Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Altus Midstream Company (NASDAQ:ALTM)
Q4 2019 Earnings Call
Feb 27, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by and welcome to the Altus Midstream Company Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today Mr. Patrick Cassidy. Thank you. Please go ahead.

Patrick Cassidy -- Director of Investor Relations

Good afternoon and thank you for joining us on Altus Midstream Company's Fourth Quarter and Full year 2019 Financial and Operational Results Conference Call. We will begin the call with an overview by Altus Midstream CEO and President Clay Bretches; and Ben Rodgers CFO will summarize our financial performance and outlook. Our prepared remarks will be approximately 15 minutes in length with the remainder of the call allotted for Q&A. Remarks during the call may also refer to the Altus Midstream Investor Presentation which can be found on our Investor Relations website at altusmidstream.com/investors. On today's conference call we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted. Finally I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. Information being discussed today is based on estimates at this time and the final amounts in the Altus Midstream Form 10-K may be materially different than those on last night's earnings release or referenced in today's call. Altus Midstream's Form 10-K is expected to be filed next month upon completion of the audit of the financial statements for the year ended December 31 2019 for each of the pipeline entities in which we own an equity interest. A full disclaimer is located with the investor presentation on our website.

With that I will turn the call over to Clay.

Clay Bretches -- Chief Executive Officer and Director

Good afternoon and thank you for joining us. On our call today we'll highlight key accomplishments during 2019 and the recently completed fourth quarter provide an update on the operating environment we're facing today and offer an outlook for the year ahead. By nearly any measure 2019 was a challenging year. Prices for natural gas and natural gas liquids collapsed compared to historic levels. Basis differential out of Waha were volatile and generally weak and activity levels at Alpine High declined significantly from the prior year. Our fourth quarter and full year 2019 results include a $1.3 billion impairment related to a reduced Alpine High development outlook and weak commodity prices. Despite these challenges we largely accomplished the goals we set at the beginning of the year. We entered 2019 with an ambitious plan to exercise the remaining three options to acquire ownership in our long-haul pipeline projects secure financing for our capital plans without issuing common equity complete construction of three state-of-the-art cryogenic processing plants and conduct our operations to meet the highest safety and environmental standards in the industry. I am pleased to say we have accomplished all of those goals. The employees working on Altus projects have done an outstanding job. I'll start the review with our joint venture pipeline projects as these will be the key drivers to our earnings growth in the foreseeable future. The Permian Basin remains takeaway capacity constrained even with expected activity levels lower than a year ago leading to strong inherent value in these joint ventures.

For 2019 JV pipe adjusted EBITDA exceeded the midpoint of our guidance and we are encouraged with the prospects going forward. Altus owns equity interest in four long-haul pipelines that transport natural gas NGLs and crude oil from the Permian Basin to the Gulf Coast. The Gulf Coast Express natural gas pipeline in which Altus own 16% came into service in September ahead of schedule. GCX is supported by minimum volume commitments and Kinder Morgan recently disclosed that it has been routinely operating at its full capacity of approximately two billion cubic feet per day. Altus holds an approximate 27% equity interest in the Permian Highway natural gas pipeline which is also operated by Kinder Morgan and supported by minimum volume commitments. Required permits have been granted and construction is under way along the full stretch of the line from West Texas to the Katy hub near Houston. PHP is expected to commence service in early 2021 with capacity of 2.1 billion cubic feet per day. The enterprise products operated Shin Oak natural gas liquids pipeline was our first JV pipe to come into service with the mainline commencing operations in early 2019. Adjusted EBITDA contributions to Altus commenced shortly after we exercised our option in the third quarter of 2019. Altus holds a 33% equity interest in Shin Oak. Shin Oak is currently averaging approximately 300000 barrels per day and the pipeline was recently expanded to handle 550000 barrels per day.

