, great. Appreciate the color there. And then, I guess quickly, have you all given anymore thought to potential conversion to an [0:21:15.0] upsee corporate structure or a full-on C corp conversion?

Brent J. Smolik -- Chief Executive Officer and Director

Yes, we have -- we said at the time of the drop [Phonetic], we haven't closed out that possibility. By doing the transaction, we still left that open as an option down the road. I think we need to continue to analyze it and make sure we -- make sure we understand the full merits of it. It's not completely obvious to me that there is a advantage for unitholders. And so, we'll keep looking at it over time. But I think we've made the right call in the near-term to stick with the current structure.

Phil Stuart -- Scotiabank -- Analyst

All right Brent. I appreciate the time. That's it from me.

Brent J. Smolik -- Chief Executive Officer and Director

Okay.

Operator

Our next question is from Pearce Hammond from Simmons Energy. Go ahead.

Pearce Hammond -- Simmons Energy -- Analyst

Good morning, and thanks for taking my questions. And Robin, welcome aboard. Good to have you there. My first question, and you touched on this in the prepared remarks and then in the press release. But if you could provide a bit more color on what happened to EPIC in Q4 and [0:22:23.7] is that resolved for Q1.

John Reuwer -- Vice President of Corporate Development

Sure. This is John Reuwer here. There were kind of -- there are basically two items that caused us to have a difference to what we had previously guided to around the EPIC project. One is, it's currently in what we call interim service. And under interim service, there is no obligation of any shippers to bring barrels under a traditional commercial arrangement. However, when we switched to fully commission service in March, all of the commercial agreements that sit at the EPIC level come into effect and the shippers are required to bring the barrels that they're required to bring. So, there was some volatility in the volumes over interim service that we didn't anticipate that kind of flow through to our financials. And then the other item would be, we typically see EPIC reporting on a monthly lag. And so -- but those two items kind of caught up to us here in Q4.

Pearce Hammond -- Simmons Energy -- Analyst

Okay. That makes a ton of sense. Thank you. And then, as a follow-up, can you provide some color as to the specific drivers accounting for the record cost per well connections in the DJ and Delaware Basin in 2020?

Brent J. Smolik -- Chief Executive Officer and Director

Yeah, there is a couple of big things in there at a high level, then I'll let Robin give you some more color. We fundamentally shifted how we manage our contractors and how we manage those projects in 2019 and we saw real benefits that will carry over. And then, we're really close to existing infrastructure in both basins. So, we're going to significantly reduce the distances. I don't know if you want to add anything, Robin?

Robin Fielder -- President and Chief Operating Officer

I think this is a complete scrubbing of our processes and procedures out in the field and even some of the design changes where we've made some optimizations. And as Brent pointed out, the good news is we see the sustainability of those cost savings, and that's why we were able to roll that through and reduced our organic capital outlook for this year.

Pearce Hammond -- Simmons Energy -- Analyst

Great. And then last one for me, Brent, if you could just provide some background on the strategic rationale, as to why you exercise the Saddlehorn option and then the strategic benefit, that ownership on that pipeline accrues to NBLX.

Brent J. Smolik -- Chief Executive Officer and Director

Yeah, I think, to start with the benefit to the customers. I mean there -- we're able to offer them significantly reduced versus historical rates, with significantly lower transportation rates to get out of Cushing. And so, I think that's our main motivation is figuring out ways to be able to expand the service that we provide to our customers. And that's a really good option. And one of them frankly is Noble. Noble took some space themselves and then, we'll be able to -- because of the working collaboratively with them, we were able to get the option to own equity in the pipeline.

Robin Fielder -- President and Chief Operating Officer

This is Robin. I'll just add, as I think Tom pointed out, we really like the nature of the minimum volume commitments on this and what these long-haul opportunities add to our portfolio and help sustain the cash flows of our business.

Pearce Hammond -- Simmons Energy -- Analyst

Perfect. Thank you so much.

Operator

[Operator Instructions] Our next question is from Jeremy Tonet from JPMorgan. Go ahead.

