PennTex Midstream Partners' (PTXP) CEO Tom Karam on Q2 2016 Results - Earnings Call Transcript

| About: PennTex Midstream (PTXP)

PennTex Midstream Partners (NASDAQ:PTXP)

Q2 2016 Earnings Conference Call

August 4, 2016 09:00 ET

Executives

Andrejka Bernatova - Vice President, Finance and Investor Relations

Tom Karam - Chairman and Chief Executive Officer

Steve Jones - Executive Vice President and Chief Financial Officer

Analysts

Tristan Richardson - SunTrust

Andrew Burd - JPMorgan

Lane French - Baird

Matt Niblack - HITE

Jeff Birnbaum - Wunderlich

Operator

Good day and welcome to the PennTex Midstream Partners Second Quarter 2016 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I will now turn the meeting over to Andrejka Bernatova, Vice President of Finance and Investor Relations. Please begin.

Andrejka Bernatova

Thank you, operator. Good morning, ladies and gentlemen and thank you for joining us for PennTex Midstream’s second quarter 2016 call. During today’s call, we will discuss our financial and operational highlights and then we will open the call up for questions. Supplemental materials are available on our website at penntex.com and a replay will be made available shortly after the call.

Before we begin, I would like to remind you that our remarks, including the answers to your questions, contain forward-looking statements and we refer you to our earnings release for a detailed discussion of these forward-looking statements and the associated risks. In addition, during this call, we will refer to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can be found in our earnings release on our website.

With me on the call today is Tom Karam, Chairman and CEO and Steve Jones, Executive Vice President and CFO.

I will now turn the call over to Tom.

Tom Karam

Thanks, AB and good morning, everyone. It’s been just over one year since our IPO and a rocky at that. Fortunately, our business and company have remained strong and continued to strengthen over the year. We appreciate your continued interest in PennTex and look forward to an exciting future. On July 21, we announced the distribution for the second quarter of $0.2846 per unit, which represents a 3.5% increase in the distribution. As we look forward, we expect PennTex to remain positioned to consistently grow its distributions and provide top-tier returns to you, our investors.

I would also like to discuss a few recent developments for PennTex. As many of you know, our primary customer, Memorial Resource Development, or MRD, announced a merger agreement with Range Resources. This transaction requires stockholder approvals and the votes are scheduled for September 15. We continue to be encouraged by the strong upstream economics in the Terryville and believe that it stacks up extremely well relative to other basins in North America even in this low commodity price environment. Obviously, Range feels the same as we do.

We are pleased to confirm that as of July 1, our minimum volume commitments under the partnership’s gathering and processing agreements with MRD have increased to 460,000 MMBtu per day. Our minimum volume commitments now cover 100% of our nameplate available capacity. We have also started working with MRD to design and build the infrastructure to support their initial well development on their expansion acreage. They are drilling three wells on that acreage, which they expect to complete before the end the year.

Lastly, we have an update on our private company, Permian platform. On July 27, the conflicts committee of our general partner made a recommendation to the Board of Directors that the partnership declined to exercise its right of first offer with respect to the sale of PennTex Permian. Today, EagleClaw Midstream Ventures announced it had reached an agreement to purchase PennTex Permian from our private company. The partnership concluded that the value proposition of acquiring PennTex Permian in a materially dilutive transaction for the opportunity to invest additional capital, hoping to achieve long-term growth was simply not prudent.

We are pleased with our second quarter results. Our volumes averaged approximately 240 million cubic feet for the quarter per day. Steve Jones will go through our numbers in more detail, but overall our operating results were above our expectations. And based on our first half 2016 results and our expectations for the remainder of 2016 as Steve will detail, we are increasing our full year guidance for 2016. Also as promised, we decreased our leverage, increased our coverage, and at the same time, increased our distribution. We are quite happy with those results.

I will now pass the call to Steve to provide a detailed review of our financial performance for the quarter.

Steve Jones

Thanks, Tom. Good morning, everyone. Our operating revenues were $19.2 million and total operating expenses were $13.4 million, resulting in operating income of $5.8 million for the quarter. We reported net income of $4.2 million or $0.13 per unit. Net operating cash flow was $14.9 million for the quarter and adjusted EBITDA was $15.5 million, up from $15.1 million in the first quarter. These results included $3.9 million of deferred revenues related to our minimum volume commitments with our primary customer, MRD. As a result, for the quarter, we generated $14 million in distributable cash flow, up from $13.3 million in the first quarter.