The line is integrated with Enterprise's entire system in the Permian. And its ability to deliver Y-grade directly to fractionation and storage facilities at Mont Belvieu on the Gulf Coast provide significant advantage to E&P companies in the Permian. Given the currently weak differentials at Waha there's economic incentive to recover ethane as ethane comprises close to half of the Y-grade barrel. The EPIC crude oil pipeline announced yesterday it has begun delivering crude oil successfully commissioning its 30-inch permanent crude oil pipeline. We anticipate that lessons learned from operating the interim line last year will contribute to a smooth start-up in an ongoing operation of the pipeline going forward. We hold a 15% equity interest in the EPIC crude line. The EPIC crude oil pipeline provides transport out of the Permian and Eagle Ford Basins to the Gulf Coast. In December EPIC announced that its stocking facilities in the Corpus Christi harbor loaded their first 700000 barrel Aframax-sized crude carrier. This capability offers a strategic export option to shippers. A second dock that can handle larger one million barrel Suezmax-sized tankers is under construction and expected to be operational in the second half of 2020. Altus Midstream's ownership in JV pipes is a compelling investment proposition that offers a diversity of stable cash flows and long-term contracts across all three commodity streams being produced in the Permian Basin. I'll move on now to gathering and processing. Negative Waha differentials and low NGL prices reduced expected volumes from Apache during the year as production was curtailed. However lower operating costs combined with the lower capital investments resulting from reduced activity helped to mitigate this impact to earnings.

For the year our G&P business generated adjusted EBITDA at the top end of our guidance with capital coming at the low end. We also benefited from a restructuring of our organization earlier in the year with the shift from multiple widespread MRU operations to a centralized cryo processing center we were able to adjust to changing activities more efficiently as we streamlined our processing capabilities. We continue to benefit from this lower cost structure. Our operational performance for the year exceeded our goals. All three cryogenic processing plants were built on time and on budget demonstrating excellent performance in both ethane recovery and rejection modes. Uptime exceeded 99% and flaring was less than 1% with an improving trend coming into 2020. The Railroad Commission of Texas conducted routine audits of our DOT-regulated pipeline programs and observed no areas of noncompliance. I'm especially proud of our safety performance as we had 2.1 million construction man-hours without a recordable incident in 2019. We are aggressively pursuing third-party volumes to replace declining production from Alpine High. We have had initial success in this area as we are currently processing third party non-spec natural gas liquids through our NGL stabilization unit. Though not currently a material component in our expected adjusted EBITDA this is a positive step and demonstrates that we are open for third-party business. Altus has advantages that we can leverage in this effort.

The SRX technology we've installed at our cryo complex offers improved netbacks to customers. We're also installing H2S treating facilities which will provide another competitive edge allowing us to treat sour gas for Delaware Basin producers. Altus is uniquely positioned to provide treating processing and transportation solutions to customers earning a fee at each stage of the stream. Ben will provide more on our guidance for this year but significantly lower G&P capital requirements and lower operating expense in 2020 will help to offset lower throughput volumes. Clearly our stock price has underperformed our peers and we continue to examine a full range of strategic alternatives. We are taking a view of opportunities that encompass all of our assets with a singular goal to maximize value for Altus and its shareholders.

With that I'll turn the call over to Ben.

Ben C. Rodgers -- Chief Financial Officer and Director

Thank you Clay. As noted in the press release issued yesterday Altus reported a fourth quarter net loss including noncontrolling interest of $1.33 billion. This included $1.36 billion for impairments of Altus gathering and processing assets to reflect lower volume expectations from Alpine High and associated deferred tax charges. As Apache noted in their call today they dropped the remainder of their drilling rigs at Alpine High and have no current plans for future drilling. Excluding those and other items Altus generated fourth quarter adjusted EBITDA of approximately $46.2 million. Gathering and processing volumes averaged 643 million cubic feet per day up 38% compared with 467 million cubic feet per day in the preceding period. The quarter-to-quarter increase represents both new well hookups at Alpine High and production volumes that were brought back online with the start-up of GCX in late September. Approximately 65% of fourth quarter volumes were rich gas. Capital investments in midstream infrastructure during the quarter were $196 million. This included $164 million for our JV pipeline projects which comprises capital calls for our ownership in our long-haul JV pipeline projects. Capital for gathering and processing infrastructure for the fourth quarter came in at $32 million. For the year Altus reported a net loss including noncontrolling interest of $1.34 billion. Excluding the impairment items noted above we generated $86.3 million of adjusted EBITDA coming in above the high end of our guidance range mostly achieved through aggressive cost-cutting and organizational rightsizing.

