Western Midstream Partners, LP (WES) Q2 2014 Earnings Report, Transcript and Summary

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Western Gas Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host for today, Benjamin Fink, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and I'm glad you could join us today for Western Gas' Second Quarter 2014 Conference Call. I'd like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. Please be aware that actual results could differ materially from what we discussed today, and I would encourage you to read our full disclosure on forward-looking statements and the non-GAAP reconciliations we've attached to last night's earning release and to the slides that we'll reference on this call. With that, I'll turn the call over to Don Sinclair, and following his remarks, we'll open it up for Q&A with Don and the rest of our executive team. Don?

Thanks, Ben. Good morning, everyone, and thank you for joining us today. As you can see on Slide 3, our second quarter was highlighted by a solid portfolio performance and a successful startup at the Lancaster Plant, which is currently running at capacity. WES increased its distribution to $0.65 per unit in the second quarter, its 21st consecutive quarterly increase. This is a 16% increase over last year. WGP increased its distribution to $0.27125 per unit, which is a 37% increase over last year. Yesterday, we reported adjusted EBITDA of $167 million and distributable cash flow of $137 million, both of which are in line with our expectations. Our resulting coverage ratio of 1.3x was comfortably above our long-term target of 1.1x. Our second quarter natural gas throughput was marked by sequential growth in the DJ, Marcellus and Green River basins. We also experienced throughput growth at all of our crude and NGL assets. Our adjusted gross margin for natural gas assets increased by $0.05 per Mcf to $0.65 per Mcf, primarily driven by higher margins at the DJ Basin complex. Our adjusted gross margin for crude and NGL assets increased by $0.54 per barrel to $2.06 per barrel, primarily driven by the receipt of our first distributions from Front Range pipeline. With respect to the second train at our Lancaster facility, I'm pleased to report that we remain on schedule for our second quarter 2015 in-service date. Approximately 25% of pipe welding is now complete. The rest of the compressors arrived at the site in late July, and we expect to demethanize the tower to arrive this month. I'm also pleased to announce that we've recently signed an agreement with a third-party producer that enables us to expand our Hilight facility by $20 million a day. The Hilight facility, which we acquired in 2008, is located in Eastern Wyoming and benefits from the increased recent drilling activity in the Powder River basin. As you read in yesterday's release, we're raising our total capital expenditure guidance to $720 million to $770 million. This includes additional capital required primarily at the DJ Basin complex, the Hilight facility, the Front Range pipeline and at our Haley Gathering System, which we are currently repurchasing to be able to handle rich gas from Anadarko's West Texas production. Our full year guidance for all other metrics is currently unchanged. As it is our custom during our second quarter earnings call, I'd like to take a moment to reflect on how far we've come since WES' IPO in 2008. WES recently celebrated its sixth birthday and during this period, the enterprise has more than quadrupled, the quarterly distribution has more than doubled, and we have completed over $3 billion of acquisitions and have been invested over $2 billion in organic capital projects. We remain extremely grateful to our unitholders and lenders for your support over the years, and we look forward to continue our relationship for years to come. With that, operator, I'd like to open up the line for questions.

[Operator Instructions] Your first question comes from the line of Bradley Olsen from TPH.

Don, my first question is on the Haley opportunity that you mentioned in the press release about converting your Haley system to be more accommodating of the rich gas that Anadarko is drilling up in the area. Is that solely a gathering opportunity, or could we see that kind of transform into more of a processing plant opportunity in the coming quarters or years?

Brad, if you remember, just -- the history of that system is originally dry gas system built for the pin gas. And with the development of the Wolfcamp and Bone Springs, it's given us the ability to re-purpose that asset and as we think about it "get a second life." It's still early in the process, as it is for all the development of Wolfcamp. For Anadarko, I think there'll be processing opportunities in West Texas. Whether they will be correctly associated with Haley or not, it's kind of hard to tell at this stage because we're so early in the development.

Got it. And as far as the development in the DJ is proceeding, obviously, going from kind of 0 to full on the Lancaster plant in just a couple of months is reflective of the demand for field services up there. We've heard some of the E&Ps -- the big E&P producers report on their conference calls who are using other midstream service providers that they've had issues with reliability and getting their gas wells flowing to their maximum potential. Do you see an opportunity, given the fact that you've really brought on a lot of kind of new high-tech equipment, the opportunity to maybe start poaching some volumes from customers of your competitors up there?

