Western Gas Equity Partners (WGP) CEO Don Sinclair On Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Western Gas (WGP)

Western Gas Equity Partners, LP (NYSE:WGP)

Q2 2014 Results Earnings Conference Call

August 6, 2014; 12:00 p.m. ET

Executives

Don Sinclair - President & Chief Executive Officer

Benjamin Fink - Senior Vice President & Chief Financial Officer

Analysts

Bradley Olsen - TPH

Selman Akyol - Stifel Nicolaus

Sunil Sibal - Global Hunter

Operator

Good morning. My name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Second Quarter Western Gas 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).

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

Benjamin Fink

Good morning everyone and I’m glad you could join us today for Western Gas’ Second Quarter 2014 Conference Call.

I’d like to remind you that today’s presentation includes forward-looking statements and certain non-GAAP financial measures. Please be aware that actual results could differ materially from what we discuss today and I would encourage you to read our full disclosure on forward-looking statements and the non-GAAP reconciliations we’ve attached to last nights Earnings Release and to the slides that we’ll reference on this call.

With that, I’ll turn the call over to Don Sinclair and following his remarks we’ll open it up for Q-&-A with Don and the rest of our executive team. Don.

Don Sinclair

Thanks Ben. Good morning everyone and thank you for joining us today. As you can see on slide three, our second quarter was highlighted by solid portfolio performance and the successful start up at the Lancaster plant, which is currently running at capacity.

WES increased its distribution to $0.65 per unit in the second quarter, its 21st consecutive quarterly increase. This is a 16% increase over last year. WGP increased its distribution to $0.27125 per unit, which is a 37% increase over last year.

Yesterday we reported adjusted EBITDA of $167 million and distributable cash flow of $137 million, both of which are in line with our expectations. Our resulting coverage ratio of 1.3 times was comfortably above our long-term target of 1.1.

Our second quarter natural gas throughput was marked by sequential growth in the DJ, Marcellus, and Green River Basins. We also experienced throughput growth at all of our Crude and NGL assets.

Our adjusted gross margin for natural gas assets increased by $0.05 per Mcf to $0.65 per Mcf, primarily driven by higher margins at the DJ Basin Complex. Our adjusted gross margin for crude and NGL assets increased by $0.54 per barrel to $2.06 per barrel, primarily driven by the receipt of our first distributions from the Front Range Pipeline.

With respect to the second train at our Lancaster facility, I’m pleased to report that we remain on schedule for our second quarter 2015 in service date. Approximately 25% of the pipe welding is now complete. The residue compressors arrived at the site in late July and we expect the demethanizer tower to arrive this month.

I’m also pleased to announce that we recently signed an agreement with a third party producer that enables us to expand our highlight facility by $20 million a day. The highlight facility, which we acquired in 2008, is located in Eastern Wyoming and benefits from the increased recent drilling activity in the Powder River Basin.

As you read in yesterday’s release, we are raising our total capital expenditure guidance to $720 million to $770 million. This includes additional capital required primarily at the DJ Basin Complex, the highlight facility, the Front Range Pipeline and at our Haley gathering system, which we are currently repurposing to be able to handle rich gas from Anadarko’s West Texas production. Our full year guidance for all other metrics is currently unchanged.

As this is our custom during our second quarter earnings call, I’d like to take a moment to reflect on how far we’ve come since WES’s IPO in 2008. WES recently celebrated its sixth birthday and during this period the unit price has more than quadrupled, the quarterly distribution has more than doubled. We have completed over $3 billion of acquisitions and have invested over $2 billion in organic capital projects.

We remain extremely grateful to all our unit holders and lenders for your support over the years and we look forward to continuing our relationship for years to come.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Bradley Olsen from TPH. Your line is open.

Bradley Olsen - TPH

Hey, good morning guys.

Don Sinclair

Good morning, Brad.

Bradley Olsen - TPH

Don, my first question is on the Haley opportunity that you mentioned in the press release about converting your Haley system to be more accommodating of the rich gas that Anadarko is drilling up in the area. Is that solely a gathering opportunity or could we see that kind of transform into more of a processing plant opportunity in the coming quarters or years?

Don Sinclair

Brad, if you’ll remember, just the history of that system was originally dry gas system built for the Penn Gas and with the development of the Wolfcamp and Bone Springs, its given us the ability to re-purpose that asset and “as we think about it” get a second line.

It’s still early in the process as it is for all the development in the Wolfcamp. For Anadarko I think there will be processing opportunities in West Texas, where they will be directly associated with Haley or not. It’s kind of hard to tell at this stage, because we’re so early in the development.

Bradley Olsen - TPH

Got it and as far as the development in the DJ is proceeding, obviously going from kind of zero to full on the Lancaster Plant in just a couple of months is reflective of the demand for field services up there.

We’ve heard some of the big E&P producers report on their conference calls who are using other midstream service providers that they’ve had issues with reliability and getting their gas wells flowing to their maximum potential. Do you see an opportunity given the fact that you really brought on a lot of kind of new high-tech equipment, the opportunity to maybe start poaching some volumes from customers of your competitors up there?

Don Sinclair

Well, I’ll start Brad and talk about facilities first. If you think about the luxury we had because of Anadarko’s position out there, it gives us the ability to build facilities, whether it’s trunk lines or processing capacity for future volumes that have yet to be developed. And that along with the horsepower we’ve put in the field has really allowed us to do a lot of different things for all of the producers connected to our systems.

