Energy Transfer LP (ET) Q3 2020 Earnings Report, Transcript and Summary

Good morning. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Enable Midstream Third Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Mr. Matt Beasley, Senior Director of Investor Relations, thank you, Mr. Beasley please go ahead.

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 will 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 4 with a few high level business updates. As you may recall from our last earnings call, the impact from shut-in production this year has been less than we anticipated. And I am pleased to now report that all production that was offline due to depressed commodity prices is back online. In our transportation and storage segment, we recently received the FERC’s environmental assessment for our Gulf Run Pipeline, a key milestone for that project. Earlier today, we released our inaugural sustainability report demonstrating our commitment to transparency and sustainable business practices. I plan to share some highlights from the report with you at the end of today’s call. Our COVID-19 safety protocols remain in place and we continue to monitor local, state and federal guidelines and recommendations from health organizations. To-date, the pandemic has not impacted our ability to maintain safe and reliable operations. Finally, I want to once again emphasize that we continue to benefit from our significant scale, diversified assets, integrated systems, unique market solutions and a strong base of firm demand driven transportation and storage contracts. I will now cover a few financial highlights on the next slide. Due in part to lower than expected impacts for producer volume curtailments this year I am pleased to report that we now anticipate performing in the upper half of our previous 2020 outlook ranges for adjusted EBITDA and distributable cash flow. If it weren’t for the non-cash impairment of our investment in the SESH joint venture, we would have expected to perform in the upper half of our 2020 outlook for net income. Due to our business performance and the actions we took to reduce distributions, capital and operating costs in response to the industry downturn earlier this year, we have seen DCF exceed distributions by $293 million, allowing us to fully fund our expansion capital program, while decreasing total debt by almost $100 million. We remain focused on the aspects of our business that we can control, including our cost structure. Our progress on cost reduction initiatives, includes annualized savings of $21 million for aligning our organizational structure to the current industry environment, including the impact of planned retirements and eliminating open positions, $14 million for producing rental compression and treater assets and $2 million from optimizing our processing fleet by putting plants in standby operations and implementing crewless operations in select plants. As we look forward to 2021, we remain focused on capital discipline and will continue to prioritize contracted long-term transportation and storage projects and contracted capital efficient gathering and processing projects. Finally, while some producers have faced credit challenges in the current commodity price environment, we have not experienced any meaningful credit losses during this cycle. Now, turning to the next slide, Enable’s Gulf Run Pipeline project is a key energy infrastructure project serving growing LNG markets. The project is backed by a 20-year commitment from Golden Pass LNG, a joint venture between Qatar Petroleum and ExxonMobil. The project will help add to the global supply of LNG, which should support the displacement of higher carbon intensity fuels worldwide. We continue to advance the project and just last week on schedule the FERC issued the project’s environmental assessment. We anticipate finalizing the project scope and financing plans in the coming months and we continue to believe that we will have a number of financing options for the project given its firm demand-driven revenues and strong customer base. Turning to our transportation and storage commercial highlights on the next slide, the segment continues to benefit from its firm fee-based contracts and the segment is anchored by large investment grade utilities. Our integrated systems serve as a crucial link between supply and downstream markets and we continue to have success contracting capacity. From September, we have contracted or extended almost 1.5 million dekatherms per day of transportation capacity with an average volume weighted contract life of over 5 years. On our EGP system, the mass project has received all required regulatory approvals and construction has begun. The project is backed by a firm 5-year commitment for 100,000 dekatherms per day and we anticipate placing it in service in the second quarter of 2021. On our MRT system, the southbound expansion project is in service and the project is backed by a firm 5-year commitment for 80,000 dekatherms per day. Finally, despite recent contract explorations, our SESH joint venture with Enbridge remains a critical artery serving utility markets in the southeast. Turning to our gathering and processing commercial highlights on the next slide. As I mentioned in my opening remarks, we have seen all production that was shut-in due to depressed commodity prices come back online and we have experienced no noticeable production performance degradation from these wells. Producers remain active on our gathering footprint with 6 rigs currently drilling wells expected to be connected to Enable’s gathering systems. Substantial DUC inventories have been built behind both our Anadarko and Williston Basin systems, with approximately 175 DUCs between both systems. These DUCs provide an inventory of wells with the lower economic hurdle to be completed, because they do not require drilling capital investment. On our Anadarko crude oil and condensate gathering system, we recently completed an extension of that system into McLean County, Oklahoma increasing the system’s reach and ability to add new customers. In the Haynesville shale, significant increases in natural gas forward curves should benefit our producers in the play and further support continued drilling activity. Finally, we added a new customer to our Williston Basin system and recently completed a connection to a 7-well pad for that customer. I will now turn the call over to John to discuss third quarter results.

