Good afternoon and welcome to the Altus Midstream First Quarter 2019 Earnings Conference Call. During today's presentation, all callers will be placed in a listen-only mode, and following management's prepared remarks, the conference call will be open for questions. I would now like to turn the call over to Patrick Cassidy, Director of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us on Altus Midstream Company's first quarter 2019 financial and operational results conference call. We will begin the call with an overview by Altus Midstream's CEO and President, Clay Bretches, and Ben Rodgers, CFO, will summarize our first quarter financial performance and provide an update to 2019 activities. Also available on the call to answer questions will be Jonathan Greenberg, Vice President of Corporate Development for Altus Midstream, and Craig Collins, Chief Operating Officer. Our prepared remarks will be approximately 15 minutes in length with the remainder of the call allotted for Q&A. Remarks during the call may also refer to the Altus Midstream Investor Presentation, which can be found in our Investor Relations website at altusmidstream.com/investors. On today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the news release issued yesterday. Finally, I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the Investor Presentation on our website. With that, I will turn the call over to Clay.

Thank you and good afternoon. Today, we are going to review Altus Midstream's key accomplishments since our call in February, provide an update on the company's operational and financial performance, and highlight selected opportunities and activities under way to achieve future objectives as we pursue our goal of becoming the premier midstream entity in the industry. Our efforts to date have been focused on building a company and organization that can deliver strong results across changing business activity levels and commodity price cycles. Since the beginning of the year, we worked close with our sponsor, Apache Corporation, to maintain our focus on building out infrastructure that adds value to production from Alpine High, delivers gathering and processing services timely and efficiently, and provides a midstream system that will serve for the full development life of the field. This is progressing well. Our first cryogenic processing plant is mechanically complete and on budget with Trains 2 and 3 following closely behind. I will provide more details on this progress in a moment. Altus has also taken a number of steps to strengthen its financial position. As noted during its conference call this morning and in the news release last week, Apache is assisting Altus in managing its cost structure and reducing shared services costs. Altus expects no change to its 2019 adjusted EBITDA guidance at this time. Altus has made good progress on completion of its 2019 and 2020 financing plan. We have seen significant interest from a number of motivated counterparties. We have the support of an investment-grade sponsor, an experienced deal team, a world-class asset at Alpine High, and top-tier JV pipelines. Discussions are well advanced. Importantly, we have taken proactive steps to create the financing capacity to invest an additional midstream infrastructure, both within Alpine High and downstream…

Thank you, Clay. As noted in the press release issued last night, under generally accepted accounting principles, Altus reported first quarter 2019 net income attributable to Class A shareholders of $1.1 million on revenues of $33.9 million. Gathering and processing volumes for the period increased 20%, averaging 564 million cubic feet per day compared with 471 million cubic feet per day in the fourth quarter of 2018. Approximately 53% of these volumes were rich gas. Our first quarter 2019 adjusted EBITDA was approximately $12.1 million, up from $8.2 million generated in the fourth quarter of 2018. Capital investments in midstream infrastructure during the quarter were $258 million. This includes $118 million for the JV pipelines, comprising the exercise of the EPIC crude oil option in February and continued capital calls for our ownership in GCX. $105 million primarily for gathering and processing infrastructure, and $35 million attributable to a finance-lease obligation related to power generators at the Diamond cryo complex. In March, EPIC crew closed on $1 billion Term Loan B and a $75 million revolving credit facility with attractive terms and pricing. This project level financing reduces Altus' share of capital calls to the project based on Altus' proportional 15% share of net proceeds of the term loan. However, Altus' adjusted EBITDA and capital guidance do not change as a result of the term loan because Altus' guidance is based on its proportional ownership of gross project EBITDA and capital, which do not incorporate the impact of project financing. Our capital program in 2019 remains focused on the exercise of our long-haul JV pipeline options. Approximately 75% of our growth CapEx in 2019 and 2020 is related to our JV pipeline projects, including those with options yet to be exercised. In addition to the EPIC crude and GCX projects,…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Spiro Dounis of Credit Suisse.

Hey, good afternoon, gentlemen. How are you?

Good, Spiro. How you doing?

Not too bad. I'll just maybe start off on the last point, Ben, around financing. It's encouraging to hear you guys are pretty far along on that front. To the extent you can, maybe just provide a little bit more color around it? I think some of the things we're looking at to maybe get some clarity on, you mentioned potential for a Term Loan B I guess out there. Could this financing take multiple forms? Maybe a Term Loan B and maybe a preferred offering? And then just in terms of timing, how should we think about you concluding your discussions?