Performance-related to our investments in GCX and Shin Oak pipeline also exceeded expectations. Gathered volumes averaged 509 million cubic feet per day above the high end of our most recent gathered volume forecast for 2019. In 2019 capital investments totaled $1.47 billion which represents cash outlays by Altus during the year. Of this $1.17 billion was for JV pipeline projects and approximately $300 million was for gathering and processing assets. Including our gross proportionate share of capital in relation to equity method interests which is how we guide to growth capital investments 2019 capex came in at $1.62 billion within our guidance range for the year. As outlined in our press release earlier this month we recently exited the initial period of our revolver as expected. This enhances our liquidity by $150 million bringing our revolver commitments up to $800 million and providing ample liquidity for 2020 and 2021. Liquidity may be further enhanced as we evaluate and execute additional asset sales. We previously identified $40 million to $50 million in assets for potential sale of which we've closed on $18 million. We are continuing to work toward the sale of the remaining noncore assets in 2020. Moving on to guidance. Gathered volumes for 2020 are forecast to range between 480 million to 520 million cubic feet per day. Adjusted EBITDA is currently expected between $190 million and $220 million. These revisions from previous guides primarily reflect Apache's plans to remove drilling rigs at Alpine High and defer completions.

With the prevailing weak basis pricing at Waha Apache may choose to defer production at certain points during the year and quarterly volumes may be less predictable based on the actual timing of any curtailments. We have considered this potential in our revised guidance and estimate full year volume could be up to 15% to 20% lower and adjusted EBITDA and DCF could each be up to $10 million to $15 million lower. As Clay noted we continue to actively pursue third-party business from other midstream companies and producers in the Delaware Basin. Though we expect to close third-party business this year we have not reflected this in our revised 2020 adjusted EBITDA or capital guidance. We will update our guidance accordingly upon the signing of such contracts. Our JV pipeline adjusted EBITDA assumptions are relatively unchanged. Growth capex guidance for 2020 is $300 million to $360 million which is primarily attributable to PHP with a lesser amount budgeted for EPIC capital calls. Capital associated with the EPIC crude line is expected to come in above the previous planned budget due to completion of projects that were out of the original project scope and general cost overruns as the pipeline nears completion. We expect the total overage will be funded with a combination of operating cash flow increased debt fundings at the asset level and equity contributions from all partners. As we have done in the past our capital guidance reflects our gross proportional share of capital without taking project finance into account though we don't anticipate having to equity fund all of the overage.

G&P capital in 2020 is expected to be de minimis and will remain so until we add third-party volumes to the system. Following completion of the two remaining JV pipes Altus will have almost no growth capital requirements and only nominal maintenance capital requirements which will position the company to generate significant distributable cash flow. This ability to generate cash is underpinned by the strength of our diverse set of long-haul JV pipes where we have partnered with some of the strongest pipeline operators in the basin. We also remain confident in our ability to attract third-party business which can fill throughput gaps in our cryogenic plants and provide upside to our guidance.

I will now turn the call over to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Spiro Dounis with Credit Suisse. Your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, guys, Clay just maybe want to pick up on one of the last comments you made around the strategic options available to you. Just looking for more color there. It sounds like you kind of have taken an "everything is on the table" approach but just trying to think through maybe weeding out some of the things that maybe are kind of out of reach thinking acquisition may be tough just given where your stock currency is. I'm just wondering do you feel like you have the balance sheet capacity to go after some larger third-party projects here? Thinking about asset sales is anything larger scale fit in? And does Apache become part of the strategic review as well? Just hoping to really narrow the focus here to a few maybe tangible options that you think are available to you.

