Western Midstream Partners LP

NYSE:WES

Earnings Call Transcript 2018-Q2

[Operator]

Good day, everyone and welcome to the Western Gas Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jon VandenBrand, Director of Investor Relations. Please go ahead, sir.

[Jonathon VandenBrand, Director of Investor Relations]

Thank you. I'm glad you could join us today for Western Gas' Second Quarter 2018 Conference Call. I'd like to remind you that today's presentation includes forward-looking statements and certain non-GAAP financial measures. The accompanying slide deck and last night's earnings release contain important disclosures on forward-looking statements as well as the non-GAAP reconciliations. Please see the WES and WGP 10-Ks and other public filings for description of the factors that could cause actual results to differ materially from what we discuss today. Those materials are all posted on the Western Gas website at www.westerngas.com.

I would now like to turn the call over to our CEO, Ben Fink. Ben?

[Benjamin Fink, Chief Executive Officer]

Thank you, Jon. And I hope everyone will join me in welcoming Gennifer Kelly our new Chief Operating Officer. Gennifer joined us in May and brings over 20 years of industry experience to our team. She has already made a meaningful impact to our operations and we will continue to leverage her expertise as we execute the largest capital program in our history.

This is a special quarter for us, as Western Gas recently celebrated the tenth anniversary of its IPO. And while we've certainly seen healthier MLP investor sentiment than what we are experiencing today, we believe that our asset performance and competitive positioning is as strong as at any time in our history. Our assets are running smoothly, our volumes from key basins are growing and our development activities remain on schedule.

We began the year by telling me why we expected to see a ramp of volumes during the second half of the year and I'm delighted to say that the ramp is now beginning to materialize. Hopefully we're able to see Anadarko's earnings release from last night as they reported that they brought critical West Texas infrastructure online safely and on time. The first two trains at the Reeves Regional Oil Treating Facility are ROTF representing 60,000 barrels per day of capacity came online towards the end of the quarter and subsequent to quarter end the first train at the Loving ROTF was placed into service.

As a reminder, while these projects a part of Anadarko's dropdown inventory, the startup of this midstream infrastructure allows APC to more efficiently develop their acreage and should result in a step change in production growth in the second half of the year. You also no doubt noted that this quarter's results included in accrual of approximately $11 million. This accrual is related to estimated future costs associated with our decision to shut down two legacy gas gathering systems one in Wyoming and one in Colorado that have reached the end of their useful lives. These systems represent throughput of less than eight million cubic feet per day and our decision to shut down these systems was driven by our focus on doing what is best in the name of safety and the environment.

Turning to our second quarter results, we reported adjusted EBITDA and distributable cash flow of $271.7 million and $221.8 million respectively after the aforementioned shutdown costs. These costs also reduced our quarterly coverage ratio by 0.05 times. In general our run rate coverage is in line with our expectations and we still expect quarterly distribution coverage to be over 1.2 times by the end of the year.

Operationally we had a very strong quarter as we experienced natural gas throughput growth at the DBM complex, DBJV gathering system, DJ Basin complex and Bison Treaters. The adjusted gross margin for Mcf of $0.95 was $0.05 lower than the previous quarter, primarily due to the impact of the shutdown costs. Also during the quarter, we closed the acquisitions of a 20% interest in Whitethorn and 15% interest in a Cactus II pipeline.

The growth in our crude, NGL and produced water throughput was driven by the Whitethorn acquisition in June as well as the continued volumetric ramp of our produced water gathering in disposal business. We also saw higher volumes on the Front Range and Texas Express pipelines.

The adjusted gross margin for crude, NGL and produced water assets of $1.56 was $0.28 lower than the previous quarter. Approximately $0.18 of this decrease was due to the fact that while we booked volumes at Whitethorn for the month of June, we have yet to receive the associated distributions. The balance of the decrease was primarily driven by the incremental volumes on our DBM Water system, which as we have noted previously have a lower margin than most of our crude and NGL assets.

Looking forward our 2018 outlook for adjusted EBITDA and total capital expenditures remains unchanged, but we are updating our full year guidance for maintenance capital expenditures to a range of $90 million to $100 million. This $10 million increase is primarily due to increased activity in some of our key basins. We still plan to finance our capital program without issuing equity while maintaining our investment grade rating.

As always we appreciate all of your continued support and with that operator, I'd like to open up the line for questions.

[Operator]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Your first question will be from Jeremy Tonet of JP Morgan. Please go ahead.

[Jeremy Tonet, JP Morgan]

Good morning.

[Benjamin Fink, Chief Executive Officer]

Good morning, Jeremy.

[Jeremy Tonet, JP Morgan]

Just wanted to touch on the kind of ramp over the back half of the year as you guys talked about with the APCs, a lot it is coming online. Is that something we could expect kind of ratable increases into 3Q and into 4Q and would that kind of ramp for those two facilities extending to 2019 or any color on how we should think about that trajectory?

[Benjamin Fink, Chief Executive Officer]

Yeah Jeremy, this is Ben. I would think of it as accelerating through the second half of the year, so bit heavier in the fourth then in the third and then continuing into the early part of 2019.

[Jeremy Tonet, JP Morgan]

Great, thanks and we've seen some assets - upstream change hands in the Permian Recently. I was just wondering if this could impact what does that work in t kind of where does the third party business mix stand now in the Permian and where do you think that to go over time?

