Michael Garberding - EVP & CFO
Jimmy Nguyen - Bank of America Merrill Lynch
Crosstex Energy, L.P. (XTEX) Bank of America Merrill Lynch Global Energy and Power Leveraged Finance Conference Call May 14, 2013 10:30 AM ET
Jimmy Nguyen - Bank of America Merrill Lynch
This is Jimmy Nguyen and on behalf of Bank of America Merrill Lynch, I would like to thank you for joining us today. Next up, we have, I would like to introduce Crosstex Energy and with the company we have Michael Garberding, Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you very much and good morning everyone. I appreciate you all being here. Stan Golemon and myself are going to walk you through today the Crosstex story to give you a little better picture of who we are and what we are doing.
If there is one thing I want you to take away today its really the right time for Crosstex and so when you think about the right time for Crosstex you can think about it in a couple of different ways; you know first we are on a spending program of about a $1 billion that we started in 2012 and will be completed in 2014 related to our PNGL assets and related to our crude and condensate assets we acquired in Ohio, so real good growth around existing platform. Secondly, think about the additional $1 billion in opportunities we have on top of that. So again, the growth in platforms provide other opportunities to continue to grow the business. Third, fee based business; first quarter we ended about 86% fee based, so good stability in gross operating margin. And fourth, strategically we've really focused on diversity of geography, and diversity of product ,so again fixed shale plays, we are in across the region as well as we have about 50% of our gross operating margin from NGLs and crude and 50% of our gross operating margin from natural gas.
We look at the rest of the right and the rights really support what we are doing, so again the right energy market; the right platform; the right people and the right opportunities, we’ll go look for each of those but again that all supports the right time to invest in Crosstex.
When you think about the right energy market, you can just look at the fundamentals of what’s occurring. So from crude growth, we've seen about a 16% crude growth year-over-year. From NGL and gas growth, we've seen about a 20% growth over the last five years. If you look at the rigs running, today about 1,700 rigs running, about 1,400 are crude and kind of stayed focus; about the rest, gas, that’s flipped over the last five years. So fundamentally we're seeing good growth in production and we're seeing the growth in production in the non-traditional areas. You know, you still see it in the West Texas. We're now at the Bakken with the Utica, with the Marcellus. What that’s doing is giving the Midstream’s a great opportunity ultimately to grow their business and a good example of that is the [INGA] study. You know, the INGA study says, we’ll be spending about $10 billion a year on infrastructure between natural gas, liquids, crude and natural gas for the next 20 years, a great opportunity for us.
The other thing you are increasing is the repurposing of assets. So again you have seen the natural gas asset that was used in the past as far as bringing gas from one area, one production zone to the market, repurpose now it’s being used for crude and NGL. So again, for us, we've seen a big change in the gas market, which then leads to what you are doing for providing the end use market, the opportunities of that production increase. And that really goes to the value chain.
So if you look at Crosstex, Crosstex really encompasses the whole value chain. So again from the natural gas, natural gas liquids and the crude side, we play all those different roles and again that’s changed a lot from who we are. If you go back five years ago, we're really more of a natural gas focused business and we really threw our strategy, expand on that to where we encompass not only the gas, but the crude and the liquids. You know, two good examples of that is Ohio acquisition we had last year and if you look at that acquisition, we expanded, we bought an asset mid year last year that’s focused on crude and condensate gathering and transportation in Utica use of shale; great asset we think and what it's doing is provide service to trucks, barge, pipeline, rail, so again you think about the logistics of moving that product to the best value market.
Another good example of the NGL business down in PNGL, again we’ve got through the project down there but that’s aligning yourself at the end use market of PetChems to provide them the ethane and propane they need to grow their business. So from a value chain standpoint, we are really now are in all pieces up the value chain and when you come back now you think about the platform, so again the energy market is a platform, and the platform can come in two different ways when you think about it. First platform assets we will talk about how we think about developing assets in the ground, but also platform of the company.
The size that who we are and how those assets fit in with our size of the MLP, so first are the platform assets. Again an example that is when we started in Barnett in 2004, we acquired assets and we have been continually building off those assets and because of that footprint gives us that opportunity to grow. I use Ohio as an example, the great opportunity for us, because we have the people on the ground and the assets on the ground to meet the needs of the producers today and to grow into their needs with that.