James Kirby -- JPMorgan -- Analyst

Hey, good morning. This is James on for Jeremy. Just want to touch more on EPIC here in terms of the trajectory that you guys see through 2020 for that pipe, and then, especially after kind of 4Q '19 and and 3Q '19. And I believe the capex increased, if you could just talk to kind of the why it went up.

John Reuwer -- Vice President of Corporate Development

Sure. Two items there. I'll answer both, Jeremy -- James. This is John. On the EPIC side, I've kind of mentioned before, we haven't really changed our long-run view of the EPIC project post fully commissioned, so it's pretty much exactly where we expected it to be when we underwrote the project. The volatility that we've seen in Q4 was primarily due to the interim service volume changes, given that there was no commercial agreements on the pipeline. So, we fully expect and we've seen roughly that trend will change and we'll kind of get into a fully commissioned type cash flow profile for them.

On the capex side, there was some two buckets of items. There was a couple of things that were kind of out of scope that were bought into scope. As an example, acquiring the interstate grain terminal relative to a build project if you kind of recall that they had done that last year in the scope that have increased. And then secondly, they had seen some higher costs on some pipeline in steel due to tariffs. And those came reported to us from them on a one-month lag that hit in this quarter.

James Kirby -- JPMorgan -- Analyst

Great. Thanks. And then, I don't know how much work you guys have done here, but in terms of just how much capex needed to keep EBITDA flat in 2020. Any color there you could share?

John Reuwer -- Vice President of Corporate Development

Sure. So when we report our maintenance capital figure in our guidance, that's actually an estimate that we use to keep volumes flat. So, we don't do like an implied EBITDA amount. We actually do a full calculation of what we think the capital will be required to keep volumes flat. I will say that we typically do those only for our G&P assets and then our joint ventures. The maintenance capital is implied via that at the bottom of that project and we only report DCF via cash distributions from those investments. So, there is kind of two parts to how we calculate maintenance capital, but the number that we report for guidance is typically what we think would be required to keep our G&P business flat.

James Kirby -- JPMorgan -- Analyst

Great. Thanks for taking my questions.

Operator

Our next question is from David Amoss from Heikkinen Energy Advisors. Go ahead.

Michael Cusimano -- Heikkinen Energy Advisors -- Analyst

Good morning. This is Michael on for David. Thanks for taking me.

Brent J. Smolik -- Chief Executive Officer and Director

Hi, Michael.

Michael Cusimano -- Heikkinen Energy Advisors -- Analyst

Can you give more detail around the freshwater volume outlook in 2020?

Robin Fielder -- President and Chief Operating Officer

Yes. Hey, this is Robin. As I alluded to, we're going to see some annual growth there. We're expecting on the order of 20% year-on-year, but it is pretty volatile.

Michael Cusimano -- Heikkinen Energy Advisors -- Analyst

Would you say the range that you've previously provided is still intact, or you just can't speak on it?

Brent J. Smolik -- Chief Executive Officer and Director

Yeah, it's largely still intact. You will see that we expect it to be a little front-weighted. We have shifted guidance to be just one quarter ahead just due to the lack of predictability of that cash flow stream, but our initial impression of that business is still similar to what it's been historically.

Michael Cusimano -- Heikkinen Energy Advisors -- Analyst

All right. Thank you.

Brent J. Smolik -- Chief Executive Officer and Director

Thanks, Michael.

Operator

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

Park Carrere -- Manager of Investor Relations

Thank you all for joining the Noble Midstream fourth quarter call today. I'll be around all day to answer any questions. Please reach out. Thank you all.

Brent J. Smolik -- Chief Executive Officer and Director

Thank you everyone.

Robin Fielder -- President and Chief Operating Officer

Thank you.

John Reuwer -- Vice President of Corporate Development

Thanks.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Park Carrere -- Manager of Investor Relations

Brent J. Smolik -- Chief Executive Officer and Director

Robin Fielder -- President and Chief Operating Officer

Tom Christensen -- Chief Financial Officer and Chief Accounting Officer

John Reuwer -- Vice President of Corporate Development

Phil Stuart -- Scotiabank -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

James Kirby -- JPMorgan -- Analyst

Michael Cusimano -- Heikkinen Energy Advisors -- Analyst

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