QEP Midstream Partners LP (NYSE:QEPM)
Q4 2013 Earnings Conference Call
February 26, 2014 11:00 AM ET
Greg Bensen – Director, IR
Chuck Stanley – Chairman, President and CEO
Richard Doleshek – EVP and CFO
Greetings, and welcome to the QEP Midstream Partners’ Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Greg Bensen, Director of Investor Relations. Thank you, sir, you may begin.
Thank you, Christine, and good morning, everyone. Thank you for joining us on the QEP Midstream Partners LP fourth quarter 2013 earnings conference call. With me today are officers of our general partner, Chuck Stanley, Chairman, President and Chief Executive Officer; Richard Doleshek, Executive Vice President and Chief Financial Officer; and Perry Richards, Senior Vice President and General Manager.
In a moment, Chuck will provide a brief review of our results for the quarter and an outlook for 2014 followed by Richard who will summarize the financial results for the quarter.
Following the prepared remarks, we’ll open up the call for questions. Before we begin, I would like to remind participants that our comments today may include forward-looking statements. It should be noted that a variety of factors could cause the partnership’s actual results to differ materially from the anticipated results expressed in these forward-looking statements.
For a complete discussion of these risks, we encourage you to read the company’s press release and SEC filings. Today’s call will also contain certain non-GAAP financial measures. Please refer to the earnings release we issued yesterday afternoon for important disclosures regarding such measures discussed on today’s call. You can obtain a copy of our earnings release on our website, www.qepm.com.
I’ll now turn the call over to Chuck.
Thanks Greg, and welcome everyone to QEP Midstream Partners fourth quarter and year-end call. Since we successfully completed the IPO of QEPM back in August of last year, this is our first call to report results from a full quarter.
Since we’re still a relatively new company, please refer to the replay or transcript of our third quarter conference call for an overview of the partnership strategy for future growth. And while we believe QEPM is an attractive investment.
For your reference, our four different areas of operation associated assets are as follows. The Green River System in Western Wyoming, the Vermillion gathering system primarily in Southwest Wyoming; the Three Rivers gathering system in Northeast Utah and the Williston gathering system in North Dakota.
Maps of these systems along with additional details can be found in our SEC filings on our website www.qepm.com.
Finally, as a reminder QEP Field Services is a sole owner of the general partner and 56% owner of limited partnership units of the partnership.
Although the fourth quarter was the partnership’s first full quarter as a standalone public company, the steady financial and operating results are a continuation of the consistent results of these assets and our operating teams have been delivering for years.
Fourth quarter, 2013 revenue was just slightly higher than fourth quarter 2012 revenue as a slight decline in gas gathering volumes is also by increased gathering rates. The decrease in natural gas volumes was a result of a decrease in the Vermillion gathering system throughput which was partially offset by an increase in natural gas gathering volumes on our Green River gathering and North Dakota gathering systems due primarily to increases in QEP production in those areas.
Crude oil gathering revenue declined slightly from the fourth quarter of 2012 levels as lower volumes were only partially offset by higher average gathering fees.
Water gathering revenue increased 14% to an increase in volumes on the Green River gathering system. Gathering expenses increased by approximately $900,000 from 2012, due primarily to an increase in labor and benefits costs associated with the contributed properties.
Looking forward to 2014, we expect another year of consistent performance from these assets. With QEP Energy’s announced four-rig drilling program on its operated Pinedale acreage, and anticipated 2014 drilling activity levels similar to 2013 on other gathering system areas, we expect 2014 gathered volumes revenues would be slightly higher than 2013. Richard will cover the details of our guidance assumptions later in the call.
At December 2013, QEP announces its intention to separate its Midstream business, QEP Field Services from QEP Resources. And in January this year, QEP further announced that its board is authorized to begin preparing the appropriate SEC filings to facilitate the separation.
QEP also announced it’s retained a search firm to assist in recruiting executive management for the new Midstream Company. Finally, QEP indicated simultaneously with the preparation of the SEC filings, we will also entertain and evaluate proposals for alternative transactions for separating the Midstream business.
So, what would a standalone Field Services company look like? In a straight spin-off scenario, the new company would own a portfolio of Midstream gathering and processing assets. In addition to QEP’s current general partner and limited partner interest in QEP Midstream.
The separation of Field Services from QEP Resources creates a number of significant advantages. QEP Midstream partners, we continue to be a sponsored entity and we would expect to maintain a close working relationship with QEP Energy, who would remain our largest customer.
Each business will be able to independently deploy resources and allocate capital according to their strategic initiatives and growth strategies. Additionally, separate E&P and Midstream businesses, each with an experienced incentivized leadership team will be able to compete more effectively to capture future growth opportunities in their respective markets.
Most importantly, we believe we will continue to be in a good position to execute on our strategy to grow distributions for our unit holders.
As discussed in our first earnings call back in November, our primary strategy involves pursuing dropdown acquisitions from our sponsored QEP field services. Our second strategy involves leveraging our relationship with QEP Energy to pursue organic growth projects in current new geographic area in support of both QEP Energy and third party E&P customers.
Even after QEP in partnership separate, we expect to engage an ongoing development work in support of QEP’s upstream E&P activities.
Our third strategy is to pursue the acquisition of additional Midstream assets from unrelated third parties both within the geographic footprint of the partnership and in new basins.
