Kinetik Holdings Inc. (KNTK) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Altus Midstream Company First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, 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 2020 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 financial performance and outlook. 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 on 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 investor presentation posted yesterday on the Investor Relations website previously noted. 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.

Good afternoon, and thank you for joining us. On our call today, we'll highlight key accomplishments during the first quarter, provide an update on the operating environment we're facing and offer an outlook for the year ahead. First, I would like to thank the Altus team for their commitment to operating safely and efficiently in light of the coronavirus pandemic. Our team continues to operate with dedication and focus despite these new challenges. Their safety, as well as that of their families, is our top concern, so we continue to monitor the situation closely and adjust our practices accordingly. The COVID-19 pandemic has presented an unprecedented challenge for the global economy and has put the supply and demand of oil and gas more out of balance than we have ever seen before. The good news is that Altus is well positioned to meet these headwinds. We have no upcoming debt maturities. Our revolver extends through November 2023 and provides ample liquidity to meet our foreseeable investment needs, and we expect to begin generating free cash flow upon the start-up of Kinder Morgan's Permian Highway Pipeline in early 2021, at which point, our ongoing capital requirements will be minimal. Our priority is to maintain a strong liquidity position through this downturn, and we are confident in our ability to do so. Unlike many other midstream companies with single-basin G&P assets, Altus has a portfolio of assets comprised of G&P and long-haul pipes that provide a diversified cash flow stream. Our interests in oil, NGLs and natural gas and are supported by a mix of minimum volume commitments, acreage dedications and walk-up volumes. These assets continue to perform well even in the current low commodity price environment, and we are pleased with their overall performance. I'll start by discussing highlights from our four JV pipeline projects. The Gulf Coast Express natural gas pipeline, in which Altus own 16%, is supported by minimum volume commitments, which provide more certainty around floor rates than acreage dedications. Kinder Morgan has highlighted GCX as a major contributor to its higher volumes in the first quarter. Altus also holds an approximate 27% equity interest in Kinder Morgan's Permian Highway, a natural gas pipeline with capacity of 2.1 billion cubic feet per day, also supported by minimum volume commitments. Despite the challenge of the coronavirus, construction of PHP remains on track with service still expected to commence in early 2021. This was confirmed by the operator during its first quarter update last month. The Enterprise Products' operated Shin Oak natural gas liquids pipeline continued its steady performance through the first quarter, providing stable EBITDA contributions to Altus. This pipeline is integrated with Enterprise's entire system in the Permian, and its ability to deliver Y-grade directly to fractionation and storage facilities at Mont Belvieu on the Gulf Coast provide significant advantages to E&P companies in the Permian. The EPIC crude oil pipeline went into full-service on April 1 with a smooth start-up. Oil volumes in the Permian remain challenged due to reduced drilling activity. However, EPIC is aggressively sourcing business and adding incremental revenue from short-term storage and transport deals. I'll move on now to our gathering and processing business. In line with previous discussions, we remain focused on third party volumes to add on to the production we process from Alpine High. With the addition of our new VP of Business Development, Steve Noe, we have strengthened our deal team that is actively pursuing third-party volumes. We offer a distinctive processing capability that can be bundled with takeaway capacity to move customers' product to premium markets along the Gulf Coast. The current market situation has slowed the pace of many of these conversations. Nevertheless, we have identified a number of opportunities that remain promising, and we continue to engage with prospective customers in both the upstream and midstream sides of the business. In addition to pursuing third party G&P business, we continue to process Apache's Alpine High production. Apache has eliminated all drilling and completion activity for an indeterminate period of time in Alpine High. Due to continued volatility in Waha [ph] basis differentials in NGL prices, volumes at Alpine High remain a dynamic situation. We continue to work closely with Apache accommodating production throughput. Ben will provide more detail in his remarks. Our operations team continues to focus on what is within our control, primarily on the cost side. In the fourth quarter of 2019, we reduced OpEx by 5% from the third quarter and have further improved first quarter 2020 cost savings by 15% over the fourth quarter. As an example of our ongoing efforts to reduce cost, all electricity needs at the Altus Diamond processing facility, including the bulk of residue compression, are being converted to grid power, providing significant OpEx improvement. Altus' cost structure continues to benefit from our 2019 reorganization, and we are taking another look at every expense in the system to further reduce operating costs. We will have more to say on that in a future call. The team continued its strong performance during first quarter. Uptime exceeded 99% and flared volumes were less than 1%. We also maintained our safety record with no recordable incidents during the first quarter. In closing, Altus is positioned to successfully navigate this current economic downturn through its diversified cash flow streams, strong balance sheet and healthy liquidity position. We will continue to focus on bringing in additional third-party business, reducing cost and operating safely. I want to thank our team again for their ongoing hard work. And with that, I'll turn the call over to Ben.