As Tom mentioned, we increased our distribution per unit by 3.5% in the quarter and our coverage remains strong in more than 1.2x. We declared the quarterly distribution of $0.2846 per unit or approximately $1.14 per unit on an annualized basis. This distribution will be paid on August 12, 2016 to unitholders of record as of August 1, 2016. Recall, this is before the effect of the increase in our MVCs under our contract with MRD, which went into effect on July 1. Based on the strong results for the first half of the year and our forecast for the remainder of this year, we are pleased to increase our full year 2016 guidance for distributable cash flow by approximately $4 million, that’s about 7%, up to a range of $60 million to $63 million for the year.

As of June 30, partnership had borrowings under our revolving credit facility of $158 million, including letters of credit, which represents a decrease in our total debt outstanding from the end of the first quarter. Our availability under the facility was $117 million at the end of the quarter. And together with cash on hand, our resulting liquidity was $118.7 million. You can see the calculation for our facility availability and liquidity for the quarter on Slide 4 of the investor presentation published to our website this morning. We are very pleased with our financial performance for the quarter and year-to-date and we believe our strong financial profile positions us well for growth going forward.

Now, I will turn the call back to Tom for some final thoughts.

Tom Karam

Thanks, Steve. So, given our very strong performance, we continue to evaluate opportunities to expand the PennTex portfolio. And while we hope to grow our asset base in the near to intermediate term, we will remain prudent in our selection of any businesses being combined into the MLP. We will continue to work with MRD and eventually, hopefully Range to execute on organic growth projects in North Louisiana. And we will make use of our conservative balance sheet and our GP equity as it makes sense to create the most value for our unitholders.

We have said before that our goal is to provide investors with high-teens total returns and that is still our focus. With our long-term MVC contracts ramping to our full processing capacity, we now have both the ability and the desire to continue increasing our distributions and we expect to do that all the while continuing to de-lever an increased coverage through the balance of 2016.

Thank you for your interest in PennTex and we would now like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is from Tristan Richardson of SunTrust. Your line is open.

Tristan Richardson

Good morning guys. Just curious, in terms the GP, given the GP owners’ incentive to grow the MLP and is there – has there been discussions of the GP stepping in and increasing its efforts to support the MLP given this – the asset sale or could you talk about just some of the ways that the GP can either support the MLP or show deal flow, etcetera, to help PennTex?

Tom Karam

Yes. Tristan, this is Tom. Thanks – Tristan, thanks for the question. Look, let me start from the beginning. As it relates to the sale of the Permian platform, it was a pretty straightforward analysis. Given the current margins that we are seeing in the commodity price environment, the partnership just couldn’t make a competitive offer without it being very dilutive and in essence, jamming the MLP. And in addition to that, we were faced with the fact that plant one was commercially full and we would have to spend a lot of additional capital at what is essentially a lower margin environment to see any potential for growth. So it was a very simple and straightforward analysis for the committee and for us that this is absolutely the right move. One of the ancillary benefits of that straightforward analysis is that we now have a very clean GP, which simply owns the IDRs and the 15-plus million units in the GP structure. So we actually believe that we are going to be in a far more competitive position as we look at deal opportunities using a combination of not only our MLP balance sheet, but our GP equity as currency to be competitive in this marketplace. And in fact, since my lawyer is not in the room here, I w ill tell you, we are in active conversations right now using this approach. Now while we can’t handicap what the outcome will be, we are very encouraged by the interaction with the different counterparties about using that template of the MLP balance sheet and our GP equity as a combination consideration package. So I hope that answers the question.

Tristan Richardson

Thanks Tom, that’s helpful. And then just curious in terms of areas you see as attractive, I mean is the Permian still attractive to you, is it more just given the specific economics of the asset at the GP that was the hurdle there?

