Earnings Call Transcript - KNTK Q1 2021

Operator, Operator

Thank you all for being here, and welcome to the Altus Midstream Company First Quarter 2021 Earnings Call. I will now turn the conference over to your first speaker, Mr. Patrick Cassidy. Please proceed.

Clay Bretches, CEO

Good afternoon and thank you for joining us today for Altus Midstream's first quarter 2021 conference call. We entered the year with very positive momentum and have been able to maintain this as we've advanced into the second quarter. Yesterday we issued our earnings release and we're on track to meet or exceed the midpoints of the performance we guided to last November even with the severe freezing weather we all experienced in February and other challenges related to our business. I'm especially pleased with the execution of our team and I will note a few of the milestones accomplished during the first three months of this year. This was our first quarter with all four JV pipelines in service. We also achieved our first full quarter in which we were free cash flow positive. Operating costs decreased for the seventh consecutive quarter and Altus paid its first cash dividend in March. Altus is a unique midstream competitor. We are a pure play Permian Basin and Gulf Coast midstream company. We own equity interests in four premier long-haul pipelines that transport oil, gas, and natural gas liquids out of West Texas. Complementing this, we operate state-of-the-art gathering and processing assets which provide cleaner, more efficient product recoveries. These drive improved net backs and are aligned with the industry's increasing focus on ESG initiatives. We have a proven record of exceptional execution as our results during the first quarter further demonstrate. A major event during the quarter was the February freeze that disrupted our operations and JV assets over a nine-day period. While the harsh weather tested facilities and field crews, broadly speaking, the favorable impacts offset the unfavorable. Ben will address guidance in his remarks, but I would note that we expect no material negative impact on our annual adjusted EBITDA guidance range as a result of the winter storm. As noted in previous investor calls, Altus has a fixed price power contract that affords us the option to shed load and sell excess power back to the grid. During the storm, Altus was able to sell power, generating incremental income that offset lower throughputs and our assets and operations. Impacts from the storm were temporary and the pipelines were quickly brought back to pre-storm service levels. All four JV pipes and the gathering and processing facilities are newly built with experienced operators. The quality of these assets and the expertise of the crews working them also help to mitigate the negative impacts of the storm. Before moving on to the business review, I want to acknowledge the many individuals who did an impressive job keeping operations online in particularly difficult weather conditions and I recognize that they conducted this essential work while dealing with their own challenging circumstances at home. In our gathering and processing business, volumes during the first quarter were supported by the addition of two newly completed wells at Alpine High. Apache is scheduled to complete five more wells this quarter, some of which will begin flowing back later this month. Operating costs decreased for the seventh consecutive quarter which is especially impressive given the overtime incurred responding to the harsh weather conditions. A portion of these cost savings is related to timing where we have accelerated expenses to take advantage of lower pricing. Last quarter, we pulled forward schedule maintenance and pre-bought supplies and chemicals, reducing our burden at the start of this year. We also benefited from lower contractor costs. Our operations teams have been very successful converting many of our fixed costs to variable costs. We continue to pursue third party business though the environment is still somewhat subdued with lower activity levels across the Permian Basin. Conversations are ongoing with both public and private equity-backed E&P operators as well as other midstream companies. We're also working deals with Apache outside of Alpine High. This includes providing compression and other fields in the Delaware basin and identifying additional opportunities for expanding services with our sponsor. Looking ahead to the remainder of the year, our focus areas will be capturing new business, optimizing our assets, and continuing to build on our strong ESG culture. We are optimistic that demand for oil and gas products will continue to strengthen which should support measured increases in drilling and completion activity in the Permian Basin. Altus Midstream's significant road capital obligations are behind us and the company is in a strong position to generate meaningful free cash flow. Our business is becoming more straightforward with upside potential from both our GMP assets and liquids pipelines through increased utilization. Earlier this week, Altus' Board of Directors declared a dividend of $1.50 per share payable at the end of June to shareholders of record on May 28. Our unique combination of long-haul pipelines and gathering and processing assets provides substantial support for our dividend which offers one of the most attractive yields compared among our midstream peers today.