Thank you, Rod and good morning everyone. I will 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 in our third quarter earnings release and in our 10-Q, both of which were released earlier this morning. Turning to our operational performance overview slide, our natural gas gathered, processed and transported volumes saw decreases compared to the third quarter of 2019, primarily as a result of lower gathered volumes across all basins, inclusive of continued producer shut-ins in the Anadarko basin that ended in the third quarter. Our crude oil and condensate volumes increased compared to the third quarter of 2019 as a result of higher production in the Anadarko basin offset by lower production in the Williston basin. Turning to our financial results on the next slide, we saw lower revenues, gross margin and net income for the third quarter of 2020 compared to the third quarter of 2019 primarily as a result of lower volumes and lower prices. While net income benefited from lower O&M and G&A expenses and lower interest expense as Rod mentioned earlier, net income was impacted by non-cash impairment of our investment in our SESH joint venture. Adjusted EBITDA and DCF were both lower for the quarter compared to the third quarter of 2019 primarily as a result of lower volumes and lower prices partially offset by lower O&M and G&A expenses. Adjusted EBITDA and DCF exclude the non-cash impacts from changes in the fair value of derivatives in the SESH. DCF also benefited from lower adjusted interest expense and lower maintenance capital expenditures for the third quarter. After considering the distributions declared, Enable’s distributable cash flow exceeded distributions declared by $75 million fully funding our expansion capital expenditures for the quarter. While this year has had some unexpected challenges, this was yet another quarter of continued execution for Enable. As Rod mentioned earlier, we now expect to achieve the upper half of the outlook we provided during our first quarter 2020 earnings call for adjusted EBITDA in DCF and excluding the third quarter 2020 non-cash impairment of our SESH investment, Enable would have expected to achieve the upper half of our net income range. The business has generated significant cash flows this year to fully fund our distribution and capital program while reducing total debt levels and we remain focused on further optimizing our cost structure and aligning it with the industry environment. With that, I will now turn the call back over to Rod.

Thanks, John. As I mentioned in my opening remarks, Enable issued its inaugural sustainability report earlier this morning. You can find the report under the sustainability section of our website at enablemidstream.com. Sustainable business practices are deeply embedded across our business and we have a long history of operating in a safe, efficient and responsible manner. At Enable, part of our mission is to partner in the success of our employees, customers, investors and communities. As you read our report, you will find just some of the ways Enable has demonstrated and continues to uphold that partnership commitment. Some of the report’s highlights include our conservation efforts for vulnerable species, including Enable’s participation in the American Burying Beetle oil and gas industry conservation plan, a species that was recently down-listed from endangered to threatened status. Enable’s award winning Integrated Vegetation Management program, along our rights of way, our pipeline inspection program that inspected almost twice the miles of pipeline in 2019 as required by current regulations. The commitments we have made to minimize methane emissions across Enable’s operations through [indiscernible] methane emissions commitments, community partnerships, including Enable’s Safety Partner Program honoring first responders, a program to build or refurbish community basketball courts and a program to support STEM-focused educational initiatives. We also support community organizations by offering our employees 16 company-paid volunteer hours each year. In 2019, Enable employees recorded over 22,000 volunteer hours, including over 15,000 company-paid hours. Finally, our comprehensive contractor safety initiative has helped contribute to a reduction of reported contractor incidents from 22 in 2015 to 3 in 2019. We aligned the report with the voluntary Sustainability Accounting Standards Board or SASB reporting standards for midstream companies allowing for better comparisons of Enable’s sustainability performance. I am proud of our team’s work on our inaugural report, but note that this is only one more step on our sustainability journey. We welcome your feedback and look forward to updating you on our progress. Before we open the call up for questions, I wanted to say that management will not be commenting on strategic alternatives for Enable. Since CenterPoint announced its business review, there has been published speculation related to possible actions by both sponsors. It is not the first time a sponsor has announced such a review or that has been reported that they are considering options with respect to their ownership interest in us over the years since our formation. As has been the case over that period, we have declined to comment on such reports and we will continue in that tradition today. We will now open the call up for your questions.

[Operator Instructions] Your first question comes from the line of Jeremy Tonet from JPMorgan. Your line is open.

Hi, good morning.

Hey, good morning.

