OASIS MIDSTREAM PARTNERS LP (OMP) Q2 2021 Earnings Call Transcript

OASIS MIDSTREAM PARTNERS LP (OMP)
Q2 2021 Earnings Call
Aug 04, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Oasis Midstream second-quarter conference call. [Operator instructions] Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Richard Robuck, CFO.

Please go ahead.

Richard Robuck -- Chief Financial Officer

Thanks, Nick. Good morning, everyone. This is Richard, as Nick mentioned. Today, we're reporting our second-quarter 2021 financial and operational results.

We're delighted to have you on our call. I'm joined today 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 other, matters that we described in our earnings release as well as the filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly report 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 the applicable GAAP measures can be found in our earnings release and on our website. We will also reference our current investor presentation, which you can 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 an amazing job controlling costs and maximizing operational reliability, which supports strong financial performance. Additionally, the business development team continues with new third-party contracts, which support our long-term outlook. Importantly, OMP safety record has been great year-to-date, and we applaud the team for all their hard work and progress here.

I'd like to start today's call by highlighting a handful of key things. First, OMP's second quarter performance exceeded expectations on volumes and cost control, leading to EBITDA and coverage outperformance. Second, the team has secured multiple third-party contracts across the Bakken and Delaware. In the Delaware, OMP recently expanded its third-party business, which includes building a new pipeline connection to Wink.

This is a major milestone for OMP as it connects our infrastructure to a key hub in the Delaware Basin, which greatly expands our third-party opportunity set. As you've likely noticed, rig and permitting activity have increased in both the Bakken and Delaware. Much of this expected activity is around OMP's key infrastructure, and we continue to work a robust pipeline of new opportunities in both basins. Third-party business accounted for about 17% of our revenue in the second quarter, treating 100% of the Delaware revenue as third party to account for Oasis divestiture.

Third, we declared cash distribution of $0.56 per unit in the second quarter, representing a $0.01 increase from first quarter levels. We continue to have confidence in our new opportunities and business as we move ahead. We'll discuss those opportunities a bit more on this call. Fourth, our sponsor, Oasis Petroleum, expects its Williston Basin acquisition to close late in the third quarter.

As we highlighted last call, this strategic move provides additional value to OMP. Oasis has indicated that post integration, it expects similar or higher volumes in OMP-dedicated areas. We have already seen the pivot as evidenced by our capturing the City of Williston acreage dedication from Oasis. The dedication includes crude oil, natural gas and produced water services.

We added a case study in the Oasis and OMP investor presentations that highlight the strength of the City of Williston asset. The upstream economics are fantastic, allowing OMP to invest incremental capital at attractive build multiples. Volumes under each services offering will flow as soon as late 2022. Oasis is becoming an even stronger anchor tenant with more size and scale and a deeper inventory, along with its peer-leading financial position, allowing for a steady, resilient development program.

We also have a right of first refusal in the Painted Woods project area, which is expected to be developed right after City of Williston and is one of Oasis core operating areas. Painted Woods is also part of the case study in the investor presentations. Finally, both Oasis recent strategic moves and O&P's success in capturing new business translate into differential value creation for our unitholders. Our outlook, coupled with our strong balance sheet, have us excited about the future of OMP.

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

Michael Lou -- Director and President

Thanks, Taylor. OMP delivered another remarkable quarter with both volumes and EBITDA beats. Capture rates remain at very high levels as OMP 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 pipelines. Wild Basin gas capture was about 99% in the second quarter.

Natural gas-related business is the primary driver of OMP's financials, accounting for over 60% of our fee-based revenue. Our sponsor announced it will publish its first sustainability report in August, which, among other things, outlines its strong gas-flaring performance, as well as minimizing the number of trucks needed to move its oil and water volumes. OMP is proud to play a critical role in ensuring Oasis meets its objectives on this front. Quarter-over-quarter volumes were generally flat or declined slightly across most commodity streams, reflecting limited completion activity from our sponsor and others, which was expected.

