Western Gas' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Western Gas (WGP)

Western Gas Equity Partners, LP (NYSE:WGP)

Q1 2013 Results Earnings Call

May 2, 2013 12:00 PM ET

Executives

Benjamin Fink - Senior Vice President and CFO

Don Sinclair - President and CEO

Danny Rea - Chief Operating Officer

Analysts

Brett Reilly - Credit Suisse

Selman Akyol - Stifel

Helen Ryoo - Barclays

Suzanne Hannigan - Janney

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Western Gas Partners and Western Gas Equity Partners Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to your host for today, Benjamin Fink, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Benjamin Fink

Thank you, Steve. I'm glad you could join us today to discuss Western Gas' first 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 will be available to answer your questions later in the call.

Before I turn the call over to Don, I'll remind you that 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 those that we discuss. You should read our full disclosure on forward-looking statements, our presentation slides, our latest 10-K’s, our other SEC filings and our press releases for the risks associated with our business and other relevant information.

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 the slides that we will refer to on this call at www.westerngas.com.

With that, let me turn the call over to Don.

Don Sinclair

Thanks, Ben. Good morning, everyone, and thank you for joining us today. Last night we announced our first quarter results for 2013. Our quarter was highlighted by the closing of the two Marcellus acquisitions that we discussed on our last call. We raised the WES quarterly distribution to $0.54 per unit, which is a17% increase over the first quarter of last year and an 80% increase over the distribution at IPO.

In addition, we raised the WGP quarterly distribution to $17.78 per unit, which is 8% above the prior quarter. I’m also very pleased to report that last week WES received an investment-grade rating from Standard & Poor’s. We’ve now achieved our goal of investment-grade ratings from all the major credit rating agencies.

We reported adjusted EBITDA of $95.9 million and distributable cash flow of $79.1 million, which together represent yet another quarter of consistent performance. Our coverage ratio of 1.13 times is in line with our target coverage ratio of 1.1 times and while we still believe there may be quarters of lower coverage in 2013, our long-term target will remain at 1.1 times.

Our first quarter operating results benefited from sequential throughput growth in the DJ Basin and our Red Desert facility. We also experienced higher throughput at Chipeta, although mechanical issues affected the plant’s performance.

Train II was impacted for seven weeks during the quarter and Train III was limited to 250 million cubic feet per day. We’re diligently working to resolve these issues in the second quarter. The overall financial impact has been mitigated by higher than expected throughput and our ability to process substantially all the available gas with our refrigeration facilities.

We’re particularly excited by the drilling activity in number of well connection in our liquid rich areas, primarily at the Wattenberg, Platte Valley, Red Desert and Hilight systems. We’re the beneficiary of Anadarko’s continued horizontal development DJ Basin, while anticipated growth at Red Desert and Hilight will come from third-party producers.

We’re also encouraged by the growth of our Marcellus assets, with throughput significantly higher today than year end exit rates. Our gross margin per Mcf was lumping lower than we reported in the fourth quarter due primarily to the addition of the lower margin Marcellus gathering assets in March.

Now I’d like to quickly update you on the status of our major growth projects. I’m pleased to report the Brasada construction is almost complete, commissioning activity has begun and we are expected to be in full operations by June. While Brasada and Lancaster continue to be on time and in line with total project cost estimates that we discussed last quarter.

As you read in yesterday's release, our guidance for 2013 is unchanged. We believe our results continue to support distribution growth of no less than 15% at WES and no less than 33% at WGP.

As always, this outlook does not include the effect of any future acquisitions and consistent with our past practice, we will update our outlook if we make future acquisitions this year.

With that, Steve, I’d like to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Brett Reilly with Credit Suisse. Your line is now open.

Brett Reilly - Credit Suisse

Good morning, everybody.

Don Sinclair

Good morning.

Brett Reilly - Credit Suisse

So with Brasada coming online this quarter, any updated thoughts on looking forward to Brasada II?

Don Sinclair

Brett, as you know, Anadarko has got a very aggressive development program and you'll hear them talk about it next Tuesday on their earnings call. I think as our model of operation has been, we’ll fill up one plant and then start to work on another. So our objective is to get Brasada I up and running, and then I'm sure our focus will turn to the next Train.