Clay Bretches -- Chief Executive Officer and Director

Yes. Well first and foremost Spiro thanks for the question. But first and foremost the objective our foremost objective is to maximize value for Altus shareholders. So when we look at this we look at how we can do this the menu that we see before us is includes third-party business. It includes potential divestments partnerships some other form of combination or joint venture. Really nothing is off the table at this point in time. And again go back to the first and foremost objective and that is to maximize value. So we're entertaining a variety of ideas. We had a few inbounds from various banks and others that have ideas on ways to do this. We're also brainstorming internally on how we can do that. We're very active on the third-party side in terms of trying to attract business both from producers and other midstream players in the area and we have a good line of sight on that. We've actually started as we stated in our release we've actually started some third-party business taking off-spec natural gas liquids into our plants so that we can clean those up and make them marketable. And that's a nice margin business and something that we feel like that we can grow and scale up. As far as being able to bring in additional business on the third-party side we are very much open for business. We have state-of-the-art SRX technology or loss SRX technology cryo plants that have the highest recoveries in the basin.

So we think that that's going to be a strategic component in our arsenal. In addition to that we have connections to multiple pipelines both NGL and natural gas and we believe that getting those liquids out of the basin into the Gulf Coast and teaming up with Apache on those pipelines is going to make the Diamond facility the Diamond cryogenic facility very attractive for third-party business. In addition to that we've mentioned that we're looking at a sour gas gathering business which we think is something that we're going to see a great need for in the basin given the amount of sour gas associated sour gas that we see within a 30- or 40-mile range of the Diamond cryogenic processing facility where we can bring that gas in clean it up and process it all for fees. And we think that that's going to be a good business for us as we go forward. So we have a line of sight on several third-party ideas on the G&P side of the business. Let's not forget we have some great assets and those takeaway pipelines those four pipelines that we have equity interest in. Those are great cash flow assets that's going to sustain us in the near-term and the long term. Those are great assets in and of themselves stand-alone. But what we're really focusing on right now is what do we do with the G&P side of the business to make sure that we're maximizing value there.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. That was very helpful. And just on the JV assets it segues into my next question here you guys have laid out the G&P impact just from a volume perspective to the extent that you do see further declines in the basin. But just trying to get a sense of what's underlying your guidance with respect to JV price? Obviously a lot of those volumes do flow through those pipes a good amount of it is on MVC but you still have some volume risk. So just trying to get a sense of quantifying that. Is all that sort of in your guidance as well?

Clay Bretches -- Chief Executive Officer and Director

Yes. So let me take a swing at it and then I'll let Ben get over into the specifics. But you point out correctly the natural gas pipelines both Permian Highway and Gulf Coast Express MVC is on both of those. Fully subscribed great pipes great assets for us to have a piece of so we're super excited about those. The other two pipelines that don't have the MVC is mini MVCs let me put it that way. Shin Oak on the NGL side and then EPIC crude pipeline which has some MVCs more shorter-term in nature but there are some MVCs associated with that. But we continue to see volumes climb on EPIC and Ben can talk a little bit about that. We've been very conservative in the way that we forecast that but we believe that EPIC is a great crude pipeline. And we believe the destination in Corpus Christi is going to be strategic to Permian producers as we move forward. So we think that's going to be a really great pipe as time goes on. Shin Oak as well. We have a lot of confidence that Shin Oak is we'll see additional volumes on Shin Oak. They're running about 300000 a day right now on Shin Oak but we actually saw them just ramp up to 550000 barrels per day in the fourth quarter. We think we're going to see those volumes continue to grow as we see recovery occur.

And I mentioned this in my comments earlier that we see more ethane recovery occurring right now because of the awful Waha gas natural gas differential. The basis at Waha right now is driving a lot of producers into ethane recovery which should ramp up the volumes on Shin Oak. So we expect those volumes to be going up very soon. But all in all great set of assets more variability I guess you would say on both Shin Oak and EPIC. But again we feel really good about those assets. But Ben if you want to talk a little bit about how we model that and the way that those EBITDA targets were achieved?

