Enable Midstream Partners' (ENBL) CEO Rod Sailor on Q2 2016 Results - Earnings Call Transcript

| About: Enable Midstream (ENBL)

Enable Midstream Partners LP (NYSE:ENBL)

Q2 2016 Earnings Conference Call

August 3, 2016 10:00 ET

Executives

Matt Beasley - Senior Director, Investor Relations

Rod Sailor - President and Chief Executive Officer

John Laws - Chief Financial Officer

Analysts

Nick Raza - Citi

Andrew Burd - JPMorgan

Lin Shen - HITE

Operator

Welcome to the Enable Midstream Partners Second Quarter 2016 Earnings Conference Call and Webcast. [Operator Instructions] It is now my pleasure to turn the floor over to Enable’s Senior Director of Investor Relations, Mr. Matt Beasley. Sir, you may begin.

Matt Beasley

Thanks, Erica. Good morning and welcome to Enable Midstream Partners’ second quarter 2016 earnings call. I am joined on today’s call by our President and CEO, Rod Sailor; and our Chief Financial Officer, John Laws as well as other members of management.

Statements made during this call that include Enable Midstream’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from our projections and the discussion of factors that could cause actual results to differ from our projections can be found in our SEC filings. Also, please see the appendix of the presentation for a reconciliation of non-GAAP financial measures.

With that, we will get started and I will turn the call over to Rod Sailor.

Rod Sailor

Thanks, Matt. Good morning and thank you for joining us on our second quarter call. Enable Midstream continued to perform very well in the second quarter of 2016 and rig activity on our footprint remained strong. We are one of the top gathering and processing companies in the country in terms of customer drilling activity with 29 rigs contractually dedicated to us, which represents 6% of all active rigs in the country. We continue to invest in infrastructure to support production growth and recently announced the completion of our Bradley II plant, a 200 million cubic feet per day processing plant that will serve producers across the Anadarko Basin, including the many producers active in the SCOOP and the STACK plays.

We have remained focused on reducing costs and in the second quarter of 2016 we reduced our O&M and G&A expenses by 8% compared to second quarter of 2015. Enable also announced the second quarter 2016 cash distribution of $0.318 per unit on all our outstanding common and subordinated units and a second quarter cash distribution of $0.625 per unit on our partnership Series A preferred units. The common and subordinated distribution remains unchanged from the previous quarter. Enable also achieved distribution coverage of greater than 1x in both the first and second quarters of 2016 with distribution coverage ratio for the first six months of 2016 at 1.18x.

Turning to the next slide, we want to highlight – we wanted to highlight our market leading position in the SCOOP and STACK areas of the Anadarko basin which continued to gain recognition as two of the top plays in the country by producers, analysts and industrialists. In the SCOOP and the STACK, we are the number one midstream provider with 22 rigs dedicated to us close to 2 million gross acreage dedications at approximately 240,000 horsepower of compression. In addition, we have our super-header processing system that interconnects nine processing plants with approximately 1.7 billion cubic feet per day of processing capacity. And as you can tell from this map, it is uniquely positioned to serve the SCOOP and STACK – SCOOP, STACK and other plays in the Anadarko basin. In summary, we have significant size and scale in the SCOOP and STACK and are well positioned to support production growth out of these prolific plays.

On Slide 6, you can see the rig activity across our entire gathering and processing footprint. As I previously mentioned, there are 29 rigs currently drilling wells that are contractually dedicated to Enable. The rigs contractually dedicated to us in the SCOOP, STACK and Haynesville represent a significant percentage of the total active rigs in these respective plays. With six rigs dedicated to us in the SCOOP represent 60% of the total rigs in the play, over 16 rigs in the STACK represent 38% of all active rigs in the play and the five in the Haynesville represent 36% of the active rigs in that area. In addition, 89% of the active rigs in North Dakota are in the four counties in which Enable operates its crude gathering systems where we continue to see year-over-year growth in gathered volumes.

