American Midstream Partners' (AMID) CEO Steve Bergstrom on Q2 2014 Results - Earnings Call Transcript

| About: American Midstream (AMID)

American Midstream Partners, LP (NYSE:AMID)

Q2 2014 Results Earnings Conference Call

August 12, 2014 10:30 AM ET

Executives

Allysa Howell – Manager, Investor Relations

Stephen W. Bergstrom – Executive Chairman, President, CEO

Daniel C. Campbell – SVP & CFO

Matthew W. Rowland – SVP & COO

Analysts

Michael Plum – Wells Fargo

Operator

Welcome to the second quarter 2014 American Midstream Partners earning conference call. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) Now, I would like to turn the call over to Allysa Howell, Investor Relation’s Manager.

Allysa Howell

Welcome to the second quarter 2014 earnings conference call for American Midstream Partners. My name is Allysa Howell and I am the new Head of Investor Relations at American Midstream. Prior to joining the partnership I worked in investor relations at Newmont Mining Corporation. Many of you I have met, for those of you who I have not had the pleasure of meeting I look forward to building our relationship over the next few months.

Our press release outlining the second quarter results can be accessed on the investor relations’ page of our website at www.AmericanMidstream.com along with our 10Q which was filed yesterday with the SEC. A replay of this call will be archived on our website for a limited time. Leading the call today are Steve Bergstrom, Executive Chairman, President, and Chief Executive Officer and Dan Campbell, Chief Financial Officer. Matt Rowland, our Chief Operating Officer is also available to answer any questions.

Steve and Dan will be discussing results for the three and six months ended June 20, 2014. Afterwards we will open up the call for your questions. Please note the cautionary language regarding forward-looking statements contained in the press release. This same language applies to statements made in today’s conference call. This call will contain time sensitive information as well as forward-looking statements which are only accurate as of today, August 12, 2014. American Midstream Partners expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today’s date except as required by applicable law.

For a complete risk of the risk and uncertainties that may affect future performance, please refer to the company’s periodic filings with the SEC. With that, I’ll turn the call over to Steve.

Stephen W. Bergstrom

Welcome everyone and thank you for joining us to discuss our second quarter and year-to-date performance. To begin with I will provide a brief overview of our results, then turn the call over to Dan to discuss the quarter in detail. We’ll conclude the call with an update on the progress we have made on executing our growth strategy and our expectations for the remainder of 2014.

We delivered strong financial results for the first half of the year as demonstrated by gross margin growth of 21% quarter-over-quarter and 46% year-over-year as well as year-to-date growth in adjusted EBITDA of approximately 40%. We attribute this performance to the execution of our growth strategy through the delivery and successful integration of three accretive acquisitions over the past 18 months. The acquisitions include the High Point System in April of 2013, Blackwater Midstream in December, 2013 and the Lavaca System from Penn Virginia in the Eagle Ford earlier this year.

Gross margins nearly doubled in the transmission segment year-to-date which is almost entirely attributable to High Point. Blackwater which added the terminal segment to our business has been a strong addition to American Midstream contributing 11% and 9% to our total gross margin for the second quarter and year-to-date respectively. The segment continues to grow contributing incremental cash flow to our business with minimal capital cost. Most recently operations commenced on the new Harvey site in July where we have added 250,000 barrels of additional terminal capacity with minimal capital investment and we could more than double American Midstream’s total storage capacity there over the next 24 to 36 months.

The Lavaca System continues to exceed our expectations with volumes coming in higher than anticipated as Penn Virginia accelerates development of their acreage position. To accommodate the higher volumes and accelerated drilling schedule, we increased our 2014 capital expenditure forecast by $10 million. Year-to-date the system has contributed $6 million in gross margin and we expect the Eagle Ford to continue to be a primary focus and source of growth over the next several years.

In addition to executing on these acquisitions, we have also successfully integrated them into our portfolio as evidenced by their contribution to our year-over-year operating results. As we move forward in evaluating additional growth opportunities, we will remain focused on smoothly integrating the prospects into our portfolio. One such opportunity includes the recently closed acquisition of DCP Midstream’s interest in the Main Pass Oil Gathering System or MPOG for total consideration of $13.5 million. The acquisition is complementary to our High Point System. I will provide more details on this later in the call.