Brett Reilly - Credit Suisse

Okay. And then just maybe to follow-up. How long generally would it take to construct the second plant there?

Don Sinclair

The historical cycle has always been 15 to 18 months for construction of the new trial.

Brett Reilly - Credit Suisse

Okay. Maybe one for you, Ben, G&A running pretty low in relative to this quarter last year, is that something we can look forward to continuing around this run rate moving forward?

Benjamin Fink

Good morning, Brett. It’s tough to compare G&A quarter-over-quarter when you’re looking at assets pre and post drop down, because how you allocate the G&A before drop down is just different. So that comparison is always a little messy.

The other thing you got to do is take out the non-cash piece, because you had a lot more non-cash G&A last year due to that EIP bonus plan that we’ve talked about that you won’t see going forward.

Brett Reilly - Credit Suisse

Right. Okay. That’s helpful. Thank you.

Operator

Your next question comes from the line of [Medula Mardy from CDP Capital]. Your line is now open.

Unidentified Analyst

Good afternoon.

Don Sinclair

Good afternoon.

Unidentified Analyst

A couple of things, one, I know you’ve indicated in the past that there would be likely -- another monetization of WGP to improve the liquidity after, I think, after the six months following the IPO.

So if I’m not mistaken, I think right now there is about 8% or 9% of GP is out in the public float. I’m wondering if what, conceptually, you’re thinking about in terms of how much the public float would increase and how much will still be retained by Anadarko after rotation?

Benjamin Fink

Hi Medula. This is Ben. The information I can give you is somewhat limited because it’s Anadarko that owns 91% of those, even it’s in any sales that make, are up to them. It did indicate during the road show that they would be amenable to periodic transaction but there's been no indication of any types of size or timing. I think they are quite pleased with how their holdings have performed.

Unidentified Analyst

Okay. And secondarily, just more conceptually as we look over the next 18 to 24 months or so, when you think about the organic growth opportunities outside of drop downs or acquisitions, how should we think about the balance between third-party organic opportunities versus those that are specifically tied to Andarko?

Benjamin Fink

That’s hard to forecast because when you think about from where the organic opportunities are going to come, they will come obviously from the liquid rich areas. Our biggest contributor in liquid-rich area as you all know is Wattenberg. The biggest producer behind that is Anadarko. But obviously we provide services for Noble, EnCana and others.

So, it’s hard to really give you a split but it will be significant tilted towards Anadarko because of the DJ Basin. But you will see a lot of third-party activity behind Red Desert, Hilight as well as -- as well as Chipeta.

Unidentified Analyst

Okay. Thank you very much.

Don Sinclair

And obviously, if you do, we’re also going to spending a lot of money in the Marcellus and that’s four-party gas there, Anadarko, Chesapeake, Statoil and Mitsui.

Unidentified Analyst

Thank you.

Operator

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

Selman Akyol - Stifel

Thank you. Good morning. Real quickly, going into the Marcellus, the Liberty, Rome, Larry's Creek, I guess, when you made the acquisitions, came with the backlog of wells, 270 in total and you had 50 get connected in the quarters, had a good rate going forward. Should we think of that accelerating?

Don Sinclair

I would think of it as a pretty consistent clip of well connects throughout the year, pretty consistent monthly clip.

Selman Akyol - Stifel

Just going back to the Brasada plant coming on line in June. Just to reconfirm that’s going to be pretty much full from day one? Is there going to be a ramp-up over the years?

Benjamin Fink

Hi. This is Ben. No, it will not.

Selman Akyol - Stifel

Okay.

Benjamin Fink

There will be a slow ramp from when we introduce the gas to the facility in June to the end of the year. And as you know, starting in January, Andarko has the guarantee for 180.

Selman Akyol - Stifel

All right. Thanks.

Operator

Your next question comes from the line of Helen Ryoo from Barclays. Your line is open.

Helen Ryoo - Barclays

Good morning.

Benjamin Fink

Morning.

Helen Ryoo - Barclays

On your -- comments on the Chipeta mechanical issues, was there any cash flow impacts for you guys?

Benjamin Fink

Yeah. Relative to our expectations, we were about a million short.

Helen Ryoo - Barclays

Okay. And it’s still an ongoing issue did you say?