And what is that take again that takes from a crude and condensate standpoint or trucking today, but ultimately move into pipelines and future expansion of that platform. So you can see from a growth standpoint what we have done to ensure that we meet our needs when we talk about the strategy of growth and geography and growth by product is to create additional platform growth opportunities in new areas, so you look at our legacy assets which are really Barnett in Louisiana, and then you start drilling from there. So again we drill in the Eagle Ford through our investment and Howard Energy, we are drill in the Permian for a joint venture with Apache, we drill in Ohio with our acquisition of Ohio assets and growing in Southern Louisiana through our expansion of our NGL business. So the key you will see to us is really taking that initial platform and using that platform as an opportunity to grow and that ties directly into our strategy of how we are trying to diversify both form a geography standpoint and diversify from a product standpoint.
And this all happens because of the people, I mean when you look at what we are doing, the execution is key because of the people; we have the great field of operations group which is key to us both from the day of the operations but also what we are doing from a growth standpoint. Long experience in the business as well as a good culture of safety, so that’s important for us. We also have a management team that’s been together from 2008 on, so we have seen a lot of ups and downs in this industry and we all know this industry is cyclical, so for us together as a team we have a very clear understanding of what we want to do for the company.
When you think about, now we talked about people, we talked about platform now we talk about opportunities and again it goes back to what I was trying to say, from starting with a platform and using that to grow and one of our key growth projects really is the Cajun-Sibon expansion and this is an NGL expansion in our Southern Louisiana assets, so we have assets in South Louisiana today that have processing, fractionation, storage and ability to move different products around. What we did was look at the growth both on the supply side from producers and demand side from the PetChems to really expand our opportunities there, so I’ll start with the producers. Again we have seen really that increase in wet gas drilling that I was talking about which then brings the additional raw make into the Mont Belvieu area or the key market for NGLs.
What we are doing for the producers, or the parties that control those barrels is we’re provided not only geographic diversity where fractioning is going to occur, but we are providing really a value that equal whether they go to Belvieu or Louisiana market. And then you go to the demand side and I'll go through this in a second, but you have a large PetChem complex that's existed in Louisiana for numerous years. That PetChem complex was really built upon offshore gas and that offshore gas really fed from a product standpoint the existing PetChem complex. That offshore gas has decreased so we really fit the need for the PetChem complex of providing them additional source materials ethane and propane not only for their facilities but for the growth in their facilities.
So again going back to that value chain we are bridging the production growth side to the demand side really with our projects and the platform we have in PNGL. We can do that because we have existing asset base we are building off of so Phase 1 of the project is building a pipeline from North of Mont Belvieu that connects into the three product lines and is bringing product over into Louisiana where we are expanding our unit fractionator. So that project as we talked about should be up and running in August of this year and be at full capacity ultimately by the end of the third quarter beginning our fourth quarter. That project from a total EBITDA standpoint is expected to be between $40 million to $45 million.
Project one by creating the pipeline creates additional opportunity to expand in that space too. So the pipeline on Phase 1 is bringing 70,000 barrels across. Phase 2 is now going to bring in additional 50,000 barrels across and we are building another 100,000 barrels a fractionator right near the river market and that is supported again by contract with Dow. So what we are able to do is bring that raw make in and provide the diversity of location for producer, provide that end use market the product they need and then if you were to Phase 2 which is expected to be on the second half of ’14 that's about a $75 million to $85 million project. So this ties back to that $1 billion in opportunities I started with about the right time about what we are executing on today and the growth you will see in our business. So from a return standpoint that project we have a 115 to 130 million in EBITDA, $700 million in capital, really represents a great opportunity for us.
And when you think again about the platform you know platforms like I said platforms provide opportunities. So when you look at those additional opportunities off that platform, so now when you think about it I have more product moving into the market, I have good long-term contracts through that end use market and with that now I can look at moving up and down that value chain to provide additional services both to the producers and to that end use market. Examples for that would be NGL storage, would be export terminals, potential that we've talked about which could be an expansion of the fractionation assets or which could be expansion of our crude assets.
