Azure Midstream Partners' (AZUR) CEO Chip Berthelot on Q4 2015 Results - Earnings Call Transcript

| About: Azure Midstream (AZUR)

Azure Midstream Partners, LP (NYSE:AZUR)

Q4 2015 Results Earnings Conference Call

March 30, 2016 11:00 AM ET


Stephen Ciupak - Director, Financial Strategy

Chip Berthelot - President and CEO

Mandy Bush - CFO


Tony Kamin - Eastwood Partners

Selman Akyol - Stifel

Russell Green - Wunderlich Securities

Akil Marsh - Janney Montgomery Scott


Good morning. My name is Luke and I will be your conference operator today. At this time, I would like to welcome everyone to the Azure Midstream Partners Fourth Quarter 2015 Earnings 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] Thank you.

Stephen Ciupak, Director of Financial Strategy, you may begin your conference.

Stephen Ciupak

Thank you and good morning, everyone. We would like to welcome you to the Azure Midstream Partners’ fourth quarter 2015 earnings call. With me today are President and CEO, Chip Berthelot; and Chief Financial Officer, Mandy Bush.

We issued our fourth quarter 2015 earnings this morning and posted the earnings release on the Investor Relations portion of our website. If you would like to listen to the recording of today’s call, you can access the webcast replay on our website at

In a moment, Chip and Mandy will lead us through the recent business activities and financial results. Then, we will open up the call to questions.

Before we begin, I would like to remind everyone that our comments today will include forward-looking statements. Our anticipated results or expectations expressed in these forward-looking statements are subject to a variety of risks and uncertainties that could materially impact Azure’s actual results. For a complete listing of these risks, we encourage you to read our most recently Form 10-K.

Today’s call will also contain certain non-GAAP financial measures. You can refer to the earnings release that we issued this morning for important disclosures and reconciliations regarding such measures and the definitions.

And with that, I will turn the call over to our President and CEO Chip Berthelot.

Chip Berthelot

Thank you, Stephen, and good morning, everyone. We appreciate you joining the Azure Midstream Partners’ 2015 fourth quarter conference call. We had a good year, but we no doubt continue to face significant challenges in our Company and in our business sector, as a whole. We will methodically, as a team, embrace and overcome these challenges. To that end, we will talk about a significant development for the Partnership this morning that takes care of one of these. And we will continue our focus on things that we can control ensuring that we’re a healthy gas Company when this cycle turns around, and it will.

We are in unprecedented [ph] extended low commodity price portion of the cycle, one of the most extreme which we have ever seen with commodity prices and activity at unprecedented lows. We believe that 2016 will be another year of challenges, but the pendulum always swings back. In the past 30 years, we’ve worked through a half a dozen of these major complete cycles. I assure to you, there is more to the Azure story.

We believe that the bottom is close, it’s not upon us because we’re seeing drilling budgets significantly reduced and or eliminated across the board. This will inevitably be followed by volume declines and a corresponding supply demand balance, which ultimately leads to the strengthening of commodity prices. We remain focused on positioning our assets, both our human assets and our physical assets for when that turnaround happens.

Our core mission over the long term of being the best midstream company in the basins in which we operate has not changed. We continue protecting our assets, competing for business and seizing every opportunity, every day. We do this by relentlessly focusing on cost efficiencies and working smarter the team by aggressively pursuing new business opportunities such as the two new significant gas supply deals, which we announced in January, we also expect to announce a few more in the very near future.

We continue to examine opportunities to strategically realign and recalibrate this Partnership by raising equity, selling non-core assets or putting idle assets to work in other areas or even possibly merging or selling the entire Partnership. All options are being actively evaluated by our team and our Board. When we have something concrete to discuss, we will absolutely share the details with you. In the press release this morning, we announced one such realignment that we have been working on that will enhance our ability to execute the strategic alternative just mentioned. A settlement agreement has been reached with our previously affiliated counterparties, AES and NuDevco. This agreement eliminates the AES NVCs for both the gathering and processing, and the logistics businesses. Those were MVCs, minimum volume commitments which we expected to continue through July of 2016 and February of 2020, respectively.