Tom Karam

Well, I think the rationale for our action on our Permian platform was specific to that platform. But if you are at all involved in our industry, you know that there are significant levels of activity and interest and opportunity in the broader Permian itself and certainly we are aware of those and open to evaluating those. The counter to that is based on the offer that we received for our Permian platform, it’s a very hot area right now. So maybe the – in some respects, the buy side pricing maybe a little bit frothy, but we are still focused on evaluating that because it is a stacked play that is just very attractive in our sector.

Tristan Richardson

Thanks Tom. I will turn it over.

Operator

Thank you. The next question is from Andrew Burd of JPMorgan. Your line is open.

Andrew Burd

Hi, good morning. Just a follow-up on using the GP equity to help PTXP unit holders, can you just expand a little bit more on that and does that kind of imply that the types of opportunities the GP will be looking at really are kind of exclusively appropriate for PTXP to avoid the same issues as we sell the Permian?

Tom Karam

Well, I am thinking about how best to answer that. I think the ability that we would – that we now have to use our GP as part of the consideration is the way for us to do deals with respect to the MLP that will be accretive and appropriate for the MLP and have that arrow in our quiver to bridge whatever valuation gap there may be to get us to a transaction by offering a piece of the GP, which has the upside potential not otherwise available in many transactions.

Andrew Burd

Okay, great. That makes sense. And then second question on distribution growth that seems to be tracking ahead of guidance, I guess if you just continue this rate of change through year end, but I don’t think you had modified distribution guidance like you did DCF guidance, so could there potentially be upside to distributions this year and what would some of the drivers be for that decision?

Tom Karam

Yes. I am pretty hesitant to front-run our Board on that. But I think that we can just reiterate our posture and that is our singular focus is to increase our DCF in order to be in a position to increase our distribution consistently over time.

Andrew Burd

Okay. And then in terms of distribution growth for 2017, is that something at this point that kind of entirely hinges on what Range it’s going to do or is there kind of a bank of excess distribution coverage that could be worked down if Range, for whatever reason, decided to move slowly?

Tom Karam

Yes. The statements that we are making relative to our position that we think that we can consistently grow our distribution over an extended period of time is not dependent on any change in activity level by Range. I would add that clearly, if they ramp up of their level of activity that would then raise the ceiling on whatever distribution increases we would be considering. But in terms of the floor and how we look at the range of increases, that’s pretty well baked in now.

Steve Jones

I might add to that Andy, that we achieved 1.2x coverage in second quarter, that’s higher than we had expected. And with the increase in the MVCs going forward, we can continue to increase our distribution as we had guided before while still exiting this year with more than 1.4x coverage. So we are growing into that distribution growth rate here and have full support just with the base business.

Andrew Burd

Great. Thanks for taking my questions.

Operator

Thank you. Our next question is from Lane French of Baird. Your line is open.

Lane French

Good morning. Can you elaborate on what is driving the DCF guidance increase for 2016, obviously you guys factored in the July MVC step-up into your original guidance, is it just I guess, more confidence in the producer volumes in the second half of the year that is driving this increase here?

Steve Jones

Yes. There are a couple of things, Lane. One, our operating cost and G&A are tracking a little bit lower than we had previously guided. And we are looking at slightly higher NGL recoveries than we had previously guided. So as we look forward, I think we have better clarity around where our results would be. Really all we have done is update it for our out-performance in the first half of the year and gotten a little bit more comfort around what the second half the year will look like. That’s before any expectations of any increase in activity from Range, which we really think will be more of a 2017 item.

Lane French

Got it. And then can you provide an update on the other Permian plants you were talking about building, I believe in the last call you talked about permitting and construction and it was previously expected to come online around mid-2017, any update there would be great?

Tom Karam

Well, all of the permitting activity had already taken place. And with the announcement of the divestiture to EagleClaw today, we are simply passing off all that activity to them.

Lane French

Okay, so just Terryville pure play right now, then?

Tom Karam

Correct.

Lane French

That’s all I have. Thanks.

Operator

[Operator Instructions] Next question is from Matt Niblack of HITE. Your line is open.

Matt Niblack

Thank you. If you could just walk through how you are able to be – given the structure of your contracts and that you are running below MVC, I am probably being a little dense here, but would love your help there?

Tom Karam

I don’t understand the question, Matt. I mean the way the...