And finally, we also intend to achieve some growth by increasing throughput on our existing systems. We don’t have a specific transaction to discuss during today’s call regarding our dropdown strategy. I did want to make a couple of comments with respect to this opportunity.
Our sponsor QEP Field Services owns a large and growing inventory of Midstream assets and we expect they will periodically make such assets available to us for acquisitions. While we will aggressively pursue third party acquisition opportunities, we expect that the majority of our acquisition opportunities over the next several years will be sourced as dropdowns from our sponsor.
In anticipation of these opportunities, we put in place a $500 million revolving credit facility that remains un-drawn at this time. We would anticipate that QEP Field Services will continue to fund large Greenfield Midstream investments until such time that the partnership has grown sufficiently to be able to support development at Greenfield projects on our balance sheet during the construction for this, without compromising our ability to increase cash distribution to our unit holders.
Some of you have asked the QEP’s announcement of its intention to separate field services from QEP Resources, precludes any type of dropdown transaction prior to the separation.
To be clear, it does not. While we are confident that we can grow distributions near term with our existing asset base, we believe that our continued growth will be enabled by acquisitions from our sponsor.
We believe we’re in a good position to deliver continued distribution growth with the help of our sponsor QEP Field Services, which has one, a significant inventory of Midstream assets are available to dropdown.
Two, a strong balance sheet that can support development of sizable Greenfield projects and acquisitions from third parties. Three, an existing collection of primary assets, Midstream assets that are overlaid, some of the most economic oil and gas place in United States. And four, a stable cash flow generating business model with multiple growth opportunities.
In summary, we continue to believe that we should be able to achieve our objective of growing cash distributions between 10% and 20% annually.
I’ll now turn the call over to Richard.
Thanks Chuck. Before I get into our financial results, I want to review the construct of our earnings release. The earnings release includes results for MLP for the fourth quarter in the time since the IPO days, and those results are labeled as successive results.
We compare those results with time periods before the IPO and those results are labeled as processor. Results are not particularly comparable because the processor contains assets that were contributed with MLP. Specifically, all of QEP’s Uinta Basin and gathering assets in our 38% interest in Uinta Basin Field Services are included along with MLP’s assets in the predecessor’s financials.
Recall, that due to the large capital requirement associated with the Utah Basin and gathering assets in the coming years, we did include those systems in the initial set of assets we contributed at MLP. However, because the nature of that business is somewhere to that of the assets that were initially contributed, the SEC required that we include those assets in the processor.
More directly comparable metrics, we’ve included a pro forma results table in the earnings release with some financial and operating statistics for the fourth quarter and full year 2013 in 2012, we know it’s confusing.
Okay, with that as background on January 23, we announced our quarterly distribution to limited partnership unit holders for the fourth quarter 2013. We announced distribution as $0.26 per unit a $0.01 increase from the $0.25 per unit, minimum quarterly distribution that was prorated in the third quarter to a distribution of $0.13 for the 48 days that the partnership was public.
As you saw on the partnership’s release yesterday, fourth quarter distributable cash flow was $17.1 million, which included $2.2 million of net maintenance capital. You noticed a total maintenance capital expenditures in the quarter were $8.8 million which includes $6.6 million that was reimbursed by QEP for repairs related to gathering pipeline issue that occurred prior to the IPO of the partnership.
The total distributions to LP unit holders for the quarter were $14.2 million which was covered 1.2 times by distributable cash flow.
Fourth quarter 2013 adjusted EBITDA was $20.2 million which is in line with one fourth of the guidance we gave at the time of the IPO for the 12 months ending June 30, 2014 which was $82 million.
Gathering and transportation revenues were down slightly from the third quarter, but content sales were up slightly.
Switching over to guidance, we expect adjusted EBITDA for 2014 to be in the range of $78 million to $83 million, and distributable cash flow to be $65 million to $70 million.
Maintenance capital expenditures are expected to be $10 million to $12 million and growth capital expenditures of approximately $8 million are related primarily to the expansion of our gathering system in the remaining area of Southwest Wyoming.
Cash interest expense is expected to be at approximately $1.2 million, which relates to commitment fees for the unused portion of the $500 million revolving credit facility.
And as a reminder, we define maintenance capital expenditures as that that will enable us to maintain our operating capacity or operating income over the long-term and define expansion capital expenditures as those that we expect will increase our operating capacity or income over the long-term.
We also remind everyone of the fact that we have some seasonality in our financial and operating results. Typically, our first quarter of the year is the weakest quarter for gathering volumes as a result of how producers manage the growing and completion activities in the winter.
The condensate sales tend to increase slightly in the first quarter as the colder ground causes more condensate to fall out in the gas stream in our gathering systems. We also expect some lumpiness in our capital expenditures through the year due to timing of delivery of some large maintenance items.
Finally, on liquidity front, we ended the year with $19 million in cash and equivalents on the balance sheet and as Chuck mentioned, we had no debt as seen under our $500 million revolving credit facility.
With that Christine, we’ll now open the call up for Q&A.
Thank you. (Operator Instructions). Mr. Stanley, it appears we have no questions at this time. I would now like to turn the floor back over to you for additional comments.
Thanks a lot. Thanks everyone for dialing in today for our QEPM year-end and fourth quarter results call. Richard Doleshek and I will be on the road, Richard will be on the road tomorrow and I’ll be on the road all next week. And we hope to meet with you in person in the near future. Have a good day.
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.
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