Ben C. Rodgers -- Chief Financial Officer and Director

Yes. Clay hit most of that really the only thing to add is really just going back to what Enterprise said on their call recently with respect to Shin Oak is it's and it's in line with our comments too it's flowing approximately 300000 a day right now. And so but they fully expect to try and do more deals to increase volumes on that pipe. As well as us we can go out and any third-party deal that we work through would be incentivized to make sure that we can try and get Y-grade on that pipe as well. So in line with that we're not assuming a lot of herculean growth associated with the Shin Oak pipe it's kind of in and around that same 300000 number that they mentioned. And I think all the different aspects that go into it that Clay mentioned we took into account for our guidance level.

Operator

[Operator Instructions] Our next question comes from Becca Followill with U.S. Capital Advisors. Your line is now open.

Becca Followill -- U.S. Capital Advisors -- Analyst

Good afternoon, guys. On your slide deck you no longer have 2021 guidance. Can you speak to that?

Ben C. Rodgers -- Chief Financial Officer and Director

Yes. Becca it kind of goes to what we did last year as well. In line with what we've provided historically throughout the year as we get more clarity for what the following year is we provide updates. Didn't have not provided volume forecast more than a year out. So that goes into it. And kind of given the uncertainties around the third-party business that we're actively pursuing now that could move G&P volumes additional we know how dynamic the market is on the other JV pipes that we have flows from EPIC and Shin Oak. We are in close communication with those partners. And really a lot of the discussion we've had with each of those really goes one year out. And then the other piece is just the timing of PHP. We're at 27% equity owner with that the same as Kinder Morgan and EagleClaw. And the timing of that could move within the first quarter is what Kinder Morgan has said. And until we have more clarity on that I didn't want to put anything out there definitively. So we knew what we had in 2020 with respect to our G&P business and the JV pipes. Too many moving parts right now for us to land on a specific midpoint and guidance number for 2021.

Becca Followill -- U.S. Capital Advisors -- Analyst

Understood. And then next question is how much third-party business are you currently doing?

Ben C. Rodgers -- Chief Financial Officer and Director

The only third-party that we have right now is with respect to the NGL stabilization business that Clay mentioned it's at the cryogenic side it's with a counterparty that brings us off-spec Y-grade barrels. And just like he said we clean them up and sell back to them the condensate barrels that come out of that as well as we sell the Y-grade and the residue gas. And so that is something that we think we can grow. Our stabilization unit can handle upwards of 10000 barrels a day. And we're not doing that volume right now. I think our assumption for this year is pretty small. That is kind of a month-to-month style contract that we have but we've been processing that in 2020 so far. So it's just a good first step to show that we can attract third-party business to the entire site. Doesn't have to be just as a traditional producer. So it's again it's I think Clay mentioned that it's immaterial to our adjusted EBITDA forecast but it's a good step in the right direction.

Becca Followill -- U.S. Capital Advisors -- Analyst

And then my last question is when you look at the strategic review and you go back to the original reason that Altus was put out as a public company it was for an Alpine High. And that is no longer at least for now it's not no longer going to be developed. And you have a bunch equity stakes at pipes which are good but it's not what normally you would have as a stand-alone company. So does it make sense for Altus to be a stand-alone company in light of the change in philosophy on Alpine High?

Clay Bretches -- Chief Executive Officer and Director

So Becca this is Clay and to address that question it does make sense for now for us to be a stand-alone company as we are situated. You have to realize this is all fairly sudden. This has evolved over the last year to the point where we are now. We never expected to be in a situation where we were not going to be fully servicing Alpine High gas. If you go back to where we were a year ago not only did we expect to fill these three cryogenic plants with Alpine High gas we also expected to be starting plant number four in 2020 or early '21 with plant number five shortly thereafter. So this is a real turnaround. We always had an expectation that we would be pursuing third-party business particularly gas processing and gathering. We expected that to happen but we really weren't expecting that to happen until around year three. So what it has caused us to do is accelerate our program and really augment the commercial side of our business make sure that we have the proper business development staff in place where we can go out and do the work. But because this is fairly recent at least in terms of business development days because it does take time you don't just turn on a dime and start attracting third-party business. Furthermore with the three cryogenic plants and Apache thinking that they were going to utilize all three there wasn't a real willingness on Apache in the past for Altus to go out and they had first dibs on those plants to go out and pursue third-party business. Now that they have reduced the rig count to 0 and are not going to be pursuing any additional activity in the area in the foreseeable future Apache is working very closely with us to release that capacity so that we can open that up for third-party business.

