Energy Transfer LP (ET) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is Marian, and I'll be your conference operator today. At this time I would like to welcome everyone to the Enable Midstream Second Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Mr. Matt Beasley. You may begin your conference.

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.

Thanks, Matt. Good morning, and thank you for joining us. I would like to begin my remarks on Slide four with a few high level business updates. First, our COVID-19 safety protocols remain in place, and we continue to monitor local, state and federal guidelines and recommendations from health organizations. Today, the pandemic has not impacted our ability to maintain safe and reliable operations. Since early May, we have seen a substantial increase in crude oil prices, due in part to this increase the crude focus shut-ins as we saw during the second quarter, were not as significant as previously anticipated. With the outlook for higher future prices we've seen some new gas wells in the stack shut-in and we expect those shut ins may continue through the third quarter. Based on current commodity prices, our latest discussions with our customers and progress on our costs and capital reduction initiatives, we are reaffirming all aspects of our outlook for 2020 provided on our first quarter earnings call. Finally, despite industry challenges Enable continues to benefit from its strong balance sheet, significant scale and key operating basins and our overall diversified asset portfolio of gathering and processing systems interconnected with natural gas transportation and storage systems. I will now cover a few financial highlights on the next slide. First, our distributable cash flow exceeded our declared distributions by $76 million for the quarter fully funding our expansion capital expenditures. As I mentioned, we have made good progress executing on our expansion capital and cost reductions we announced in early April. On the cost front, we recently took steps to align our organizational structure for the current industry environment, reducing staffing levels. While building for flexibility in the future. This organizational restructuring resulted in a reduction of 165 positions across the company, including the impact of planned retirements and eliminating open positions. We also have achieved cost savings from releasing leased assets by redeploying existing assets and optimizing operating processing plant assets to match current volumes. As I've said before, we are limiting our capital expenditures to contracted long-term transportation storage projects, and contracted capital efficient gathering and processing projects. For our Gulf Run project we continue to have commercial discussions to increase the firm commitments to the project. We expect those discussions will continue through the second half of the year. Once concluded, we will finalize the scope and execute our funding plans. Well, some producers have faced credit challenges in the current commodity price environment, we have not experienced any meaningful credit losses during the cycle. In our gathering and processing segment, we are typically a net payer for our natural gas processing customers, which helps mitigate our credit exposure. And we generally have the right to request adequate assurance from non credit worthy counterparties. Our credit profile is also supported by a strong base of large investment grade utility customers in our transportation and storage segments. Finally, we repurchased approximately 22 million aggregate principal amount of our senior notes during the quarter for approximately $17 million plus accrued interest. We will continue to evaluate opportunistic note repurchases based on market conditions and available liquidity. Turning to our commercial highlights on the next slide. We contracted or extended almost 1 million decatherms per day of transportation capacity during the quarter, including our previously announced recontracted capacity with EGT's largest customer CERC. The contracted term for the majority of the renewed CERC capacity is nine years. And the effective date of the new contracts will be April 1st, 2021. The CERC contracts, along with our recent MRT contract extensions and our 20 year Gulf Run commitment from Golden Pass L&G demonstrate the strength of Enable’s integrated transportation systems and significantly extend the partnerships weighted average contract life. The Gulf Run project is proceeding on schedule and FERC’s current schedule anticipates and environmental assessment will be issued by the end of October, subject to FERC approval we still anticipate placing the project into service in late 2022. EGT mass natural gas transportation project remains on schedule for anticipated second quarter 2021 startup. We also recently received a five year commitment for 80,000 decatherms per day of firm capacity on MRT’s southbound expansion project with an anticipated fourth quarter 2020 in service date. Finally, our joint venture pipeline SESH has upcoming contract explorations with the key shipper later this quarter; we believe SESH plays a key role in serving markets in the Southeast with a load factor of well over 90% in recent years and we are focused on re-contracting this capacity. Turning to our gathering and processing commercial highlights. As I mentioned in my opening remarks shut in volumes for the second quarter were less than we had anticipated. Wells curtailed to the scoop and stack plays due to lower crude prices are substantially back online, but we have seen some shut ins in the gassier part of the stack due to anticipated higher natural gas prices. We expect these shut-ins of approximately 0.2 TBTU per day, to continue through the third quarter. To the Williston basin all but two pads are now back online, importantly to date, we have not experienced any significant degradation in well performance from the production that is coming back online. We have seen continued investment from producers in the Haynesville shale plays and the plays long-term outlook remains strong. Rigs also remain active in the Anadarko and Williston basins, building ducks to support future volumes. I will now turn the call over to John to discuss second quarter results.