However, OMP exceeded expectations versus guidance on aggregate gas, oil and water volumes. As we move to the second half of 2021, volumes are expected to grow in the third quarter before declining in the fourth quarter, reflecting the planned turnaround at the Wild Basin gas complex. This turnaround is expected to last just over a week as we're taking the opportunity to accelerate maintenance into the fourth quarter of 2021 to ensure strong operating reliability in 2022 and beyond. Given the anticipated downtime related to accelerated maintenance, our full year EBITDA range was adjusted to $218 million to $224 million.

Excluding the turnaround, our new guidance range would have exceeded our original guidance midpoint by roughly $1 million. Third quarter EBITDA is expected to range between $56 million and $59 million, with fourth quarter EBITDA expected to decrease by $6 million, reflecting the turnaround. Coverage for the fourth quarter is expected to be about 1.2 times as maintenance capex increases for the turnaround. Given the excitement around anticipated volumes from South Nesson in the recent City of Williston dedication, along with Oasis' development program focused on OMP's asset base, it's worth spending some time on our preliminary outlook for the next couple of years.

The volume trajectory from the fourth quarter into the first quarter of 2022 suggests flat to slightly down EBITDA versus the fourth quarter of 2021, in similar coverage levels. First quarter of '22 should be the low point for 2022. Volumes and EBITDA thereafter are expected to accelerate sharply in the second quarter and beyond as the South Nesson project comes online. The fourth quarter of 2022 should be the highest of the year.

On average, we're currently expecting 2022 EBITDA to be up high single digits versus the full year of 2021. That outlook is pro forma for the first quarter simplification. 2023 EBITDA has the potential to increase mid-teens versus 2022 based on Oasis' current plan and assuming OMP receives the acreage dedication for Painted Woods, where we captured the ROFR on this area during the simplification process. Additional third-party business would represent upside to our plan.

On the capital side, second quarter spending of $13.2 million was in line with our guidance. Concurrent with the new City of Williston acreage dedication and additional third-party business, we expect spending will increase to $73 million to $78 million in 2021 as OMP begins construction on key infrastructure. 2022 capital spending is expected to increase versus 2021 levels as O&P invests in critical infrastructure to support that strong EBITDA growth. With that, I'll hand the call over to Richard.

Richard Robuck -- Chief Financial Officer

Thanks, Michael. OMP's financial position remains compelling, and our outlook is differential. As you can see on Slide 12 of our investor deck, OMP's EBITDA has grown from $43 million when we IPO-ed in 2017 to an expected $218 million to $224 million in 2021. As Michael discussed, this is set to increase further in coming years as we receive additional acreage dedications from our sponsor and grow third-party business as well.

With our press release, we announced that OMP is increasing our distribution $0.01 to $0.56 per unit. While still delivering strong coverage, our operating and financial projections have improved significantly from where we were a year ago, and we will continue to make distribution decisions quarter by quarter based on recent performance and the go-forward outlook. Big part of the decision around the distribution is our leverage targets. We seek to maintain prudent distribution strategy with long-term leverage within our target of 2.75 to 3.25 times.

Michael outlined our EBITDA trajectory earlier, which will translate into leverage in the beginning half of 2022 at slightly above the high end of our long-term target leverage range. We are comfortable with this tick-up since leverage should quickly fall into the middle of our range or about three times in the fourth quarter of 2022. As of June 30, OMP had $213 million drawn on its $450 million revolver, along with $450 million of unsecured bonds and $9.7 million of cash. Leverage based on the second quarter 2021 annualized EBITDA was approximately 2.9 times.

In closing, OMP executed well during the quarter, and I'd like to congratulate the team for keeping margins high, which supported our outperformance. OMP is in a position of strength as our go-forward outlook is impressive, which should drive attractive returns and cash back to our unitholders for years to come. I'll now hand the call over to Nick to open up the line for questions.

Questions & Answers:

Operator

[Operator instructions] First question comes from Jose Cossetti of JPMorgan. Please go ahead.

