Rattler Midstream LP (RTLR) Q3 2021 Earnings Call Transcript

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Rattler Midstream LP (RTLR)
Q3 2021 Earnings Call
Nov 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Rattler Midstream Q3 2021 Conference Call. [Operator Instructions]

And now, I would like to hand the conference over to your first speaker today, Adam Lawlis, vice President of Investor Relations. Thank you. Please go ahead.

Adam T. Lawlis -- Vice President of Investor Relations

Thank you, Paul. Good morning, and welcome to Rattler Midstream's Third 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 the 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 Stice -- Chief Executive Officer

Thank you, Adam, and welcome, everyone, and thank you for listening to Rattler Midstream's third quarter earnings call. The third quarter of 2021 was another strong operational performance for the Rattler team as the business generated $60 million in free cash flow. While the volumes were lower with Diamondback completing eight Delaware Basin wells outside of the Rattler dedication during the quarter, the Rattler team did an incredible job managing expenses and limiting capex to more than offset the impact to free cash flow.

The best practices implemented in our operations are beginning to bear fruit and are expected to have long-term benefits to Rattler's unitholders despite inflationary headwinds hitting the industry. Rattler also announced recently a series of strategic transactions that collectively repositioned the Rattler portfolio in line with Diamondback's shift to Midland Basin development, where 75% of its drilling capital is currently being allocated.

The WTG transaction gives Rattler exposure to a growing gas-gathering and processing business in the Northern Midland Basin and the new plant currently under development by WTG will help enable Diamondback and other producers to continue their highly economic development there. The drop down transaction with Diamondback is largely a sale of complementary adjacent assets and gives Rattler additional scale, in the Midland Basin, particularly, with which to apply its learnings in building out large integrated systems in the Delaware Basin.

Additionally, by purchasing the available water assets and increasing the exposure to Diamondback development across the produced and sourced water segments, Rattler expects to limit the volatility in volumes and earnings. Finally, the sale of the Pecos Gas System presented a unique opportunity to divest an asset with little expected growth to a logical buyer of the system at an attractive multiple in order to fund the previously discussed acquisitions and maintain a conservative financial management.

With greater capital investment expected in the near future as Rattler integrates the acquired drop down assets and constructs a new system in Southeast Martin County, the proceeds from the gas-gathering divestiture enhanced Rattler's flexibility and continuing to return capital unitholders. Altogether, after 1.5 years of reducing expenses, limiting capital expenditures and focusing on free cash generation, Rattler is, once again, finding attractive investments that we believe fit within our operating expertise and align with our strategy of leveraging the Diamondback relationship to generate value for our unitholders.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Vinay Chitteti with JPMorgan. Your line is open.

Vinay Chitteti -- JPMorgan -- Analyst

Hi, good morning guys. I just wanted to follow up on the volumes commentary for next year here. So FANG kind of assumes a maintenance mode for 2022. And then considering the activity shift in different regions for FANG, maybe if you could share on how that would translate to Rattler? Do you expect the volumes next year to be same or better than what FANG is guiding right now?

Travis Stice -- Chief Executive Officer

Yes. Good question. I mean, with the drop down, the volumes are certainly going to go up on a consolidated basis. And I think you may have a couple of slides that show what percent of Diamondback's completions will be dedicated to Rattler on the sourced water side as well as the disposed water side. And I think the drop down certainly cleans up the consistency of volume performance. We should see a pretty substantial increase from where we are today pre-drop down to the pro forma business in 2022.

Vinay Chitteti -- JPMorgan -- Analyst

Got it. And then maybe on the multiple guidance on the transactions here. I think you kind of mentioned what the EBITDA expectations for the drop down assets are, but any details on -- you could share on the JV and the other -- the asset sales, which you guys had?

Travis Stice -- Chief Executive Officer

Yes. I mean we talked about $25 million to $35 million of EBITDA for the drop down in 2022 is set to increase pretty dramatically in 2023 as capital is deployed to build out these recycling systems. And then I'd say, generally, on the equity method, EBITDA contribution next year definitely going up with the WTG deal as well as Wink to Webster coming on in full force, and our OMOG JV, humming on all cylinders, I think volumes on that system are up 40% from where they were a year ago. So I think, generally, we kind of hint that we had $40 million to $45 million of distributions this year, a little bit more on the EBITDA side. I bet you that number goes up 20% to 30% next year.

Vinay Chitteti -- JPMorgan -- Analyst

Got it. Yeah, that's it. Thank you, guys.

Travis Stice -- Chief Executive Officer

Thanks.

Operator

Thank you. [Operator Instructions] Your next question is from Kyle May with Capital One Securities. Your line is open.

Kyle May -- Capital One Securities -- Analyst

Hey, good morning guys. Maybe just one question to start on the recycled water side. I believe, in the release, you highlighted the 23% of sourced water volumes during the quarter were from recycled produced water. Just curious if you have the ability to grow the amount of recycled water and kind of how much that could potentially grow?

Travis Stice -- Chief Executive Officer

Yes. Good question, Kyle, very topical. We're spending a lot of money on recycling, particularly in the Midland Basin. We kicked off our recycling program in the Delaware, where you have so much water production that you're able to pull 100% of the water you need for a frac from recycled sources. And as we move into the Midland Basin, Diamondback, consolidated with Rattler, have made commitments to recycle at least 55% of water by 2024, 2025. And the key to that is going to be us building these large recycle pits in the Midland Basin.

So we acquired a few of those from QEP. I think we're going to build some larger ones throughout the course of next year to be able to kind of move and recycle water across all of Martin County and other areas, too, particularly Spanish Trail in that area as well. So it's picking up and we set the contracts up where recycling is incentivized because Diamondback paid less for recycled water, but rather makes a higher margin. And that's where we're headed in '22 and beyond.

Kyle May -- Capital One Securities -- Analyst

Thanks for that case. And then maybe just one more. Now that Rattler has increased and extended the share buyback program, just wanted to get your latest thoughts about balancing dividend growth with buybacks going forward?

Travis Stice -- Chief Executive Officer

Yes, good question. I think we didn't touch the distribution this quarter because there's a lot of cash going out for the drop down as well as the WTG deal and a little bit of cash coming in from the Brazos sale to offset that. I think we need to see where leverage settles post all of that, and then we'll continue to look at touching the distribution. I think the buyback has been a good weapon for us at Rattler as well as our other two companies, and the Board recognized that having it out there is a good sign of defense sometimes with market weakness. And I think we're pretty consistent last quarter using it, and I think that's a decent run rate going forward.

Kyle May -- Capital One Securities -- Analyst

All right. That sounds great. Appreciate the time.

Travis Stice -- Chief Executive Officer

Thank you, Kyle.

Operator

I don't see additional questions at this time. I will now hand the conference back to Travis Stice, CEO, for closing remarks. Sir?

Travis Stice -- Chief Executive Officer

Thanks, again, to everyone participating in today's call. If you've got 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 Stice -- Chief Executive Officer

Vinay Chitteti -- JPMorgan -- Analyst

Kyle May -- Capital One Securities -- Analyst

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