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Altus Midstream Company (NASDAQ:ALTM)
Q3 2020 Earnings Call
Nov 6, 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 Third Quarter 2020 Earnings Call. [Operator Instructions]

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

Patrick Cassidy -- Director of Investor Relations

Good afternoon, and thank you for joining us on Altus Midstream Company's Third Quarter 2020 Financial and Operational Results Conference Call. We will begin the call with an overview by Altus Midstream's 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. However, a number of factors could cause actual results to differ materially from what we discuss today. 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 President

Good afternoon, and thank you for joining Altus on its third quarter 2020 conference call. We had another good quarter as we saw commodity prices recover and many operators resume production activity in the Permian Basin. While there are still headwinds in front of us, it's encouraging to see signs of stability and progress, and we are cautiously optimistic about the outlook for the fourth quarter and 2021. On today's call, I'll discuss how Altus has evolved since going public two years ago, provide an update on our joint venture pipeline projects and our gathering and processing operations and comment on expectations for the remainder of this year and 2021. Ben will cover our financial performance and outlook, and then we'll take any questions from analysts in the queue. Altus Midstream has evolved significantly to adapt to a rapidly changing operating environment since becoming a public company in 2018. Since then, NGL prices have degraded by nearly 60%, which led to reduced drilling at Alpine High and a review of the opportunities in front of us. We adjusted quickly, shifting our business focus and capital investment from gas gathering and processing facilities in the Delaware Basin to the long-haul joint venture pipeline projects and options contributed to the company by Apache. We implemented new operational and commercial initiatives with the concentration on cost structure, pursuit of new revenue streams and elevated efforts to identify and evaluate strategic alternatives. This year's global pandemic and its impacts to commodity prices further validated those decisions. Through all the macro fluctuations, the company's assets haven't changed. We're nearly equally invested in our two businesses: Gathering and processing and long-haul pipelines. And our growth capital commitments are decreasing significantly across all of our assets. Altus remains a competitive Permian Basin focused midstream company.

While we're still very interested in gathering and processing, we recognize the changing drivers to our earnings profile. From where we stand today, our equity ownership in these JV pipeline projects will contribute the lion's share of Altus Midstream's EBITDA next year. We expect Permian Highway to be in service in the first quarter of 2021, which will result in all four JV pipeline projects being in service. This establishes a strong base that combines exposure to very well-known and respected midstream operators through a unique mix of long-haul pipeline equity ownership with state-of-the-art processing capabilities in the Delaware Basin. Altus is not the single-basin focused G&P company we looked like in 2018. I'll move now to a discussion of our assets, beginning with the JV pipeline projects. I'll start with the Permian Highway pipeline. Kinder Morgan noted in its recent third quarter release that PHP is more than 97% mechanically complete. It's on schedule to be placed into service early in 2021. PHP is designed to transport up to 2.1 billion cubic feet per day of natural gas through a 430-mile, 42-inch pipeline from the Waha area to U.S. Gulf Coast and Mexico markets. The pipeline is fully subscribed under long-term binding agreements and Altus owns approximately 27% of the project. Our other long-haul natural gas pipeline, Gulf Coast Express, continued its strong and steady performance, delivering results in line with our forecast. NGL volumes on the Shin Oak pipeline were relatively flat with the prior quarter. We forecast a modest ramp in volumes during 2021 as drilling activity is expected to pick up in the Permian Basin. Similarly, the EPIC Crude Oil Pipeline continues to be impacted by reduced production in the Permian Basin. Volumes are expected to gradually ramp as oil drilling increases. On the G&P side of the business, we have seen gas volumes recover from the second quarter, up 22%. This reflects both higher gathering system uptime and curtailed volumes coming back online. The third-party G&P market is soft right now, but it's not frozen, and there are still signs of deal flow picking up with a more favorable gas market and more stable oil prices.