Just want to start off with SESH here if I could, just want to see what factors fed into the impairment now and just updated thoughts as far as re-contracting is concerned on the pipe and how you think about discounting or what approaches you might take to kind of secure contract there and what type of contract tenor would make sense? And then there is debt at the JV level as well, so just wondering how you think about leverage there? Is the debt cheap enough to buy in? Would that make sense at all to reduce leverage just any of these different factors would be helpful for your thoughts?

Yes, it’s Rod, excuse me and I will start with sort of the first question on SESH re-contracting and again, we had a large contract or a law. But again, we still expect to enter into discussions with that and other counterparties, about re-contracting. So I don’t think it’s appropriate to really talk about anything other than again we expect, because as I said, in my opening remarks, we think sessions is a vital piece to the transportation artery into the continuing growing Florida market. So we – again, we have continued to expect to realize value on re-contracting there. I will turn it over to John to maybe talk a little bit about the other part of that question.

Yes, sure. Jeremy, it’s John. Just to follow-up there. I think the drivers of the impairment now really do relate to the timing of the re-contracting. And when we believe some of that might take place as you know that, that contract that Rod alluded to rolled in early September was not re-contracted all that capacity just yet. And as we said we are in the midst of doing so, but the accounting rules really do require you to look at things on a basis that does contemplate some of that timing. And with our view of those accounting rules and how we have interpreted those, that’s what drove the time to the impact. As it relates to the debt at the SESH level that’s really not anything that we thought about doing anything with here in the near-term, those notes do not mature until 2024.

Got it. And just want to be clarifying the point as far as re-contracting, did you – have you guys re-contracted any portion of it so far that rolled?

We are in the midst of re-contracting. We have done some short-term things here and we are in the midst of re-contracting some things now that and we will leave it at that.

Got it. That’s helpful. Thanks. And just want to see what your crystal ball might say as far as 2021 is concerned and really thinking more on the natural gas side, we have seen some good strength into ‘21 with the strip there. So, it seems like that could be levels that could incentivize some activity across parts of your footprint. So, anything you can share with us as far as producer activities or what you are seeing out there, particularly in the gas side or even on the rest of your footprint as well. Any color would be helpful?

Yes, Jeremy, it’s John, I will start and then may have others come in here as well. So, look, I think what you have observed here in the gas trip has certainly been something that we have been very interested in, I think as we continue to have dialogue with our producers, particularly those that have more gas exposure, dry gas exposure, that continues to do, we are very interested, just last quarter in the [indiscernible] that we reported record volumes on that system that are there. And so we continue to be encouraged by the activity that we have seen in some of the leaner gas or drier gas areas as well as what the strip and the curve is showing for some of these producers on a go forward basis. So, look, I think in terms of current rig activity, we reported 6 rigs running across our footprint today, we expect those to continue to run and the DUCs that we have in and across our footprint in the Anadarko, we expect the economics here to continue to support activity on a go forward basis, but we will wait and see how producers evolve and finalize their plans as they roll into completing their budget season here over the next couple of months.

Got it. That’s helpful. One last one, if I could just with, I think on Slide 5, you talked about cost reductions here. And just wondering so I am thinking about sustainability of that into ‘21 or other opportunities there, just any thoughts on that would be helpful?

Jeremy, we have made really good progress on the goals that we announced in early April for 2020. We are on track there and expect to continue to be on track to meet the goals and objectives that we had set for ourselves in the company in early April.

Got it. I will stop there. Thank you.

Thanks, Jeremy.

Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open.

Yes. Hi, good morning, guys and thanks for taking my question. So, just to follow-up on SESH, how should we be thinking about the distributions from SESH going forward? Are there any kind of restrictions in terms of the debt structure there that would impact the distributions that you receive from that entity?

There are no restrictions per se at the entity to think about and the distributions on a go forward basis will continue to be a function of the entity’s free cash flow.

Okay. So there are no restrictive covenants for holding back cash there, right?

No, that’s correct.

Got it. Thanks for that. And then just a broader question, we have seen a fair bit of upstream consolidation in Permian, which is probably could accelerate in other basins too, how do you view your asset position specifically in the mid comp with regard to that and then more specifically, with regard to midstream consolidation, do you see any opportunities for Enable? Thanks.

