Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Gene Dubay - President & Chief Executive Officer

Glenn Powell - Chief Operating Officer

Eric Kalamaras - Chief Financial Officer

Brian Begley - Vice President of Investor Relations

Analysts

John Tysseland - Citi

Sharon Lui - Wells Fargo

Atlas Pipeline Holdings L.P (AHD) Q1 2010 Earnings Call December 31, 1969 9:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2010, Atlas Pipeline Partners earnings conference call. My name is Amity [ph] and I’ll be your operator for today. Later we will conduct the question-and-answer session. (Operator instructions)

I would now like to turn the conference over to Mr. Brian Begley, Vice President of Investor Relations; please proceed sir.

Brian Begley

Thank you. Good morning and thank you for joining us for today’s call. Before our management team provides comments on our fourth quarter results, I’d like to remind everyone of the following safe harbor provision.

During this conference call we make certain forward-looking statements. That is statements related to future and not past events. In this context forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as expects, anticipates, intends, believes and similar words or phrases.

Forward-looking statements by their nature address matters that are to different degrees uncertain and are subject to certain risks and uncertainties, which could cause actual events and results to differ materially from those projected in the forward-looking statements. We discuss these risks in our Quarterly Report on Form 10-Q, and our Annual Report also on Form 10-K, particularly in item one.

I’d also like to caution you not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. The company undertakes no obligation to publicly update our forward-looking statements or to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Lastly, management’s presentation this morning includes references to such items as adjusted EBITDA, and recurring adjusted EBITDA, as well as attributable cash flow, which represent non-GAAP measures. A reconciliation of these non-GAAP measures is provided in our financial tables of our first quarter earnings release, as well as our Form 10-Q.

With that I’ll turn the call over to our Chief Executive Officer, Gene Dubay, for his remarks.

Gene Dubay

Thank you, Brian. Ladies and gentlemen thank you for your participation and your interest in Atlas Pipeline Partners. Since our last call this past January, there have been a number of very positive developments for Atlas Pipeline.

The announced joint venture encompassing Atlas Energy and Reliance Industries has tremendous positive indications for Atlas Pipeline. We expect that the new drilling program will bring volumes to the infrastructure earlier and more robustly than we would have otherwise seen.

Results for Atlas Pipeline is that we will have a major position in what is certainly the most significant guest of element played in the lower continental United States. The potential for growth for the Laurel Mountain joint venture with Williams should surpass anything we have experienced.

We are enormously pleased that across our field operating areas, we saw a significant increase in drilling activity in the first quarter, and the results of that activity will become evident in the second quarter and beyond. Our core acreage positions in Oklahoma and Texas are in the liquids rich areas that are the focus of the exploration and the production companies development activates, and in West Texas our consolidated plant which became operational in November continues to operate at or above our expectation.

Our Chief Operating Office, Glenn Powell, will speak to you shortly in greater detail about the activity we are seeing in each of our operating areas, and the volumes gathered and processed in each of those areas.

Though we are generally pleased with the operating results for the first quarter, those results were adversely influenced by the colder than normal winter weather which effected operations across Oklahoma and West Texas.

Our financial results were also negatively impacted by the legacy commodity positions that we have spoken to you about previously, but the second quarter is the last quarter for which we have significant exposure to the legacy commodity positions. We will begin the third quarter without the encumbrances of prior hedging decisions. We made a great deal of progress in the past year and we believe that we could not choose better operating areas for our gathering and processing business.

Certainly challenges remain. We need to manage our business so that we can take advantage of the opportunities which have presented themselves to us in the Marcellus and Mid-Continent areas. We need to improve our balance sheet and begin our distribution.

We believe that this business will flourish if we maintain our focus on the necessary discipline and our decision making and we will do that. Our vision anticipates that we will grow this business in a manner that overwhelmingly benefits our equity investors, and assures the returns of our debt holders.

I’m now going to ask Glenn Powell, our Chief Operating Office, to talk to you about the performance of each business unity. Thank you.

Glenn Powell

Thank you, Gene. The announcement concerning the Atlas energy joint venture with Reliance, and the increased drilling activity in all of our operating areas will lead to volume growth in the periods ahead.