Ben Rodgers, CFO

Thank you, Clay. In my prepared remarks, I will review Altus Midstream's financial performance for the first quarter, including the financial impact of the February freeze and our updated guidance for 2021. As noted in the press release issued yesterday, Altus reported net income including non-controlling interests of $22 million for the first quarter. Adjusted EBITDA was $65 million and growth capital expenditures were approximately $21 million. Net income including non-controlling interests was lower by approximately $17 million related to an unrealized embedded derivative loss for the quarter which reflects a technical accounting revaluation of the embedded derivative in our preferred units for the period. Gathered volumes for the quarter averaged 436 million cubic feet per day, of which approximately 72% was rich gas. Volumes for the first quarter were impacted by weather-related curtailments which were partially offset by the two additional well hookups at Alpine High during the quarter. All the weather-related shutdowns were brought back online before the end of February. Our first quarter results also include the initial contributions from the Permian Highway natural gas pipeline which entered service on January 1, 2021. However, distributions were delayed a month. So this quarter's results reflect only two months of distributions from PHP, one of which was lower due to the weather impacts of winter storm Erie. Both PHP and Gulf Coast Express are fully supported by shippers' minimum volume commitments and we expect steady contributions from them going forward. For Altus, the financial impact of the storm was immaterial. Across our four JV pipes and our GMP system, the negative impact to net income before taxes and adjusted EBITDA was approximately $0.5 million. Negative impacts from lower volumes across all assets, including pipeline imbalances were almost fully offset by the benefit of our power contract that Clay discussed. I would also like to commend the commercial and operations team for their achievements before and during the storm. Results are an outcome of preparation and from contracting strategies that provide flexibility and mitigate risks necessary for maintaining our operations in severe conditions; they did an excellent job. I'll move on now to our outlook for 2021. We've provided updated guidance in the investor presentation posted to the Altus website yesterday and I want to highlight items. Our gathered volume outlook has been adjusted upwards and is now 370 million to 410 million cubic feet per day. This reflects the encouraging early performance of the two new wells brought online at Alpine High during the first quarter and the addition of five more wells that Clay noted earlier. Higher GMP volumes have a positive effect on our outlook for adjusted EBITDA. Therefore, we are raising the low end of our guidance range to $240 million from $230 million, increasing the midpoint to $255 million for the year. Following the startup of the Permian Highway, our growth capital obligations are minimal. And we remain on track with our previous annual guidance estimate of $30 million to $40 million. Altus has a strong liquidity position. Our revolvers are committed through November of 2023 and we foresee no need to access capital. We continue to focus on the balance sheet with priorities on addressing the preferred and supporting our strong dividend payout.

Chad, Analyst

Hi, this is Chad on for Spiro. Just starting off Clay, I believe you've previously alluded to some potential growth opportunities coming later this year. It sounds like that may still be the case based on your prepared remarks. But can we see any of those projects you mentioned coming in the next few months or being announced in the next few months? Just wondering how we should think about timing some of those opportunities.

Clay Bretches, CEO

Yes. Thanks for the question, Chad. And with regard to the growth opportunities, we do believe that those are feasible. I do believe just from a timing standpoint, we'd be looking at the second half of the year rather than the next two months. A lot of that will stem from operators that are starting to increase their activity in and around the Delaware basin. We think that some of the regulatory mandates that we'll see with regard to methane and flaring are going to benefit Altus greatly, not only in the last half of this year, but going into 2022 as well. So the fact that we are structured the way that we are with a new plant, state-of-the-art facilities, a lot of ESG additions that you can see on our investor presentation, we really do have some great additions to that plant that don't exist in many of the other older plants in the Permian Basin. We think that that is something that's really going to be helpful and beneficial to Altus in the future. So that's something for the second half of 2021 going into 2022, especially when we start seeing these mandates materialize from the EPA, as well as the Railroad Commission with regard to flaring. So we think that's going to create some opportunities for us.

Chad, Analyst

Okay, thanks. That's clear. And then I guess just sticking with the growth opportunities, could you provide any kind of detail on what CapEx could look like from these opportunities? They sound like they're maybe a little bit smaller spend kind of complimentary projects, but is there anything in there that could be significant CapEx?