Yes, it’s Rod. I will take that. Again, yes we have been watching the upstream consolidations. Look, there are a number of smaller or less well capitalized E&P companies along our footprint, specifically in the Anadarko would not be surprising and we would expect some consolidations just based on forward strip, and I think the need for everybody to think about cash flow costs and those things. So we are not surprises today, we haven’t seen anything that’s been of an impact on our – on any of our system. As you talk about midstream consolidation, we have said in the past that we believe that scope and scale matter on the midstream side of the business and that will likely lead to some consolidation, probably starting with some of the smaller and private players and we will continue to watch that environment. But again stating we do believe scope and scale matter in the midstream side.

Okay, got it. Thanks.

Your next question comes from the line of Gabe Moreen from Mizuho. Your line is open.

Good morning, guys. Quick question on Gulf Run, can you talk about how negotiations or discussions are going with potentially attracting third-party volumes to that project? And then maybe you can walk us through the timeline there in terms of capital spend ‘21 versus ‘22 and beyond just how we should be thinking about that?

Yes. As it relates to – I will take the first part of that question. Again, as it relates to commercial discussions, I hate to sound like a broken record, but we have continued to have a number of discussions with potential counterparties clearly in this environment. Those discussions have been somewhat muted. We have continued to move along with our plan and we will evaluate it. We are evaluating a number of potential financing options both with financial and strategic players that will also lead us down to the proper scoping of that project in the near future. John, I don’t know if you want to add anything?

Yes. No, I think that’s right, and Gabe, ultimately the total quantum of CapEx will be a function of the finalized scope. But as we have said in the past and with late ‘22 or early ‘23 start date, it’s not a particularly long way of pipe and so we would expect that most of that capital would probably be concentrated in the second half of that build cycle. So you were kind of thinking for ‘21 and ‘22, I would expect that we would see more of that capital, majority of that capital show up in ‘22 as opposed to ‘21.

Thanks. And then, if can follow-up on the shifting to the oil side of things just what you are seeing from completion crews there with TI trading where it is your outlook, you think in terms of Gulf completions, you can be flat from here into ‘21 so just curious there?

Yes, won’t get too much into expectation for ‘21, as I mentioned, really important for us there to hear from the producers and their finalized budgets, which is the process that they are going through here at the moment. I think what we intended to do is show you a little bit of how we think about the inherent backlog that’s there in terms of the DUCs that are on our system. And you can see that there are a substantial number of DUCs out there that we have reported in each of the Anadarko as well as the Bakken. And so, that’s ready inventory that’s out there and available for producers to complete in a lower bar from a commodity price standpoint and an all-in half cycle return economics that are there and available. So, we speak inherent capability in terms of what’s out there, in terms of the DUCs that are out there to come online and add good volumes to the system that we just unfortunately we need to leave it at that for the moment as it relates to ‘21.

Thanks, John. And then not to probe again on ‘21, but a two-pronged question on CapEx, can you talk about where you think you might end up coming in on the growth CapEx side of things for ‘20 and EXCO front? Is there any reason to think that growth CapEx for ‘21 should be different than the ranges laid out in ‘20?

We won’t comment on ‘21, Gabe, but thanks for the preface there. I think, on CapEx we have not pointed specifically to a spot and a range there, but we are doing everything that you would expect us to be doing in terms of optimizing the capital spend that we will have show up in 2020 and again prioritized around those things that Rod mentioned, which are our committed transportation and storage projects that we have got underway and good returning and capital efficient gathering and processing arrangements that we have with producers that are bringing volumes online to the system.

Thank you.

[Operator Instructions] Your next question comes from the line of Ned Baramov from Wells Fargo. Your line is open.

Hi, good morning. Thanks for taking the question. Just one from me. Could you maybe talk about ethane recoveries across your system, it seems produced NGL volumes, the increase from the prior quarter and part of this is driven by the higher processing volumes across the system, but I presume some of the increase is also a function of ethane recoveries, so any thoughts there?

Yes, no, I think that’s right. We did see some higher recoveries of ethane in the quarter. And look I think that, that’s something that on our system, we have the ability to flex into and out of ethane recovery really as it relates to our plants and what we see across the system, I think as we have seen gas prices strengthen, you see a little bit of E&P falloff, we may see something different in the fourth quarter, but we did see and have seen throughout the course of the year, floating into and out of ethane rejection and recovery.

Thanks. That’s all I had.

Thanks, Ned.

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

Thank you all so much for joining us on the call today. In closing, I want to recognize our employees for their hard work, dedication and continued focus on safety during these challenging times. I thank everybody on the call again for your interest in Enable and I hope you all remain safe and healthy. Please have a great day.

Thank you for attending today’s presentation. The conference has now concluded. You may now disconnect.