During the first quarter, we have seen increases in rig activity in the Spraberry and in the Granite Wash. We have also seen steady improvement in the number of rigs working in all of our operating areas.

The success from running our Mid-Continent asset as efficiently and as robustly as possible allowed us to transport approximately 787 million cubic feet of natural gas per day, and product approximately 54,100 barrels per day of NGLs. Additionally we recovered 2400 barrels per day of continence. We connected 75 new wells into or Mid-Continent gathering systems during the quarter.

At our Chaney Dell we gathered approximately 222 million per day in the first quarter, which is down slightly from the volumes gathered during the fourth quarter of 2009. NGL production was 12,580 barrels per day, a slight 3% reduction as compared to the production in the fourth quarter of 2009. Condensate production was 759 barrels per day. A total of 28 new wells were connected to the system during the second quarter.

In 2009, Atlas connected approximately 100 wells to the system and with the increased drilling activity, we are currently analyzing over 50 well connect opportunities. There are currently 18 dedicated rigs working behind this system.

The construction related to the OLC operating agreement we discussed last quarter is progressing well. We will begin receiving $5 million to $6 million a day in June, and approximately $12 million to $13 million per day of additional volume in November. Atlas is providing processing in a pipeline connection to OLC existing system, which currently moves over $18 million a day.

OLC has over 70,000 acres held by production and an additional 140,000 acres under lease. OLC plans to drill 120 wells over the next five years. This new gas will help Atlas to grow its business in Western Oklahoma and in Kansas.

At our Elk City/Sweetwater system, we moved volumes of approximately 228 million per day, a 9% decrease from the prior quarter. We produced an average of 9,400 barrels of NGLs during the first quarter, a 12% decrees from the prior quarter. Condensate production was 480 barrels per day, which is approximately 100 barrels per day higher over the fourth quarter of 2009.

Seven wells were connected into the system during the quarter. The liquids rich Granite Wash continues to be active with several new wells coming on in the second and third quarter. We are continuing to accelerate our position in this area through new contracts.

The producers have brought on new Granite Wash productions since the first quarter and we will report on this new production in our next earnings call. The producers have increased our drilling plans and there are currently 16 dedicated rigs working behind the system.

On our Midkiff/Benedum system, gathered volumes increased to $158 million per day, a 1% increase over the prior quarter. NGL production was up to 24,400 barrels per day, and condensate production decreased to 690 barrels per day. The consolidated plant continues to exceed our expectations, in which the primary drive is behind the 11% increase in NGL production over the prior period.

The Midkiff/Benedum system completed a total of 37 new well connects in the first quarter. Our partner pioneer expects to drill 440 wells in 2010, and the second larges producer CONSOL Energy projects to drill approximately 150 wells in 2010. Currently there are 60 dedicated rigs working behind the system.

Within our Velma system, we gathered approximately $73 million per day, 11% increase over to the first quarter of 2009. We recovered 7,800 barrels per day of NGLs and 4,480 barrels of condensate. From a commercial stand point there were three wells connected to system during the quarter. Two producers are reworking several wells within each recompilation, improving the flow and drilling activity has increased. There are currently nine dedicated rigs working behind this system.

In our Laurel Mountain gathering system, we are anticipating significant growth in the system related to horizontal drilling by Atlas energy, enhanced by the Reliance joint venture, and the build our of the Appalachia system. We are working on several expansion projects and we anticipated completing five expansion and looping projects in 2010. These projects will add additional volumes to the system in 2010.

In summery, in the first quarter we dealt with the colder that normal weather in Texas and Oklahoma, which led to volume freeze-offs that adversely impacted our volumes. However we believe we will see steady growth in our gathered volumes across all our systems.

Comparing the first quarter averages to yesterdays volumes processed and barrels produced, we are processing over 64 million per day more than the first quarter average, and we will be producing over 4000 more barrels per day of NGLs based on this additional process volume.

We continue to realize an increase in NGL production through the increased recoveries at our consolidated plant, and increases in the Btu content of the wells being connected into our systems, particulate the Granite Wash wells.

