Crestwood Equity Partners (CEQP) Q4 2022 Earnings Call Transcript

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Crestwood Equity Partners (CEQP)
Q4 2022 Earnings Call
Feb 21, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to today's conference call to discuss Crestwood Equity Partners' fourth-quarter 2022 financial and operating results and 2023 outlook. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures, such as EBITDA, adjusted EBITDA, distributable cash flow, and free cash flow will be discussed.

Reconciliations to the most comparable GAAP measures are included in the news release issued this morning. Joining us today with prepared remarks are founder, chairman, and chief executive officer, Robert Phillips; president, Robert Halpin; and executive vice president and chief financial officer, Johnny Black. Additional members of the senior management team will be available for the question-and-answer session with Crestwood's current analysis following the prepared remarks. At this time, all participants are in a listen-only mode.

[Operator instructions] As a reminder, today's call is being recorded. It is now my pleasure to introduce your host, Bob Phillips. Thank you, sir. You may begin.

Bob Phillips -- Founder, Chairman, and Chief Executive Officer

And thank you, operator, and good morning to everyone. Thanks for joining us today. I'm going to start us off with a recap of the strategic transition that we've made over the past couple of years, and then I'll turn it over to Robert to discuss our operational results and our segment outlooks and then, finally, to Johnny to dive deeper into our 2022 financial results and our '23 guidance. So, let me start with 2022.

It was another extremely important year for Crestwood as we pushed forward with our regional consolidation strategy, which was designed to establish Crestwood as a top three gatherer processor in the Williston, Delaware, and Powder River Basins. This follows a portfolio realignment strategy, which we started in 2021 to core up our competitive position in all weighted resource plays which have better long-term producer economics and decades of undrilled inventory which are dedicated to our system. And we've done this while divesting assets in gas-weighted, low-growth basins and businesses, and we think this streamlines our portfolio, and it kept our balance sheet in a good spot while we made the transition. So, effectively, we've been transitioning away from the widely diversified midstream portfolio we put together in the first few years of Crestwood, and it served us well during the formative years to a much more concentrated gathering and processing position in the basins that offer stable, long-term production profiles and more visible growth potential at what we think are realistic commodity prices going forward, very proud of it.

I think that we've accomplished that. We're in a good spot as we look to the future. Just as a recap, transactionally in 2021, I'll remind you that we acquired First Reserve's general partner and limited partner interest. We converted our governance structure to a publicly elected board.

We sold our Northeast Stagecoach gas storage facility, and late in the year, we announced the Oasis Midstream deal to make us bigger in the Williston. In 2022, we closed the Oasis Midstream merger, doubling our size in the Williston Basin. We increased our annual distribution by 5%. We organized a significant stock buyback of CEQP units from Chord which was created through the merger of Oasis production and Whiting.

We also sold our legacy Barnett and Marcellus gathering and processing assets, which were on PDP decline, and we significantly expanded our Delaware position by buying out First Reserve's CPJV interest in acquiring the Sendero Midstream assets. So, a big year in '21 and in '22. Cutting across both years, we built the Continental Express pipeline to connect all of Continental's acreage in the Powder River Basin which dramatically improves the long-term outlook for the PRB. And we successfully integrated all of our acquired assets with our legacy assets in the Williston and Delaware Basins, which gave us cost savings, operating synergies, significantly more processing capacity, new commercial opportunities and made our capital program much more efficient due to the larger scale in each of these basins.

Now I can say, while I'm disappointed in our actual '22 results, which came in short of our expectations and the market's expectations due largely to extreme winter events and producer development delays, which were caused further by industrywide oilfield services and supply chain challenges, I am very pleased strategically with the repositioning of our portfolio and the assimilation of these new assets and the positive growth outlook that we have in all three basins for 2023 and beyond. I think that Crestwood is a much better, stronger, and more resilient company, one of the top gathering and processing franchises in the industry, a leader in midstream ESG and an MLP with significant upside potential for our unitholders who are looking for stable distributions and growing total return. So, as we begin 2023, we're continuing to focus on our balance sheet with a successful -- recently with a successful $600 million senior note deal in January that was upsized and significantly oversubscribed. And we termed out our revolver and significantly enhanced our liquidity going forward with that very successful note deal.

