Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Rattler Midstream LP (NASDAQ:RTLR)
Q1 2021 Earnings Call
May 6, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Rattler Midstream First Quarter 2021 Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to turn the conference over to your host, Vice President of Investor Relations, Adam Lawlis. Please go ahead.

Adam T. Lawlis -- Vice President of Investor Relations

Thank you, Atif. Good morning, and welcome to Rattler Midstream's first quarter 2021 conference call. During our call today, we will reference an updated investor presentation which can be found on Rattler's website. Representing Rattler today are Travis Stice, CEO; and Kaes Van't Hof, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, and future performance.

We caution you that actual results could differ materially from those that are indicated in these forward-looking statements, due to variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will refer to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon.

We'll now turn the call over to Travis Stice.

Travis D. Stice -- Chief Executive Officer and Director

Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream's first quarter earnings call. Despite Winter Storm Uri having an outsized impact on Rattler throughput volumes and operations during the quarter, Rattler was able to deliver strong free cash flow of over $47 million for the quarter because capital spend was kept under $6 million. This free cash flow was used to fund our $0.20 per unit distribution, $11 million of common unit repurchases, and reduce debt, displaying our commitment to return capital to investors. Operated cash capex is down almost 9% from one year ago, illustrating the ability of the company to quickly adapt to a new business model, where lower growth is offset by increasing free cash flow to fund more capital return to unit holders.

We are maintaining our full year 2021 EBITDA guidance, even after the slower start to the year due to the impacts of the winter storm, expressing our confidence in the forward outlook. In fact, March operated EBITDA was back on track with the run rate we expected to hit, the mid-point of our 2021 guidance. We also see upside from our equity method investments, as volumes are expected to grow significantly on our OMOG oil gathering system, driven primarily by Diamondback activity after closing its merger with QEP Resources. Lastly, operated capex is expected to remain low in the second quarter, giving Rattler optionality on our capital plan for the second half of the year, depending on Diamondback's forward development plan. Moving on to our non-operated equity method investments. The first quarter of 2021 was the first in which our distributions received from these investments exceeded our contributions.

We are also announced the sale of our Amarillo-Rattler joint venture, which in addition to upfront and deferred consideration of potentially up to $37.5 million net to Rattler, removes the need to contribute substantial capital to fund the construction of a new gas processing plant. With Rattler receiving an attractive return on its investment, and Diamondback secure in having the gas gathering and processing capacity necessary to develop one of its core operating areas, the joint venture exhibits the mutually beneficial relationship between Diamondback and Rattler. With this sale and Wink to Webster expected to begin full service in the fourth quarter of 2021, our equity method joint venture build cycle is substantially complete, and we expect to reap meaningful and increasing distributions from these investments in the years to come. We also sold a non-core asset for $10 million, shedding a real estate asset that was no longer core to our business.

The cash from this and the Amarillo-Rattler sale will go toward the balance sheet for the time being, and could be a source of funds for a future dropdown or investment. In conclusion, with our full year 2021 guidance unchanged, Rattler is focused on executing on its business plan of providing the highest level of service to our customers in the most environmentally responsible and efficient manner possible. In doing so, Rattler should continue to benefit from the substantial investment over the last few years, peer-leading balance sheet, and best-in-class sponsor, which all position Rattler to capitalize on opportunities in this dynamic and essential industry.

With these comments now complete, operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of James Kirby with JPMorgan.

James M. Kirby -- JPMorgan -- Analyst

Just want to start here with the Amarillo decision to exit that JV. I just wanted to confirm there's no impact to 2021 numbers here. And then maybe just on Diamondback's view of the asset and what activity levels they're budgeting for going forward there, around that asset.

Matthew Kaes Vant Hof -- President and Director

Yes. Good question, James. No impact to our financials this year. The business Amarillo-Rattler was formed in a time when high growth was in Vogue, and we were going to need to build a plant in order to meet Diamondback's growth plans for that particular area in Northern Martin County. I think not only has sentiment change toward growth, but so has Diamondback's opinion on growth and therefore we didn't need to add that capacity. Generally, EnLink had the dedication surrounding this position, and so it made a lot of sense for us to approach EnLink and see if there was a deal to be had. So I think a win for Rattler, getting some cash in for an investment that we weren't going to spend a lot of capital on and weren't making a lot of money on. It's a win for Diamondback because Diamondback gets to send its molecules through the EnLink system, which provides a little bit of an uplift and I think it secures a long-term relationship between Diamondback and EnLink for a long time in Northern Martin County. And then to your activity, activity is going to be pretty high there. We're going to be consistently running multiple rigs across this dedication. I would say generally, we're planning to spend probably 50% of our capital in Martin County, and this is probably half of that. At Diamondback, excuse me.

Operator

Our next question comes from Pearce Hammond of Simmons Energy. Your line is open.

Pearce Wheless Hammond -- Piper Sandler -- Analyst

In the quarter, really good free cash flow generation. And just curious, all things being equal, how do you see capex spending on a runway basis as we move forward since you've already spent a lot of capital to get everything in place? What do you think capital spending looks like as we move forward, absent any big drop-downs or anything like that?

