Rattler Midstream LP (RTLR) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

Rattler Midstream LP (RTLR)
Q2 2021 Earnings Call
Aug 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Rattler Midstream Q2 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Adam Lawlis, Vice President of Investor Relations. Sir, you may begin.

Adam T. Lawlis -- Vice President of Investor Relations

Thank you, Julia. Good morning, and welcome to Rattler Midstream's Second 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, future performance and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

Travis D. Stice -- Chief Executive Officer & Director of Rattler Midstream GP LLC

Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream's Second Quarter Earnings Call. Rattler had a strong second quarter, highlighted by cost control as volumes and operations normalized after the impact of the first quarter's weather events. Both the operated business and our equity method joint ventures witnessed a return to trend in both volumes and earnings. And the Rattler team did a tremendous job in controlling capital and operating costs during the quarter. Since the onset of the pandemic and the refocus of Rattler's and Diamondback's operations on free cash flow generation over growth, we have tasked the Rattler organization with cutting operating expenses and capital expenditures to reflect the environment in which producer volume growth and its associated call on midstream capacity is limited. While the progress on opex was apparent this quarter, Rattler also reduced 2021 operated midstream capex guidance by over 40% at the midpoint to $30 million to $50 million, which compares extremely favorable to the $240 million and $140 million of operated capex expense in 2019 and 2020, respectively. The net result of stabilized volumes and cash flow in conjunction with decreased capex and contributions to equity method investments is the strong free cash flow generation Rattler has witnessed over the last year. Since the end of the third quarter last year, Rattler has used this free cash flow to completely pay down its approximately $85 million revolver balance while simultaneously funding $90 million of distribution and $30 million of common unit repurchases. Accordingly, from this strong financial position and peer-leading low leverage profile and with improved confidence in the free cash flow trajectory of our operated business and equity method investments, Rattler is increasing its distribution by 25% to $1 annualized per common unit, nearly a 10% distribution yield as of yesterday's close. Although while the last year has been incredibly challenging for our industry, through the labors of Rattler staff and adherence to its conservative strategy, Rattler has endured and emerged in a position of strength. We look forward to continuing our focus on unitholder return of capital and prudent capital allocation to drive value for all of our investors. With these comments now complete, operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of [John Evans].

Unidentified Participant

Hi. Could you just talk a little bit about the stock buyback going forward since you increased the dividend so much? Does that change your strategy relative to buying back the equity?

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Not particularly, John. I think overall, we looked at our net debt balance that went down $100 million over the last four quarters. And we still paid distribution and bought back stock over that time period. I think generally, the stock doesn't have a ton of float. So we're a little limited on how much we can buy back. But we've still stayed pretty active particularly in the last month on the buyback. And I think a buyback is going to be a nice ancillary return of capital option for Rattler along with a steady and growing base dividend. So overall, we're definitely not souring on the buyback. We just felt with the amount of free cash that we have, getting it back to shareholders with a little higher distribution, which is where we went public at, along with a buyback that's in place through the end of the year this year. But the Board is very open to having discussions on that, extending over time as a supplementary return of capital.

Unidentified Participant

Got it. And then may I ask you one other question? Just relative to your leverage, etc. You've paid down the revolver. All you have is the bond debt. So if you continue to be this judicious with capital going forward, I mean, is there a place you want to get to relative to net debt? Or is it about coverage? Or kind of what's the goalpost there?

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Yes. I mean I think we like to think of the revolver as short-term funding. I think we feel very comfortable with the $500 million of debt outstanding on the bond side, particularly with the operating capex coming down so much. I think we didn't talk about it in the prepared remarks, but we do have a drop-down we're working on from Diamondback to Rattler. I think generally, we now feel comfortable that we can probably pay for that with cash on the Rattler side and be able to not lever the business up. So using that revolver as short-term funding is the priority. And I think the bond is trading pretty well. I think it's trading at a price where next year, should rates stay where they are, we can refinance that cheaper. And that just means more free cash going to the shareholders.

Unidentified Participant

Great thank you so much

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Thank you John

Operator

[Operator Instructions] You have no questions at this time. I do apologize. You have another question from [John Evans].

Unidentified Participant

I'm sorry. Could I just ask you one more question relative to the drop down? And so would you just use the revolver to fund it? Would you fund it with equity, too? How would you think about that? And I assume it will be accretive to Rattler, right?

I'm sorry. Could I just ask you one more question relative to the drop down? And so would you just use the revolver to fund it? Would you fund it with equity, too? How would you think about that? And I assume it will be accretive to Rattler, right?

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Yes. I mean I think the key message is not using equity to fund it. We have the revolver balance. We could easily tack on to our existing bond if we wanted but -- or maybe do something in between. But generally, I think with the amount of liquidity we have, the amount of free cash flow we're generating and how the equity looks expensive to us, raising equity is off the table for us to fund that drop down.

Unidentified Participant

Okay. And then the last question, I promise. You guys did a phenomenal job on the capital side. And I mean is that just you've pushed projects out into '22? Or is that really just the capital that you need for FANG staying at this fourth quarter kind of production that they talked about on their call?

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Yes. I mean I think it's mostly the team cutting scope from the initial budget at the beginning of the year. Things are still also coming in under AFE a little bit. But generally, I think with FANG not growing as much and Rattler focusing on the pennies, it's just a lot of little things that add up to a pretty big difference in this year's capital plan. I think generally, if the drop-down happens, there is some onetime capital to spend in 2022 to get ahead of water recycling and disposal in the new areas. But long term, I think getting back down to this $30 million to $50 million run rate feels like a pretty good annual run rate, if not lower, for Rattler capital over a long period of time.

Unidentified Participant

Ok, thank you so much and Congratulations.

Travis D. Stice -- Chief Executive Officer & Director of Rattler Midstream GP LLC

Thank you, [John].

Operator

[Operator Instructions] You have no questions at this time.

Travis D. Stice -- Chief Executive Officer & Director of Rattler Midstream GP LLC

Thanks again to everyone participating in today's call. If you have any questions, please contact us using the contact information provided.

Operator

[Operator Closing Remarks]

Duration: 11 minutes

Call participants:

Adam T. Lawlis -- Vice President of Investor Relations

Travis D. Stice -- Chief Executive Officer & Director of Rattler Midstream GP LLC

Matthew Kaes Vant Hof -- President & Director of Rattler Midstream GP LLC

Unidentified Participant

More RTLR analysis

All earnings call transcripts