Matt Niblack

So you raised guidance on EBITDA and DCF for the year, which I guess is a great thing, don’t take it there wrong way, it’s a great thing and good to hear, I guess the way I have always thought about this is, you have got this ramp-up period during which your MVCs start to guarantee a certain level of cash flow. And until you exceed that cash flow, you are sort of not able to exceed expectations. Now, the good thing is you are not able to underperform expectations either. It’s very locked in. But this is actually a pretty significant raise. And maybe I just haven’t had enough time to read through and connect all the dots yet, but if you could help me understand how given that you are below MVC, how are you able to generate more EBITDA and cash flow than expected?

Steve Jones

Matt, it’s Steve Jones here. There are a couple of components to that. One, our MVCs are on our gathering revenues and on our processing fees and so there are some variable revenue items that are subject to tailgate dedication. So, any of the residue takeaway or NGL takeaway are still somewhat volume dependent. We have not increased the expectations of our throughputs on average, but we also have gotten the benefit of running below expectations on our OpEx and G&A. So, there is some just cost discipline that has led to this. And as we look through the end the year, we do have the continued third-party volumes coming in from Linn and from WildHorse 2 and that’s all led to us just being able to firm up that guidance at the higher level.

Matt Niblack

Got it, got it. And then in terms of the lower OpEx and G&A, is that something that is sustainable as you increase activity kind of within the existing footprint or is this one-time or related to low commodity prices or how do we think about that?

Steve Jones

That’s a good question. No, we think it’s sustainable and that’s part of what we have seen going forward. And as we look through the second half of this year, we expect to continue to have those savings. It’s really just a matter of having our full operations up and going for a number of quarters now that we have gotten a better handle on what our ongoing G&A and OpEx is.

Matt Niblack

Great. Well, appreciate the strong execution here. Thanks.

Steve Jones

Thanks, Matt.

Operator

Thank you. [Operator Instructions] The next question is from Jeff Birnbaum of Wunderlich. Your line is open.

Jeff Birnbaum

Yes, good morning everyone. Just a quick question from me. Can you kind of give a little more color on – you mentioned the evaluation of additional infrastructure and sort of MRD steps out a bit. Can you kind of talk a bit more about what you are seeing in the opportunity set there, maybe some sort of time horizon? Thanks.

Tom Karam

Yes, Jeff, thank you. So, I think in our prepared remarks we told you that we are currently working with MRD to put some gathering infrastructure in what they define as their expanded acreage, which is in Jackson Parish. They expect to drill – or they expect to complete three wells by the end the year and we are working right now to implement that infrastructure. It’s not a significant CapEx spend, but the way we look at it is, it’s the beginning of what will be a much larger, more comprehensive gathering system as they ramp up their own activity there. So, that’s a point of real long-term potential for us as we continue to work with them to be a step ahead and to build out that gathering infrastructure. Clearly, that’s dependent on what their drilling program is relative to the allocation between the core Terryville and their expanded acreage, but that’s certainly an opportunity. And I think that as each quarter goes by we will be able to give you more detail than expanded information on that. We see that as a real opportunity for organic growth in North Louisiana.

Jeff Birnbaum

Okay. So fair to say that for now it’s not necessarily significant, but as the acreage changes hands, it could become something potentially more significant?

Tom Karam

Yes, I think that we are on the ground level of beginning to work with our primary customer to develop a Greenfield gathering system to support their development of that acreage.

Steve Jones

And Jeff, when you look at Range’s public statement so far and they haven’t said that much about their future plans, but they referred to this acreage as the Vernon Field and they have been very positive about it. So, with their upbeat remarks, we are very hopeful that they will continue on in that development.

Jeff Birnbaum

Great. Thanks, guys.

Operator

Thank you. There are no further questions in the queue at this time. I would like to turn the call over to management for any closing remarks.

Tom Karam

And Jeff, just one follow-up to that before I close, all of that Vernon Field acreage that Steve was referring to is all within the AMI that we have with MRD and ultimately, we will have with Range. So in closing, we just want to thank you. We hope that this call is informative. And we will continue to focus on our execution and our growth and we are very excited about the near-term and long-term future here. And with that, I will say thank you and we will talk to you in a few months.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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