Unknown speaker

Good morning. I just wanted to ask about the preliminary guidance for 2022 and 2023. My understanding was Oasis was looking forward to a flattish production outlook in 2022 and beyond. But you also noted a big addition in the second half of this year.

So I want to understand how that would translate to volumes upside to as its midstream. And also, what kind of completions activity are you expecting in the second half versus what you would see in 2022?

Taylor Reid -- Chief Executive Officer

Yes, sure. That's a great question. As you know, Oasis is expecting to close on its acquisition of the Diamondback assets at the end of the third quarter. That asset, we're not putting rigs on in the near term.

And so naturally, that means it's going to be declining over time. So Oasis will be keeping volumes flat, as you mentioned, over time, which means that it's going to be putting its rig activity and completion activity on other assets. Those other assets are specifically the OMP assets. So on an overall basis, those would be necessarily growing as it's related to kind of the overall profile for Oasis.

So that's a great clarifying question, which was why we were so excited when Oasis announced that acquisition and then directed more capital toward the OMP asset base. The other thing that's important to note is kind of two things. One is that our forecast is conservative as it relates to third-party volumes. But the flip side is by putting in that incremental capital into both that South Nesson area, as well as the City of Williston and Painted Woods area, there's potential for third-party upside to our numbers for that, which is extremely highly capital efficient capital to put into the ground.

Unknown speaker

Got it. Sir, just one, picking up on the last comment you made there. So the guidance assumptions baked in for 2022 and '23, is that primarily Oasis? Or you also bake in some kind of third-party assumptions? I mean you did note it's conservative, but I just want to get a little more thoughts there.

Taylor Reid -- Chief Executive Officer

I mean as was noted earlier, around 17% of our revenue is from third parties. The way we think about it is that's good contracted revenue. And so we get volume forecast and expectations from our third-party customers, which we roll into our forecast. And then we have a very, as mentioned earlier, conservative wedge of incremental contracts.

It's already really kind of like the final negotiation stage of the process. So we got a lot more behind that stage, like stuff that we're talking term sheets and working on incremental prospects that is not included in our forecast. So that's kind of three buckets, if you will, that we categorize our third-party opportunity, and what we're doing is really designed and the forecast that we get and then stuff that's like super close to being nailed down.

Unknown speaker

Understood. Maybe if I could and again one last on distribution here. So you are kind of seeing the higher activity and then capex creep from 2021 and 2022. And then leverage still in the manageable range, like you said, kind of hitting the top line in 1Q '22.

But just to understand like keeping the distribution flat versus modestly increasing, what levels of leverage is comfortable? And how do you think about distribution growth guidance given the current capex outlook?

Taylor Reid -- Chief Executive Officer

Yes, I think the balancing act that we've been going through for a while now. And our long-term targets have been 2.75 to 3.25 times. We're unique compared to a lot of midstream businesses that is in that kind of neighborhood. So it gives us a lot of flexibility.

It gives us flexibility to, in the near term, spend a little bit of incremental capital. And then the capital we're spending is on volumes, we understand very well. And so we have the ability to understand and predict where our leverage is headed. And so we see that leverage, as you noted, at the end of 2022 coming down to around three times.

And so as we march forward, we see it coming down even and even below those levels over time given what we know right now and not baking any incremental third-party upside. And so the way we think about it is like we feel really good about our plan. And so we see the ability to increase distributions, and we've been doing it at a very moderate pace. As you heard in our prepared remarks, haven't committed to a distribution growth because we just want to make sure that we stay conservative on that front and remain flexibility kind of quarter in and quarter out, just given some of the volatility that we've seen over the past couple of years.

We just want to make sure that we're in good shape. I guess, the offset to that is that we feel really good about is Oasis has a really strong hedge book. And so their cash flows are locked in for the next couple of years. And so the activity that they will be delivering to OMP gives us a lot of comfort in our numbers and the ability if we decide to continue to increase the distribution.

Unknown speaker

That's very helpful. Thanks guys. That's it for me. Have a good day.