We are working on the partnership build out with Williams to take advantage of the continued success of Atlas Energies drilling in the Marcellus. We are also pleased with the increased drilling by Pioneer and the other producers in West Texas.

The OLC operating agreement will add volume to our system in June, as we expand into Kansas and participate in drilling growth. Lastly, in the Mid-Continent region we are experiencing an increase in well connects, and we continue to see accelerating producer interests in connecting to our systems in 2010.

That concludes my remarks and I’ll turn the call over our Chief Financial Officer, Eric Kalamaras.

Eric Kalamaras

Thanks Glenn, and thank you everyone for joining the call this morning. As both Gene and Glenn mentioned, we continued to make significant progress in executing our operational and financial plan, and delivering under value proposition to our stake holders.

During the quarter we continued to advance in our main goal, in positing Atlas to benefit from future growth opportunities. In doing so, we made further progress in our risk management strategy that not only protects future cash flow, but also gives us additional clarity as we look to reduce debt and increase liquidity, which we did meaningfully during the quarter. Before I address those items further, let’s review this quarters financial results.

The first quarter of 2010; in addition to announcing solid EBITDA, we also have positive results on net income basis, with a partnership reporting distributable cash flow of $0.36 per unit or $1.44 annually, and recurring adjusted EBITDA of $50.8 million. This quarter’s recovering adjusted EBITDA compares favorably to $26.4 million earned last year, but the primary difference between the two quarters being a 73% increase, not realized NGL price.

July, we are recurring adjusted EBITDA, ex the non-recurring items such as gains from asset sales, legacy derivative settlement, and other one-time items. We believe recovering adjusted EBITDA is the best way to evaluate our ongoing operating cash flow. This quarter, recurring adjusted EBITDA excluded a $5 million negative impact in legacy commodity positions. In the press release, we reconciled to non-GAAP measures, including distributable cash flow and recurring adjusted EBITDA.

As I previously mentioned, one of our main primary objectives is to position the partnership so it can effectively participate in future growth opportunities, and one way to do that is to protect our cash flow. As I mentioned last quarter, we made the strategic decision to eliminate further impact of legacy natural gas swaps that were originally impended to hedge our short gas position and keep all contracts.

As I also mentioned last quarter, in January we took a $1.5 million cash loss for those positions. In February, we took advantage of the rise in gas prices, and successfully terminated all of the remaining legacy natural gas swaps from February through June of this year. This was a very positive event as we are now receiving significantly higher cash flow from our assets. Based upon current gas prices, the annual benefit of the swaps being terminated increases EBITDA by approximately $28 million annually.

Last quarter, I said we were to newly begin adding additional hedge protection to stabilize our cash flow, and that is exactly what we did. Consistent with our strategy, we added additional NGL and condensate protection for not only the third and fourth quarters of 2010, but also for the first and second quarters of 2011.

With the new protection we have in place, we are approximately 51% hedged for all of 2010, and approximately 30% hedged for the first half of 2011. As you can see, we are committed to adding protection to the business and doing so prudently. In that context, we will continue to enter into additional protection, as we look to foster our leverage, capital spending, and distribution reinstatement objectives over the coming quarters.

As a reminder, our risk management strategy is to hedge up to 80% of our NGLs during the prompt year, and up to 50% in the following year. We will do this by using product specific options and swaps, and using crude oil to protect the heavy end of the NGL stream and condensate.

In our press release, we have included a summary of our existing hedge positions for 2010 and 2011. Our realized NGL prices compared to last year’s quarter increased 73% to $1.05 a gallon. To aid analysts, in our press release we provided our unhedged realized prices. We have also included our composite NGL mix for [Inaudible]. Hopefully including this additional information will allow better insight into our prices versus those at the fiscal hub.

From a near-term price trend perspective, active supplies are still tight due to plant turnaround. As we begin to exit the seasonal ethylene and propylene cracking periods, capacity is now going back online. We continue to remain constructive on near-term NGL prices, as US industrial demand remains solidly an expansion territory, which should continue to bode well for end users of NGLs.

Our adjusted gross margin per Mcf of processed gas in the quarter was $1.47 versus last year of $0.77. This marked increase is primarily the result of NGL prices, partially offset by lower system volume.