Matthew Kaes Vant Hof -- President and Director

Yes, really good question, Pearce. I'd say we have a capex budget of $60 million to $80 million out there. I find it very hard, today on May 5, to think that the high end of that is even close to in play. I think generally Q1 was a really low quarter capex-wise, but in our budget we probably have $35 million or $40 million of what we would call essential projects, and I guess the rest is optional in case something happens with Diamondback's development plan the rest of the year. So capex is going to stay very, very low in Q2. I think we have some optionality in the back half of the year, pending a dropdown or Diamondback's activity level shifting significantly. But overall, those dollars are going to be very tight on the capex side, and as Travis said in his opening comments, if you're not growing EBITDA like we originally expected, we've got to grow free cash flow by cutting capital and cutting costs. And that's the game plan today at Rattler.

Pearce Wheless Hammond -- Piper Sandler -- Analyst

Okay. And then my follow-up maybe a difficult one to answer, but I'm just curious your thoughts on this. As everyone knows, there's excess oil pipeline takeaway capacity out of the Permian and there's some talk about maybe repurposing some of those assets to maybe instead of carrying oil, carrying natural gas or NGLs. I was curious, if you did see some assets that get repurposed, would that impact Rattler? And then furthermore, how hard is it to repurpose assets, both commercially and just physically?

Matthew Kaes Vant Hof -- President and Director

Yes, it reminds me of the days back when the Permian was underpriced and everyone said that Epic couldn't turn an NGL line into an oil line, and guess what? They were able to do it. But I'm going to leave that up to the experts, Pearce. I think generally, if any basin in the US is going to grow on oil production, it's the Permian. So while we're over-piped right now, these things tend to go in waves. I think if other people decided to repurpose pipelines out of the Permian, it would certainly benefit the pipelines we have interest in right now because it would make oil supplies tighter. But that would be my best guess today. 2

Operator

[Operator Instructions] Our next question comes from the line of Tristan Richardson of Truist Securities.

Tristan James Richardson -- Truist Securities -- Analyst

Appreciate all the comments on plans and thoughts for activity the rest of the year. I guess just on the potential dropdown asset, I think maybe on the last call, you suggested a general size and scale, and this could come down all in one piece. But maybe just any update on some operational metrics of the midstream asset upstairs and either volumes or EBITDA size, just to help us get our arms around the scale here.

Matthew Kaes Vant Hof -- President and Director

Yes. No, good question, and we're working diligently to get this prepared. There's not only the assets that need to be dropped down, but there's also a lot of work going on behind the scenes to get kind of a master development plan for our Diamondback's Martin County position. I think we're going to be more focused on recycling water and storing produced water in order to recycle as part of our ESG goals. And I think it's just the right thing to do and probably better for Rattler's margins. So that's going on, but also we are sizing the dropdown. I guess I could say generally it's somewhere in the 15% to 20% the size of Rattler today, from a cash flow perspective. So certainly a meaningful piece of business and it should belong in the Rattler sub, it's just going to take a little time to get through land agreements and that long-term capital build-out plan.

Tristan James Richardson -- Truist Securities -- Analyst

That's helpful. And then, yes, obviously the name of the game is getting cash upstairs to the parent, but should we think that from a valuation perspective, key objective is a creative on day one for any potential drought?

Matthew Kaes Vant Hof -- President and Director

Yes. I think it's got to be a creative day one because you have two public companies that need to work through these, these details. And I think fortunately, there's a lot of production already on the QEP position, so there's not a lack of cash flow that would be dropped down. So I think fortunately, the asset is in the right position from a cash flow perspective. The key details we're working through is, how efficient can we get with our existing systems to not spend a ton of extra capital on the disposal side, and how do we connect everything from a recycling perspective to be able to store water and set some goals on limiting future disposal wells drilled in Martin County.

Tristan James Richardson -- Truist Securities -- Analyst

That's great. And one last follow-up, I think as we look past the drop in terms of priorities for capital, obviously chopped a lot of wood on the repurchase authorization, but when we look forward -- obviously the theme of this call has been being very prudent on capital spend. I guess when we think about free cash flow after a drop, could you talk a little bit about further repurchases and/or reupping the authorization versus shifting back to a growth and distributions type of model?

Matthew Kaes Vant Hof -- President and Director

Yes, I still think the majority of cash distributed to shareholders is going to be in the form of the distribution. Even with the repurchase program, the majority of cash is still being returned to unit holders. I think we'd like to be a long-term distribution growth company, but also be smart with capital allocation, where like in the fall we had to put our hands up and say, "Buying back our shares at a high-teens free cash flow yield back then was the best use of a shareholder's dollar." And that decision is a little less obvious today. I think generally, we want to get through the dropdown in the next couple quarters and then get back to distribution growth. And if there's an opportunity to keep repurchasing, I think we will. The value of the repurchase has to compete with the value of what we're spending capital on at Rattler.

Operator

Thank you. At this time, I'd like to turn the call over to our CEO Travis Stice for closing remarks.

Travis D. Stice -- Chief Executive Officer and Director

Thanks again to everyone participating in today's call. If you've got any questions, please reach out at the contact information we provided.

Operator

[Operator Closing Remarks]

Duration: 16 minutes

Call participants:

Adam T. Lawlis -- Vice President of Investor Relations

Travis D. Stice -- Chief Executive Officer and Director

Matthew Kaes Vant Hof -- President and Director

James M. Kirby -- JPMorgan -- Analyst

Pearce Wheless Hammond -- Piper Sandler -- Analyst

Tristan James Richardson -- Truist Securities -- Analyst

More RTLR analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.