Western Midstream Partners, LP (WES) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter Western Gas earnings conference call. [Operator Instructions] Thank you. Mr. Benjamin Fink, you may begin your conference.

Good morning, everyone. Thanks for joining us today to discuss Western Gas's Third Quarter 2013 Results. Please note that on this call, we will be referring to Western Gas Partners as WES and Western Gas Equity Partners as WGP. Joining me on the call today are Don Sinclair, our President and CEO; Danny Rea, our COO; and other members of the management team, who'll be able to answer your questions later in the call. This presentation contains estimates that are based on the best information available to us at this time, and we believe that these estimates are reasonable. However, a number of factors could cause actual results to differ materially from what we discuss. Please refer to our latest filings with the SEC for the risk factors associated with our business. In addition, we'll be referencing certain non-GAAP measures on the call, so be sure to see the reconciliations in our earnings release. As a reminder, you can view and download all of these materials, including this call's presentation slides at www.westerngas.com. With that, let me turn the call over to Don.

Thanks, Ben. Good morning, everyone, and thank you for joining us today. Our third quarter operating results were very impressive. You'll recall that in early 2012, we began several substantial organic growth projects and we are now realizing the benefits of these significant investments. Our strong performance enabled us to raise WES's third quarter distribution to $0.58 per unit, which is a 16% increase over last year and is WES's 18th consecutive quarterly increase. We also raised WGP's distribution to $0.21375 per unit, which is an 8% increase over the second quarter. Also in the third quarter, we executed our first senior notes offering that carried investment-grade rating from all 3 major credit-rating agencies. These 5-year notes were very well received by the market as evidenced by the final coupons of 2.6%. Yesterday we announced our third quarter results for 2013. We reported adjusted EBITDA of $125.2 million, distributable cash flow of $105.9 million, and a healthy Coverage ratio of 1.26x. We expect that coverage will be above 1.1x for the full-year, although it may fall below 1.1x in the fourth quarter as additional maintenance CapEx is spent. Our third quarter's throughput numbers were driven by the ramp up of our Brasada facility, sequential growth in the DJ and Marcellus basins, and increased volumes at our Hilight and Chipeta plants. The Brasada facility was also a key driver of the increase in our gross margin per Mcf, which was $0.04 higher than what we reported in the second quarter. With Brasada online and ramping up, our remaining major growth projects under construction are Lancaster Trains I and II. As we noted on our last conference call, the start up of the Lancaster I is contingent on Front Range pipeline being in service. Based on Front Range's updated completion schedule and construction delays suffered as a result of the flooding in Colorado, we now believe that Lancaster I will be operational in March 2014. Train II remains on schedule for first quarter 2015 start up. As you read in yesterday's release, we have revised our full-year outlook for 2013. We believe adjusted EBITDA will be between $440 million and $450 million and our maintenance capital will be between 7% and 10% of adjusted EBITDA. Our total capital expenditure guidance of $670 million to $740 million is unchanged and does not include acquisitions or the equity investments in White Cliffs and Mont Belvieu fractionators. However, please note that the capital expenditure guidance we provide is on a cash basis. This means that the actual amount [ph] spent can be materially affected by the items over which we have no control, such as the timing of invoices. In the future, we will provide CapEx guidance on an incurred basis, which will have less sensitivity to invoice timing issues. We now believe WES and WGP will generate 2013 full-year distribution growth of 16% and 37%, respectively, which exceeds our initial guidance. While we cannot give formal guidance for 2014 until after our annual budgeting process has been completed, what we can say today is that we liked the organic growth we're seeing from our portfolio and we believe 2014 has the potential to be another outstanding year. With that, operator, I'd like to open up the line for questions.

[Operator Instructions] Your first question comes from the line off Stephen Maresca from Morgan Stanley.

So things obviously seem to be working quite well, but it has been a bit of a longer spread, I think, between your last acquisition that you did in March. And here we are in November, and just looking back at the history and one of your recent presentations, probably one of the longest gaps, I think, you've had since your IPO in terms of either a drop-down or third-party. Anything to read into the gap between deals thus far? Is it just you don't need to do something right now, there's so much on your plate, organically? Setting things up for '14? Just any commentary on that.

Steve, as you know, obviously, the portfolio is performing well, and we spent a tremendous amount of money, capital, around organic growth and it has performed well. We actually have had transaction, as you know, we did [indiscernible], which was not very significant. But we also did Mont Belvieu 7 and 8 at mid-year, as well as announced Lancaster II. So in our mind it's still -- we're still down the same path of execution. It just looked a little bit different in -- at mid-year, this year, than it has in the past.

Okay. So we should expect sort of the same continuum going forward that we've seen in the past?

Based on what we know today.

Okay. Have you guys had any more rate resets on any of the dry gas systems in 2013?

No.

Okay. And then, just on maintenance CapEx, coming down a little bit for the year, I guess the fourth quarter will be a little bit heavier, but overall, on a percent basis, on the year, it's down. Any -- can you talk a little bit about what's driving that?