We're seeing more opportunities, and we couldn't have said that three months ago. Even though we are not seeing a strong sense of urgency from producers, we are currently in discussions with third parties to process gas. As discussed previously, we have executed some smaller third-party deals, and we continue to look for larger ones. We have completed two compression service agreements with Apache at compressor stations outside of Alpine High, expanding our footprint in their Permian Basin portfolio. And we are looking for additional business, both with our sponsor and third parties in the region. We installed a product cooler at our NGL loading facility in April and have processed nearly 600 truckloads of off-spec condensate over the past six months. We commenced a load shedding transaction in June with our electric compressors. Building on this, we recently signed a contract to participate in an electricity grid response program starting in 2021 that will use generators we have on site. In aggregate, we expect these projects will contribute $4 million to $6 million in EBITDA per year, and we're working on additional transactions to monetize underutilized assets. Before moving on to my closing remarks, I want to note that we continue to attack our cost structure. And for the fifth consecutive quarter, have reduced our operating expenses on an absolute basis. Year-over-year, our operating expense is down 33%. This is particularly impressive as you consider the additional protocols and procedures we've put in place in the field to prevent the spread of COVID-19. Altus' operations have not been materially impacted by the coronavirus, and I want to recognize the team for their ongoing diligence in this effort. In fact, the execution of the Altus team since its start-up has been impressive, which is contributing to a more promising outlook for the year ahead. As we reviewed our strategic alternatives over the last 12 months, among various scenarios we considered were the timing and wherewithal for Altus to return capital to shareholders. With the positive execution seen across our operations and the imminent in-service date of PHP, we have much more confidence with our EBITDA forecast, especially the contributions from our JV pipeline projects. The forecast for distributable cash flow has also improved from the view we held earlier this year with increasing certainty of cash flows and limited future capital needs. Our leverage profile is manageable well within our covenants. For these reasons, we now expect to be able to support a substantial dividend beginning in 2021 as originally planned when Altus went public. We view this as the best option to maximize shareholder value. Ben will elaborate on this outlook in his remarks.

And now I will turn the call over to him.

Ben Rodgers -- Chief Financial Officer and Treasurer

Thank you, Clay. In my prepared remarks, I will briefly review our financial results for the third quarter, update our guidance for 2020 and 2021 and conclude with comments on our financing outlook through 2021 and plans to implement a dividend next year. As noted in the press release issued yesterday, Altus reported third quarter net income, including noncontrolling interest of $29 million. This included approximately $4 million related to an unrealized embedded derivative loss, which reflects a technical accounting revaluation of the embedded derivative in our preferred units at the end of the quarter. Excluding this and other items, Altus generated third quarter adjusted EBITDA of approximately $53 million, a 21% increase over the preceding quarter, which was impacted by both planned and unscheduled production curtailments. Approximately 71% of third quarter volumes were rich gas. Capital investments in midstream infrastructure during the quarter were approximately $134 million. This included approximately $119 million for the Permian Highway pipeline which, as Clay mentioned and Kinder Morgan recently announced, is nearly complete. On to guidance, which you can also review in the quarterly presentation posted on our website yesterday. Capital spending for 2020 will decline significantly in the fourth quarter as the Permian Highway pipeline moves into its commissioning stage. Consequently, our growth capital for this year is being refined to $330 million to $360 million. A slight increase in the midpoint but still under the upper limit of the range provided earlier this year. As we have done in the past, our guidance reflects our gross proportionate share of capital without taking project finance into account. EPIC Crude is the only JV pipeline that has project level financing and the upside of that debt earlier this year funded a portion of the project's capital overruns. Therefore, we expect our share of funding will be lower than the gross proportionate share we've outlined.

Gathered volumes for 2020 are still expected to range between 480 million to 520 million cubic feet per day with volumes currently trending toward the middle of the range due to production curtailments previously discussed. Moving on to other guidance items. Adjusted EBITDA for the year has been revised as we've updated our forecast from the JV pipes in our G&P business. We're lifting the lower end of our range to $170 million, raising the midpoint for the year to $180 million, up from $175 million in our last report. We're also updating 2020 distributable cash flow. Raising the midpoint based on expected higher cash distributions from our G&P operations and JV pipes. DCF for the year is now estimated to range between $115 million and $125 million. In line with previous DCF guidance, there are no cash distributions from EPIC included in 2020, given the priority to project level finance. Our 2021 guidance reflects a growth capital spending program that is nearly 0 after the first quarter. We also expect a significant ramp in cash flow, driven by our substantial 27% ownership in Permian Highway. 2021 forecasts include a modest volume ramp at Shin Oak, and we continue to exclude cash flow from EPIC in next year's DCF outlook. Please refer to the investor presentation posted yesterday for details on the positive revisions to our 2021 guidance. I'll now move on to our financing outlook. First and perhaps foremost, Altus has ample funding sources to execute plans through 2021 and beyond with a very manageable balance sheet and strong liquidity position. Our revolving credit facility extends through November 2023 and has investment-grade like covenants. In January, this facility was expanded to $800 million and $580 million was drawn at the end of the third quarter. We expect cash from operations and distributions from our JV pipelines, combined with available capacity on our revolver, to be more than sufficient to meet our capital needs.