Thank you, Rod and good morning, everyone. I'll now cover a few of our key operational and financial metrics for the quarter. As always, you can find a more detailed and comprehensive overview of our financial and operational results on our second quarter earnings release and in our 10-Q both of which were released earlier this morning. You can see the impacts of recent production shut-ins on the operational performance overview slide. Our natural gas gathered processed and transported volumes saw decreases compared to the second quarter of 2019, primarily as a result of production shut-ins in the Anadarko basin. The decreases in our natural gas gathered volumes were partially offset by higher natural gas gathered volumes in the Ark-La-Tex Basin has a result of continued drilling activity in the Haynesville shale play. Our crude oil and condensate volumes were also lower as a result of the shut-ins in both the Anadarko and Williston basins, as Rod mentioned, the shut-ins we saw for the quarter were lower than what we assumed in the financial outlook we provided in May. Turning to our financial results on the next slide we saw lower revenues, gross margin and net income for the second quarter of 2020, compared to the second quarter of 2019, primarily as a result of the lower volumes and prices and changes in the fair value of derivatives as a result of increasing commodity prices from first quarter of 2020 to the second quarter of 2020. Net income was also impacted by an increase in O&M and G&A expenses for the quarter primarily as a result of a non-cash loss on retirement of an Ark-La-Tex gathering system. Decreases in our adjusted EBITDA and DCF results were impacted by lower prices and volumes. But these measures exclude the non-cash impacts from the changes in the fair value of derivatives in the non-cash loss on retirement of assets. DCF also benefited from lower adjusted interest expense and lower maintenance capital expenditures for the quarter. After considering the distributions declared Enable’s distributable cash flow exceeded distributions declared by $76 million, fully funding our $26 million of expansion capital expenditures for the quarter. This was yet another quarter of continued execution for Enable albeit against a different plan than what we had envisioned at the beginning of the year. And as Rob mentioned earlier in the call, we are reaffirming the outlook we provided last quarter, and we still expect to fully fund our anticipated expansion capital expenditures for the year while reducing total debt levels. With that, I'll turn the call back over to Rod.

Thanks, John, as I said before, Enable is a strong company that is built for the long-term. We believe we entered this downturn from a position of strength. Our large scale, fully integrated mid-stream platforms is a critical link between production and downstream markets. Our contracts are primarily fee based, and we expect over 90% of gross margin for the balance of the year to be fee based or hedged. In our transportation and storage segment, we continue to develop new capital efficient projects and re-contract capacity. In our gathering and processing segment, we are aligned with key producers in key producing basins and recent long-term natural gas outlooks from Wood McKinsey support long-term growth in the scoop, stack and Haynesville plays. We took decisive action earlier this year to strengthen the company and we will continue to take the necessary actions to position Enable for success in 2020 and beyond. We will now open the call for your questions.

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Quick question my connection’s kind of poor so hopefully you can hear me. I wanted to know your expectations sort of in some of the stack on the dry gas coming back. Has that come back entirely? And then also, you mentioned record volumes in the Ark-La-Tex trajectory for the back half of the year, if you can, you can speak to that a little bit too?

First on the stack, primarily the shut-ins that we talked about on the first quarter call, were largely in the scoop area, the more they're more crude -- more crude focused areas. And as we said about in the release, and as we said on this call, what we've seen just with the price dynamics look like they're strengthening the back half and early 2021. We have now seen some, as the scoop crude and gas has come back online. We've seen some of our stack wells, get shut in and again, as we said right now we would anticipate that this stay, those volumes to stay curtailed for the third quarter. I believe you were breaking up a little bit, but I believe the back half of your question was around the Haynesville. And again, we continue to see those volumes growing through the year. And so I think that that was your question.

Can you talk about MRT's Southbound project? Was that new? And then also sequentially, it looks like the amount of contracted capacity on the interstate side has declined lately and what the impact was.

We did announce the expansion ourselves on, oh, I'm sorry.

That's right. So I think as Rod was saying, we got the southbound contracts that is what we were talking about before we entered and got everything finalized with the MRT agreement. We did have some ability to close out. So that is new. It is new for this year, but it had been contemplated in the first quarter, when we talked about the contribution that we were expecting from the rate case in future years, I think if you think about the sequential reductions, we did have just to remind you some of the time back that we had talked about in aggregate volumes on MRT from some of the larger customers there, but again, much of that was replaced with the new rates that we talked about in the first quarter. And then we also had expiration online CP earlier this year has shown up in the sequential numbers as well. So nothing really new from a development standpoint and what we had otherwise contemplated and really no capital per se de minimus capital on the southbound expansion if that was your question.