As far as what happens with producers and commitments, as you know there’s a lot of historical dedications up there. There’s still some acreage available. We’ve got agreements, so what we’re trying to do now is stay focused on Anadarko and our other customers and make sure we have all our facilities in place and on time.

Bradley Olsen - TPH

Got it. Thanks a lot, Don. That’s all for me.

Don Sinclair

Thanks, Brad.

Operator

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

Selman Akyol - Stifel Nicolaus

Thank you, good morning.

Don Sinclair

Good morning.

Selman Akyol - Stifel Nicolaus

Just following up on the Haley comments, I was just curious, as you look at not only your inventory, but I guess what also is up at Anadarko, do you see a lot of opportunities to repurpose assets?

Don Sinclair

You know, for us most of our assets Selman, were specific to mainly, either wet gas or dry gas. So it’s not like we have a lot of long haul pipes that can be repurposed for different commodities and/or change direction and be bi-directional assets, so there’s some opportunity but not a significant amount.

We’ve been able to see our greatest opportunity to date that’s been at Haley. We’re always looking and we’ll always try to get the maximum value out of the assets we own, but because of the primary nature and the original purpose, there’s just not as much of those opportunities probably for us as there is for others.

Selman Akyol - Stifel Nicolaus

Okay and I guess just in preceding conversations there’s been some discussion in terms of crude oil gathering as well for Anadarko. Any update on where that is? Any thoughts on that?

Don Sinclair

Selman, I’d refer back to Anadarko’s call for this quarter. You know they talked about the increase in crude oil production onshore North America as you can imagine. That increase has been followed by facilities. Midstream facilities have been constructed. So from that perspective, APC Midstream spent a significant amount of capital focused on providing that service for APC. As those volumes in that business grows, we look at that as becoming more of a significant component of potential future drop downs.

Selman Akyol - Stifel Nicolaus

All right, thank you very much.

Operator

Your next question comes from the line of Sunil Sibal from Global Hunter. Your line is open.

Sunil Sibal - Global Hunter

Hey, good morning guys.

Don Sinclair

Good morning.

Sunil Sibal - Global Hunter

A couple of questions for me. First a follow-up from the previous question with regard to the APC Midstream assets. I was wondering if you could, when you look at that inventory of future drop downs, if you could quantify that a little bit in terms of where it stands as of now and how should we think about a break down between say crude assets versus gas or gas processing?

Benjamin Fink

Okay Sunil, this is Ben. I’ll take my best shot. I think roughly if you were to take a snapshot today, there’s around, call it around $300 million of EBITDA with all of the APC Midstream assets, but some of those assets are really in their infancy and I would call the crude infrastructure assets in its infancy, meaning they are generating very little EBITDA relative with CapEx today.

So you would expect over the years a higher rate of growth. And there are other assets that would fit that profile as well, such as gathering in West Texas where Anadarko is really just getting started, going after the Wolfcamp. Does that answer your question?

Sunil Sibal - Global Hunter

Yes, that does. So basically what you’re saying is $300 million of EBITDA as of now, but of course that will grow much more rapidly considering the CapEx spend so far? Is that a fair way to describe that?

Don Sinclair

Yes, I would say a subset of those assets are growing much faster than WES’s current assets.

Sunil Sibal - Global Hunter

Okay, that’s fair. And then in regards to the opportunity in Wyoming, I was wondering if you could talk a little bit about that and what kind of gas, in terms of the NGL content, you guys are seeing out there from an opportunity perspective.

Don Sinclair

If you kind of remember the history, our highlight, that plant was put in for the original conventional oil production up there in Eastern Wyoming. So if you kind of remember a little bit about our CapEx history, last year we spent money basically repurchasing some of the pipe, not repurchasing, but getting the pipe and the horsepower in the field that was going to allow us to adapt to the hydrocarbons that you’re now seeing being developed up there.

As far as the quality it varies, but if you think about it, it’s not dissimilar from anywhere else where you have a crude play, in which you would think the GPM of the associated gas would be, so that five to six gallon per thousand range is probably as reasonable as anything to look at now.

Sunil Sibal - Global Hunter

Okay, that’s fair. And then lastly, on the $70 million or so of CapEx increase that you announced yesterday, is a majority of that with the Haley and is that a fair way to describe that, most of that going towards Haley?

Don Sinclair

The largest component of the increase is actually increased activity in the DJ Basin and then the three secondary factors are Haley as you mentioned, which is really just an acceleration of CapEx. We thought we were spending in ‘15 into 14; the expansion we mentioned at the highlight, and the Front Range Pipeline.

Sunil Sibal - Global Hunter

Okay, that’s all for me. Thanks guys.

Operator

And we have no further questions at this time. I will now turn the call back over to Don Sinclair for closing remarks.

Don Sinclair

Thanks Rob. I’d like to thank everyone for joining us today and for your interest in Western Gas and we look forward to speaking to you again soon. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call and you may now disconnect.

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Western Gas Equity Partners (NYSE:WGP): Q2 EPS of $0.25 beats by $0.01.

Revenue of $329.94M (+31.2% Y/Y) misses by $1.79M.