And just this morning, Crestwood and our joint venture partner, Brookfield, have announced the sale of our Tres Palacios Gas Storage facility for $335 million in total proceeds. This sale represents for Crestwood, our fourth noncore divestiture and a highly compelling valuation and allows Crestwood to utilize our $168 million in cash proceeds to pay down debt and further strengthen our balance sheet. I want to take a moment to personally thank the hardworking field employees at Tres Palacios that have contributed so much to our success over the last decade. They fully embody Crestwood's operating principles.

And I'm proud to say that they have the longest string of net-zero, triple-zero safety performance in the entire company. So, we're really proud of the Tres Palacios folks. They did a great job for us. The divestiture of Tres Palacios, I think, culminates our strategic repositioning plan over the last couple of years, and we're now laser-focused on maximizing free cash flow out of the portfolio and reducing debt over the next few years through what we think is a very streamlined and very competitive asset portfolio in the three basins that we operate.

Robert and Johnny are going to get into the details, but I do think that the industry is much better equipped to manage some of the supply chain challenges that we saw last year going forward. And certainly, our producer portfolio is in much better shape, both financially and operationally to deliver on their forecasted development activity in 2023. We expect to add approximately 260 new well connects in 2023, that is an increase of over 15% from last year. And we're going to continue to carefully and efficiently spend growth capital to expand backbone infrastructure of our strategically located systems and plants and make new well connections, primarily in the Williston and Delaware basins.

And we have budgeted more than 8% increase in cash flow year over year at our midpoint in the guidance. So, let me close by highlighting our current distribution rate of $2.62 per unit annually. At that rate, Crestwood is returning approximately $276 million to common unitholders this year. And our distribution is very well covered at more than 1.7 times, and that enables Crestwood to deliver what we think is one of the best investment opportunities in the midstream space.

Really proud of the work that the team has gotten done last year. And so far, this year, we're in a really good spot. And with that, I'll turn the call over to Robert and Johnny to provide additional details on our '22 operations and our '23 guidance. Robert?

Robert Halpin -- President

Thank you, Bob, and good morning to everyone. I would like to echo Bob's thoughts around the strength of our repositioned portfolio and the outlook over the coming years. Additionally, we are excited to pivot our focus on execution in 2023 following an active year of M&A and integrating our newly acquired assets to fully maximize throughput across our systems. Starting in the Williston Basin.

We connected 21 wells across the Arrow and Rough Rider systems during the fourth quarter, bringing the full-year total to 86 wells which was below our initial expectations due to the extreme winter weather, which we discussed in our January 11 operational update. While we cannot control the weather, we can control how Crestwood responds to these events. I am extremely pleased with our operations teams on both the Arrow and the Rough Rider systems as they did a tremendous job during the quarter, working with producers to get production back online and flowing as quickly as possible. As we look to 2023, we expect an active drilling program across our dedicated acreage, led by Chord Energy and Devon Energy, driving approximately 120 well connects in the Williston or about 40% more than in 2022.

We anticipate an average of four to five rigs running throughout the year, driving approximately 5% to 10% volume growth year over year. With respect to growth capital, roughly half of our 2023 capital budget will be invested in the Williston Basin as we continue the build-out of the multiproduct gathering system for Chord Energy's Painted Woods and City of Williston acreage and complete smaller incremental expansions on the Arrow system. Now, turning to the Delaware Basin. We connected 35 wells during the quarter for a full year of 128 well connects across Crestwood's gathering systems.

We expect our diverse set of public and private operators to continue their active drilling and completion programs in 2023, resulting in approximately 125 well connects across our assets. That should drive a 10% to 15% volume growth year over year. Our commercial teams are actively capturing incremental low-pressure and high-pressure gathering and processing opportunities across our New Mexico and Texas assets, which will position Crestwood to fully optimize our 550 million cubic feet per day of in-service processing capacity. Approximately 40% of our 2023 capital budget will be invested in the Delaware Basin, primarily on well connects, system expansion, and compression additions in New Mexico.