In addition to the acquisition of MPOG, we also recently announced the execution of an option agreement with ArcLight Capital to acquire 50% of Republic Midstream for total consideration of approximately $200 million. Republic Midstream and ArcLight Portfolio Company recently announced an agreement with Penn Virginia to develop a crude oil gathering system, storage and blending crude oil terminal and an intermediate takeaway pipeline in the Eagle Ford. American Midstream originated the opportunity with Penn Virginia and we decided it made the most sense for an affiliate of our general partner to finance construction of the project with our general partner before dropping down the asset. We intend to exercise the option to acquire 50% of Republic Midstream upon commencement of operations which is expected to be in the first half of 2015. The Republic Midstream deal is consistent with our growth strategy to expand in the Eagle Ford and will generate significant operational and construction synergies with our existing midstream assets in Gonzales and Lavaca County.

We also recently exercised our right of first offer which the board of directors of the general partner of the partnership approved to acquire the Gonzales County full well stream gathering system in the Eagle Ford for total consideration not to exceed $110 million. Similar to the Republic Midstream deal, American Midstream originated the Gonzales County project with Forest Oil Corporation and is working in conjunction with our general partner to finance the project during construction. We expect drop down of these assets to occur in late 2014 or early 2015.

As we expand our operations through acquisitions, drop downs, and organic growth, we remain focused on continuing to grow our distribution for unit holders. We recently announced a second quarter distribution of $46.25 per unit or $1.85 annualized. The second quarter distribution is flat compared to the first quarter 2014 distribution, but represents a 7% increase over the second quarter of 2013. In addition and in conjunction with the Lavaca acquisition, management intends to recommend a third quarter distribution increase of 2% and for the fourth quarter a 3% increase related to our MPOG acquisition and anticipated growth in the partnership in 2015. Assuming our distributions increase as anticipated, we would achieve more than 12% growth in distribution since the beginning of 2013 and our intention is to continue to deliver increasing distributions while maintaining a coverage ratio in the range of 1.2 to 1.3 times beginning in 2015.

In summary, American Midstream is delivering strong year-over-year financial results primarily as a result of successfully executed acquisitions that have been seamlessly integrated into our portfolio. We are performing in line with our expectations for operating and financial results this year and as such provided an update forecast for our 2014 adjusted EBITDA and distributable cash flow that is an increase of 2% and 27% respectively over original expectations for 2014. Looking ahead, and as a result of the acquisitions I have mentioned today, we anticipate 2015 adjusted EBITDA to more than double compared to our 2014 forecast.

I’ll provide more detail on how we plan to achieve these growth objectives after Dan discusses our financial results.

Daniel C. Campbell

My comments today will focus on an overview of our second quarter and year-to-date operating results including our balance sheet, capital expenditures, and derivatives. As a reminder, our earnings release includes reconciliations of certain non-GAAP items that we’ll discuss on today’s call and their GAAP equivalents. We remind you to refer to these reconciliations and the additional details regarding our results that are contained in our quarterly filings.

Gross margin was $22 million in the second quarter and $45 million year-to-date. Increases of 21% and 46% respectively primarily due to the High Point, Blackwater and Lavaca acquisitions and this was partially offset by lower throughput in our gathering and processing segment. Adjusted EBITDA for the second quarter 2014 was lower than second quarter 2013 but the first six months’ adjusted EBITDA increased to nearly 40% year-over-year, again, primarily as a result of the acquisitions.

The benefit of these acquisitions was partially offset by incremental costs which I’ll spend a minute discussing. During the second quarter, operating expenses increased 31% over the prior year quarter primarily attributable to incremental cost related to the acquired assets as well as planned maintenance at the Chatom and Burns Point plants, longer than expected maintenance at Bazor Ridge in April, and additional leased compression costs to support accelerated drilling activity at Lavaca. SG&A also increased quarter-over-quarter primarily as a result of personnel and systems costs required to support near term growth, some of which we are incurring in advance of the anticipated growth.


It’s important to note that our second quarter results were also impacted by seasonal factors including lower demand within our transmission segment that we see each year specifically, at AlaTenn and Midla, scheduled maintenance at our processing facilities, and offshore producer maintenance in advance of the hurricane season. We anticipate seasonality in our transmission segment to occur in the second and third quarters annually and maintenance at our processing facilities and offshore producer maintenance to occur in the second quarter or third quarter each year. As such, we expect our second and third quarters to reflect seasonally lower results in our first and fourth quarters each year.