This contract termination is coupled with the acceleration of an AES $15 million letter of credit backstop for the logistics contracts. This $15 million letter of credit will be pulled down and immediately be utilized to reduce our debt and the forfeiture by NuDevco of all of their common and subordinated units along with their 10% incentive distribution rights.

This transaction upon closing will provide the Partnership with the following benefits. It reduces our outstanding unit count by about 50%. It lowers our outstanding debt by the $15 million I’ve just mentioned or around 7% and it simplifies our capital structure and unitholder approval process to facilitate the potential strategic initiatives that I just mentioned. The cost of eliminating the future MVCs was no doubt concerning, but the majority of those were related to the logistics business, which first of all is not our core business; secondly, it’s a business that continues to struggle because crude, marketing, and truck to rail margins experienced significant commercial pressure in this crude price environment. And in our view, over the long-term, this contract had counterparty credit risk that frankly we felt we just needed to put behind us. I’ll add that we don’t see any other material counterparty risk with our remaining customers in the Partnership at this time. Those are folks like Anadarko, BP, EOG and diverse set of others.

Now for the quarter, the Partnership did have its second best in terms of financial performance with adjusted EBITDA of $11 million. Our cash and liquidity position at yearend was $7.5 million and it’s currently closer to $15 million and our assets continue to cash flow and have plenty of capacity to add low or no cost volumes. [Ph] We do still face some challenges like I’ve mentioned. We have an unqualified opinion from our auditors KPMG for our 2015 financials related to our credit agreement and some deficiencies therein, which we have solved with our bank group and Mandy will explain further when she makes her comments. We appreciate our bank group’s continued support and certainly expect the same from them throughout the year.

While working through this with AES, our focus has been consistent, it’s been to appropriately work with and protect the interest of all of our stakeholders, the financial positions of both our bank group and our unit holders while continuing to provide a safe environment for our employees and the communities in which we operate, and while providing reliable and consistently efficient service to our customers. This focus was on display recently when our team won a significant safety award for last year about which we are all extremely proud. My congratulations go out to our employee team for that.

The outlook and guidance for 2016 is at the midpoint, $35 million of EBITDA, if you assume that AES letter of credit gets applied to EBITDA and closer to $20 million for the year, if it doesn’t. With our reduced unit count, that translates to pro forma guidance of $0.50 per unit of distributable cash flow annualized for 2016. Again, we continue to believe in the Partnership’s relatively new and efficient gathering and processing assets that we operate in east Texas. We believe we’re in a great location, close to growing LNG in Mexican exports for natural gas. Shiner [ph] just announced their first export shipment from Lake Charles in February by the way. We believe they’re in a great oil and gas field with good wellhead economics even at commodity prices that we experience currently and these assets which we own in East Texas continue to have significant low cost upside.

Mandy Bush, who joined our team when we did the Marlin transaction a year ago and has been our CFO since the end of 2015 or the beginning of this year, will lead you through the financial details. This is Mandy’s first call as the CFO of Azure and I believe you will find her accessible, responsive, extremely smart and pleasant to deal with.

Mandy, would you please lead us through the financial results.

Mandy Bush

Thank you, Chip, and thank all of you on the line for joining us on the call this morning. Yes, these are challenging times in which we find ourselves, but know that we’re committed to doing everything possible to maintain and enhance unitholder value until we see a turnaround.

Before going into the financial results and our 2016 outlook, it’s worth reminding you of the accounting treatment for Azure’s Legacy gathering system. For accounting purposes Azure’s Legacy gathering system was treated as a reverse merger and as a result, our historical numbers are not necessarily indicative of the distributable cash flows that were generated by the Partnership in 2015. As a result, my review of Q4 financial results will draw more heavily on comparisons to the previous quarter as opposed to year-to-date.