That’s really helpful. And last one from me is just on -- there's some language in the queue about the DAPL shutdown or potential shutdown and the impact on the Williston in the last couple of pads still being off-line, is that waiting on a DAPL decision? And if DAPL does go off-line, your view in terms of how volumes look there.

I would say we, we feel like we have outlets for all of our crude, outside of DAPL capacity, but I would say that again, if DAPL were to be shut down, that's going to put pressure on the entire basin and that would likely result in some curtailments but again, right now, we believe that again, the two pads that are offline that's not related to DAPL.

Our next question is from Colton Bean with Tudor Pickering Holt. Your line is open.

Just looking at the full year guide to 900 million and 960 million adjusted EBITDA versus first half at a little over 500, can you speak more to your expectations for the back half of the year? Is it seems like the guide would imply flat to down versus Q2.

And I think, we're at as we affirmed on the call this morning, our range is, we really wouldn't point directionally anywhere kind of north of the midpoint. We're comfortable with the range as it sits today.

Understood. And then you mentioned you're still in commercial discussions around Gulf Run. Any preliminary thoughts on how you might fund that projects and whether the existing commitments are sufficient to attract or to attract project financing?

Yes, again, we've got a lot of -- as John has mentioned in the past go on options around the Gulf Run funding. I think we need to, as soon as we said on the call, it is wise. We still have some commercial discussions going on. We need to get those settled, we would anticipate that we'd have everything wrapped up by the end of the year on that as the answer a project financing, yes, we've got really strong contracts and currently very good credit quality behind that. That is an option we did look at, along with some others. Some other discussions we're having both with financials and other players.

Your next question is from Jeremy Tonet with JP Morgan. Your line is open.

Hi, good morning, just wanted to kind of pick up with the guidance, questions before here, and you said you won't anything north of the middle of the range? And I guess just trying to think of how that ties to I guess, rigs running on your areas that kind of assuming, you have the current, drilling activity levels stay consistent from these what you've seen in July with the seven rigs here or is that assuming kind of rigs decline just trying to get a feeling for those signposts there?

Yes, I'll say a few words and then turn it over to John, Jeremy. But, I mean, again, as we said, we continue to see activity along our system specifically in the Anadarko and the Haynesville. In Anadarko, we're not seeing a lot of completions primarily what we're seeing is duck counts grow in the Anadarko and in the Bakken area. And again, there's still some uncertainty around price. And that's why we're guiding the way that again, that's the way we’re guiding and John may add.

I think that’s well said.

Got it. Thanks for that. And during the quarter, I think you guys made some bond repurchases out there just wondering if that's something we should expect to continue seeing happen with the kind of to the latest with the rating agencies there. And I guess your thoughts on retaining investment grid?

Three part question there as it relates to the repurchases. Those were opportunistic in nature, through the second quarter at least before we started early spreads are very wide. Those bonds and the complex was trading at a pretty deep discount. We saw meaningful recovery, of course through the quarter, but we were able to take advantage of a little bit of that discount on an opportunistic basis. I think you should continue to expect us to think about and act opportunistically, if that makes sense. But where we're at from a rating agency standpoint is not dissimilar from where we've where been in the past, ratings have all recently been affirmed media negative outlooks at S&P and Fitch. But I think we're continuing to work towards, the efforts that we've described for you this year, earlier in the second quarter around the actions and initiatives that we taken to preserve liquidity and flexibility, through the year and for the future. So, the agencies are well aware of that they they've commented on that and interact there. So our dialogue here hasn't changed and we continue to make good progress on the commitments that we've made on cost, improving liquidity and maintaining that capital discipline as well.

Got it makes sense. In just the last one if I could, I wanted to get your thoughts with regards to some M&A activity we seen in midstream recently, we saw Berkshire kind of make a big purchase in this space. And, wondered if you thought there you guys own transmission assets, kind of similar a similar stature that, and just also, I guess, with the two new additions board, wondering if there'd be any kind of review, strategic outlook for Enable at this point.

Well, I think as we've said in the past, we look at a number of things all the time, we're very active in understanding what transactions are taking place in the market. So probably be the only answer I would give is it relates to some of the M&A activities that we've seen. I would say as to the new board members, they were appointed yesterday, getting two very strong industry individuals have a lot of upstream and midstream experience, very well regarded in the space and we look forward to working with them, but as soon as it has any change in the direction that we're going in.

Our next question is from Shneur Gershuni with UBS. Your line is open.