Moving on, distribution coverage for the second quarter was ..73 times and year-to-date coverage was 1.08 times, in line with our guidance to remain at approximately one times for the year. I also wanted to mention that we recently executed an amendment to the partnership agreement in relation to the Series A units in which the Series A distributions, beginning with the distribution for the second quarter 2014 and the subsequent three quarters, will be made via PIK units, cash, or a combination thereof at the sole discretion of the Board of Directors. Prior to the amendment, the Series A units received distributions, half cash, and half PIK. The amendment provides additional flexibility as the partnership grows allowing us to reinvest and grow the business as well as maintain a strong coverage ratio, particularly as we elect to finance growth through equity issuances. For the three months ended June 30, 2014, the Board of Directors approved a distribution of paid in kind units payable on August 14th.

Yesterday we announced the closing of the MPOG acquisition from DCP Midstream for a total consideration of $13.5 million. Previously we had announced the execution of a PSA with DCP Midstream to acquire multiple entities for consideration of $115 million and subsequently DCP notified us that a material customer was moving its production from Mobile Bay in Dauphin Island, the gas transmission and processing assets. The loss of that customer constituted a material adverse effect in accordance with our PSA and the agreement was amended to include the acquisition of just the MPOG assets. Total consideration for MPOG equates to an adjusted EBITDA multiple of approximately five to six times for the next 12 months and for the full year 2015. The acquisition was funded through borrowings on the partnerships’ revolving credit facility, which as of June 30th, had approximately $141 million of outstanding borrowings and approximately $59 million of available capacity. Our leverage ratio for the second quarter was 3.5 times which is well within the covenants in our credit agreement.

Regarding our 2014 forecast, we provided updated adjusted EBITDA and DCF guidance yesterday with the announcement of the acquisition of MPOG from DCP. Our 2014 adjusted EBITDA guidance of $42 million to $45 million now represents a 2% increase from our original expectations and our revised DCF outlook of $27 million to $30 million represents a 27% increase. 2014 capital expenditure guidance remains $65 million to $70 million and as a reminder, the adjusted EBITDA and DCF forecast includes the benefit of the MPOG acquisition, and the capex forecast increased $10 million from our original guidance to account for the higher than expected growth at the Lavaca System. The adjustment to our 2014 DCF guidance accounts for the modification of the Series A distribution.

Second quarter capital expenditures were $9.3 million of which $9 million was related to expansion capital primarily for the Lavaca System build out and the balance was for maintenance capital. Year-to-date total expansion capital was $10.6 million and we expect the majority of the remaining 2014 capital expenditure forecast to be allocated to the Lavaca System, construction of a pipeline off our High Point System that Steve will discuss, and the development of the Harvey Terminal including the deep water ship dock.

As of June 30th, we’ve hedged approximately 18% of our expected exposure to NGL prices or 26% excluding ethane. We also increased our oil hedges from 33% to 60% through the end of 2014, and we’ve also added hedges into the first six months of 2015 with approximately 6% of our expected exposure to NGL prices hedged or 9% excluding ethane, and 60% of our expected exposure to oil prices. We’ll continue to evaluate opportunities to hedge our commodity exposure to mitigate pricing risk.

Overall, we remain pleased with our quarterly results and the progress we are making on our growth initiatives while also maintaining our distribution coverage ratio and reducing leverage. I’ll now turn the call back over to Steve to discuss progress on executing our growth strategy.

Stephen W. Bergstrom

We remain committed to creating long term sustainable distribution growth for our unit holders and I am pleased with our results this year and energized by the opportunities ahead of us. We continue to make progress on growing the company through a multipronged approach that includes new asset development, third-party and bolt on acquisitions, organic growth on our existing assets, and drop downs from our general partner. Based on the acquisitions we discussed today, including MPOG, the Republic Midstream Crude Oil System, Gonzales County Full Well Stream Deal, as well as additional growth from our Lavaca System in the Eagle Ford, we expect 2015 adjusted EBITDA to more than double compared to 2014. Keep in mind that this level of adjusted EBITDA growth does not include any other potential acquisitions, drop downs, organic growth, or asset development opportunities that we are currently evaluating.


Let me provide a few comments on the acquisition from DCP. The MPOG transaction is consistent with our growth strategy of pursuing bolt on acquisitions that leverage our existing midstream assets. The assets are complementary to our existing High Point System in southeast Louisiana and further position us to compete for increased deep water production from new drilling in the eastern Gulf of Mexico. Further, the system was acquired at an attractive adjusted EBITDA multiple of approximately five to six times. We will continue to identify bolt on opportunities such as MPOG to add to our portfolio in line with our growth strategy.