So, I should've been clearer. Sorry for the confusion. I referenced the EPIC Term Loan B as just one type of financing that's been done in the market recently. You're probably aware of Noble Midstream's preferred that they did at the asset level for EPIC, and the EQM also did a convertible preferred at the corporate level. They announced that a couple months ago as well. So, just kind of highlighting the number of different investment options that are out there. It really comes back to what we've talked about before. These assets are very financeable. Even outside of that, we've got a very supportive bank group. The banks are 100% crossover to the Apache bank group, so a lot of support there from our bank group. They understand the buildout nature of this. They understand the value of Alpine High. And so, we're looking at a bunch of different options with really three goals in mind: making sure that as we look to finance our net financing need, definitely in 2019 but beyond, making sure that we have a strong amount of liquidity, and manage our weighted average cost of capital for that financing, and then make sure that we minimize any friction costs associated with refinancing anything we do in the near term as we kind of right size our balance sheet in a couple years. Once we do reach our EBITDA goals, the midpoint of our 2021 EBITDA guidance is $450 million. That's obviously a lot different than the $85 million of our midpoint this year, so it would expect to kind of right-size things in a couple of years and make sure we can manage through the friction costs. So, there's a lot of different pieces that we manage through as we look at financing, but when we do have something lined up, we'll definitely make sure that it's announced and outlined for folks the reason we went a certain path.

That's helpful. And I just want to sort of reiterate to make sure I understand it, but it sounds like you're running a multitrack process right now, and ultimately, you're not looking for an interim or bridge solution. Whatever you sort of come out with is something you'd expect to sort of have on the balance sheet for a longer period of time. Is that fair?

Yeah, that's fair.

Fair enough. Second one, just thinking about next year, Kinder seemed to indicate that Waha maybe could be back in the same position this time next March or April, with everyone just waiting for Permian Highway to come back online. Obviously, you guys have GCX coming as well as the cryos. Just wondering how you assess the risk of another deferral this time next year if Waha goes negative the way it did. Is that sort of a low risk in your mind just given all the other things in front of you?

Yeah, I think it's low risk for us. I'd have to refer you to Apache's guidance. I know they provided production guidance for 2019 and not into 2020, but for the market generally, it's really hard to forecast past 2019 just kind of given rig count and production growth in the Permian, but I think it's fair to say that we're going to be in a good position, and we've got sponsorship support, and again, most of the drilling from Alpine High, as Apache talked about in the February call as well as this morning, is going to be in rich gas anyway, and that puts the impetus on the cryos and making sure we have the ability to process that gas.

And Spiro, this is Clay Bretches. Just to reiterate that if you look, just all things being equal next year versus this year, just having all three cryos in place and processing will clearly improve the net backs of any of the producers, including Apache in the area. So, we really believe that that higher liquid yield makes the situation much different than it is today when we flow that rich gas through mechanical refrigeration units and the liquid yields just aren't that great. So, you're selling a lot of the BTU away at methane prices whereas next year with all three cryos on, we'll have great recoveries because of the SRX technology that we're employing. We'll have 100% liquid recoveries of propane plus if we're in rejection on ethane, but if we're recovering ethane, we'll have 100% on that as well as 100% on all of our other liquids as well. So, it will be a significantly different picture, again all things being equal, this time next year, even if we did see that constraint that you're talking about.

Got it. That makes sense. That's it from me. Thanks, guys.

Our next question comes from the line of Mirek Zak of Citigroup.

Hi. Good afternoon, everyone. Further talking on the financing options, can you give an idea of if you're looking a little bit more at temporary financing or structures that allow you to maintain the ownership of these pipeline interest and options, or are you getting more interest or options around more permanent financing methods here?

Hey, Mirek. This is Ben. So, what we're looking at is a solution that allows us to exercise the options this year, and namely – and that's a third quarter event. You recall the option exercise deadlines that are outlined for both Shin Oak and PHP. Both are in the third quarter. And so, we're going to line up financing to make sure that we can exercise those, and it's going to be a number of factors. I just reiterate that we've got a strong bank group. We're talking to our banks about different options, and then there's other investors that we're talking with, and there's different routes it can go. Don't want to do anything that's kind of short term, so I would say that anything in the bridge loan financing, it's definitely an option, it's just not on the high end of the priority table here for us. We're looking to do something, again, that manages our liquidity, our all-in cost of capital, and making sure that in 2021 and beyond, we can pay our dividend and kind of have a right sized balance sheet that you see with our peers that kind of have more long-term financing like regular-way corporate bond deals.

Got it. And when might we see the shared costs with the Apache when reverting back to regular levels?

So, that's really at Apache's discretion, and we're working with them. I'll just say that the COMA that outlines all the different costs is one of the largest expenses that Altus has to manage, but there's other expenses, and so Altus is managing all the different costs that are at our disposal during a time when we expect volumes to be lower. I can't really speak to the exact timing of that, but as we assess the forward-looking gathered volumes, which was outlined in our press release, and when we look at that based with how we expect to decrease costs, we put all that together and did not choose to move the midpoint of our guidance or our range. But can't really speak to the specific timing of that because that's really unknown.

But Mirek, this is Clay, and just to follow up a little bit on that, if you take a look at what we're about to see, which is the Cryogenic Plant No. 1 coming on at the end of May and Cryogenic Plant No. 2 coming on at the end of July, that means very likely that the economics will return to process the rich gas again because of the rich liquid yields that Apache will receive when they go through the processing plant. So, if you think about it from that standpoint, there just shouldn't be that much deferral, at least along the rich gas lines at that point in time. So, again, it will be Apache's decision to make, but clearly their economics will be better once those cryos come into play.

