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Noble Midstream Partners LP (NYSE:NBLX)
Q1 2020 Earnings Call
May 9, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Noble Midstream First Quarter 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

Park Carrere -- Manager, Investor Relations

Thank you, and good morning, everyone. And welcome to the Noble Midstream Partners first quarter 2020 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; Chris Stavinoha, Director of Capital Projects; and Barry Guice, Director of Operations.

This morning, we announced first quarter 2020 results as well as updated 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-Q 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 Smolik -- Chief Executive Officer

Thanks, Park. Good morning, everyone. I'd like to first say to everyone on the call that I hope you and your families are well and have remained safe. In response to COVID-19, Noble Midstream made an early decision to transition to work from home to protect the health and safety of our office-based workforce.

Our field personnel continue to report to our operating sites took precautions to keep themselves safe from the virus and work very hard to maintain safe and efficient operations. I'm very proud of our response and the uninterrupted customer service that we delivered and I'd like to thank all of our employees and contractors that made that possible. So far our ability to gather oil and gas and produce water and execute on our capital projects has not been impacted by the virus. Robin will share more of our Q1 execution in a moment.

During the quarter we reacted quickly at Noble Midstream to protect our business and prioritize our balance sheet and liquidity. We reduced our organic capital expenditures by over $140 million through additional capital efficiency gains and lower operator activity. We delivered a 15% reduction in operating costs from our contractor negotiations, lowering supply chain cost and project deferrals.

We reduced our net G&A cost through multiple methods, including lowering cash management -- cash compensation for management and enacting a new furlough program. And lastly management and the Board made the difficult but prudent decision to reduce our distribution nearly 75% saving approximately $200 million in annualized cash flow to further protect the balance sheet.

We outperformed on all of our Q1 guidance metrics and continue to execute well on what we can control. Oil, gas and produced water gathering volumes all benefited from accelerated new well delivery and well connect timing. This all led to record quarterly EBITDA. Going forward, we expect a fairly limited completion activity beyond early Q2.

Before I turn the call over to Robin, I want to highlight Noble Midstream's key differentiators and important inflection points within our business. First, in our gathering business, the Partnership has spent capital to build out the necessary infrastructure in each basin over the last couple of years. We now have the backbone infrastructure in place to efficiently add new connections and continue to reduce our capital cost per well.

Second, over the last several years we've diversified our business with the addition of intermediate and long-haul pipelines. Investments in these projects was nearly complete in the first quarter. As we move past the investment phase, we expect to see growth in high-quality, contracted EBITDA and free cash flow that will differentiate us from gathering peers.

The EPIC Crude and Delaware Crossing pipelines are online and flowing and we anticipate the EPIC Y-grade to transition to full service very soon. With approximately 65% of the 2020 estimated throughput backed by minimum volume commitments, Noble Midstream now has line of sight to growing EBITDA from our transmission business.

Beginning in Q2, these inflection points will transition Noble Midstream into a self-funding entity, without the need for additional equity investment. So going forward we'll continue to prioritize capital discipline, free cash flow generation and debt reduction.

With that, I'll now turn the call over to Robin, to update on operations and guidance.

Robin Fielder -- President and Chief Operating Officer

Thanks Brent. During the first quarter, Noble Midstream's core gathering business, outdelivered volumes expectations, benefiting from higher run times across our systems, and excellent project execution. This strong throughput coupled with operating efficiencies and cost reductions, contributed to the record EBITDA and distributable cash flow that Partnership generated.

The team delivered fresh water to 58 completions and added nearly 140 well connections into our gathering systems, across both basins during the quarter. In addition, tankage was expanded on the Black Diamond crude gathering system, in the DJ Basin with 60,000 barrels of oil storage completed during the first quarter and an incremental 30,000 barrels added in late April.

Turning to the 2020 outlook, we have suspended gathering guidance due to the uncertainty around the volume and duration of customer production curtailments over the next several months, yet we provided an updated full year outlook for capital investments and other key financial metrics based on scenario analysis.

We assumed moderate customer curtailment across gathering and transmission segments in the high-end of our guided ranges. And significant curtailment through August, in the lower bound of our ranges. These curtailments and adjustments of gathering fresh water delivery and transportation forecast due to reduced activity, translate into annual adjusted net EBITDA of $370 million to $410 million. And a range of distributable cash flow of $280 million to $310 million.

Despite per-well connections the Partnership reduced, per-well connection cost more than 25%, in the first few months of this year. As a result of these efficiency gains and project deferrals, we have reduced our organic capital budget, an additional 30-plus percent from our March update. And now anticipate a capital range of $60 million to $80 million this year.