Given the unprecedented environment in which we now find ourselves, we believe these comparisons provide the most transparency in the current trends. As Chip mentioned, this was the second best quarter for the Partnership. Adjusted EBITDA was $11 million and distributable cash flow was $8.3 million or $0.38 per limited partner units. This compares with EBITDA of $10.5 million and $0.37 for the third quarter. This increase is primarily due to certain minimum volume commitments associated with the ETG dropdown.

Had the Partnership paid a distribution for Q4 of $0.38, our coverage ratio would have been over onetime, an increase from 0.98 times in Q3. As a reminder, in calculating adjusted EBITDA, we excluded non-recurring non-cash and onetime items. We provided a reconciliation of these measures beginning with net income in our press release.

Our gathering and processing business gross margin for the fourth quarter was $10.5 million, down from $11.9 million in the third quarter, a result of lower volumes. Gathered gas volumes were 249 million cubic feet per day, down from 275 million cubic feet per day in Q3 and gas process volumes were 114 million cubic feet per day for the fourth quarter, down slightly from 121 million cubic feet per day last quarter.

On the logistics front, gross margin for the logistics segment for the fourth quarter was $4.2 million. The logistics segment provided over 22,000 barrels per day in transloading services. These numbers are very similar to the previous quarter. However, it is important to note that as a result of the recent settlement with AES, there will be little to no EBITDA generated from these assets for the foreseeable future.

The Partnership’s fourth quarter recurring operating expenses were $4.9 million, similar to the third quarter. Recurring general and administrative expenses were $2.4 million; depreciation and amortization expenses $6 million; and interest expense was $2.7 million.

Regarding the suspension of a distribution earlier this year, this is not something we did without much thought and deliberation. However, like many of those in our sector, have come to a similar conclusion, suspending a distribution was necessary to improve liquidity and maintain our strategic options. And as Chip outlined, we are aggressively pursuing all options available in this market.

Now, turning to 2016, as Chip said, we’ve had some challenges in this environment. And after taking into account the terminations of AES contracts, we project to generate between $32 million and $37 million of EBITDA when including the proceeds from the AES settlement. We will also have a minimum of $9 million of cash on hand through June 30th, and project sufficient distributable cash flow to meet all of our current obligations for 2016.

Finally, we successfully completed the Third Amendment to our current facility, which provided for temporary covenant relief, waives going concern explanatory paragraph being an event of default and reflects support of the bank groups for the AES settlement. In our view, this amendment reflects a support of our bank group to provide covenant relief while we work to find the more permanent solution to our leverage constraint.

I’ll now turn the call back to Chip for closing remarks.

Chip Berthelot

Great, Mandy. We continue to work and make progress, even if some of it is “tough love” because you need to exhibit tough love in a tough environment. And that’s what we’re doing. A couple of clarifying points on this settlement agreement is that you have to be clear, AES and NuDevco are not affiliated parties. And although the settlement has been agreed to in principal, but both the GP and AES and NuDevco and the bank group is still subject to final documentation and approvals, which we expect to complete in the next week or two.

So, we will now open the line to questions from our analysts. Thanks.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Tony Kamin from Eastwood Partners. Your line is open.

Tony Kamin

You mentioned in your statement and on the call that you are continuing to try to work through all these from the interest of the unitholders. Does the ‘we’ include the support of Energy Spectrum and Tenaska? And can you talk about how their ability to help you here might impact the leverage ratios, which maybe out to, if you’re only doing 20 million, maybe out sort of 10x and just particularly interested in those and these support of the partnership going forward?

Chip Berthelot

Thanks, Tony. We run to companies; we run the public company and we run the private company. And the private company is the GP. These companies are related. The private company and our sponsors continue to be supportive when it makes sense. There we expect any transactions between the companies to be a fair and to stand on its own just like we would not do something against or that did not benefit the common unitholders at Azure. For the benefit of the private company, we can’t do anything -- that significantly is detrimental to the investors in our private company. So, that being said, we’re focused; we’re supportive; we are trying to find creative ways that benefit both parties. We’re aimed and we’re committed but it’s got to be support that benefits both parties, Tony.


