OASIS MIDSTREAM PARTNERS LP (OMP) Q1 2021 Earnings Call Transcript

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OASIS MIDSTREAM PARTNERS LP (OMP)
Q1 2021 Earnings Call
May 06, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Oasis Midstream Partners first-quarter earnings results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Robuck, chief financial officer. Please go ahead.

Richard Robuck -- Chief Financial Officer

Thanks, Sarah. Good morning, everyone. Today, we're reporting our first quarter of 2021 financial and operational results. We are delighted to have you on our call today.

I'm joined by Taylor Reid and Michael Lou, as well as 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 have described in our earnings release, as well as our filings with the Securities and Exchange Commission, including our annual report 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 will also make reference to certain non-GAAP financial measures and reconciliations to applicable GAAP measures that can be found in our earnings release and on our website. We will also reference our investor presentation, which you can also find on our website. With that, I'll turn the call over to Taylor.

Taylor Reid -- Chief Executive Officer

Good morning, everyone. And thanks for joining our call. OMP delivered another great quarter as the team has done a fantastic job winning new business, managing cost and maximizing margins while maintaining a strong safety record. Because of the team's hard work, OMP is in a strong, competitive position, and we remain excited about our long-term outlook.

I'd like to highlight a handful of key points. First, OMP's first-quarter performance was impressive as EBITDA proforma for the acquisition was above expectations and distribution coverage was solid. Cost control was excellent, and margins were healthy as the company exceeded all volume forecasts. Second, shortly after the quarter, the team signed several incremental third-party contracts in both the Williston and Delaware basins, ranging from some short-term water gathering and disposal deals to longer-term gas gathering and processing.

We continue to work a robust pipeline of new opportunities in both basins. Third, on March 30, we announced the successful closing of our purchase of remaining interest in the Bobcat and Beartooth DevCos in simplification of our financial structure. This transaction is extremely attractive for our investors by allowing OMP to increase its scale in a creative manner while improving its competitive position to capitalize on future opportunities. Fourth, we declared a cash distribution of $0.55 per unit in the first quarter, representing a $0.01 increase from fourth-quarter levels.

This is our first distribution increase since 2019, and it shows our confidence in our opportunities in business as we move ahead. Fifth, our sponsor, Oasis Petroleum, announced an acquisition in the Williston Basin, which provides additional optionality for OMP. Oasis has indicated that, post integration, it expects similar or higher volumes in OMP-dedicated areas, Oasis becoming an even stronger anchor tenant with more size and scale and a deeper inventory, along with its purely financial position, allowing for a steady, resilient development program. And finally, OMP remains an attractive investment opportunity.

The recently announced acquisition, as well as strong traction on securing third-party business, put us in a compelling position to maintain healthy distribution levels while keeping our leverage within our targets for the foreseeable future. We look forward to executing our plan in 2021 and beyond. I'll now turn the call over to Michael to get into a little more operational detail.

Michael Lou -- President and Director

Thanks, Taylor. The team continues to operate well and exceed expectations. Capture rates remain at very high levels as OMP's systems experienced a 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 first quarter versus the prior quarter, expected volumes were generally flat or declined slightly across most commodity streams, reflecting limited activity from our sponsor and others.

However, as we move to the second half of 2021, volumes are expected to increase, as you can see in our guidance. OMP's asset base is situated in one of the best parts of the Williston and Delaware basins and in close proximity to strong levels of activity. Given our customers' plans and the recent new commercial transactions, we are seeing a great trajectory for our multiyear plans. Clearly, 2020 was an unprecedented year for the world and for the energy industry.

Now a few months into 2021, we've obviously had a significant amount of change since last year, both from a macro perspective and from an activity-level perspective. At the OMP level, we've seen major changes as well. You're all familiar with the recent acquisition of the remaining DevCo interests, which was highly accretive to OMP. Additionally, as part of the simplification, OMP was given the right of first refusal on a couple of large projects in Painted Woods and the city of Williston.

Finally, the outlook for third-party business has improved tremendously, and you've seen we've already been able to sign a few new deals that weren't in last year's projections and continue to work on a robust pipeline of additional opportunities. We've always been in a great position with a strong distribution coverage and a strong balance sheet, which allowed us to keep our distributions while many of our peers cut their distributions. Given our current outlook, we expect to be able to continue to keep a strong distribution coverage and keep leverage inside our target ranges. Turning to gas capture.

Wild Basin gas capture was about 99% in the first quarter, which compares to approximately 91% across North Dakota. As a reminder, natural gas-related business is the primary driver of OMP's financials, accounting for approximately 60% of our fee-based revenue. Reported capital spending during the first quarter was approximately $232 million, reflecting the cash component of the acquisition, along with purchase price adjustments related to the January 1 effective date and the purchase of legacy South Nesson infrastructure that was included in February guidance. Adjusting for these items, OMP is on track with a $63 million to $68 million of gross 2021 capital expenditures, outlined with February guidance, with approximately $53 million to $58 million of capital spending expected in the remaining nine months of 2021.