Moving to Slide 7, our Transportation and Storage segment continues to provide significant firm fee based margin. Over 40% of Enable’s gross margin is derived from our Transportation and Storage segment with over 90% of segment revenues from firm fee based contracts. We continue to see growth from demand driven customers in our interstate transportation volumes supporting power burn increased by 46% in the second quarter of 2016 compared to second quarter 2015. In addition, interstate and intrastate pipelines are uniquely positioned to support the supply-demand dynamics in the Mid-Continent, Southeast and Gulf Coast region. In Oklahoma, our transportation systems are well positioned to provide new solutions for both producers and end users, while our Perryville Hub remains a central market hub at the intersection of growing Oklahoma and Marcellus production and growing Southeast and Gulf Coast demand markets.

And now I would like to turn the call over to John to discuss our quarter results.

John Laws

Thank you, Rod. Turning to operating specifics on Slide 8, gathered volumes decreased 3% for the second quarter of 2016 compared to second quarter of 2015. The decrease was primarily due to lower gathered volumes in the Ark-La-Tex and Arkoma basin. A couple of items to note as it relates to total gathered volumes are that when observed sequentially volumes are higher in the second quarter of 2016 than the first quarter of 2016. And as the reference decreased in lower gathered volumes in the Ark-La-Tex and Arkoma basins is expected to be offset largely by payments in the minimum volume commitment contracts.

Overall, processed volumes decreased 4% in the second quarter of 2016 when compared to the second quarter of 2015 which is primarily due to the lower processed volumes in the Ark-La-Tex. The decline was partially offset by higher overall processed volumes in the Anadarko basin and both our gathered and processed volumes in the Anadarko for the second quarter of 2016 were impacted by customer volume curtailments due to commodity prices. Of note is that with the improved commodity pricing particularly natural gas prices, these volumes began returning to production late in the second quarter and are no longer curtailed.

In concert with the growth in natural gas processed volumes in the Anadarko Basin, our gross NGL production increased 12% for the second quarter of 2016 compared to the second quarter of 2015. Taking a look at the Bakken, crude oil gathered volumes continued on a positive trend with an increase of over 16,500 barrels per day for the second quarter of 2016 when compared to the second quarter of 2015. The increase was driven by the continued connection of new wells to Enable’s Bear Den and Nesson crude gathering systems.

In our Transportation and Storage segment, total transportation volumes decreased slightly, while the interstate firm contracted capacity decreased by 4% in the second quarter of 2016 relative to the second quarter of 2015. The decrease in interstate firm contracted capacity was a result of contract expirations on EGT, which were partially offset by the new Bradley Lateral contract.

Finally, interstate transported volumes decreased by 6% for the second quarter of 2016 when compared to the second quarter of 2015. The decrease was primarily related to the completion of EGT’s Bradley Lateral in the fourth quarter of 2015 that is now transporting volumes under the firm fee-based contracts that were previously served on an interruptible basis by our intrastate transmission system. Again, I will note that on a sequential basis, the intrastate firm transported volumes are increasing in accordance with the increase gathered in processed volumes we are seeing in the SCOOP and the STACK.

Moving on to our second quarter financial results, the variance explanations for each of the results mentioned on this can be found on Slides 9 and 10 of this presentation and I will highlight a few of the key metrics now. Revenue was $529 million for the second quarter of 2016, which was a decrease of $61 million compared to the second quarter of 2015 and gross margin was $275 million for the second quarter of ‘16 which was a decrease of $38 million compared to the second quarter of 2015. The decrease in revenue and gross margin was primarily related to losses attributable to changes in fair value of our commodity derivatives, lower commodity prices and lower natural gas volumes sold.

Quickly, I would like to take a moment to discuss the losses attributable to the changes in fair value of the commodity derivatives as this item is indicated as key driver for a number of the line items listed on Slide 9. As we have disclosed in our 10-Q and our previous filings, Enable uses derivatives to manage the partnership’s commodity price risk. The accounting for these derivatives requires that the change associated with the fair value of these instruments be recognized in current earnings, which is run through the revenue line on our income statement.