Good morning. Maybe just a follow up on the last question with respect to kind of the new board members and so forth, it sort of seems every couple of years, this sort of seems to be a discussion about your GP intent with respect to their holdings and so forth. It's just, is this therapy as of late, is that similar to the ones we heard a couple of years ago? Or does the current environment, the fact that you kind of distribution earlier this year sort of accelerated and sort of change the pace or interest in trying to sort of resolve the entire GP versus LP relationships with Enable?

Well, I think if you're addressing that, how CenterPoint views their investments and Enable, I think that's a question better asked of CenterPoint and their management.

Got it. Moving into Gulf Run you talked about one of your earlier responses that you've got financing options. If you were to go down in key route, would you want to retain operating control or be willing to give up operational control? If it was with a larger partner of sorts?

Well I would say this way again, generally our predisposition is to own and operate our assets, we think that where Gulf Run sits and again the ability to bring gas in from the garbage and perennial sides that gives us a lot of optionality around our system. But again, we'll evaluate all options and we would never out of term just dismiss any options. If we think that it brings more value to Enable than any other any other option.

Okay. And maybe for my follow up on, how should we think about the Haynesville production for the second half of ‘20 into ‘21? Just kind of what we're seeing with gas prices and so forth. You've got an MVC contract rolling off, will that impact production volumes, just kind of wondering if you talked about puts and takes, and we sort of think about?

Yes, the MVCs have rolled up on that system. And we continue to see volumes grow. And it's our belief that, again, appraisers are very significantly hedged. They've done a great job and maximizing -- minimizing well costs and maximizing the returns around the Haynesville production and we would continue as we sit here today to see it growing into 2021. So, we're not given any guidance on 2021 yet.

And your next question is from Anil Duval with Seaport Global Security. Your line is open.

Good morning guys, and hopefully everybody is safe. And thanks for taking my question. I was wondering if you could talk a little bit about SESH and especially with regard to the competitiveness of that natural gas in the Florida market?

Sure. Good morning. Look, I think the way that we think about SESH is. SESH comes off as sort of the eastern end of our line CP system and there's a number of other interconnection points and feeds down into the end of the Gulfstream, air Gulfstream delivery point and on into the foreign markets, we think that that pathway is a cost advantage pathway is one that has served the Florida and Southeast power markets for a long time and we believe that we'll continue to do so, as the call for generation over time, we expect to continue to grow out of that area in that basin. So, we see it as a very competitive alternative for southeast power market.

As you look at re-contracting, can you give us a sense of the range of options that we should think about in terms of terms or the rates as you get process?

I stopped short of going exactly there we are in active discussions with a number of parties around how we think about re-contracting. And when I say we, I mean, the SESH joint venture. And so those are those are competitively and commercially sensitive. But, again, I'll go back to we do believe that this is a competitive source of supply for those markets, and we think there's a good long-term viability for that asset.

In terms of the timing, are there any regulatory restrictions or things that we should be aware of in terms of resolving that re-contracting?

Not that I'm aware of.

Our next question is from Alex Kania with Wolfe Research. Your line is open.

Good morning. Two questions for you. I think first is, I mean, could you talk a little bit about the cadence of O&M cuts? It looked like it was a little bit higher than Q1 just the one in G&A, through the constant things and then maybe if you could talk a little bit more about the flex points, on when you might want to look at look harder at additional contracts, I guess, as you mentioned there as well as environment where that will make sense or do things need to get worse. And the second question would just be on, I guess, following up on SESH, as well as putting into context with CenterPoint, they were calling the queue. There's a provision where I guess Enbridge could buy because actually have an option to buy SESH. In the event that the CenterPoints just kind of have a lower interest in the business, what are the mechanics of how that would look?

On your cost cuts, we started after our announcement back in late March to start cutting, costs, we've gone through, as we said in the release, some redesign and we're largely through that process. We've now identified and achieved the majority of the cuts that we talked about for 2020 some of those especially around headcount reductions with full year effect in 2021. We've still got some work to do to achieve all of the cost cuts that we talked about in our release for 2021. But I think we're on track for those and we're going through them. And so again, I think you can continue to see our O&M coming in line with the cost cuts, come in line with what we announced in late March, early April.

And Alex this is John, just want to make sure you took note in the O&M and G&A numbers for this quarter, there was a $17 million loss on retirement embedded in the quarter. And then as related to SESH you’re right there is a mechanism in there at the end of the day, there are, it's not quite as straightforward as you might think it’s complex. There are a number of triggers that one would have to work through in order to understand if the test had been satisfied to trigger the repurchase option. And then the repurchase to the extent there would be one with, would be a fair market value in any event.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Sailor for any closing remarks.

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

The conference is now concluded. Thank you for attending today's presentation. You may not disconnect.