Clay Bretches, CEO

Yes. When we take a look at what we're talking about in terms of CapEx, it's going to be connection CapEx because we have excess capacity in the plants. We have 660 million cubic feet per day of processing capacity, we're processing right now between 340 million to 360 million cubic feet per day through our rich system. We have plenty of capacity in our lean system, over 200 million cubic feet per day of excess capacity. So whether it's lean gas or rich gas, the opportunities to bring that gas in there is really just going to be pipeline ways to either producers or other midstream operators in the area. So to answer your question, we're not talking about significant capital expenditures. What we're talking about is utilizing excess capacity that we have in our lean gas and rich gas processing systems.

Ben Rodgers, CFO

Yes. And one more clarifying point there on top of that, we think of it as well in terms of kind of building multiple projects and a lot of what we're seeing are very attractive build multiples kind of in the low to mid-single digits which will be accretive for our shareholders.

Chad, Analyst

Okay, that's clear. Thanks for that. That's all I had. Thanks for the time, everyone.

James Carreker, Analyst

Hi, guys, thanks for the question. Do you happen to have the contribution that PHP made in Q1, just as we think about what that could look like going forward?

Clay Bretches, CEO

Not specifically, James. It's going to have some noise in it from Q1 as we mentioned, because of the winter storm impacting flows and imbalances, quite frankly, across many of the pipes in Texas, including GCX and PHP. I haven't disclosed the specifics around that. But I fully expect it to normalize in Qs 2 through 4 and beyond barring any other kind of force majeure events out there.

James Carreker, Analyst

Okay. So I mean, you'll disclose the distributions you've got in the 10-Q I imagine, but you're saying that even taking that up and grossing it up for a third monthly payment, would still not reflect really what its ongoing earnings will be because you had that storm impact?

Clay Bretches, CEO

That's right.

James Carreker, Analyst

Okay. Is there any early indications on how the two completed wells are performing? How long have those been flowing and any kind of IP rates or one-month production rates so far?

Clay Bretches, CEO

No, Apache mentioned that on their call this morning about the fact that the two wells were completed earlier this year at Alpine High and they have five more which we mentioned earlier as far as those will be completed in the month of May and we will even have some of them flowing. But there has not been any discussion on the results of the two that have already been completed from Apache. So that's not something that we can comment on ourselves. But we expect to have more information and expect Apache will disclose some of that in further discussions on Alpine High.

James Carreker, Analyst

Well, one reason I asked is because with the two wells completed plus five more in Q2, it seems like that would have led to maybe a little bit higher revision of the throughput guidance. Are there any other things that are going on there to offset what would be those added volumes?

Clay Bretches, CEO

Yes. So it's a good question and let me say this as far as our guidance, we're being very conservative. So what you're not seeing is a lot of upside baked in from those wells and their performance. So standby on that. We'll try to provide some more color on that in the months ahead. But we're waiting on Apache to make that disclosure before we get out in front of that, but what you're not seeing in the guidance is a lot of upside baked in for those wells.

James Carreker, Analyst

Okay, and then maybe final question for me, I think Apache did allude to the non-core Permian asset sale on their call, but it didn't sound like it was related to Alpine High. Is that your understanding as well?

Clay Bretches, CEO

That is correct. Thank you for listening to our call today. I'd like to leave you with the following closing thoughts about Altus Midstream. We entered 2021 with significant momentum and this continues. Signs of economic improvement are out there as more people get vaccinated and business activity picks up across all sectors. We see potential with new wells contributing to our GMP business, the potential for third-party volumes, and increased utilization on our joint venture liquid pipelines. We have the capability to provide Permian Basin operators a range of midstream solutions with a focus on ESG performance. It should be noted that our updated guidance does not include upside associated with this optimism. Lastly, Altus is well-positioned to achieve its financial and operational goals in 2021. This supports our objective of returning capital to shareholders. And I am pleased we will deliver our second quarterly dividend payment next month.

Operator, Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.