We have no plans or need to access capital to finance our growth. Currently, we anticipate covenant leverage on our credit facility to be in a range of two to three times debt-to-adjusted EBITDA through 2022, which is well below the five times leverage covenant. I'd like to add to Clay's comments on our intention to initiate a dividend next year. We came to this decision recognizing that Altus has a strong balance sheet with minimal capital demands, and we are confident in the cash flows from our G&P assets and increased distributions from our JV pipes, particularly with the start-up of PHP. When we initiated our strategic review last year, returning capital to Altus shareholders was among the many ideas we examined. We engaged with the bank to consider a wide range of scenarios from taking no action to various mergers and divestments. After COVID hit, a number of alternatives were ruled out. But shortly thereafter, the outlook for Altus stabilized. And over the past several months, our confidence increased around PHP entering service. Following this extensive review of alternatives, we now believe a dividend is the best option to create value for Altus shareholders and are proposing a quarterly dividend of $1.50 per share. This payout reflects the strong cash flow generating capacity of Altus assets, while also maintaining very manageable credit metrics under the revolver. Pro forma for the proposed dividend, we still expect to be within the two to three times range of debt-to-adjusted EBITDA through 2022 that I mentioned earlier. Altus management believes now is the right time to initiate a significant return of capital through dividends, and we believe this could also expand Altus ownership to new potential investors seeking income and yield in an otherwise yield starved environment. Ultimately, this is an Altus Board decision. And though we have previewed it with our Board and received preliminary support, we will be requesting formal approval by the end of this year, paving the way for a dividend to start next year.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, Clay. Hey, Ben. How are you guys doing?

Ben Rodgers -- Chief Financial Officer and Treasurer

Hey, Spiro. Doing great, thank you.

Spiro Dounis -- Credit Suisse -- Analyst

Yeah, I can tell by my screen. Gonna shock you and start out with the dividend announcement. I was wondering if you guys provide a little bit more color on why $1.50 is the right amount? Why you ultimately reach that conclusion? I think another approach, of course, would have been a more gradual uplift over time, or a ramp up. Obviously, you decided against that, at least for now. So, would just love to know a little bit more about how that process went and why you landed here?

Ben Rodgers -- Chief Financial Officer and Treasurer

Sure. I think, first and foremost, the $1.50 per quarter, it does have kind of a sticker shock to it. But when you actually look at our cash generation from our underlying assets and kind of step back, it's really very manageable. The inverse of that from an annual standpoint, when you look at next year is a 1.8 times coverage to our distributable cash flow. And I think that's kinda where a lot of our midstream peers have been trending as kind of in the higher ones. And really just feel like that is prudent from a return of capital for our shareholders when we look at the amount of leverage that we're gonna have, which is extremely cheap debt, kind of in and around 1%. The preferred is -- has the 7% distribution rate. And so we feel like that level sets us up to where we can have a decent yield. I think the yield that that implied based on closing price last week was just outlining really the disconnect that we thought was implied in our share price. I didn't think that we were trading at a fair value. And so it's a very manageable dividend, and we think that that provides us enough flexibility. When you look into next year, Spiro, really the only variability that we may have is associated with Shin Oak. And we're not making herculean assumptions around Shin Oak. And think -- and it's performed very, very well even through COVID. And so that's gonna be the material driver to any type of variability. But even with the 1.8 times coverage, again, if you look at the inverse, we've got flexibility in there to manage through that and keep that dividend flat.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. That's helpful. And so maybe expanding on that a little bit further. I totally agree, you guys have plenty of capacity here in the near-term to cover that. And Clay, you alluded to this a little bit in your prepared remarks. It sounds like some of this was covered during the strategic review, but just thinking about what the complexion of Altus looks like longer term, pursuing growth opportunities, pursuing third-party business and M&A. I guess with this dividend, consuming a good amount of your free cash flow in Alpine High then on next year, and potentially after that without any new investment. How are you guys weighing the ability to use the remaining free cash flow you have to continue to grow that business to make sure that this is a sustainable and growing dividend over a longer period of time?