So again creating that platform in that area really has allowed us that opportunity to announce the next $1 billion so again that was the second piece I mentioned was those opportunities are next opportunities above the first billion we are executing on is the second billion dollars of opportunities you know and the table here really points out to something that's key when you think about it that end use market, 85% of the PetChem complex today is in Texas, Louisiana, 30% of it around 30% of it is in Louisiana. The product naturally is going to gravitate towards that area which you see from not only us but our peers so it gives us a good advantage to continue to expand with them which as you can see they are expanding. So again we think this is a great opportunity and again one of the growth opportunities we are looking at you know and other opportunities we are still looking at is growth in West Texas, growth in South Texas for hard assets and then continued growth in ORB or Ohio assets.
So again, Ohio asset start acquire the platforms, and we had the acquisition mid last year and again required for us it was great, it was the people, the rail terminal, the pipe, the barge terminal and trucks and again that’s a good footprint to really grow with the producers in the region. So what we've been doing is growing at producers as they are developing after shale play. We think we will see a big change in that play this year once producers are able to get midstream services on and we should see more wells flowing. We think there is about 150 wells that should come on this year whether they are related to midstream infrastructure related to what's baking, really the final development of the well.
So with that, we should see a lot more volumes there and should see the growth in this area. So we really like the Utica as far as what opportunity it presents us. So with this platform, we're trying to grow organically, which you will see us do right. So we're expanding our barge terminal. We're expanding our rail terminal. We're looking at options on our pipeline and putting new pipelines in for condensate ad also we did something to where we bought another party in to invest with us through E2, which is the ex-management of Enerven. So we did was fund E2 through our XI which is our sequel and E2 is currently developing assets in and around the Utica with us.
So we own 93% of E2, but what it allows us to do is get on the front end of the development with the partner for everything being on the backend and buying it. So we are very much aligned as far as what we're trying to do and how they compliment. So they compliment us well and so as you see the red dot on this map represents two assets and we actually just signed a third one just a couple of weeks ago where we're going to put compression and condensate stabilization facilities in place for Antero that will be all up and running either at the end of the third quarter or the fourth quarter of this year.
So good opportunity and opportunity with development of XI that we talked about being able to drop in to EX or the LP and then utilize the facility that try for additional growth above and beyond that. So good platform asset, good growth not only from the base assets but also we think good growth from our venture in E2. So from a position standpoint we really like the position.
And going back to strategy, so again when I started I said what was our strategy, our strategy was to grow geographically and product diversity and that’s key in one of things that what we have really tried to do. So if you look at the first half of this segment cash flows from 2010 on to-date, you can see in 2010 we are really levered the gas and again that was really the market of that. If you look what our strategy did by moving in those new areas, in those new opportunities by end of 2013, we will have a relatively down portfolio, 50% crude, condensate liquids, 50% gas, we like that.
We all know there is cycles in this business, and we are going to see cycles so we like that balanced portfolio and you will continue to see that portfolio change with our growth projects. In a growth project I went through were all NGL and crude focus between Ohio and the Permian and South Louisiana.
When you think about stability at cash flows, the other thing we talked about was a fee-based business or favourable cash flows and you can look at the bottom and see what we have done on that, again I think I have said we ended the first quarter with 86% of our gross operating margin from fee-based income 14% from direct commodity exposure.
We are continuing to dwindle that down not through hedging but through project development, the way we can actually deal with that is developing fee-based projects. We can always continue to hedge which we have a good hedge program, but the most successful way to decrease your commodity exposure through the type of project you do.
So when you look at us, we really have migrated to just south of 90% fee-based that doesn’t mean we just like commodity exposure, we think there is an element of its good. We just think that given what we are trying to do to support not only the current distribution with the growth and distribution it makes a lot of sense to really have that good fee-based business.
So when we think (inaudible) a follow up financially we can start on the right top hand, corner. So a good metric to look at is where we are in 2012 where we are going. So 2012 ended adjusted EBITDA $214 million just think about the growth and what that can be.
The cases of [bone project] that I talked about were $115 million to $130 million accruing to us over 2013, 2014 that is a big step change in our business and that’s projects we are executing today. So you can really see what that is coming. So if you look at the annualized run rate expected in the fourth quarter of this year, when you have cadence about one up and running and you have river side phase two which is our crude terminal South Louisiana, it’s a big step change.