Now, finally, in the Powder River Basin, we expect between 10 to 20 new well connects on the Jackalope system. Continental Resources, Crestwood's largest customer in the basin, continued to delineate its large acreage position, targeting multiple formations. We continue to work with other large operators in the area to bring new volumes on the Jackalope system and capitalize on our excess processing capacity at the Bucking Horse facility. In the Storage and Logistics segment, with the divestiture of Tres Palacios announced this morning, the NGL Logistics business will now make up about 90% of the earnings for the segment going forward.

We expect the earnings for the S&L segment to return to normalized levels in 2023, as our 2022 hedges have rolled off at the end of 2022 and the current contango in the NGL forward curves present incremental margin opportunities around our NGL storage assets. And now I'll turn the call over to Johnny to cover our financial results and 2023 guidance.

John Black -- Executive Vice President, Chief Financial Officer

Thank you, Robert. For the fourth quarter of 2022, Crestwood generated adjusted EBITDA of $200 million and distributable cash flow of $111 million, year-over-year increases of 34% and 22%, respectively, driven by our M&A activity over the past year. For the full year of 2022, our assets generated adjusted EBITDA of $762 million and distributable cash flow of $467 million, year-over-year increases of 27% and 26%, respectively. For the fourth quarter of 2022, Crestwood announced a $0.655 distribution, payable on February 14 to unitholders of record as of February 7, resulting in a quarterly coverage ratio of approximately 1.6 times.

Looking at the segment results. In the Gathering and Processing North segment, fourth-quarter 2022 EBITDA totaled $141 million, an increase of 21% over the fourth quarter of 2021, driven by higher natural gas gathering, natural gas processing, and water gathering volumes from the expanded operations of the Oasis Midstream assets. In the Gathering and Processing South segment, fourth-quarter 2022 segment EBITDA totaled $45 million, an increase of 53% year over year. Segment growth was driven by a combination of the Sendero Midstream and CPJV acquisitions, coupled with volume growth from the legacy Crestwood assets offset by the divestitures of the Barnett and Marcellus assets.

In the Storage and Logistics segment, EBITDA totaled $26 million for the fourth quarter, an increase year over year, driven by our NGL Storage and Logistics business, capitalizing on price volatility around our assets. During the fourth quarter, we invested $66 million in growth capital bringing the full-year total to $188 million, approximately $12 million below the low end of the 2022 growth capital guidance range of $200 million to $220 million. Our project management team continues to do an excellent job executing projects both, safely and below cost targets in an inflationary environment. With several well connects being pushed from 2022 to 2023, our project management team did a great job optimizing our capital spend to efficiently match the updated timing of our producer development plans throughout 2022.

Turning to the balance sheet. Crestwood ended the fourth quarter with approximately $3.4 billion of total debt outstanding, including $1.1 billion on the revolving credit facilities, resulting in a consolidated leverage ratio of 4.2 times. As mentioned earlier, we successfully issued $600 million of 7.375% senior unsecured notes in January and used the proceeds to pay down the corporate revolving credit facility borrowings and repay and terminate the Crestwood Permian JV revolving credit facility. Pro forma for the senior notes issuance in the sale of Tres Palacios, Crestwood will have $3.2 billion of long-term debt outstanding and a consolidated leverage ratio of four times.

Now, turning the focus to our 2023 outlook. We estimate adjusted EBITDA to be in the range of $780 million to $860 million and distributable cash flow to be in the range of $430 million to $510 million. Our financial guidance for the year is underpinned by the most recent development plans from our producer customers, a constructive oil price environment, and the continued realization of cost and commercial synergies from our acquisitions in 2022. As Bob highlighted in his remarks, the financial plan is focused on maximizing throughput on our available gathering and processing capacity while reducing costs and capital requirements across the portfolio.

Additionally, because there was a lot of moving parts last year due to the M&A and divestitures, we wanted to help bridge and provide a little bit more detail for our year-over-year EBITDA growth expected in 2023. If you adjust our 2022 results for the acquisitions and divestitures completed in both, 2022 and 2023, Crestwood would have generated 2022 adjusted EBITDA of approximately $778 million, which incorporates approximately $80 million of EBITDA additions from acquired assets for the periods that we did not own the assets in 2022 and backed off approximately $65 million of EBITDA for divested assets that are recorded in our 2022 reported earnings from last year, including the 2022 contribution from the recently announced divestiture of Tres Palacios. In 2023, compared to the 2022 M&A adjusted number, we are forecasting approximately 5% year-over-year EBITDA growth at the midpoint of our guidance range, which is primarily driven by gathering volume growth on our system and partially offset by lower commodity prices. Although we ended 2022 with a lower volume exit rate than we had previously expected, we are forecasting sizable quarterly EBITDA growth from Q1 of 2023 to Q4 of 2023 driven by approximately 260 new wells to be connected across our G&P systems throughout the year.