Regarding Republic Midstream, we are excited to work with ArcLight on another asset development project in Eagle Ford. The system, located in the oil window of the Eagle Ford consists of 180 miles of gathering and trunk lines, a 144 acre blending and crude oil storage terminal, and a 30 mile intermediate pipeline system with initial capacity of 80,000 barrels per day. Republic Midstream will provide midstream services to Penn Virginia under a long term fee based transportation agreement with approximately 85,000 acres dedicated in the area served by the gathering system. The acquisition of our 50% interest is expected in the first half of 2015. Prior to and as owner, American Midstream will provide construction, operations, and general management services for Republic Midstream, increasing our footprint in the Eagle Ford and the services we provide to produce customers.

Finally, we are also excited to be nearing the drop down of the Gonzales County full well stream gathering system for total consideration not to exceed $110 million. The system will include salt water disposal capabilities as well as full well stream gathering and treating infrastructure to manage oil, gas, and water production. The initial phase of the system is expected to be operational in the fourth quarter of this year with the full system expected to be operational in the first quarter of 2015. Total capital expenditures are estimated at approximately $100 million. We believe the drop down of the Gonzales System will further strengthen our footprint in the Eagle Ford and we anticipate adding it to our portfolio in late 2014 or early 2015.

In addition to acquisitions, we continue to advance organic growth opportunities including finalizing engineering design for a new pipeline to be constructed connecting the High Point System to a large industrial customer. High Point is nearing execution of a firm demand contract to support the construction of the line estimated to cost approximately $15 million and increase throughput by up to 50,000 dekatherms a day. The new line is expected to be complete and in service by the first quarter of 2015.

We have also commenced engineering studies to consolidate certain legacy assets that will result in substantial operating cost savings and improved operating efficiency. These projects are currently projected to commence construction in early 2015. We continue to evaluate additional acquisitions, drop downs, organic growth, and asset development opportunities and I am confident that with the opportunity set available to us, we will continue to deliver significant growth in the near term.

We expect the Eagle Ford to remain a core focus area for us. We believe there are significant opportunities to develop midstream infrastructure in other high growth areas that we are currently pursuing. Our year-to-date results demonstrate our ability to build scale through acquisitions and asset development projects, and we remain focused on additional opportunities in order to deliver long term sustainable distribution growth.

Again, thank you for joining us today and with that operator, I’ll open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Plum with Wells Fargo.

Michael Plum – Wells Fargo

Two questions really, one, can you just talk about this change to the Class A units going to a PIK and kind of what was the thought process behind that and how should we be interpreting that decision?

Stephen W. Bergstrom

When we did the deal where ArcLight came on board, we just arbitrarily picked a date because we knew it had to be fairly far out in the future but didn’t know kind of what our growth was going to look like at that point. So we just think that with all the construction projects that we have going on that are capital spend and equity raised ahead of some of the projects that it made sense for us to move that out. ArcLight is not hung up on cash distributions necessarily, they’re in this for a longer term growth proposition so it gave us more flexibility as we continue to build out our projects. We’ve got pretty significant projects that are underway now that will not deliver cash flow for a while and we just felt like it would give us more flexibility to be able to do that at our option. I mean, we can elect to pay cash if we want to but we can also can PIK them if we want to.

Michael Plum – Wells Fargo

Would you anticipate that you’ll continue to PIK them and for how long?

Stephen W. Bergstrom

I anticipate that we will probably continue to PIK them into next year until our cash flow systems come on. The Gonzales County and the Republic deals, as they get closer and our cash flow starts picking up, my suspicion is that we’ll probably do that PIK into next year.

Michael Plum – Wells Fargo

Then my second question is on the Republic Midstream deal, I guess when you had spoken previously about it, it sounded like this was really kind of your deal to lose so to speak, and I’m just kind of curious what transpired that this ended up being a 50/50 JV with another ArcLight company?

Stephen W. Bergstrom

It was ours and how this transpired and how it ended up being 50/50 is that it ended up being a $400 million deal, quite a bit larger than what we had originally thought as they’ve continued to expand. They now control over 140,000 acres in the area so it’s almost doubled from the time we did the gas deal just from an acreage perspective. The reason why we did half of it instead of all of it was because I felt like we were already going to have $150 million to $170 million of capital invested on the gas deal that we did in January, to add another $400 million in one area with one large driller in the area. I just thought it was too much capital frankly, concentration in one area for the size of our company that we are today.