In addition to that on the commercial side we work very closely with the Apache marketing and midstream group with regard to the capacity that they have on their pipeline on the pipelines that we own but Apache owns the capacity within those pipes. They own the firm transportation within the pipes particularly Gulf Coast Express Permian Highway and Shin Oak which are very much related to plant activities. But that said Apache is willing to add some of that capacity to the Altus service offering where we can gather others' gas their rich gas process it and then be able to offer some of that firm transportation on Apache's NGL and natural gas space which we get certain producers to the Gulf Coast. And we know this is very important particularly for those producers who like to take their barrels or their molecules of gas in kind to the Gulf Coast and trade them there. So it's really very appealing especially for some of your larger more integrated producers that would want something like that. In addition to that just from a service offering standpoint because of the way that this plant was built and it's state-of-the-art not only in its ability to recover but also when you take a look at our loss and unaccounted for gas which is almost nil. That's because the plant's dug tight we have some of the best technologies some of the best leak detection technologies and repair that exists. We make sure that we don't have leakage. So from an ESG standpoint I can tell you that our Altus Midstream facilities are better than any that are in the basin.

And I can make that claim very boldly that producers that are really trying to stay within their ESG boundaries and take their gas to a plant that is going to provide them the best service in terms of it being leakproof and checked on a regular basis to make sure that we don't have leaks and have the highest recoveries and very little flare time. We have our flare time with these three cryogenic plants that we have right now it's less than 1%. In the month of December it was 0.12% flare time. So reliability and ESG which is becoming more and more important to companies and particularly larger producers we think that that's something that we have going for us that's going to make this a business in the near term and the long term. So while this is a bit of a setback if you will going to 0 rigs with Apache it's not the end of the road. We're not in the ditch it just hastens our need to bring third-party business to the Diamond facility much faster than what we thought that we would have to. So stay tuned on this. We feel like this is something that we're going to be able to build on and we'll be able to share with you in the future. We have ongoing conversations with various producers with various midstream companies about potential for bringing in third party gas. So this the NGL the off-spec NGL work that we're doing right now de minimis and as far as moving the needle from an EBITDA standpoint. But stay tuned we really believe we're going to have a good story to tell with regard to third-party business in the quarters ahead.

Becca Followill -- U.S. Capital Advisors -- Analyst

Thank you.

Operator

Thank you, And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Clay Bretches for any closing remarks.

Clay Bretches -- Chief Executive Officer and Director

So thank you again for listening into our call. Before we end I want to leave you with some final thoughts. As we look ahead into 2020 and beyond I see a company and asset portfolio well positioned to compete despite increasing pressures and challenges on multiple industry and market fronts. Our SRX cryogenic processing technology offers best-in-class capability at scale. Our operational and on-time budget execution performance provide a strong track record in which future producer customers can feel confident as we compete for their business. Altus is proactive and purposeful ESG mindset most vividly illustrated by our very low and declining flaring and curtailment metrics bolster our competitive strengths as potential producer customers and midstream JV partners alike will increasingly seek to align with industry-leading performers in this important arena. And while our stock price performance has been disappointing our balance sheet and liquidity positions are sound providing Altus with differential flexibility to maneuver on a challenging and rapidly changing midstream landscape. I look forward to sharing with you our progress in 2020. Thank you and good day.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Patrick Cassidy -- Director of Investor Relations

Clay Bretches -- Chief Executive Officer and Director

Ben C. Rodgers -- Chief Financial Officer and Director

Spiro Dounis -- Credit Suisse -- Analyst

Becca Followill -- U.S. Capital Advisors -- Analyst

More ALTM analysis

All earnings call transcripts

AlphaStreet Logo