In total, we have lowered capital expectations by more than 65% from our original February guidance, these reductions further enhance our free cash flow generation, beginning in the second quarter and continuing for the remainder of this year, and highlights our resiliency and ability to efficiently reallocate resources to align with customer activity.

Looking ahead, early in the second quarter, we connected 54 wells in the DJ Basin and anticipate approximately two rigs across our acreage dedications for the remainder of the year. When Noble recommences completion activity, we are well positioned to quickly connect new wells for minimal cost due to the synergies of road development.

In the Permian Basin, we anticipate an additional half a dozen well connections early in the second quarter, before a pause on new projects, with activity expected to resume in late 2020. As a result of these activity reductions, we are planning for minimal organic capital spend for the remainder of 2020 and are currently evaluating optimization of our facilities to reduce operating expense.

Meanwhile, we have already identified $15 million to $20 million in total expense savings for the year. We will continue to work with our existing and potential customer base on timing and future development opportunities. And we'll be cautious before committing incremental capital, until we have further line of sight on activity plans which are likely to be supported by improved commodity prices.

I will now turn the call over to Tom, to update you on equity investments and the balance sheet.

Tom Christensen -- Chief Financial Officer

Thanks Robin. First an update on our pipelines, effective February 1st, Black Diamond our partially owned subsidiary, acquired a 20% ownership stake in the Saddlehorn pipeline for $160 million or $87 million net to Noble Midstream.

During the first two months of ownership Saddlehorn generated earnings of $4.6 million for Black Diamond or $2.5 million net to Noble Midstream. We also saw volume improvement from EPIC Crude during the first quarter as the crude line transitioned to permanent service.

Despite near-term activity headwinds we continue to believe that EPIC Crude is advantaged in this environment, as the new build pipeline EPIC Crude has lower operating costs than existing pipelines. And its recent market-based tariffs reduced its exposure to near-term rate renegotiations.

Its dock space, in Corpus Christi provides customers with access to premium pricing, in international crude markets. And it adds over 5.1 million barrels of crude storage online now, with an additional 1.8 million expected later this summer.

Y-Grade is currently transitioning from interim service back to NGL service and is on target to start up during the second quarter. In this uncertain investing backdrop, the JV partners have delayed the completion of the second greenfield fractionator until the second half of the year when we expect to have better visibility as to the depth of this market downturn. Delaware Crossing entered full service on time and on budget during the quarter and began transporting crude from the Southern Delaware Basin to Wink.

Benefits of this asset include that it is tied into multiple customer terminals in a drilling hub in the Permian Basin and its connectivity in the EPIC Crude mainline allows us and -- allows our current and future customers low-cost access to the Gulf. In addition to these recent portfolio enhancements, we continue to see solid performance from our Advantage and White Cliffs pipeline investments. These pipeline investments coupled with our fresh water MVC provide quality and stability to the Partnership's cash flow profile and will help us to navigate an uncertain 2020.

Now to first quarter financials. Noble Midstream had a record quarter with $107 million of adjusted EBITDA and $94 million of distributable cash flow. This is the first full quarter reflecting the impact of our recent drop simplification transaction. During the quarter, we spent $43 million on organic capital expenditures and $148 million on equity investments. These investments were made to acquire the Saddlehorn interest and meet the funding requirements of our other pipeline investments.

For the full year, we now expect equity investment capital to be between $240 million and $260 million. The current price dislocation has caused us to lower our near-term price forecast for our third-party DJ gathering business and has resulted in the Partnership recording a goodwill impairment of $110 million or $60 million net to Noble Midstream. This goodwill was related to the 2018 acquisition of our Black Diamond gathering system. It's worth mentioning that the fair value analysis used in assessing goodwill for impairment does not include our recent valuable investment in Saddlehorn pipeline.

The Partnership is on path to be self-funding even in this low to no-activity environment, which highlights the support of our sponsor in creating a long-term sustainable and valuable midstream company. Additionally, we expect that our distribution coverage will remain above 4 times in 2020. Returning capital to unitholders remains an important priority for the Partnership. We will continue to monitor both our business and the market conditions as we assess the appropriateness of our distribution each quarter.

We ended the quarter with 4 times leverage and over $400 million in liquidity. Additionally, we are actively working to extend the debt maturities that come due in the back half of 2021 and in 2022. We believe that even in disparate curtailment scenarios, we will remain safely below our 5 times debt covenant threshold. As a company, we understand that lower leverage will be essential to keep the partnership competitive through commodity cycles.