We continue to remain focused on reducing cost to maintain efficiency across our businesses. For the quarter G&A was $9.8 million, down nearly 10% from last year, primarily related to head count reductions. We continue to expect full year G&A to be between $32 million to $35 million, with most of the incremental improvement in the second half of 2010, as we continue to take proactive steps to further reduce these expenses.

Operating expenses for the quarter totaled $15.5 million versus $13.8 million last year. The increase is primarily related to increased wage and salaries, higher compression expense, and an increase in property taxes. We expect to average between $15 million and $16 million a quarter for the rest of the year.

Interest expense totaled $26.4 million versus $21.1 million last year. The increase is due to higher LIBOR on our floating rate debt from changes in our credit facility, despite a low overall debt balance. In addition to a higher LIBOR rate, as you may recall, we had interest rates swaps that expired this past January, and a second trench that expired in April. The net effect of those swaps will be an additional improvement in our interest expense by about $12 million annually. We are now receiving the full benefit of the swaps being terminated.

Now moving to our capital structure. As we look to position the company towards future growth, deleveraging is an important component. During last quarter’s call, I said we have more work to do, and that you could expect further debt reduction. We made additional steps towards that effort this quarter, as we were able to reduce debt and increase liquidity by nearly $50 million. We now have over $9 million of availability on our $380 million revolver, including approximately $10 million of letters of credit that are currently outstanding.

In March 31, our debt consisted of the following: $280 million of revolver borrowings, $426 million term loan, $495 million of unsecured notes maturing in 2015 and 2018, and mere compliance of all of our financial covenants, with our trailing 12-month leverage being 5.6 times and debt to total capital at 62%.

Over the coming quarters we will continue to focus on deleveraging, by retaining cash flow, and a careful eye on our capital spending. As we position our business to take advantage of tremendous growth opportunities over the coming quarters and years, we continue to be diligently focused on managing the returns on our capital spending. We are only spending on cash return projects.

During the quarter we invested $10 million in growth capital, spent about $1 million in sustaining capital, despite seeing growth for well connections driven by a significant increase and drilling in our areas of operation, especially in our mid system related to development of the Spraberry plant. Our growth capital spending has been slower than our original plan, but we continue to expect the second and third quarters to be our peak capital spending periods.

We continue to expect mid-continental extensional capital spending to be approximately $50 million in 2010, with another $50 million in maintenance capital spending. Pursuing to our current agreement, we can allocate an additional $37 million for Laurel Mountain capital spending in the Marcellus Shale this year, of which we have spent about $9 million.

We continue to work with our partner Williams’ companies in evaluating the updating drilling plan with Atlas Energy and the joint venture with Reliance Industries. To the extent, the amount or timing of that capital spending changes, we will update the market place as we revise the budge with Williams.

In closing, we continue to advance the business and more aggressively position Atlas Pipeline for growth. We will seek ways to improve the structure and leverage of our balance sheet, and capitalize on future opportunities to maximize cash flow from our strategic asset base. We remain very enthusiastic about what the future holds for our business and all our stakeholders.

With that, I will now turn the call over to the moderator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Tysseland with Citi; please proceed.

John Tysseland - Citi

Good morning gentleman. My first question is for Glenn. I guess Glenn when you described that you expect to see volume growth in the second quarter, is that specifically growth of our first quarter results, or do you expect that you could show growth of a fourth quarter, where fourth quarter was really unimpacted by the freeze offs and the inefficiencies on the plants?

Glenn Powell

Good question John. We’ll see growth based off a fourth quarter when we didn’t have the freeze offs. Like I mentioned, just looking at the first quarter average versus yesterday, we are at 64,000 a day of process volumes as compared to the first quarter average. So you can already see that we are seeing that growth, and that’s predominantly the Spraberry and the Granite Wash, but we are also seeing increases in our other areas as well, plus we’ll add the OLC gas starting in May.

John Tysseland - Citi

Then also, on your plants are you seeing the gas get a little bit more richer as we move throughout the year, where producers are drilling up higher Btu content gas or has it stayed relatively the same across your system?

Glenn Powell

We are seeing more liquids coming in based on these wells that are being drilled, and where these producers are choosing to drill.