To that end, Enable’s revenues, gross margin and ultimately net income includes $39 million related to losses associated with the change in fair value of these commodity derivatives. The effect of the change in the fair value of the partnership’s commodity derivatives is non-cash and is therefore excluded from adjusted EBITDA and distributable cash flow. As Rod mentioned earlier, our cost containment efforts have resulted in lower operations and maintenance and general and administrative expenses of $11 million compared to the second quarter of 2015, which were primarily through reduced materials in supply cost and lower costs related to integration and certain other contract services.

Turning to Slide 10, net income attributable to limited partners was $39 million for the second quarter of 2016, which was a decrease of $38 million compared to the second quarter of 2015. The decrease was primarily a result of the losses attributable to changes in fair value of the commodity prices – excuse me, the commodity derivatives, which I mentioned earlier. EBITDA was $196 million for the quarter, which was a decrease of $4 million compared to the second quarter of 2015. This year-over-year decrease was driven by the changes I referenced on the previous slide adjusted to exclude the impact of the non-cash losses associated with the fair value of the commodity derivatives and lower distributions from SESH in the second quarter of 2016 relative to the first quarter of 2015 which was primarily driven by the change in the timing of distributions in the periods.

Distributable cash flow for the quarter was $144 million, which implied a distribution coverage ratio for the partnership of 1.07x relative to the 2016 cash distribution of $0.318 per common and subordinated units. As Rod mentioned previously, the implied distribution coverage ratio for the year-to-date period ending June 30, 2016 is even more robust at 1.18x. Expansion capital expenditures were $74 million for the quarter which compares with $264 million in the same period of 2015.

In terms of our liquidity and leverage as of June 30, 2016, we had approximately $742 million drawn under our $1.75 billion revolving credit facility and a total leverage of 3.87x. Finally, the partnership has reaffirmed its 2016 outlook, the details of which can be found in appendix of this call’s presentation.

With that I will turn the call back over to Rod for his closing remarks. Rod?

Rod Sailor

Thanks John. In closing Enable’s assets are located in prominent natural gas and crude oil producer basins with market leading position in the SCOOP and STACK plays. The size, scale and interconnectivity of Enable’s assets allows us to support for long-term supply and demand dynamics at the Mid Continent, Gulf Coast and Southeast regions. Our assets are also underpinned with favorable long-term fee based contracts with large cap producer and utility customers. We believe that our strong asset mix in addition to our continued focus on financial discipline positions us well for the future and makes Enable an attractive investment.

We would now like to open the call up to your questions.

Question-and-Answer Session

Operator

Thank you. The floor is now opened for questions. [Operator Instructions] Our first question is coming from Nick Raza with Citi. Please go ahead.

Nick Raza

Thanks guys. Just a real quick question on maintenance CapEx, I guess year-to-date you guys have spend about $30 million and your guidance of between $105 million and $125 million, how should we think about this going forward, should we just assume that you guys are going to spend $75 million if you come in towards the lower end over the next two quarters evenly or I mean any sort of thoughts on that?

John Laws

Yes. I would say – Nick I would say for the balance of the year, we are still pointing to our overall guidance. I think it’s clear to say that we are reduced in the first half, if you would look at things on a ratable basis. Some of that’s due to seasonality and some of that is just again our overall efforts around cost reduction and containment. But on a go forward basis, I think you will – we will continue to prioritize the same types of expenditures and maintenance capital on a go forward basis.

Rod Sailor

But again, I would that would trend – I think we will be trending down towards the lower end of that range.

Nick Raza

Okay. And I guess the other question I had, certainly appreciate you guys giving us a little bit more detail by basin on the gathering and processing volumes, so gathered volumes that are represented on I guess Slide 17 are for the Arkoma and Ark-La-Tex, I mean are these basically minimum volumes, minimum MVCs that I am looking at, are there?