Next, turning to the capital side. We anticipate investing between $135 million and $155 million of growth capital in 2023, a step down of more than 20% year over year, with approximately 90% concentrated in the Williston and Delaware Basins. When paired with our adjusted EBITDA range and the expectations of keeping the common distribution flat for the year, we expect to generate free cash flow after distributions of approximately $50 million at the guidance midpoint in 2023. As we think about our capital allocation priorities for this year, we remain squarely focused on the balance sheet and reducing our debt outstanding with a long-term leverage ratio target of less than three and a half times.

We plan to allocate all excess free cash flow and divestiture proceeds this year to debt paydown, which will drive leverage and our balance sheet strength and create financial flexibility for the company to delever incremental -- to deliver incremental returns to our unitholders over the long term. With that, operator, we are ready to open up the line for questions.

Questions & Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator instructions] One moment, please, while we poll for questions. Our first question comes from Spiro Dounis with Citi. Please proceed with your question.

Spiro Dounis -- Citi -- Analyst

Thanks. Good morning, guys. First question, just maybe want to touch on commodity sensitivity if we could. You talked about potential tailwinds in the -- on the NGL side of the house.

But just curious as you're thinking about the G&P segment, it looks like the revenue profile overall now is 15% variable versus 20% last year. So, a little bit more commodity mitigation there. And I think you guys have been keeping about $3.50 natural gas into the assumption. But curious as we go through the year, have you guys largely hedged out a lot of your exposure? I'm just curious how to think about that sensitivity going forward.

John Black -- Executive Vice President, Chief Financial Officer

Yeah. Thanks, Spiro. I appreciate the question. So, as you mentioned and as you flagged in the investor presentation that was posted this morning, roughly 15% of our cash flow in 2023 is correlated to commodity prices via our POP contracts in the Williston and the Delaware.

I would say that's down year over year, primarily because commodity prices are lower this year in '23 compared to the averages in 2024. Also, as you pointed out, the midpoint of our guidance range assumes a roughly $3.50 annual average price for gas and approximately an $80 per barrel average annual price for crude oil. I would say that we've hedged roughly 35% of our equity gas volumes in 2023 at prices north of $4 per MMBtu and a little bit lower than that on -- from a hedge standpoint on equity oil volumes at approximately $85 per barrel. So, we've got some hedges in place to lock in prices above where strip is at.

From a sensitivity standpoint, roughly every dollar move per MMBtu in gas prices has about a $10 million annual revenue impact on the plan over a 12-month period. Similarly, every $10 move per barrel in crude oil prices has about a $12 million to $13 million impact on revenue and the plan on an annual basis. So, hopefully, that gives you some color around kind of some upsides and downsides to the plan, part of the reason for the range that we set out in the EBITDA guidance range.

Spiro Dounis -- Citi -- Analyst

Perfect. OK. No, that's actually really helpful. Second question, just thinking about recommencing distribution growth.

This recent sale certainly gets you on that path to deleveraging and I think accomplishing one of your goals. And I think I also heard you mentioned it sounds like the exit rate in 4Q '23 should be a lot stronger than where you exited 2022. So, as we think about the leverage run rate by the end of '23, it would seem like you're going to be approaching that three and a half or under three and a half leverage targets, maybe not on a full-year basis but certainly by that point. Is that kind of the gating item you need to see before recommencing distribution growth? Or maybe just walk us through some of the factors you're looking at.

John Black -- Executive Vice President, Chief Financial Officer

Yeah. Great question. As you mentioned, our clear focus this year in '23 is all free cash flow allocation to debt pay down. We put out our range on leverage.

We think we should be in the kind of mid- to high 3s by the end of this year. So, I don't think we'll necessarily be quite at that three and a half times zip code. But I think to your point, we are expecting a significant ramp in cash flow here from the first quarter of '23 to the fourth quarter of '23. So, we don't necessarily want to run rate our fourth quarter number just given the seasonality in our business.