John Tysseland - Citi

Are you bumping up against any kind of operational capacity constraints where you have to bypass some dry gas, or are you able to process anything that’s coming to you at this point?

Glenn Powell

We are not having to bypass at this point, and that’s one of the real benefits of connecting our Chaney Dell system with our Elk City system. We are able to move gas around in order to maximize the barrels that we are producing.

John Tysseland - Citi

Then Eric, I guess on the capital side, you had mentioned that you are allocating $37 million in terms of the Laurel Mountain joint venture. It was my understanding that there was a $10 million limit for your covenants on that. Is that a change or what is the limit on how much you can actually invest in Laurel Mountain at this point?

Eric Kalamaras

John you are right, it is $10 million, although the $10 million is effectively rolling over from any unused prior period on an annual basis, so none of the credit facility was used last year in 2009, so we get to roll that over into 2010. So that is probably what you are thinking.

Gene Dubay

I’m sorry. John, this is Gene Dubay; and we also get to amortize the note that we had with Williams against the capital in a year, so we got 16 off of that note that we can add to the capital spend.

John Tysseland - Citi

Got it, that’s helpful.

Eric Kalamaras

16 plus the 20 gets you to the 37, the first year.

John Tysseland - Citi

Got it, and then also can you talk about what it’s like in the capital markets. I mean obviously the bank markets have loosened up a little bit. Have you had any discussions with your banks about being able to revise some of those covenants and being able to invest a little bit more in Laurel Mountain, or where do you stand in that process.

Eric Kalamaras

Sure, we are always looking at the market place and we are having conversations all the time. We can’t say whether we will or may do something in the future related to that, but I can tell you that we are very optimistic about Laurel Mountain, and we will do what’s necessary to make sure that we can spend the capital that’s needed there.

John Tysseland - Citi

Alright, thank you.

Operator

(Operator Instructions) The next question comes from the line of Sharon Lui with Wells Fargo; please proceed.

Sharon Lui - Wells Fargo

Hi good morning. The question also relates to the JV for Laurel Mountain. I’m just wondering if I guess the JV has set a budge for Appalachia spending for this year and next.

Eric Kalamaras

Hi Sharon, this is Eric. We don’t have a budget to give the street yet, we are still working through some of those things, but when we have some thing to communicate on that, we will do that.

Gene Dubay

Hey, this is Gene Dubay, and the Reliance announcement with Atlas Energy has things being reevaluated, and that process is underway.

Sharon Lui - Wells Fargo

Okay, I guess in the event that capital spending should exceed, I guess the $37 million that you have available. What are some of the options that you could pursue to not get diluted in the JV?

Eric Kalamaras

There are really a number of options that we could embark on. One option would be to go to the bank route for a waiver on the term loan if we chose to do that, or the credit facility if we chose to do that and that would be a solution, one solution. The other solution would be to try to revise the entire facility altogether. Those would be two that we would think about.

But at this point again, the timing and the amount of the capital, we don’t want to get ahead of ourselves in doing that until we have more refined plans to work with.

Sharon Lui - Wells Fargo

Okay and I guess just turning to the volumes, can you give us a sense of what volumes look like right now in the Elk City/Sweetwater system; have they recovered?

Gene Dubay

Yes, they have recovered. Basically, what you are looking at right now -- yesterday, process was around $220 million a day versus $171 million per average for the first quarter.

Sharon Lui - Wells Fargo

Okay, I guess just one more housekeeping item. The $13.4 million, that’s a reconciling item for your adjusted EBITDA for those out of money hedges. Was that actually recognized in your income statement?

Eric Kalamaras

It sits in the other income line Sharon, so it does withdraw, and that’s primarily just -- if you recall, its primarily for the gas swaps.

Sharon Lui - Wells Fargo

Thank you.

Operator

(Operator Instructions) You have no further questions at this time.

Gene Dubay

Well, this is Gene Dubay. Ladies and gentleman, again thank you very much for your interest. We look forward to working with you, and we really believe at this juncture that we have a very bright future ahead of us. Thank you very much.

Operator

Ladies and gentleman that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Atlas Pipeline Holdings L.P. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts