Earnings Call Transcript - ET Q1 2020

Operator, Operator

Good day, and welcome to the Enable Midstream Partners First Quarter 2020 Conference Call and Webcast. Please note, this event is being recorded. I would now like to turn the conference over to Enable's Senior Director of Investor Relations, Mr. Matt Beasley. Mr. Beasley, you may begin, sir.

Matt Beasley, Senior Director of Investor Relations

Thank you, and good morning, everyone. Presenting on this morning's call are Rod Sailor, our President and CEO; and John Laws, our Chief Financial Officer. To achieve social distancing and limit travel, we only have a small group joining the call in the room today. But, we also have other members of the management team on the phone to answer your questions. Earlier this morning, we issued our earnings press release and filed our Form 10-Q with the SEC. Our earnings press release, Form 10-Q filing and the presentation that accompanies this call are all available in the Investor Relations section of our website. We will also be posting a replay of today's call to the site. Today's discussion will include forward-looking statements within the meaning of the securities laws. Actual results could differ materially from our projections and the discussion of factors that could cause actual results to differ from projections can be found in our SEC filings. We will also be referencing non-GAAP financial measures on today's call, which we have reconciled to the nearest GAAP measures in the appendix of today's presentation. We invite you to review the disclaimers of this presentation for both forward-looking statements and non-GAAP financial measures. With that, we'll get started, and I will turn the call over to Rod Sailor.

Rod Sailor, President and CEO

Thanks, Matt. Good morning, and thank you for joining us. You can see on slide 4 the key topics we plan to cover this morning. As always, Enable is committed to protecting the health and safety of our employees, customers, and communities where we live and work while maintaining continuity and providing vital energy infrastructure services. Second, we plan to spend time today covering the current market environment and its impact on Enable, the significant demand reductions as a result of COVID-19, as well as the supply impacts from actions taken by Russia and Saudi Arabia that have resulted in a significant drop in crude prices, which has impacted companies across the energy value chain. The U.S. rig count has dropped almost 50% since early March, and we are starting to see production curtailed in plays across the U.S. including certain areas of our footprint. During times of market volatility, we believe Enable benefits from its strong balance sheet, significant scale in key operating basins, and our overall diversified asset portfolio of gathering and processing systems interconnected with natural gas, transportation and storage systems. Third, we have quickly responded to this new market environment by reducing our capital expenditures and operating costs. We are committed to further action as needed to ensure Enable remains strong in 2020 and beyond. Fourth, despite the challenging business environment, we continue to execute on our strategic objectives and we have several key project and contracting updates to share today. Finally, while the market has changed quickly, we know it is important to provide an updated view for 2020. John will share our updated outlook for the year at the end of the call. The next slide highlights our response to COVID-19. As the coronavirus began to spread in the U.S., we quickly implemented our business continuity program, allowing us to continue operating our assets and executing on our business objectives. Following the local, state and federal guidelines, and recommendations from health organizations, most of our employees have been working remotely, and we have implemented social distancing practices for the field and other functions unable to work remotely. I am pleased to report that business operations are running smoothly and there have been no COVID-19-related impacts to systems operation or critical business functions, a testament to the hard work and dedication of our employees. To promote physical and mental well-being, we are offering multiple support resources to our employees and their families. We recently committed to make donations to hunger relief organizations in communities across our footprint. Turning to the next slide. As the implications of the economic downturn and dramatic commodity price declines became apparent, we quickly announced actions designed to position the company well for the challenges of 2020. These actions included a 50% reduction in our distribution, as well as significant costs and capital reductions, which in total should result in approximately $450 million of additional cash flow on an annualized basis, which can be deployed back into the business to fund capital expenditures and reduce debt. From a capital standpoint, we are limiting our capital expenditures to contracted long-term transportation and storage projects and contracted capital efficient gathering and processing projects. We're also looking for cost reduction opportunities across the business and have already identified significant savings, including idling of certain facilities, deferral of non-critical projects, lower materials and supplies costs as a result of reduced activity, and lower equipment rental costs as we turn back underutilized rental compressor units and replace rental units with unused equity units. Enable is now well-positioned to fully fund its business in 2020 while reducing total debt levels. We are committed to taking further actions as needed should challenging market conditions persist. As we look at producer activity for the balance of the year, we expect most new well connects will be focused in the Haynesville shale on our Ark-La-Tex system with more limited activity in the Anadarko and Williston Basins. Given significant declines in the demand for crude and the associated reduction in crude prices, we anticipate some amount of near-term production curtailment in the Anadarko and Williston Basins, and we have updated our outlook to reflect curtailments through June. Turning to the next slide. Enable continues to benefit from a diversified asset portfolio. Our transportation and storage segment is anchored by firm contracts with high-quality customers, providing stability during volatile market environments. With a more constructive outlook for natural gas prices further out the curve, we are seeing increased producer interest in growing and completing wells in leaner gas plays, particularly in the Anadarko Basin. As I just mentioned, we expect producers will continue to drill and complete wells in the Haynesville shale in the Ark-La-Tex Basin. Over the long term, Enable is well-positioned from both a producer operating cost and wellhead pricing perspective. Based on recent third-party research, our gathering footprint includes plays with very competitive operating cost profiles. We also offer unique market solutions to our producers, and many of our producers hold downstream capacity commitments that facilitate moving production to premium markets. The next slide highlights several key project and contract updates. First, we recently received FERC approval on MRT’s rate case settlements. These settlements established rates for service on the MRT system that provide a return on MRT’s historical investments, recovery of the pipeline's ongoing operating costs and rate certainty for customers. We recognized a onetime $17 million revenue benefit in 2020 related to 2019 billings, and we estimate a $7 million benefit on an ongoing basis. Our Gulf Run Pipeline project is proceeding on schedule. We recently filed certificate applications with the FERC on February 28th, and FERC will now conduct an environmental assessment of the project. The project scope filed in the application would provide approximately 1.7 Bcf per day of capacity, which could both accommodate Golden Pass's 1.1 Bcf per day commitment and allow for additional capacity subscriptions that may develop from ongoing discussions, at an estimated total cost for the filed scope of approximately $640 million. The project will be appropriately sized to meet contracted customer capacity commitments, and we estimate a capital cost of approximately $500 million to meet Golden Pass's current 1.1 Bcf per day commitment. Subject to FERC approval, we still anticipate placing the project into service in late 2022. Our MASS natural gas transportation project also remains on schedule for its anticipated second quarter 2021 startup. The project leverages Enable’s existing infrastructure to provide access to emerging Gulf Coast markets and growing Southeast demand markets and is backed by a firm fee-based agreement. On the contracting front, EGT recently recontracted substantial capacity with its largest customer CenterPoint Energy Resources Corporation. The contracted term for the majority of the renewed capacity is nine years and the effective date of the new contracts will be April 1, 2021. We were also recently awarded a three-year renewal for approximately 150,000 dekatherms per day from a utility on the EOIT system. We recently contracted 100,000 dekatherms per day of capacity for two years, starting in 2021 on EGT's Line CP. Finally, we continue to evaluate asset optimization opportunities, and we recently closed on the sale of EGT's undivided 1/12th interest in the Bistineau Storage Facility. I will now turn the call over to John to discuss first quarter results and our updated 2020 outlook.

John Laws, Chief Financial Officer

Thank you, Rod, and good morning, everyone. My remarks will cover our first quarter 2020 operational and financial results at a high level as well as an updated outlook for 2020. As always, you can find a more detailed and comprehensive overview of our financial and operational results in our first quarter earnings release and in our 10-Q, both of which were released earlier this morning. Turning to the operational performance overview slide. We saw a slight decrease in natural gas gathered volumes as a result of lower volumes in the Anadarko and Arkoma Basins offset by volume increases in the Ark-La-Tex Basin. We saw an increase in crude and condensate gathered volumes driven by volume growth in the Anadarko, net of lower gathered volumes in the Williston. Finally, the slight decrease in transported volumes was primarily related to lower gathered volumes. Turning to the financial results on the next slide. Our decline in net income was primarily driven by non-cash impairments that we recognized in our gathering and processing segment during the quarter, offset by revenue increases from FERC's approval of our MRT rate case settlements. The slight decrease in adjusted EBITDA was driven by lower gross margins after adjusting for non-cash items, including an adjustment related to the change in fair value of commodity derivatives. The increase in DCF for the quarter was driven by lower cash payments made pursuant to the partnership’s long-term incentive plan and lower maintenance capital expenditures. After considering the distributions declared, Enable’s distributable cash flow exceeded distributions declared by $142 million, fully funding our $38 million of expansion capital expenditures for the quarter and providing additional cash flow to reduce debt. I will now discuss our updated 2020 outlook on the next slide. Before I get into the details, I want to recognize that we find ourselves in a very fluid environment. Accordingly, while we believe demand will return and prices will stabilize over time, we cannot know or predict when that may occur, nor can we predict the full extent or duration of any customer volume curtailments. The outlook shown on this slide reflects current market prices and our expectations for producer activity for the balance of the year, which have been informed by recent commercial dialogue with our key producers. As Rod mentioned, we expect to see some curtailments in the Anadarko and Williston Basins as well as some new wells connected to our systems, primarily in the Ark-La-Tex Basin. In terms of production curtailments, the outlook assumes that we will see approximately 0.6 TBtu per day of natural gas production and 70,000 barrels per day of crude oil and condensate production curtailed in May. While most producers are not giving indications on curtailments beyond May, our outlook assumes the curtailments extend through June with an approximate impact of $12 million for the month. At our current distribution rate, and considering the actions we announced in early April to increase retained cash flows, we expect that distributable cash flow will exceed distributions by approximately $325 million at the midpoint of the output. That will allow us to fully fund our anticipated expansion capital expenditures for the year while reducing total debt levels. As I close my remarks, I want to emphasize that even though we're facing near-term challenges, our assets have served customers for many decades through many different industry cycles. We are confident that the steps we are taking position Enable well for success both now and in the future. I will now turn the call back over to Rod.