Benjamin Fink

Yeah. As Don said in his prepared remarks, we will have it worked out by June.

Don Sinclair

Helen, this is Don. We have contractors on site today who are working to and having equipment delivered. So we are diligently working on it as we stated we think we'll have it all back in full service by the end of the quarter.

Helen Ryoo - Barclays

Got it. Okay. Great. And then just switching gears to your Rockies processing plants. I guess with all the talks about ethane rejection going on, are your plants up there rejecting ethane at this point?

Benjamin Fink

A little, but since the majority of our contracts are fee-based, we don’t really feel it. Just like the past couple of quarters, the financial impact of ethane rejection was south of a $1 million, just not a meaningful number to us.

Don Sinclair

Helen, you should know that, the ethane frac spread is still negative in the Rockies today.

Helen Ryoo - Barclays

All right. Okay. So I guess, even if there is -- even if you’re fully -- you’re rejecting all the ethane in all your plants, I guess, from your standpoint you shouldn’t really have any economic hit on your cash flow?

Benjamin Fink

It’s minimal.

Helen Ryoo - Barclays

Okay. Got it. Great. And then just -- I guess, just looking at especially your new plants like -- new projects like Chipeta III, Lancaster, Brasada, I guess you have throughput commitment with Anadarko on these new project. And I guess that means that even if drilling slows down around any of these assets, your cash flow will be protected, correct?

Benjamin Fink

That’s correct, Helen. At Lancaster and Brasada, that’s a throughput guarantee. So it’s demand charge, whether or not they deliver the volume. Chipeta, it’s a little different. It’s 500 million a day commitment to the plant. If there is a shortfall they pay a deficiency fee. So you get something, but not what you would have gotten had they delivered volumes.

Helen Ryoo - Barclays

Okay. And then could you just speak about other systems in Rockies, whether you have similar contracts? Certainly, to the extent that Anadarko is your volume provider, would you say other plans in Rockies also have somewhat of a similar contract?

Benjamin Fink

For the Bison treaters are 100% demand charge, which are in the Rockies. But Mountain Gas, DJ Basin, Hilight, no, there is no demand charge.

Helen Ryoo - Barclays

Okay. Even without any…

Don Sinclair

They are under at Red Desert. There are some true-up based on volumes, but not demand charge component.

Helen Ryoo - Barclays

Right. Okay. And we’re not talking about third-party. We were talking about Anadarko volumes.

Don Sinclair

Okay. For Anadarko, the answer is no except the Bison.

Helen Ryoo - Barclays

Okay. Okay. Got it. All right. And then just lastly, did your CapEx for the year go up by 50?

Benjamin Fink

Our CapEx guidance is unchanged. Not sure I understand that.

Helen Ryoo - Barclays

Okay. So it’s unchanged, right?

Benjamin Fink

Yeah.

Helen Ryoo - Barclays

Okay. Got it. Thank you.

Benjamin Fink

Sure.

Operator

(Operator Instructions) And your next question comes from the line of Suzanne Hannigan from Janney. Your line is now open.

Suzanne Hannigan - Janney

Thanks. Good afternoon.

Benjamin Fink

Good afternoon.

Suzanne Hannigan - Janney

On the last call when you announced your acquisitions in the Marcellus, you said at that time that as we move into 2014, the EBITDA multiple would look much lower than the purchase price, or the multiple on 2013. I know we’re in early days, but is there any further guidance you can give as to where you think that number will be coming in for 2014?

Benjamin Fink

Nothing has changed from last quarter. Our first quarter performance was exactly like we thought it would be internally and our year. Our forecast for the year is what we thought it would be at the beginning of year. So nothing has changed relative to what we talked about last quarter.

Suzanne Hannigan - Janney

I’m sorry, I’m asking about the EBTIDA multiple on the Marcellus acquisitions.

Benjamin Fink

Right. And nothing has changed in terms of our ’14 outlook as well.

Suzanne Hannigan - Janney

Okay. Okay. Thank you.

Operator

I’m showing no further questions at this time.

Don Sinclair

Thanks, Dave. Thank you, everyone, for joining us today. And thanks for your interest in Western Gas and Western Gas Equity Partners, and we look forward to speaking to you soon. Thank you.

Operator

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

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