Thank you, Clay. First and foremost, I'd like to reiterate Clay's comments around our team, and thank them for their extraordinary efforts and commitment to operate safely and efficiently in these uniquely challenging times. As noted in the press release issued yesterday, Altus reported a first quarter net loss, including non-controlling interests, of $27 million. This included $62 million related to an unrealized embedded derivative loss, which reflects a technical accounting revaluation of the embedded derivative in our preferred units due primarily to volatility in interest rates at the end of the quarter. There is no impact to the company's ultimate redemption price of the preferred units. Excluding this and other small items, Altus generated first quarter adjusted EBITDA of approximately $46.5 million. Gathering and processing throughput volumes for the period averaged 577 million cubic feet per day, down 9% compared with the preceding period. The volume decline is related primarily to reduced operator activity at Alpine High, including some voluntary curtailments in March due to low NGL and Waha prices. Approximately 75% of first quarter volumes were rich gas. Given the persistence of low prices through most of April, we have seen additional curtailments in the second quarter. As Clay mentioned, this is a dynamic situation, and we are working with Apache on a daily basis to manage throughput during this volatile commodity price environment. Based on past well performance following production curtailments, we believe these processed production variances are a deferral of revenue to Altus and not a permanent loss. Thus, we anticipate a lumpy G&P volume profile during the year as Apache responds to commodity price signals. Capital investments in midstream infrastructure during the quarter were approximately $90 million. This included $83 million for our JV pipeline projects, comprising capital calls for ownership in EPIC's crude line and the Permian Highway Pipeline, the two remaining long-haul JV pipeline projects still under construction at the beginning of this year. Capital for gathering and processing infrastructure for the first quarter was $7 million. Including our gross proportionate share of capital and equity method interests, which is how we guide to growth capital investments, 2020 first quarter capital totaled $97 million. Access to capital since the pandemic began has been uncertain and, in many cases, challenging for companies across multiple industries, so it is important to highlight Altus' strong liquidity position. Our credit facility extends through November of 2023 and has investment-grade like covenants. In January, this facility was expanded to $800 million and less than $500 million was drawn at the end of the first quarter. We expect this will be more than sufficient to meet our capital needs until PHP comes online, and we are free cash flow positive. Our liquidity may be further enhanced as we evaluate and execute certain asset sales, which represent an estimated $20 million to $30 million. While we have previously discussed our goal of implementing a dividend in 2021, distributions will ultimately depend on multiple factors, including the economic environment. For now, we believe it is prudent to ensure we have ample liquidity, manageable debt and a strong balance sheet overpaying a dividend prematurely. Our financial projections for 2020 remain dynamic. The market continues to adjust to the large supply, demand imbalance and impacts of COVID-19 on the global economy, and the Waha basis remains extremely volatile. However, for now, our guidance range for gathered volumes remains unchanged at 480 million to 520 million cubic feet per day. Adjusted EBITDA for the year is currently expected to range from $150 million to $190 million. This downward revision from the previous guide primarily reflects reduced forecast from both EPIC crude and Shin Oak NGL pipelines that have been impacted by lower activity in the Permian Basin. Our 15% improvement in G&P cost savings during the first quarter helps to offset lower JV pipeline throughput. Distributable cash flow for the year has also been revised, primarily due to expectations for Shin Oak. In line with previous DCF guidance, there are no cash distributions from EPIC included in 2020 given the priority to project level finance. Growth capital guidance is unchanged at this time. We expect capital investments in our G&P business to be de minimis for the remainder of the year, with more than 95% of capital in the second half of the year being directed towards PHP. As we have done in the past, our guidance reflects our gross proportionate share of capital without taking project finance into account. EPIC Crude is the only JV that has project-level financing and the recent upsize of that debt has funded a portion of the project's capital overruns. Therefore, we expect our share of funding will be lower than the gross proportionate share we have outlined. As noted in Kinder Morgan's first quarter earnings call, PHP remains on schedule for an in-service date in early 2021. With the start-up of PHP, all four of our JV pipeline projects will be in-service and contributing to our results. Looking further ahead into 2021, we don't see a need to access any additional capital source to execute our plans. Our ability to generate cash is underpinned by the strength and diversity of our JV pipelines. And with all of our JV pipelines fully funded and operating next year, we will be in a strong position to generate cash. I will now turn the call over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question comes from Spiro Dounis with Credit Suisse. Your line is now open.

Yeah. Thanks, guys. I'd like to start off with the cost cuts. Clay, it sounds like more to come there so realized details might be light. But can you provide a sense of where you're looking to extract more cost cuts? And maybe just general timing around when you think you can deliver on that?