Rod Sailor, President and CEO

Thanks, John. As we wrap up today's call, I want to emphasize a few key points. First and most importantly, we are committed to protecting the health and safety of employees, customers, and communities. Second, Enable is built for the long term. We continue to benefit from significant scale, diversified assets, integrated systems, unique market solutions, and a strong base of firm demand-driven transportation and storage contracts. Third, Enable remains strong, and the actions we announced in early April create significant financial flexibility and liquidity. Finally, Enable will take the necessary actions to position the Company for success in 2020 and beyond, including continuing to scale expenses and capital to the business environment. That concludes my remarks. We will now open the call up for your questions.

Operator, Operator

Thank you, sir. We will now begin the question-and-answer session. And the first question will come from Jeremy Tonet of JP Morgan. Please go ahead.

James Kirby, Analyst

Hey. Good morning, guys. This is James on for Jeremy. I appreciate you taking my questions. Just starting with the updated guidance, I appreciate the color in terms of the next few months how you're seeing production play out across your portfolio. Looking into the back half of the year and the second half, where are kind of the moving pieces in terms of your G&P segment or what can get you to maybe the high end versus low end of the guide?

Rod Sailor, President and CEO

Yes, James. It's Rod. I'll start the answer and John or Michael can weigh in to the extent they need to. I think, as we think about it, and we said this in our commentary around the slides, as we look at the back half of 2020, we continue to see a very constructive dry gas environment setting up. If you recall, we saw a lot of activity in the STACK area, which is a gassier play. As producers have focused on crude, they moved down into the SCOOP. Our system can handle activity, be it in the SCOOP, be it in the STACK, be it anywhere along the Anadarko basin. So, we do see some opportunities for producers to be a little more active in some of the gassier windows of the Anadarko if we continue to see a constructive gas environment. On the crude side, it's going to be highly dependent on demand and the impacts on demand that increased demand would have on price to see more crude-directed drilling. That's where we've seen the biggest pullback from producers of late. Again, stronger gas prices. We expect to continue seeing producers following their drilling plans in the Haynesville. Some of the positives that we would expect or could point to would be around a stronger gas price, what that would do for increased drilling in the gassier windows of the Anadarko and potentially others in the Ark-La-Tex Basin. Remember, one of the points we really tried to emphasize is, again, given the integrated nature of our system, the fact that many of our producers gathering customers have transportation obligations on our system, we continue to work with them to find creative ways to get gas molecules to the absolute best market available. We need to see some continued constructive gas environment, and we need to see a pickup in crude demand.

James Kirby, Analyst

Okay. Thanks.

Rod Sailor, President and CEO

Just before you leave, I’ll check if John or Michael have anything to say.

John Laws, Chief Financial Officer

No, Rod. I think you said it well. Just to think about it, maybe building on Rod's comments and really at the end of the day, we just think completions, right? We still have some work going on in the area and in the basins. We've got rigs running. But, I think we've been a little conservative from a completion standpoint for the balance of the year. If you see some of the conditions that Rod has described, we're all trying to work our way through this current environment and understand how the demand will rebound and what that will mean for prices. I think there's an opportunity to see the wells that are being drilled, are being completed this year.