But we do expect 2023 exit rates to be much higher than the exit rates here at the end of 2022, which should set us up for a really solid 2024. So, I think the other thing to think about in 2024 is we do expect capital to decline year-over-year from '23 to '24. And so, I think our free cash flow profile will be that much more enhanced next year, starting in 2024 to drive leverage kind of back to the three and a half times or lower level. I think that's really the gating item to your point on incremental unitholder returns via the distribution.

This year and next year, we're committed to maintaining the distribution flat this year. And once we have visibility to get into that three and a half times level, start to look at incremental ways to return value to our unitholders over the next few years.

Spiro Dounis -- Citi -- Analyst

Got it. Helpful color. Thanks for the time, guys.

Operator

[Operator instructions] Our next question comes from Neal Dingmann with Truist Securities. Please proceed with your question.

Neal Dingmann -- Truist Securities -- Analyst

Just a quick one. I know you laid out plans to pay down debt most of this year, but I'm just wondering, would you consider depending on, again, what the unit price does, opportunistic buybacks if you thought the situation arise or, you know, priorities such that you'll stay with the debt paydown?

John Black -- Executive Vice President, Chief Financial Officer

Yeah. I would say No. 1 focus still is debt paydown. Clearly, there's a price at which we would like to buy back.

We're not at those levels today but continue to watch the stock price and absolutely focused on debt paydown and getting the leverage back to where we want to get it to for the long term.

Neal Dingmann -- Truist Securities -- Analyst

Great. And then just secondly, I know not also active in the plans, but what would you consider right now? Would you consider the M&A market out there? I mean, I know you guys are always looking at some things, but just your view of it right now. Thank you.

John Black -- Executive Vice President, Chief Financial Officer

Yeah. We stay active in the M&A market. But I'd say for this year, it's not a top priority for us. I think we're internally focused.

But if the right opportunity comes along and we can finance it in a way that was accretive on a deleveraging or leverage neutral raises, those are kind of opportunities we're looking for. And so, I'd say active but not a priority overall.

Neal Dingmann -- Truist Securities -- Analyst

Makes sense. Thank you.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Bob Phillips for closing comments.

Bob Phillips -- Founder, Chairman, and Chief Executive Officer

Well, thanks, operator, and thanks to all of you for joining us this morning. I just want to highlight one of my comments in the intro and that is we're largely done with the strategic realignment of the company's portfolio. We're very proud of the portfolio that we've put together, proud of the operating teams and the commercial teams that are commercializing and expanding the business opportunities in these very active areas when you looked at our assets in the Delaware and the Williston and soon to be in the Powder, some of the highest drilling rig rate levels across the entire U.S., all weighted by largely oil prices, but we do benefit from higher gas prices. So, we think that's upside in this year.

Let me just say that we're very pleased with the repositioning. We're very pleased with the assimilation and integration of the assets. Our operating theme for this year is going to be execution; to continue to drive what we think is a very strong positive outlook for our assets in these basins. This is a unique time that we're in right now.

Industry needs more supply from wellhead to burner tip. We are a critical part of that in each of those three basins. We've got a lot of room for growth from a capacity standpoint. Our capital is going to be declining over the next several years, which should drive significantly greater free cash flow, debt paydown, and then we'll be in a position, like Johnny said, to look at some return of capital to investors.

And I think that's what we've built for ourselves with this strategic realignment, getting into the core areas of the oil-weighted basins and out of the gas-weighted basins where we had virtually no growth left in those assets. So, very pleased with the team and really excited about what we're going to accomplish in 2023. So, operator, thank you very much for managing the call this morning. And to all our investors, thank you for hanging in there with us.

I know it's been a little confusing from a budgeting standpoint to figure out the ins and outs of this, but I think the boys put together a very good blueprint for how the -- how we shook out last year and what the budget looks like for 2023. So, if you're in Houston, please stop by and see us, and we're happy to talk to anybody and really excited about where we go from here. Thank you very much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Bob Phillips -- Founder, Chairman, and Chief Executive Officer

Robert Halpin -- President

John Black -- Executive Vice President, Chief Financial Officer

Spiro Dounis -- Citi -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

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