Yes. Thanks for the question, Spiro. And as I stated in my previous comments, we had some really good cost savings between the third and the fourth quarter of 2019, and then we had the follow-on in the first quarter of 2020. We continue to look for items where we can reduce costs. And part of it's just coming from a debugging mode of the plants as we brought those on last year and starting to debottleneck and make sure that we have the most efficient operations out there. Our staff is better trained. They understand what the plants can and cannot do. So part of it is just getting more efficient, and we're seeing efficiency gains every day. With that said, we have a major item that we think is going to be very helpful from an expense reduction standpoint, and that is the conversion of our - our residue compression right now is mostly fired with natural gas, but we also have electric residue compressors that are on-site. The plants themselves use a lot of electricity that's all been generated, and that's all been gas-fired generation. So we've made efforts in the first quarter to convert over from the generated power that we have on-site and also to convert our residue compression to electric compression, and that will greatly reduce our operating and maintenance cost. So we see that as a big plus from an OpEx standpoint. We think that's going to be a good reduction. I'm not going to try and quantify that today, but we have expectation that we'll see a great deal of that in the second quarter as we bring the compressors on, the electric compressors on in April, so we'll get a lot of benefit from that in May and June once we've worked the bugs out of that in April and then follow-on quarters. But we think that's going to be a big reduction, not to mention the fact that we're just getting better at what we do. We - the team has identified areas where we can save expenses on down the line, and so that's something that we're excited about. So we haven't stopped. We're not in a status quo mode. We think this is an area where we can improve, and that's just going to benefit us from an EBITDA standpoint as we go forward. And that's not something that we have projected. We're not trying to put that benefit forward. That's something that we'll realize, and I think that will be upside and part of the reason for the upside that we have in our EBITDA guidance.

Okay. That's encouraging to hear. Switching gears a bit. Ben, thanks for your comments on Apache's curtailments here earlier in the year, helps explain some of the move in the guidance. But I guess on the go-forward, how are you assessing any sort of incremental shut-in risk at this point? Obviously, hearing a lot about widespread shut-ins in the Permian. But you guys are obviously gassier, which I'm sure changes the calculus and NGLs have generally held up pretty well relative to crude. So it would seem like maybe the risk is not as high. But just curious how you're thinking about it.

Yes. It's a good question. I think as we look at it, it is dynamic. We work with Apache. And given that Alpine High is a rich gas play, it is tied to both NGL prices as well as the Waha price. And we've seen the strengthening in Waha over the course of the last four to six weeks. And that's taken into consideration by Apache as they assess the economic viability of each well out at Alpine High, a mix of both Waha and NGL prices. And so NGL prices got depressed, I think, in the March time frame when ethane got down to $0.08 or $0.09 and propane was in the kind of low to mid-teens, and they've since recovered. And so it just gets to the point that I made, we all know that the forward curves on all those are very volatile and unpredictable, but it's just going to lead to a lumpy profile. The good thing is that we've got a good integrated team out there. The plants are very nimble and able to withstand either ethane rejection, ethane recovery and the ability to ramp volumes up and down pretty seamlessly. So it is a team effort. The team did a great job in the first quarter. I mentioned too in my remarks that in early April, there were also some curtailments as well, and you just kind of have to see how the year unfolds. The reason I said that we really think of it as a deferral of revenue as opposed to a loss is because you may recall that there were some curtailments last year as well from Apache when they were leading to the GCX line coming on, which came online in September. And so then throughout the fourth quarter, when the rest of those wells that were curtailed came online, they met and, in some cases, exceeded our expectations as those wells came back from being curtailed. So that revenue came right back to Apache as we continue to gather and process that gas. So it's going to be dynamic, it's going to be lumpy and we'll continue to work it with Apache. I would say that one of the reasons why our guidance for the G&P business was very modestly moved down was because it was a slight deferral of that revenue from 2020 into 2021. So hopefully, that answers your question.

No, no, it does. That's helpful. Really appreciate it. Thanks for the time today, guys. Be well.

Thanks, Spiro. You too.

Thank you. [Operator Instructions] I am not showing any further questions at this time. I would now like to turn the call back over to Clay Bretches for closing remarks.

Thank you, Joel. Before we end, I want to leave you with a few final thoughts. Altus is well positioned to withstand current market downturn and remains financially viable. We have no near-term debt maturities. We have solid cash flow coming from a diversified portfolio of projects and ample liquidity to execute our growth plans. We've adjusted practices to confront the threats posed by COVID-19 and continue to reduce our cost structure. While the economic environment is uncertain, challenges create opportunities. We have a new team dedicated to bringing in additional volumes that make economic sense. Our team and the facilities they operate have been outstanding. The Permian is a resilient basin, and it will come back. As it does, Altus will be there to safely gather process and transport the oil and gas that our customers produce and that is needed by all sectors of our economy. Thank you for listening in to our call. I look forward to sharing with you our progress going forward. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.