John Laws

No, these are actual flowing volumes, I think as we have mentioned in the past we are beneath the MVC levels and in the areas of the Ark-La-Tex and Arkoma where we have MVC contracts.

Nick Raza

Okay.

Rod Sailor

I would just add, I think the good news there is as we kind of talked about in our release and in our remarks is we continue to see activity in the Haynesville area. Five rigs in that area and we continue to see – starting to see some production growth in that area. And I think we have said since we came out as a public company that we anticipated activities start picking up in that area and we are witnessing it now in 2016.

Nick Raza

Got it. And then last question for me guys is I mean given that Haynesville may pickup, etcetera, I mean but producers are still very cautious about spending capital, have you guys had any conversations about reducing gathering rates or maybe renegotiating some contracts, just any color on that would be helpful?

Rod Sailor

No, I mean I think we are starting to see more optimism from our customers around activity in the outyears and again I think that again most of our contracts are new. We haven’t really seen a lot of pressure to renegotiate anything on the producers’ side. So, again, I really think that again we are starting to see some renewed optimism along our footprint and producers’ willingness to start investing more capital.

Nick Raza

Got it. Thanks, guys. That’s all I had.

Rod Sailor

Thanks Nick.

Operator

[Operator Instructions] We will go next to the line of Jeremy Tonet from JPMorgan. Please go ahead.

AndrewBurd

Hi, good morning. It’s actually Andy for Jeremy. Just one question, can you add some detail on the curtailed volumes that you saw during the second quarter and what type of EBITDA step up we should expect in the third quarter from those volumes coming back online?

John Laws

Yes, Andy. Good morning. We probably won’t get in exactly to the EBITDA step up, but there was about $70 million a day roughly that was curtailed for nearly the full quarter. In the second quarter, we really started to see those volumes come on in the tail end of Q2.

AndrewBurd

And there are lot of those volumes both gathered and processed?

John Laws

Yes.

AndrewBurd

Okay, great. Thank you.

Operator

[Operator Instructions] We will go next to Lin Shen from HITE. Please go ahead.

Lin Shen

Hey, good morning. Thanks for taking my question. I think your business generated good asset allocations and also the operation has been very well meeting the guidance. So, I am just wondering as an investor how should we think about your long-term DCM coverage ratio versus distribution growth? When should we expect like some more visibility for distribution growth?

Rod Sailor

Well, I would say this is that I think we have tried to continue to reiterate that we will extend our guidance past ‘16 when we get more comfort around where producers are going to put their investment dollars in ‘17. We have also been very clear that now in this price environment, our leverage ratio and our coverage metrics are very important to us. We have focused on that. And as you could tell from John’s remarks, again, we have got very strong coverage coming out of the first six months of the year at a very favorable leverage position. And so really we are going to continue to focus on that until we get clarity around ultimately where we think producers are going to invest capital. Again, but I think you opened your question was something I think is very key, we are in some very, very good areas. We are seeing a lot of rig activity along our current footprint. We are seeing a bit of resurgence in the Haynesville and we have continued to grow our volumes in the Bakken at a time when the Bakken really doesn’t have a lot of activity in it, but as we expect to see longer term prices come back, we think that it will continue – we will start to heat up. And so if you think about where our footprint is at, we already have significant amount of activity on it. We are well positioned for price recovery across our footprint and we have got significant pipe assets to facilitate producer takeaway. So, we are not prepared to say much more past ‘16 right now, but I think we are as favorably positioned as anybody in our space both in our location and with our balance sheet strength.

Lin Shen

Okay, great. Thank you very much.

Operator

[Operator Instructions] And it appears we have no further questions at this time. So, I would like to turn it back over to Mr. Sailor for any additional or closing remarks.

Rod Sailor

Well, thank you very much and thank everybody on the call. Again, in closing, I would like to thank our employees for their continued focus on safety and cost discipline in today’s environment. I would also again thank everybody for your interest in Enable. Have a very safe day. Thank you.

Operator

We would like to thank everybody for their participation on today’s conference call. Please feel free to disconnect your line at anytime.

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