We are pleased to raise 2021 EBITDA to 221 to $232 million. And separately, we've provided a gross EBITDA guidance by DevCo in our investor presentation, consistent with how we report. With that, I'll hand the call over to Richard.

Richard Robuck -- Chief Financial Officer

Thanks, Michael. OMP is executing well on both basins, where Oasis' low-cost inventory and third-party contributions support our outlook. OMP's financial position and outlook continue to be differential in our industry. As you can see on Slide 11 in our investor presentation, OMP's EBITDA has grown from $43 million when we IPO-ed back in 2017 to an expected range of $228 million to $232 million in 2021.

A large part of the financial success stems from our operations team continuing to find ways to drive more efficient operations. They stepped it up again in the first quarter, delivering expanded EBITDA margins that exceeded expectations. Last night, along with our first-quarter press release, we announced that we were increasing our distribution by $0.01 to $0.55 per unit while still delivering 1.7 times coverage. This was the first increase in the distribution we've had since 2019, and it is an indication of our positive outlook.

We expect coverage to approximate 1.3 times in the second quarter of '21, and we projected that coverage will increase through the end of the year. Full-year coverage is expected to approximate 1.5 to 1.6 times on a pro forma basis for the simplification closing on January 1, 2021. We will continue to make distribution decisions quarter by quarter based on recent performance and updated outlooks. A big part of the decision around our distribution is our leverage target.

Not only was protecting our strong balance sheet an important part of OMP's simplification transaction, we also want to maintain a prudent distribution strategy to maintain a long-term leverage target of 2.75 to 3.25 times. Our simplification in March also specifically removed incentive distribution rights, and our limited partner unitholders benefited as future distributable cash flow is no longer burdened by cash flow to the general partner. In closing, we're very excited about our financial performance, and the go-forward outlook remains compelling. OMP has greatly exceeded expectations over the past several years, outperforming peers.

And yet, it continues to trade at a discounted valuation versus its peers. And I'll hand the call back to Sarah for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Vinay Chitteti with J.P. Morgan.

Vinay Chitteti -- J.P. Morgan -- Analyst

Hi, guys. Good afternoon. Congrats on the good quarter and the simplification transaction. I just want to -- wanted to start off with the 2021 guidance here, especially on the volumes outlook.

There seems to be strong uplift in Bighorn crude oil numbers when compared to gas processing and gas gathering Williams change here. We have seen a lot of peers talking about increasing GORs and also higher capture rates, wherein, I guess, where this is already doing very strong on the capture rate side. But just want to understand what dynamic is going on there on the crude segment. Why the uplift of around 20% from what you gave into February to today? I want to understand what changed there.

Richard Robuck -- Chief Financial Officer

Yeah, yeah. Great question. So from our perspective, we have a couple of different moving parts within Bighorn. And so part of the original volume guidance for the beginning of the year in Bighorn had the oil volumes coming down in the second quarter, as expected, and then growing back up into the fourth quarter.

We also have a different piece of the business that's the oil that we move on Johnson Corner -- the line to Johnson's Corner. And that those volumes are up in the new forecast from third parties moving across that line. And so we'd been a little bit too conservative on our outlook and the past guidance, and we just updated it for now. If you look at the business overall, you see Oasis' volumes dip a little bit in the second quarter and then grow back in the third and fourth quarter, and that's specifically been communicated.

The activity is really coming online from volumes in Wild Basin. And so OMP will benefit from that growth as well. And so you'll see that climb on both oil and gas on the Bobcat side.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. And then just wanted to follow up on the transaction and on yesterday, if I may here, when I tried to map the acreage, it seemed to be a bit far away from where Oasis Midstream assets are currently. I just want to understand, if you could share any details on who the current midstream operators are on that acreage, what kind of contracts do they have. And what's the potential upside for Oasis in the coming years?

Richard Robuck -- Chief Financial Officer

Yeah. So like you mentioned, the asset acquisition that Oasis did at the sponsor level, those assets are dedicated to other parties right now. And that's what's on the reservation, as well as what's right off the reservation. There are long-term contracts there for the most part.

Some of them may expire in the future, and we'll look to see if there's an opportunity here at OMP in the future. Now what we do see as another possibility, though, is that it will take some time, we think, for the sponsor to truly celebrate on that acreage position. But it's maybe more likely, and we talked about it on the call earlier, that there's a chance that instead of that, there's actually an acceleration on the current assets, which are all dedicated to OMP. So that's a positive potential sign for OMP.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. Understood. That's it for me. Thanks.

Operator

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 -- Chief Executive Officer

Thanks, Sarah. In closing, first-quarter results demonstrate continued execution as OMP managed costs well and completed an accretive acquisition. OMP is uniquely positioned to benefit from Oasis Development Program and capture additional third-party business as well. As always, we will make ourselves available for any follow-up questions.

Thanks again for joining the call today.

Operator

[Operator signoff]

Duration: 16 minutes

Call participants:

Richard Robuck -- Chief Financial Officer

Taylor Reid -- Chief Executive Officer

Michael Lou -- President and Director

Vinay Chitteti -- J.P. Morgan -- Analyst

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