So again we are starting to see that growth. This doesn't show 2014 when you see in the second half of 2014, it's cadence (inaudible) to coming on which is an additional $75 million to $85 million. So good direct growth in that first $1 billion that we are talking about. And then you can see when you work down the page and look at guidance on all ranges of guidance for both the partnership and outside of the corporation so that we think we are seeing very good dividend and distribution growth in both entities on all side of the guidance.
So we do think this is a great opportunity for us because of what we are able to do from the business standpoint. And again I am going to circle back. So what did I say one thing was the right time for cross check and we do believe it’s a right time. So again we walk through the $1 billion of investments that we are running today, that is really making a step a changes in our opportunities from a cash flow and we think the distribution standpoint of the business. I talked about the $2 billion of opportunities.
The platform eco potential growth, you have seen it with what we have done today as far as increasing the platforms we have and we think you will see it from furthering those platforms from projects in and around that, whether it’s an additional plant in the Permian, whether it’s a kind of say pipeline in the Utica or whether it’s a further expansion of the cages and bone opportunities.
You've seen it from how we structure the business, the product and geographic diversity, the balanced portfolio between gas and crude and NGLs, the geographic span of the different shale plays of the six shale plays. We do think that's important and finally fee-based, again that's underlying gives us support of the distribution of having that almost 90% fee-based business. So combining all those together that's why we really do believe it’s a right time for cost.
So with that I will turn it over for any questions. Jim?
Jimmy Nguyen - Bank of America Merrill Lynch
Thanks for the presentation Mike. In the Utica there have been some comments among the analyst community about the results of wells in Utica whether we are seeing the kind of production and the kind of volumes that we had expected or that producers had, you are now three investments into the Utica, what can you tell us about the certainty you have about the success of that play and where you are positioned there and most importantly are you fully contracted on the investments?
So we are still very confident in our investment and like the thesis for our investment. I think the thing we talked about is the timing of production. And again as I mentioned two key factors there, one was the timing of midstream infrastructure to allow those 150 wells to produce and then the other issue was just completion technologies being used with weather baking the wells. So what you've seen is probably a little lag on timing of production, but we don't believe that changes our view on ultimate production.
The results we've seen really has pointed toward what we think is really a great condensate opportunity and that is what our focus has been. If you looked at some of the producers in and around our assets on the south you can see what they are seeing from the condensate standpoint. We think logistically we are well positioned to do that because you think of where condensate is going to go, it’s going to work out from that market. So of course the market there refiners will utilize that condensate. You will start working out from that market to find new markets which rail barge gives you opportunities to do that. So we think we are really well positioned to do that.
Next step for us is ultimately a continuation of building up pipelines from a gathering standpoint. Trucks give us the advantage today to move those barrels as they are developing and see the condensate stabilization facility we are doing with Ontario which allows you to move by truck to keep the vapor pressure down and then we think as that production grows, it naturally moves you into the pipes. So we feel very good about the investment and again feel that we can continue to grow not only with the CapEx we talked about which is the $50 million, our initial investment but we think there's a lot more opportunity on that.
Jimmy Nguyen - Bank of America Merrill Lynch
I'm going to ask a quick question. So I guess as you move forward and have a higher fee based component of your business, does that change the way you think about your balance sheet?
I think we've taken that in consideration on our balance sheet if you look I mean, we've said long term our goal was to be from a leverage standpoint below four times, but I do think we take that into consideration when we look at our distribution coverage ratio. So if you go back in 2011 when commodity prices were at a very different level than they were today, you saw us with a coverage ratio of about 1.5 times. Again because we know very well we can't control commodity prices so what we did was actually leave that in the coverage ratio and use that to run our business and long behold commodity prices came down and what we've done because we have more fee based business is ultimately lower that coverage ratio to now where you think last quarter you are at 1.13 times. So we've taken that in consideration.
We also took that in consideration with the projects we are doing. If you look at all the projects like I mentioned they are all fee based. So we're really growing our business so that fee-based which we think to your point really gives good stability to the balance sheet and good stability to the distribution and dividend.
Jimmy Nguyen - Bank of America Merrill Lynch
Do we have any other questions from the audience? There won't. Thank you very much, Michael. Thank you very much for presenting and it was great to have you.
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