If you look two or three years down the road, maybe that’s probably not an issue but that would be $550 million in one area and I just thought it was too much. The beauty behind the structure with ArcLight was that we could go to them and basically have them finance the entire project then we can drop it down when it’s operational and then we just end up being a 50/50 partner with them in the transaction. So we still have flexibility to be able to do different things with that other 50% down the road but yet don’t commit the partnership to taking a large equity position for the relative size of this company all in one spot.

We have a lot more things that we want to do with our capital and with our growth and we control the deal anyway, as it is, with 50% and it will allow us to spread our capital into other areas.

Michael Plum – Wells Fargo

Then I guess my last question related to that is, is there any kind of ROFO or other sort of option that would enable you to – if there was an opportunity to buy the other 50% down the road, to participate?

Stephen W. Bergstrom

There is not. It is only - is the agreement we announced where we agreed to purchase the half that essentially is our half and there is no arrangement or agreement for a ROFO or anything like that on the other half.

Operator

(Operator Instructions) Your next question comes from [Andy Gupta] [ph] with HITE Hedge.

Unidentified Analyst

A couple of questions, one is can you comment on the ramp you’re expecting on both the Gonzales County project and Republic Midstream?

Stephen W. Bergstrom

When you say ramp, you’re talking about cash flow ramp, or volume ramp or…?

Unidentified Analyst

The volume ramp once the project is operational in early 2015?

Stephen W. Bergstrom

Both those projects are currently operating, flowing today. They’re being trucked, the oil off of them – and I’ll address Gonzales first, the volumes are currently being trucked both water and oil and so you don’t have your typical ramp like you see on a lot of gas projects that you’re probably familiar with because as soon as we get the facilities in place they just quit trucking it and put it into the pipeline. We’ve got a pretty good clear line of sight as to production volumes that are flowing today. We’ve got a pretty good clear line of sight as to drilling. Obviously, drilling does pick up as we get systems in place because, in this area in particular, logistically it’s very difficult to handle truck volumes for crude and water in the Eagle Ford area and so both our producer customers are kind of waiting on our pipeline system if you will to be able to handle a bit larger volumes of both.

Penn Virginia on the Republic piece of it, they’ve announced ramping up their drilling. They’ve done that with an eye towards knowing when our pipeline system is going to come because they’re production growth is very strong but they’ve got like 12 years’ worth of drilling inventory left based on what they currently see just in the lower Eagle Ford. So, their volumes don’t even ramp up – they’re significant today but their volumes ramp up and peak somewhere in 2017 ’18 timeframe and so there’s still a lot of runway yet on both of those projects.

Unidentified Analyst

On the pipe deal, the $200 million pipe deal, could you give us the status on that? Is that funding still needed for these other projects? Are you going to go ahead with that or that’s not going to go forward?

Stephen W. Bergstrom

We’re in discussions with the pipe investors as we speak. Obviously, we don’t need it for the DCP deal since it’s much reduced and we funded that off of our revolver yesterday. So we’re in discussions with them. We obviously do need the capital in the near future so we’re hopeful that the pipe investors will be interested in doing something with us along the lines of what we had just kind of structured a little bit differently for a different invest.

Unidentified Analyst

The last question is on some of the legacy systems [inaudible] Burns Point, there was some commentary around volumes having come down. Do you see them as having stabilized now?

Stephen W. Bergstrom

It was really the turnaround maintenance on the Burns Point plant. The legacy systems are, I guess I would categorize them as sort of stabilized. As we said from the very beginning when we took this over, they aren’t great, they don’t have a lot of growth. They do have maintenance, they do have down time. Any time you have offshore production you get all the maintenance stuff consolidated into a pretty short time frame because they don’t want to do it in the winter time because of weather and they don’t want to do it in hurricane season which starts call it around August 1st so you’ve really got April, May, and June for a lot of your offshore maintenance both [inaudible] plants and production platforms. So we see that as that’s just kind of normal stuff that will continue and it creates seasonality in our cash flows because of that.

But the legacy stuff, we’re in the process of reworking almost every legacy asset that we have. The only one really that is remaining untouched primarily is Alatenn. All the rest of the legacy assets will look completely different this time next year than what they do today.

Operator

We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed.

Stephen W. Bergstrom

Thank you operator and we appreciate everyone joining in on the call today and we look forward to the balance of the year and into next year as we do exciting things to continue to grow this company and we look forward to working with everybody and appreciate everyone’s support. Thank you.

Operator

This concludes American Midstream’s second quarter 2014 earnings conference call. You may now disconnect your line. Great day everyone.

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