Sure, Steve. This is Ben. That's an important question. Obviously, when you look at maintenance as a percentage of EBITDA, higher EBITDA would mean a lower percentage. So that's part of it. But there's another part too that's important to understand. When we set our guidance, we go through a rigorous process of looking at all of our CapEx and putting it into 3 buckets. There's a maintenance bucket, an expansion bucket and a well-connection bucket. And as you know, we then take that well-connection bucket and we reallocate it between maintenance and expansion, using the theory that you're trying to determine what portion of maintenance kept your volumes flat, and that amount of well-connections goes to maintenance and then the rest goes to expansion. So if you think about what we go through in the beginning of the year, we're making assumptions about decline rates on systems as well as throughput growth. And then as actuals come in, you may need to revise that allocation. And so, what we really saw this year, as an example, is a lot higher throughput growth in the Marcellus based on the same amount of well-connection capital. So under that formula, you're able to allocate more to expansion, because there was more growth for the same capital. Compare that to last year, we had well-connections in the Rockies, but didn't see as much throughput growth over the -- because of some of the downstream issues. And so more went to expansion in that scenario. And so, really because of some really wonderful throughput performance, we were able to allocate more to expansion. And that's going to change every year depending on what we see in the system.

Your next question comes from the line of Bradley Olsen from TPH. Bradley Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Quick one from me. Obviously, this quarter showed some real strong performance. And I was hoping that you might be a able to maybe just qualitatively talk around the 3 factors that you mentioned in your prepared remarks, specifically Marcellus, Wattenberg and then the start up of Brasada in the Eagle Ford. Is there any way that you could maybe give some more clarity around what were the big drivers causing results to kind of tick up, quarter-over-quarter, the way they did?

Sure. I mean, obviously, on the processing side, you had very little impact of Brasada in the second quarter. And a very nice ramp in the third. Third quarter average throughput was around 4x what it was in second. So you just saw a ramp there, just as you expect, and we fully expect we'll be at least 180 at the beginning of the year as under our contract. If you look at the gathering and transportation side, the bulk of the increase was clearly Marcellus, where you just saw a step-up in throughput as we work through inventory. And the bulk of our results there, first of all, as you know, are covered under cost of service models, and then most of our EBITDA comes from the non-operated system, which is -- Chesapeake is operating the upstream. Bradley Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: And how big of a component was just the organic growth through the Wattenberg system?

If you look at as a percentage of the growth in the gathering and transportation, I'd say, it was in the 20% range.

[Operator Instructions] Your next question comes from the line of Paul Jacob from Crédit Suisse.

I guess, I'm just wondering in terms of Brasada. What are you seeing there in terms of condensate stabilization? And what capacity do you have for stabilizing condensate at that plant?

Well, this is Danny. We brought that facility up. What we are doing is collecting the condensate to uphill [ph] and bring it into the Brasada for the stabilization and then it goes further down the pipeline there. We built that to meet the needs of Anadarko, obviously, but we also have the ability to look at that for additional customers as well. At this point, we're early in the ramp of that facility at Brasada I. And given the -- as we've said before, we're looking at a Brasada II as well. So in terms of current capacity, we're moving about 4,000 barrels to 5,000 barrels a day of throughput through it. Now our capacity exceeds that by quite a bit.

Okay. That's helpful. And then, I guess, shifting over to Lancaster, what type of volume ramp do you expect when that comes on late in the first quarter?

Paul, this is Ben. As you know, that's going to be a 300-a-day plant and we will have a 90% commitment from Anadarko at startup, so that's 270 a day.

Paul, the other thing that you'll recognize up there as well is, as you know, we're utilizing refrigeration facilities in the field. Obviously, this is going to be our most efficient plant in the DJ Basin. So pure economics will load the plant physically above and beyond what the contractual obligations are as well.

Okay. So it should ramp pretty quickly?

Yes.

Okay. And then last question from me is, do you still expect to spend -- I think, you had indicated last quarter $120 million to fund your interest in Trains 7 and 8 at Belvieu? Is that kind of what you're targeting still at this point?

Still a good number, Paul.

Your next question comes from the line of Curt Launer from Deutsche Bank.

Curt Launer, here. Thank you, very much for answering the question relative to maintenance capital earlier. My other one is relative to the status in the Marcellus. There seemed to be a step-wise function relative to hooking up the wells, waiting on pipeline connection, you mentioned the inventory earlier. What still remains there? Was this a step-wise function that will now see slower growth going ahead? How does this shake out into the 2014 year, where new liquids takeaway capacity comes on in the Marcellus and those other factors?

Okay, Curt, I'll take a start at this, Don may want to add something. In terms of pure inventory, both Anadarko and Chesapeake have made comments on their calls, and I would refer you to them. What we're seeing, from our third-party operators, there's about 76 wells waiting on pipeline right now, and that's just pure industry -- that's just pure inventory. But I don't think that includes wells that are actually currently being frac-ed, so the true number is actually quite a bit above that. But I don't think it's fair to say that you'll see the type of gross rate of growth in '14 that you saw in '13, just because of the step up. I mean, if you look at what our -- that system is doing today compared to the exit rate at the beginning of this year, it's about 60% to 70% higher. And you just won't see that kind of level of growth in 2014. It'll be much more tempered.

Curt, if you listen to Anadarko's call, they reference that they'll have a lower activity level in the Marcellus in 2014. Chesapeake's been pretty straight forward about what they think their activity level is, so it's been said, by definition, you'll chew through some of the inventory, but we still see good volumes. We saw, obviously, very good volumes in third quarter. And as Ben mentioned earlier, one of the things that we really like and appreciate about that system is the cost of service model.

There are no further questions at this time. I'll turn the call back over to the presenters.

I want to thank everyone for joining us today and for your interest in Western Gas. Ben and I look forward to speaking with all of you again soon. Thank you.

This concludes today's conference call. You may now disconnect.