Clay Bretches -- Chief Executive Officer and President

No, it's a great question. And as Ben stated, what we have here is a good base level of cash flow to cover our current dividend for now and into the foreseeable future. But when it comes down to potential upside. We view two of our key assets as having that potential upside. Shin Oak being one of them because we believe that additional growth in the Permian Basin can grow that flow rate and ultimately, the EBITDA that comes from Shin Oak, and then also EPIC for that matter. But then a big piece of this is our gathering and processing business. We have some of the best assets in the Permian Basin. And while we're a little bit south of some of the Delaware Basin activity, we still feel like we're in throwing distance, and the ability to go after some of this third-party business that will come our way once there is a return of activity to the basin. So we do believe that there is growth potential on the G&P side, state-of-the-art of equipment, and it's -- from an ESG standpoint, it's some of the very best in the basin. And when you think about how other plants, other G&P processors in the basin with much older equipment and potential for regulations into the future, that's really gonna cause some problems for them. What we will see is that Altus is going to become one of the most attractive alternatives for gathering and processing. So we think we're sitting in a really good position. We've -- we continue to lower our cost structure on the gathering and processing side. So I think the upside is very good, very bright. And what we're covering right now with the $1.50 per quarter dividend, that's baseline, but we really believe that we'll have the ability to generate additional cash flow either for an increased dividend or some type of additional business, be it additional processing or additional gathering that we need to put into place, M&A type activity. But we think we'll be prepared for that one.

Spiro Dounis -- Credit Suisse -- Analyst

Great. Makes a lot of sense. Really appreciate the color today, guys. Congrats. Take care.

Ben Rodgers -- Chief Financial Officer and Treasurer

Thanks, Spiro. You too.

Operator

Your next question will come from the line of Timm Schneider with Citi.

Timm Schneider -- Citi -- Analyst

Hey. Good afternoon, guys. Hey, just a quick question. Obviously, your dividend announcement today can raise a lot of, I guess, confidence in future cash flows. A lot of that obviously coming from your JV project. Can you just maybe run us through by asset how much of that cash flow is kind of locked in under longer-term contracts versus what has spot exposure?

Ben Rodgers -- Chief Financial Officer and Treasurer

Hey, Timm. So as we've done in the past, we've not outlined EBITDA or DCF contributions by JV. You can see a large ramp next year coming from PHP. We aren't including any additional wells turned online in Alpine High or any third-party. And so, you can look at the percentage that our GMP is contributing this year compared to next year. And so, it's over 50%, I believe, of our EBITDA comes from both GCX and PHP, but we haven't provided a breakdown beyond that.

Timm Schneider -- Citi -- Analyst

Okay. Got it. So sort of read-through basically, and you don't have to get specific than this, kinda assuming Alpine High, it is what it is for now. But going forward, do you guys have a pretty -- a lot of confidence those cash flows will come in? There wasn't a lot of -- you're not skating close to the edge, having announced a big dividend is basically what I'm getting at in terms of cash flow from those JVs.

Clay Bretches -- Chief Executive Officer and President

No, Timm, we're not skating close to the edge at all. We take a look at this and we take a look at our present production and decline at Alpine High. We're not -- as Ben stated, we're not adding any third-party. We're not adding additional activity at Alpine High. So it's really -- the whole thing is substantiated by what we'll have coming from Alpine High in its present state with no additional -- no new drills. And then also very conservative views of what these pipelines will be able to deliver in terms of EBITDA as we go forward.

Ben Rodgers -- Chief Financial Officer and Treasurer

Yeah, and just to add on to that. For PHP, same operator, fantastic operator that -- with Kinder Morgan that we're partners with on GCX. And so having gone through the start-up of GCX and experienced the time that it takes to get that up and going for such a large two Bcf a day pipeline, it's a pretty good blueprint for what's gonna happen with PHP. So, very confident around everything that they've announced, that they'll get there on time. So that does provide a lot of stability to our cash flow. Shin Oak, great partner in enterprise, doing a lot to get the volumes on that pipe up as well. And then to Clay's point, from a third-party standpoint, even though this is a, I think, a big dividend from a per share basis, the -- if you look at the amount of cash that we're able to put aside or -- which we can use for third-party, we can pay down debt. We've also got upwards of $200 million plus of liquidity on our revolver. And you think about third-party, we already have over 600 million a day of processing. And so that's where a lot of new capital, as you know, has to go into. And so then you're just looking at gathering. So we could swallow some third-party deals without having to outlay a bunch of capital, which would then be accretive to cash flow. Anything we look at is gonna be accretive to cash flow and keeping our leverage in check-in. And so we feel like we have a prudent amount of debt. There's a lot of our peers that also have preferred equity just like we do, and thought that the dividend was very prudent, and it still doesn't close the door on anything as we look into the future.