Well, I'll start, Brad, and talk about facilities first. If you think about the luxury we had because of Anadarko's position up there, it gives us the ability to build facilities whether its trunk lines or processing capacity for future volumes that have yet to be developed. And that, along with the horsepower we put in the field, has really allowed us to do a lot of different things for all of the producers connected to our systems. As far as what happens with producers and commitments, there's a lot of historical dedications up there. There's still some acreage available. We've got agreements, so what we're trying to do now is stay focused on Anadarko and our other customers and make sure we have all the facilities in place and on time.

Your next question comes from the line of Selman Akyol from Stifel.

Just following up on the Haley comments. I was just curious, as you look at, Donald, your inventory, but I guess, what's also is up in Anadarko, do you see a lot of opportunities to re-purpose assets?

For us, most of our assets, Selman, were specific to need, mainly, either wet gas or dry gas. So it's not like we have a lot of long-haul pipes that can be re-purposed for different commodities and/or change direction, be bi-directional assets. So there's some opportunity, but not a significant amount. We've been able to see -- our greatest opportunity to date has been at Haley. We're always looking. We always try to get the maximum value out of the assets we own because the primary nature and the original purpose, there's just not as much of those opportunities probably for us as there is for others.

Okay. I guess, in preceding conversations, there's been some discussion in terms of crude oil gathering as well for Anadarko. Is there any update on where that is?

No. Selman, I'd refer back to Anadarko's call for this quarter. You talked about the increase in crude oil production onshore North America. As you can imagine, that increase has been followed by facilities. Midstream facilities have been constructed. So from that perspective, APC Midstream spent a significant amount of capital focused on providing that service for APC. As those volumes in that business grows, we'll look at that as becoming more of a significant component of potential future drop-downs.

Your next question comes from the line of Sunil Sibal from Global Hunter.

A couple of questions from me. First, a follow-up from the previous question with regard to the APC Midstream assets. I was wondering if you could, when you look at that inventory of future drop downs, if you could quantify that a little bit in terms of where that stands as of now and how should we think about the break down between the crude assets versus gas or gas processing.

Okay, Sunil, this is Ben, I'll take my best shot. I think roughly, if you were to take a snapshot today, there's around -- call it around $300 million of EBITDA with all the APC Midstream assets, but some of those assets are really in their infancy. And I would call it the crude infrastructure assets in its infancy, neither generating very little EBITDA relative to its CapEx today, so you would expect, over the years, a higher rate of growth. And there are other assets that would fit that profile as well, such as gathering in West Texas, where Anadarko is really just getting started going after the Wolfcamp. Does that answer your question?

Yes it does, but basically, what you're saying is $300 million of EBITDA as of now, but of course, that would grow much more rapidly, considering that CapEx spent so far. Is that a fair way to describe that?

Yes, I would say a subset of those assets are growing much faster than WES' current assets.

Okay, that's fair. And then, in regards to the opportunity in the Wyoming, I was wondering if you could talk a little bit about that. And what kind of gas are, in terms of the NGL content, are you guys seeing up there from an opportunity perspective?

If you kind of remember the history at Hilight, that plant was put in for the original conventional oil production up there in Eastern Wyoming. So if you kind of remember a little bit about our CapEx history, last year, we spent money basically re-purposing some of the pipes -- not re-purposing, but getting the pipe and the horsepower in the field that was going to allow us to adapt to the hydrocarbons that you're now seeing being developed up there. As far as the quality, it varies, but if you think about it, it's not dissimilar from anywhere else where you have a crude play and what you think the GPM of the associated gas would be. So that 5 to 6 gallons per thousand range is probably as reasonable as anything to look at now.

Okay, that's -- and then lastly, the $17 million sort of CapEx increase that you announced yesterday, is a majority of that with the Haley, and is that a fair way to describe that? Was that going towards Haley

The largest component of the increase is actually the increased activity in the DJ Basin. And then the 3 secondary factors are Haley, as you mentioned, which is really just an acceleration of CapEx we thought we were spending in '15 into '14. The expansion we mentioned at Hilight and Front Range pipeline.

And we have no further questions at this time. I'll now turn the call back over to Don Sinclair for closing remarks.

Thanks, Rob. I'd like to thank, everyone, for joining us today and for your interest in Western Gas. And we look forward to speaking to you again soon. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call, and you may now disconnect.