James Kirby, Analyst

And then, I just wanted to touch on the rating agencies and how conversations have been going with them. I assume they've viewed the reconnections as positive. But, just if there's any rating sensitivities that they've put out for you? I think, S&P put you guys on negative watch. Just how conversations are evolving with them? And if there is any leverage target that you guys are trying to get by year end?

John Laws, Chief Financial Officer

Yes. I think, good question. We've been in very regular dialogue with each of the three agencies, certainly leading up to the announcements that we had on the 1st of April and thereafter. The primary leverage target that the agencies have put out for us varies a little bit but generally, that 4.5 times range is, to the extent we're exceeding that on a sustained basis, that begins to be a point where they'll take a harder look. We entered into this crisis as we closed out last year with a pretty strong balance sheet and under 4 times, we've maintained that leverage level through the first quarter, roughly 3.85 or 3.86 from an overall leverage level. We feel like we're relatively well positioned. The measures we’ve taken additionally add to that strength as we continue through 2020.

Operator, Operator

Next, we have Danilo Juvane of BMO Capital.

Danilo Juvane, Analyst

My first one is perhaps for Rod. In your prepared remarks, you talked about being prepared to take further actions to the extent the situation calls for it. Are there any specific levers that you're thinking about potentially pulling in terms of further actions, and what necessarily makes you pursue further actions up here?

Rod Sailor, President and CEO

I appreciate the question. The point to that comment is, I think we took the right and appropriate actions in April to ensure, strengthen the balance sheet and to give us ultimate financial flexibility and liquidity. All those options are on the table going forward, depending on what we see or believe the future holds for us. I wouldn't rate anything one above the other, but I just wanted to be sure that we made the point that we've got a lot of levers to pull, we've pulled some of them, and we'll continue to look at pulling those or additional levers as we think the business climate warrants it.

Danilo Juvane, Analyst

That’s helpful, Rod. Thank you. And now, looking at the O&M for the quarter, it was a little bit lighter than what we expected. You identified when you announced the dividend cut a host of initiatives, cost savings measures and so forth. I think $35 million in O&M identified for this year, $70 million for next year. Was any of that accelerated into the quarter? Just wanted some clarity on that.

Rod Sailor, President and CEO

I think part of it was due to the actions we started taking, and some of these initiatives from the first quarter will extend into next year. We will continue to focus on this and have already identified $35 million for cost cutting. We plan to implement this amount, and it wouldn't surprise me if we can achieve even more. Some of these cost reductions depend on activity levels, which means they may fluctuate based on ongoing discussions related to certain areas with dryer gas.

Danilo Juvane, Analyst

Thanks for the color, Rod. I'll get back in the queue. Thank you.

Operator, Operator

Next, we have Shneur Gershuni of UBS.

Unidentified Analyst, Analyst

Good morning. This is Agasha calling in for Shneur. Could you please provide more color on Continental’s curtailments in the Anadarko, which wells could be impacted? Do they focus more on vintage wells? Any color would be helpful.

Rod Sailor, President and CEO

I don't think it would be appropriate for us to talk about individual customers and curtailments, especially given Continental will be having their earnings call next week, and I'm sure they will outline their plans. We've tried to point out that the level of curtailments we’ve had on our system, and clearly Continental is a large part of those curtailments. I don't want to delve into specifics regarding that. I don't think that would be appropriate for us.

Unidentified Analyst, Analyst

Then, what is management thinking about debt repurchases in the open market? Is it part of the strategy this year to reduce debt, and has Enable repurchased any debt so far?

John Laws, Chief Financial Officer

We released our Q this morning, so we don't have any debt repurchases disclosed in there. What investors should expect from Enable is that we're going to be proactive on a number of different strategies in evaluating those opportunities and looking at how the debt may trade, which could be an opportunity for us to evaluate. But we don't have anything specific to comment on regarding that.

Operator, Operator

Next we have Alexis Kania of Wolfe Research.

Alexis Kania, Analyst

Hey. Good morning. Two questions. I think, first is, you mentioned the EBITDA impact of the June assumption of curtailments, which I think was $12 million to $16 million. Is that a fair assumption to use, to the extent that we see extensions of those curtailments, so that’s again a good sensitivity that we could use on a monthly basis for the balance of the year? The second question is just on Gulf Run. Is there kind of a date when you would need to kind of decide on the ultimate sizing of that project during the FERC process? I'm sure there's probably some implications in ordering, kind of pipe diameter and alike. So, I'm curious about the window for looking for additional supply or contracted volumes.