Timm Schneider -- Citi -- Analyst

Got it. And maybe last one here real quick. I'm assuming this decision, obviously, didn't happen overnight, but it took you guys a couple of weeks, months, however long to reach that conclusion. So I'm assuming the outcome of this presidential election, looks like it is Biden at this point, is not -- doesn't have anything to do with this on the regulatory front or anything else? I mean, in terms of -- were you guys being worried about it?

Clay Bretches -- Chief Executive Officer and President

No. From the political landscape, we feel like, that the assets are going to do well no matter what. And perhaps it might even do better under a Biden presidency just because of what could happen from a regulatory standpoint on federal lands. But if you take a look at the throughput through all of our equity ownership positions in the pipelines, and you take a look at the gas throughput through our plants and our gathering systems, none of that is related to federal lands, and maybe a small portion on the pipelines, but a very small portion on the pipelines. So we really feel very insulated from that. And again, it may be a little bit more of a bullish scenario in terms of overall basin activity with a Biden presidency.

Timm Schneider -- Citi -- Analyst

Got it. Appreciate all the color. Thank you.

Operator

[Operator Instructions] We do have a question from Heather Gornik with Barclays.

Ben Rodgers -- Chief Financial Officer and Treasurer

Good afternoon, Heather.

Heather Gornik -- Barclays -- Analyst

Hi, good afternoon. Appreciate all the commentary on the dividend. Naturally great to see that announcement out yesterday. I just wanted to touch base on the preferred, to get your latest thinking there in light of the anticipated dividend policy. I think the latest messaging has been the potential peak out in the late '21 or early '22 timeframe. But wanted to see if there's any shift in timing or financing considerations there.

Ben Rodgers -- Chief Financial Officer and Treasurer

Hey, Heather, this is Ben. Not really a shift. We've got the capacity under our revolver and with the preferred. I think, again, when you look at that Excel math, the crossover, the MOIC and the IRR puts it kinda late '21 or early '22. So we've got, I think, plenty of time to work through our refinancing alternatives on the preferred. And in the meantime, it's a very manageable 7% distribution rate. And so, public company, we've got plenty of different options as you think of capital markets. And obviously, anything we do with the preferred and our balance sheet in a whole is going to make sure that we do it in a prudent fashion, and not overlever ourselves. And obviously, with the dividend starting -- hopefully, starting next year, protecting that -- the viability of that moving forward. Our cash flows and the business that you can -- as you can see from how we've done very well this year on EBITDA and DCF, and expect to continue that into next year. The cash flows from our assets, obviously, can support a balance sheet that we have plus a dividend, and we're gonna make sure that any financing instruments we put in place continue to do that.

Heather Gornik -- Barclays -- Analyst

Okay, got it. Makes sense. That's it for me. Thanks for the -- taking the question.

Ben Rodgers -- Chief Financial Officer and Treasurer

Sure thing. Thanks, Heather.

Operator

[Operator Instructions] And there are no further questions at this time. I will turn the call back over to Clay Bertrand for closing remarks.

Clay Bretches -- Chief Executive Officer and President

Okay. I would like to thank everyone for dialing into our call today. I'd like to leave you with the following thoughts about Altus Midstream. First, our outlook has improved considerably with the expected start-up of the Permian Highway pipeline. Like Gulf Coast Express, it is fully subscribed with minimum volume commitments. However, we have a more material 27% ownership in PHP. We have revised upwards several of our guidance items for 2020 and 2021, including adjusted EBITDA and distributable cash flow. These estimates do not include new third-party business nor additional wells turned online at Alpine High, including the three DUCs mentioned on Apache's call this morning. Finally, I would note that last month, we announced that Joe Frana has joined Altus Midstream's Board of Directors. We welcome him to the Board and look forward to working with him. I would like to thank Doug Johnson, who retired from our Board in September for his service to the company. Now I will return the call to the operator.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Patrick Cassidy -- Director of Investor Relations

Clay Bretches -- Chief Executive Officer and President

Ben Rodgers -- Chief Financial Officer and Treasurer

Spiro Dounis -- Credit Suisse -- Analyst

Timm Schneider -- Citi -- Analyst

Heather Gornik -- Barclays -- Analyst

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