Thanks.

Operator

The next question is from Kyle May of Capital One. Please go ahead.

Kyle May -- Capital One Securities -- Analyst

Hey good morning everyone. I appreciate the initial outlook for 2022 and 2023.

Taylor Reid -- Chief Executive Officer

Yes, for sure or did we lose you?

Richard Robuck -- Chief Financial Officer

I think we lost him.

Taylor Reid -- Chief Executive Officer

Nick, are you still there?

Richard Robuck -- Chief Financial Officer

We can't hear you if you went on mute by chance.

Operator

Yes, I'm here.

Richard Robuck -- Chief Financial Officer

OK.

Operator

Mr. May, are you still with us on the line?

Taylor Reid -- Chief Executive Officer

Let's let him dial back in and go to the next question, if that works.

Operator

Next question will be from Neal Dingmann of Truist. Please go ahead.

Neal Dingmann -- Truist Securities -- Analyst

Good morning. Thanks for getting me in. First question. Obviously, you had a lot of nice beats on the quarter, but particularly, can you talk a bit about the capex, not only beat but the improved sort of capex guide for the remainder of the year? I know you talked a little bit on efficiencies, but just talk about what you all are doing to continue to come in under cost there, but very nice.

Slash that.

Michael Lou -- Director and President

Neal, are you talking about the Oasis side?

Neal Dingmann -- Truist Securities -- Analyst

Yes, sir. Yes, sir.

Michael Lou -- Director and President

Yes. OK. So yes, this is the OMP call. But on the Oasis side, we talked about on the last call, but you're exactly right.

On the capex side, we had strong beats. You saw that in the second quarter. Really, if you look at the full year, we brought capex down 7% on the E&P side. A lot of that's around a combination of things, but think about that as kind of frac efficiency was one of the larger pieces of that.

The second quarter was a little bit more kind of a combination of frac efficiency timing and interest in wells, et cetera. But kind of the overall kind of year look, think about it as efficiency driven is kind of the cost of that 7% lowering of the capex side.

Neal Dingmann -- Truist Securities -- Analyst

Got it. Got it. Thanks for that. And then just a follow-up on -- I know you've got a lot of options you sold down.

Could you talk about the potential for just deals out there? I know you've got a lot of options on OMP out there on the table, maybe just talk about is the M&A market improved? Or what's going on with that?

Taylor Reid -- Chief Executive Officer

Yes. We talked -- and you heard on the prior call, there's a lot of options from an OES perspective. What I'd highlight are for OMP, some of the fantastic deals that have really been shareholder friendly to both sets of the companies. It's really have been super thoughtful about all the deals of simplification is just a great example of being able to take the midstream assets at the parent, drop them at a very attractive price for OMP and really set up both companies going forward and played well with both sides of the equation.

So you've seen us do that regularly. I mean, Michael and Richard both talked about some of the projects we've just added in the Q. So dedications in South Nesson, also dedication in City of Williston, again, 2 important projects for both companies that are very helpful and accretive for both of them. So we'll continue to evaluate and look for those opportunities that will help both companies going forward.

Neal Dingmann -- Truist Securities -- Analyst

Yes, sir. And that seemed like there's a lot of options. Look forward to it, guys.

Taylor Reid -- Chief Executive Officer

Great. Thanks, Neil.

Richard Robuck -- Chief Financial Officer

Thank you.

Operator

[Operator instructions] We have no further questions at this time. I'll now turn the call back over to Mr. Taylor Reid, CEO. Please go ahead.

Taylor Reid -- Chief Executive Officer

Thanks, Nick. In closing, second quarter results were solid and the go-forward outlook is attractive, supported by additional acreage dedications and a growing third-party business. OMP is in a differential position to create value for unitholders, and we look forward to continued execution. Thanks, everybody, for joining.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Richard Robuck -- Chief Financial Officer

Taylor Reid -- Chief Executive Officer

Michael Lou -- Director and President

Unknown speaker

Kyle May -- Capital One Securities -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

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