With our target leverage of 3 times we are laser-focused on reducing the absolute amount of our debt during the slowdown. Our assets are well positioned to immediately generate the excess cash flows needed to begin this deleveraging process and I look forward to updating you on our progress as we move throughout the year.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet -- JPMorgan -- Analyst

Hey, good morning guys. This is James on for Jeremy. I wanted to start here with the DJ outlook. It seems from Noble's call earlier as well as midstream peers like DCP yesterday that the DJ Basin seems pretty solid through April and even constructive. But I was wondering given your guidance assumes curtailments already in June, how you're seeing that play out through May and just talk about maybe the near-term outlook there?

Robin Fielder -- President and Chief Operating Officer

Sure. Thanks for the question James. As I mentioned in my prepared remarks in the DJ, we continue to see drilling rig activity and even through early April and into May we're seeing continuing well connection. So we do have activity. And then on the customer curtailment side as our sponsor mentioned earlier, we are anticipating to see some of that in the second quarter, but really not seeing it across our meters yet early in May since we're a month or a week into this month. But as we look forward to June, we've put some of that into our scenario analysis and our forward look with respect to our guidance on EBITDA and distributable cash flow and the associated leverage with that.

So certainly not as constructive as before, but we're well prepared there potentially even for when the activity resumes later in the year because we've got a lot of sister section development and our gathering systems are largely already in place. So it will just be incremental well connections but in some cases just turning on Econodes.

Jeremy Tonet -- JPMorgan -- Analyst

Got it. That's helpful. And then in the last quarter you mentioned, I think in your guidance you don't have any EPIC distributions. Is that still the case?

Brent Smolik -- Chief Executive Officer

Yes. It is.

Jeremy Tonet -- JPMorgan -- Analyst

Okay, great. That covers for me. I appreciate the questions.

Brent Smolik -- Chief Executive Officer

Thanks, James.

Operator

The next question is from Pearce Hammond of Simmons Energy. Please go ahead.

Pearce Hammond -- Simmons Energy -- Analyst

Good morning, and thanks for taking my questions. My first question is what is the path to bring in the distribution coverage ratio back down? And in a normalized environment, when we get past all of this COVID and the oil price implosion, what would you say would be the target distribution coverage?

Brent Smolik -- Chief Executive Officer

Yes. I think this is -- Pearce, this is Brent. I think you should think about it in terms of priority that we'll be near-term-focused on the balance sheet and debt reduction as we moved out of the heavy investment phase and as we move forward I think we'll stay focused there. But as we start to get more comfortably close to the 3 times target, we can start thinking about increasing distributions again later.

Pearce Hammond -- Simmons Energy -- Analyst

Okay. Thank you. And then as my follow-on, appreciate the guidance that you provided the leverage ratio this year 3.9 times to 4.3 times. And picking up on your comments just a few moments ago again in a normalized environment, what do you think the ultimate target should be for the leverage ratio for NBLX?

Brent Smolik -- Chief Executive Officer

We're shooting for 3 times or lower.

Robin Fielder -- President and Chief Operating Officer

Yes. And Pearce this is Robin. I'll add to both of your questions some additional color. As you know we've got much of our gathering backbone in place and much of our JV investments, those pipelines have -- are starting to turn on right now. So much of that spend is behind us. So we're well set up to have minimal capital investments as we move into next year. So then it's just a matter of turning on incremental well connects. So as far as our program outlook we're set up quite nicely especially with all the cost reductions we've been able to roll through the system to really continue to generate free cash flow like we stated we expect starting this quarter.

Pearce Hammond -- Simmons Energy -- Analyst

Okay. Thank you very much, Robin.

Robin Fielder -- President and Chief Operating Officer

Thanks, Pearce.

Operator

[Operator Instructions] There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Brent Smolik for closing remarks.

Brent Smolik -- Chief Executive Officer

I just want to thank everybody for your time today and I hope your families all remain safe. We're in some -- obviously some very unprecedented times in the industry, but we are starting to see some positive developments. When you look at producer capital reductions and the announced shut-ins and the OPEC+ supply cuts in the beginnings of maybe the recovery globally from COVID-19. I think all that sets up well for producers increasing activity later this year, early next and increasing throughput. And when they do so we'll be ready to increase with them. Thank you.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Park Carrere -- Manager, Investor Relations

Brent Smolik -- Chief Executive Officer

Robin Fielder -- President and Chief Operating Officer

Tom Christensen -- Chief Financial Officer

Jeremy Tonet -- JPMorgan -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

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