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OASIS MIDSTREAM PARTNERS LP (OMP) Q4 2020 Earnings Call Transcript

By Motley Fool Transcribing - Mar 3, 2021 at 10:57AM

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OMP earnings call for the period ending December 31, 2020.

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OASIS MIDSTREAM PARTNERS LP (OMP)
Q4 2020 Earnings Call
Feb 25, 2021, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jason, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the fourth-quarter 2020 earnings release and operations update for Oasis Midstream Partners. [Operator instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Richard Robuck, Oasis Midstream's CFO, to begin the conference. Thank you. You may begin your conference.

Richard Robuck -- Chief Financial Officer

Great. Thanks a lot, Jason. Good morning, everyone. This is Richard Robuck.

As noted today, we are reporting our year-end and fourth-quarter 2020 financial and operational results. We are delighted to have you on our call today joined by Taylor Reid and Michael Lou, as well as some other members of the team. Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call.

Those risks include, among others, matters that we described in our earnings release, as well as our filings with the Securities and Exchange Commission, including our annual report and on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we'll also make references to certain non-GAAP financial measures and reconciliations to applicable GAAP measures can be found on our earnings release and on our website. We will also reference our current investor presentation, which you will be able to find on our website.

With that, I'll turn the call over to Taylor.

Taylor Reid -- Director, President, and Chief Operating Officer

Good morning, everyone, and thanks for joining our call. Fourth-quarter results reflect another quarter of solid operating and financial performance. Oasis Midstream Partners continues to adjust to the new normal and remains focused on the health and safety of our employees, contractors and our communities. The team did an exceptional job in 2020, pivoting to a slim-down capital program and delivered strong cost control, which kept our margins healthy despite the headwind from lower upstream activity.

In January 2021, Oasis, our sponsor outlined a new strategy sharply focused on enhanced returns and return of capital to shareholders. Naturally, OMP investors have questions on what the implications are for OMP. So I think it's worth spending some time here. The new Oasis is a great anchor tenant with an amazing outlook, which we feel is positive for OMP as well.

First, Oasis is in a much stronger financial position with peer-leading leverage and a leaner cost structure. This gives Oasis the ability to run a steady, resilient development program, which is less likely to shift with market prices. Second, because Oasis improved position, add stability to OMP's financial outlook, we now have a better hand in negotiating and capturing third-party opportunities. The team has done a great job building an extensive, diverse portfolio of third-party business, and we're currently negotiating multiple projects, which could further expand that.

And finally, Oasis' deep development inventory in two premier basins remains intact. Oasis has a strong track record of involving OMP through mutually beneficial arrangements, and we expect to continue to add in the future. Additionally, Oasis' strong operating team, clean balance sheet and lean cost structure may get a natural consolidator of assets, which could ultimately benefit OMP. Having a strong balance sheet is an important part of our strategy as well.

OMP was deliberately structured at its IPO to stand on its own and be resilient to customer and market fluctuations. OMP's financial leverage was maintained at relatively modest levels compared to many GMP peers during 2020, as OMP judiciously elected to hold the distribution flat in 2020 while prioritizing the long-term strength of the balance sheet. Moving on to the quarter. Fourth-quarter performance benefited from strong third-party volumes, which offset expected natural declines from our sponsor.

Additionally, good cost control drove substantial cash generation and strong coverage of 1.6 times on our distribution of $0.54 per share. We will continue to monitor the environment in OMP's operational and financial outlook to inform decisions on future distributions, which will be largely directed by the targeted long-term leverage target of 2.75 times to 3.2 times. Capital spending remained light in the fourth quarter as our sponsor deferred some activity to 2021. Overall, 2020 capital was down about 70% from our original budget.

Our capital-efficient infrastructure allowed us to reduce spending to very low levels while maintaining strong margins. While spending was curtailed significantly in 2020, reflecting the environment, as we'll discuss in a bit, spending will pick up again this year as we prepare for Oasis next series of projects. Before I hand it over to Michael, I just want to recognize the OMP team for their strong contributions in 2020. It was certainly a difficult year on a lot of fronts, but the team was able to remain focused and was successful in aggressively lowering both capital and operating costs, which helps the whole organization.