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

Selman Akyol

Thank you. Clearly just a tough environment; I guess I wanted just to follow up a little bit in terms of when you think about asset sales, what do you really have and can you just maybe put some parameters around maybe what they might bring.

Chip Berthelot

Thanks, Selman. Good to hear from you. This is Chip. We have got several pieces of our business that in a difficult environment might be available for sale because when we project out volumes that are flat, declining slightly in an environment like this, it just means that you have assets that aren’t full. And so you always have to and what we are doing is we are looking at all of those assets matched up against their sizing and their capacity. And if they’re underutilized, then we consider the potential to sell them. The other thing we are doing is as we -- as you know when volumes decline a little bit, it does, it frees up assets whether their processing assets, compression assets. And one of the charges that our business development commercial guys are working on is potentially taking some of those major assets and utilizing them to create a competitive advantage in a handful of Greenfield type opportunities. And so that’s how we are thinking about it. Don’t have anything to kind of frame it up in terms of size for you today just because those are all discussions there influx, Selman.

Selman Akyol

I got you. And then just to be clear on the units that are being -- that are coming back from AES and NuDevco, those are just going to be retired; they are just going to come sort of out of this share count or the unit count?

Mandy Bush

Yes, that’s correct.


[Operator Instructions] Your next question comes from the line of Russell Green from Wunderlich Securities. Your line is open.

Russell Green

I just have couple of questions, I don’t want to reconcile the bank debt you have. I know in the press release it said it was $231 million that could be payable theoretically? I am just trying to reconcile that was when you reported the last quarter, you had long term debt of 225, is that the number that’s now 231?

Mandy Bush

That’s correct.

Russell Green

And then from that you theoretically would pay down $15 million if it closes with NuDevco?

Mandy Bush

Yes, the $15 million of proceeds from the LC [ph] would go to pay down debt, taking it to closer to 215.

Russell Green

And in terms of the facilities you were using through the deal with NuDevco, is there any -- going to be a write down of any assets or you are comfortable with your assets values on the balance sheet right now?

Mandy Bush

Yes, we are evaluating the intangible asset value associated with the acquisition and the reverse merger of last year. And there is potential a write down associated with that in conjunction with the settlement of AES.

Russell Green

But nothing in terms of like actual hard assets are going to be written down value.

Mandy Bush

No, just intangibles.


Your next question comes from the line of Akil Marsh from Janney Montgomery Scott. Your line is open.

Akil Marsh

When thinking about the debt level, exiting 2016, can you provide any color where you guys would think now that would be?

Mandy Bush

We expect to be with the AES settlement, somewhere between 200 and 215 by the end of 2016, absent any material strategic alternative event occurring.

Akil Marsh

Okay. And then, in terms of how things are going up at the GP, do you expect to be in compliance with your credit facility up at the GP in 2016?

Chip Berthelot

Yes, the private company looks to be in pretty solid shape.

Akil Marsh

Okay. And then, just in terms of thinking about the EBITDA guidance you gave and looking a little bit more forward, is the way to think about it is that on a sustainable basis you guys think that EBITDA will be about $20 million post 2016; is that the correct way to think about it?

Chip Berthelot

Yes, that $20 million is a good -- in my view, is a good sticking solid base number that holds up in a challenging environment. And of course, as I alluded to in my remarks, any kind of uptick in activity, significantly enhances that number.


There are no further questions at this time. I’ll turn the call back over to the presenters.

Chip Berthelot

Hey, thanks for your participation this morning. And as always, if you guys have any follow-up questions that you need some individual attention on, please feel free to primarily contact either Mandy or Stephen; and then, of course, if I can help in any way, please give me a shout. So, thanks guys and have a great day.


This concludes today’s conference call. You may now disconnect.

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