Rod Sailor, President and CEO

Yes. Regarding curtailments, we did factor them into our guidance for May and June. Most producers we’ve spoken with are assessing the situation monthly and have mentioned May, with only a few indicating June. We believe that timeframe is appropriate considering the current market conditions. The $12 million figure mentioned for June is based on the fact that those wells are gradually declining, so that figure would likely decrease if curtailments extend beyond June. We are currently in the filing process for Gulf Run. There will come a point where we have to make decisions, especially concerning the project's final size. We also need to consider how to manage the cost of the pipe. Currently, pipe costs have decreased since we announced the project, which is beneficial for us. We expect there may be some increases in other costs. We haven’t set a definitive deadline for completion; this is an ongoing process with potential customers. Activity has been variable, sometimes slowing down significantly. Our commercial team is doing an excellent job on the project and will continue engaging with potential subscribers and capacity until we decide to finalize the project scope and proceed with purchasing related to it.

Operator, Operator

Next we have Gabe Moreen of Mizuho.

Gabe Moreen, Analyst

I appreciate that things are highly uncertain at the moment. But, can you maybe speak to sort of the base volume declines you would expect in your guidance sort of on a 4Q to 4Q basis or 1Q to 1Q basis in the Anadarko? Just curious after curtailments are hopefully done with, where you see the base volumes headed absent drilling?

John Laws, Chief Financial Officer

Hey. Good morning, Gabe. It’s John. Thank you for the question. I do appreciate you're recognizing sort of how fluid things are at the moment. As I mentioned earlier at the outset, we're not real aggressive on well connections in the Anadarko this year, and we've also not put out specific volumetric guidance. But, I think, it's fair to say that if you were looking at sort of an overall decline over the year, it would probably be in that 10% range. It'd be a little bit stronger than that if you were looking at Q4-to-Q4. But I'm going to stop short of giving you a specific number just as the inactivity continues to evolve. We don't know exactly how things will unfold throughout the year.

Rod Sailor, President and CEO

I would like to add that since crude prices fell and producers began to respond, we are currently in the third week of efforts to shut in production by most producers. We've observed changes in the wells they intended to shut down. This is a very dynamic situation that makes it somewhat unpredictable. We have based our outlook on our best assumptions regarding the activity we expect to see. However, producers will continue to evaluate where they can best create value between ongoing production, drilling activities, and wells they wish to shut down. The focus is largely on crude, but there is a significant amount of gas involved with some of these shut-ins. The situation will change in May, and we are hopeful that some of these wells will begin to be brought back online sooner rather than later.

Gabe Moreen, Analyst

Thanks, John. Thanks, Rod. I truly appreciate the uncertainty of the whole exercise. Just want to clarify, John, when you mentioned the 10% number, was that Anadarko-specific or sort of cross-basin.

John Laws, Chief Financial Officer

That was more Anadarko-specific. That's not necessarily in our expectations for some of the drier gas areas. That gets into a bit of the difficulty in giving you these numbers as well, because we continue to be encouraged by some of the rig activity converting into completions this year.

Gabe Moreen, Analyst

Got it. And then, second question is, in the past you've been creative in terms of coming up with some projects and solutions around basins where there's been excess processing capacity. You had mentioned earlier about cost savings on compressors. I'm just curious whether in your own network of plants in the Anadarko, or even in conjunction with others, kind of solutions being considered, rationalizing some of that capacity. Just curious on your thoughts there.

Rod Sailor, President and CEO

Yes. Thank you. I do think we've been able to provide some creative solutions to those issues, and I think we will continue to look at that. I think rationalizing processing capacity in and around our footprint has been an exercise that we've been championing. No announcements yet, but it’s something we continue to think about. We want to find better uses for our assets. In areas where we're seeing more activity, we're trying to find creative ways to partner with our peers and competitors to utilize all the capacity that's available.

Gabe Moreen, Analyst

Got it. Thanks, Rod.

Operator, Operator

This will conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Sailor for any closing remarks.

Rod Sailor, President and CEO

Thank you very much. In closing, I want to recognize all of our employees for their hard work, dedication, and continued focus on safety during this challenging time. I thank everyone on the call for your interest in Enable. I hope you all remain safe and healthy. Please, have a great day.

Operator, Operator

We thank you, sir and also to the rest of the management team for your time today. The conference has now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect. Thank you.