I'll now turn the call over to Michael to get into a little more operational detail.

Michael Lou -- President and Director, General Partner

Thanks, Taylor. Operating performance remains strong at OMP. Capture rates remain at very high levels as OMP system experienced little downtime and allowed our sponsor to maintain its peer-leading performance in gas capture, as well as oil and water captured on pipeline. In the fourth quarter, we saw improvement in third-party activity, and we continue to see momentum early in 2021.

It's worth noting that OMP's asset base is situated in one of the best parts of the Williston Basin in close proximity to strong levels of activity. Wild Basin capture was about 98% in the fourth quarter, which compares to approximately 93% across North Dakota. I commend the operating team for strong performance in both cost control and product capture and challenge them to keep up the good work. As a reminder, natural gas-related business is the primary driver of OMP's financials, accounting for approximately 60% of our fee-based revenue.

As we look into 2021, capital spending is expected to increase as we prepare for our sponsor's next project, South Nesson. This project is adjacent to Oasis' Wild Basin acreage and is expected to be as prolific, which supports a strong fee-based cash flow stream for OMP. Full-year 2021 capex net to OMP is expected to be $56 million to $60 million. And the South Nesson spend in 2021 ranges between $40 million and $44 million with cash flow benefits from South Nesson expected in 2022.

Importantly, leverage exiting 2021 is expected to remain around current levels despite the increase in spending this year. As always, our capital projections do not include the impact of incremental third-party business that might be won over the course of the year. 2021 EBITDA, net to OMP, is expected to range between $137 million to $146 million, reflecting a steady program at Oasis and with third parties. We've provided gross EBITDA guidance by DevCo in our investor presentation on Page 12, consistent with how we report.

OMP is anchored by assets situated in the 2 of the best oil basins in the U.S. and has had a strong track record in making accretive investments and leveraging our scale by securing a diverse portfolio of third-party customers. We look forward to continued operational excellence in 2021 and beyond. With that, I'll hand the call over to Richard.

Richard Robuck -- Chief Financial Officer

Thanks, Michael. OMP's financial position and outlook continues to be differential in our industry. EBITDA has grown from $43 million when we IPO-ed back in 2017 to $144 million in 2020, driven by a combination of support from our sponsor, as well as growing third-party business. Additionally, you've seen the operations team at OMP deliver on operating costs, as they adapted quickly to ensure we have an optimized cost structure for whatever environment we're operating in.

The Midstream team continues to find ways to drive more efficient operations. Last night, we announced that we were holding distributions flat, once again, even with strong distribution coverage of 1.6 times in the fourth quarter. Throughout 2020, you saw OMP show commitment to its long-term financial health as we generated $36 million of free cash flow after distributions while protecting our balance sheet. With positive free cash flow leverage of about just over three times at $130 million of liquidity, we are in an extremely enviable position, especially on the heels of the impact that 2020 had on the broader energy sector.

Our commitment to financial strength will continue as we march forward, and we currently expect leverage to remain at similar levels through the end of 2021. In closing, it was a difficult year for the industry, but OMP rose to the challenge and once again executed exceptionally well given the circumstances. Conditions improved in the back half of the year, but volatility remains high. OMP will manage the business prudently by keeping a laser focus on cost while maintaining flexibility.

I'll now hand the call over to Jason to open up the line for questions.

Questions & Answers:

Operator

[Operator instructions] There are no questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Reid for any closing remarks.

Taylor Reid -- Director, President, and Chief Operating Officer

Thanks, Jason. In closing, fourth-quarter results demonstrate continued execution. As OMP managed costs well and benefited from resilient third-party volumes. The team is focused on controlling everything in its power to improve operations and maximize shareholder value.

As always, we will make ourselves available for any follow-up questions. Thanks again for joining the call today.

Operator

[Opertor signoff]

Duration: 13 minutes

Call participants:

Richard Robuck -- Chief Financial Officer

Taylor Reid -- Director, President, and Chief Operating Officer

Michael Lou -- President and Director, General Partner

All earnings call transcripts

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