Got it. And just one more quick one. Regarding the water handling assets up at APA and the development of those, has the timing around potentially executing on that, has that changed at all since IPO or does that maintain status quo?

Status quo. We still have a right of first offer on those assets, and a lot of it will just be dependent upon how much water is produced and at what point in time that Apache thinks that it would be a good idea to put those assets up for sale. So, at this point in time, it's unknown, but we clearly stay in advantage because we do have the ROFO on the water assets as well as the oil assets. So, we look at that as a great potential for upside in the future; we just don't have a time frame on it.

Thanks for the clarity. That's all for me.

[Operator Instructions] Our next question comes from the line of James Carreker of U.S. Capital Advisors.

Hey, thanks, guys. I was wondering if I could ask about the original throughput guidance had a high end of 575 million cubic feet, and Q1 came in at 564 million cubic feet, so I'm wondering did that original guidance have some level of deferrals built into it, just given that you came in so close to the high end in Q1?

No, it didn't have any expectations for deferrals. That was our expectation at the time. Recall that was an assessment from decreased activity across all of Apache's assets when they announced the $2.4 billion capital budget, and that was a reflection of our expectation at that time. And really, a lot of that was they talked about on the call the deferral of lean gas drilling definitely outside of our guidance period. And so, the main impact for that was lean gas coming down and rich gas coming up, but it's nice that we were at the 564, which is at the high end of our range for the first quarter.

And then I guess just thinking again about your guidance and what Apache said in their presentation, they reported 70,000 barrels a day of production in Q1 and are looking to increase that to over 100,000 barrels a day I think by Q4. How should we think about the ratio then of how many barrels equals how much a day of throughput if you just scaled both numbers up by the same percentage? It would be something north of 800 a day by Q4, so I'm just wondering what are the variables that go into thinking about translating those numbers?

There's a lot that goes into it. I would just point you to our guidance numbers for Altus' financial metrics. There's a lot that goes into it from composition changing and where Apache's drilling based on different BTU content, NGL yield, and shrink, and fuel. And so, there's a lot of different pieces that move, so I would just recommend that you continue to look at our guidance level. We've guided down on the volume side by 25 million cubic feet a day with a midpoint now of 525 million cubic feet but did not change our EBITDA.

Understood. But then I guess if I just think about the cadence then, Apache's looking at a pretty steep decline in their net production for Q2, and then kind of growing throughout the year, is at least that kind of shape what we should expect for the next three quarters?

Yeah, I mean, that's directionally right. We don't provide quarterly guidance, but I would expect that our volumes are less in 2Q and then pick up in Q3, and then we're right back on step in Q4.

And James, I would just point you toward the guidance that Apache gives because they do give quarterly guidance in their supplements, so I would suggest that you take a look there. And further to Ben's point earlier on the barrels, a lot of this just has to do with when these cryos come in, really good things happen. The mechanical refrigeration units that we have out there right now, they are adequate for what they do, but the truth of the matter is we're really going to kick tail once these cryos go into place, and our processing when all three of those are out there churning and burning, we're going to have a lot of barrels coming through there. We'll have 100% recovery, and we won't be selling it down the pipeline as methane.

Can you talk a little bit about how much better the cryos are versus the mechanical refrigeration? Is it a 10% increase? 22x? I mean, what's the broad…

That's a great question. So, just as an example, when you start taking a look at the delta in recoveries, right now, we recover very little ethane whatsoever, and clearly, we'd love to be able to have ethane throughput because of the margins. You're looking at ethane recovery's less than 20%, and ethane of course is the biggest component of all of your NGLs. We have less than 20% recovery right now because of the temperature of those MRUs, which is substantially different than what it is when you go into full cryo mode. So, right now, for example, when we're going through our mechanical refrigeration units, we're at about 20 degrees below zero. When we go into full cryo mode, we'll be about 150 degrees below zero. So, with that comes 100% recovery efficiency on your ethane, which will significantly increase your liquids overall. Same thing with propane, butane. Everything goes up significantly. Not as radically as that, but you go from a 65% recovery on propane with an MRU to something right there at 100% when you're going through the full cryo mode with this SRX technology, which again, we spent a little extra money to have that, but it clearly creates an advantage to all of our customers right now and Apache. But in the future, any customer that would come through that plant is going to experience a better recovery than they would through an MRU or even conventional technology, which is predominant in West Texas, which is the GSP technologies that are abundant throughout West Texas. So, pretty special stuff, but greatly will enhance and increase the liquid yields that comes from those liquid rich gas.

Thanks. Appreciate the color.

Our next question comes from the line of Christopher Tillett of Barclays.

Hi. My questions have been answered. Thanks, guys.

Great.

And thank you. That concludes the Q&A portion of today's call. Thank you for joining today's conference call. You may now disconnect.