[Benjamin Fink, Chief Executive Officer]

Sure, I'll take that. In terms of the third party mix, remember that until you got to Ramsey VI earlier this year, virtually all of our processing business was a third party business and it wasn't until Ramsey VI we started to process meaningful Anadarko volumes. We continue to talk to third party customers, we're seeing growth or we're tying in some offset production. We love the transaction that you're referring to; it puts a very high marker on the value of the acreage nearby and the associated midstream value of systems near that to that system. We are in contact with the acquirer, we feel we have some infrastructure that's literally right on their doorstep and we should be able to provide services quite competitively.

[Jeremy Tonet, JP Morgan]

Got you and just a housekeeping question, just want to touch base with regards to structural simplification, something that has been talked about a lot in the past. Just to know if you had any updated thoughts at this point that you would be able to share with us.

[Benjamin Fink, Chief Executive Officer]

Yeah Jerry I appreciate you asking the question, but we have nothing new to say on the topic. Right now we're focused on the second half ramp and maximizing our performance.

[Jeremy Tonet, JP Morgan]

Thanks, that's it for me. Thank you.

[Operator]

The next question will be from Colton Bean of Tudor Pickering Holt. Please go ahead.

[Colton Bean, Tudor Pickering Holt]

Hi, Ben, you mentioned the downtick in margin per barrel there for the liquids assets. Thinking about Q3, should expect a threw up for the Whitethorn distribution, meaning do we get a June payment plus a Q3 distribution or is that more so just the trailing quarterly lag there?

Yeah, I'll let Jaime take that Colton.

[Jaime Casas, Chief Financial Officer]

Yeah, Colton good morning. We will get a full quarter, but we won't get four months in that distribution is what you should be assuming. But we'll get June and the next two months, but we wouldn't get September in that quarter.

[Colton Bean, Tudor Pickering Holt]

Understood.

[Benjamin Fink, Chief Executive Officer]

After that you'll have continued growth in the water business, which will have the impact on the margin as well. Keep in mind, there's nothing out of the ordinary here. Ordinary course of operations is you get the distributions one month after you see the volumes, so it just so happened that our first month of operations was the last month in a quarter hence this disparity what you saw.

[Colton Bean, Tudor Pickering Holt]

Makes sense and just the APC message this morning that they would be dropping spread in the DJ maybe later this month and they're revising volume expectations. Does that impact the timing of Latham 1 and 2 at all or maybe they expect a time to sell those plants what's there online?

[Benjamin Fink, Chief Executive Officer]

I'll let Gennifer Kelly address that.

[Gennifer Kelly, Chief Operating Officer]

Right now we don't expect the level of activity that Anadarko is telegraphing for DJ to impact our construction dates Latham 1 and 2. Latham 2 is still on schedule to commence building and earlier - I guess later next year in 2019 and it may take a little - on a continued trend, it may take a little bit longer to fill Latham 2 with DJ volumes, but the majority of volume scheduled for Latham 2 are third party volumes anyway. So we really don't see any big impacts with Anadarko's DJ news today.

[Benjamin Fink, Chief Executive Officer]

Right and I'll just remind you Colton that also on that call earlier today they talked about the balancing of that - lifting the fracture being balanced with increased production in the Delaware, so WES is kind of neutral.

[Colton Bean, Tudor Pickering Holt]

I guess just the last one here for me, so again from positive comments from APC on the partner [ph] opportunely. I think they noted that they would probably provide an update with the 2019 capital budget later this year. Should we expect a similar timeline in terms of any potential WES participation in that basin?

[Benjamin Fink, Chief Executive Officer]

That's exactly right Colton. When we evaluate options we do it on a coordinated basis, just like we did in the DJ, just like we did in the Delaware, we're virtually hand in hand as we create our plan for the basin and so that's something we will release in more detail together.

[Colton Bean, Tudor Pickering Holt]

I really appreciate the time.

[Operator]

The next question will be from Tom Abrams of Morgan Stanley. Please go ahead.

[Tom Abrams, Morgan Stanley]

Thanks. Could you just remind us or update us on your - the options you have for equity interest in take away capacity?

[Benjamin Fink, Chief Executive Officer]

Sure, you mean an exercise options Tom?

[Tom Abrams, Morgan Stanley]

Yes.

[Benjamin Fink, Chief Executive Officer]

Okay, so we've got an option on the Red Bluff pipeline, which will expire fourth quarter of this year. You have an option on the Cheyenne Connector pipeline, which will expire in the first quarter of next year and that's how we've disclosed today.

[Tom Abrams, Morgan Stanley]

Well thank you for that.

[Operator]

The next question will be from Barrett Blaschke of MUFG Securities. Please go ahead.

[Barrett Blaschke, MUFG Securities]

Hey, guys. Can you give us just a little update on sort of any other systems that you might see coming off line or is there anything else in the portfolio that you're looking to rationalize like that?

[Benjamin Fink, Chief Executive Officer]

You mean similar to the accrual that we took during the quarter?

[Barrett Blaschke, MUFG Securities]

Yeah.

[Benjamin Fink, Chief Executive Officer]

No, those were special situations where the systems have just reached the end of their useful life. There are there are no other systems that we're - that we could anticipate anything like this in the near term.

[Barrett Blaschke, MUFG Securities]

Okay, thank you.

[Operator]

And ladies and gentlemen that will conclude our question-and-answer session. I would like to hand the conference back to the executive team for their closing remarks.

[Benjamin Fink, Chief Executive Officer]

Thank you everyone for participating today and we'll talk to you again in three months. Bye.

[Operator]

Thank you, sir. Ladies and gentlemen the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.