Rice Midstream Partners' (RMP) CEO Daniel Rice on Q2 2016 Results - Earnings Call Transcript

| About: Rice Midstream (RMP)

Rice Midstream Partners (NYSE:RMP)

Q2 2016 Earnings Conference Call

August 05, 2016 11:00 AM ET

Executives

Julie Danvers - Director of Investor Relations

Daniel Rice - Chief Executive Officer

Gray Lisenby - Chief Financial Officer

Rob Wingo - Chief Operating Officer

Analysts

Tristan Richardson - SunTrust

Brandon Blossman - Tudor Pickering Holt & Company

Jerren Holder - Goldman Sachs

Operator

Good morning, and welcome to Rice Midstream Partners’ Second Quarter 2016 Earnings Conference Call. At this time all participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Julie Danvers, Director of Investor Relations, to cover a few housekeeping items. Please go ahead.

Julie Danvers

Good morning and thank you for joining Rice Midstream Partners second quarter earnings conference call.

With me today for the prepared remarks are Daniel Rice, CEO, and Gray Lisenby, Chief Financial Officer. With us in the room to help answer your questions at the end of today's call are Rob Wingo, Chief Operating Officer of Rice Midstream Partners, and Toby Rice, President and Chief Operating Officer of Rice Energy.

Before we begin, I'd 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 make reference to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can also be found in our earnings release.

Couple of administrative items to quickly cove: we have a new investor presentation available for download on our website, ricemidstream.com. We will also file our 10-Q this afternoon after market close, which will be accessible through our website or the SEC's EDGAR system.

Lastly, we will be participating in the Citi MLP and Midstream Infrastructure Conference in a couple of weeks, and look forward to seeing everyone in Las Vegas.

During today's call, we will commonly make references to RMP and Rice in order to more easily distinguish between Rice Midstream Partners and Rice Energy, respectively.

I'll now turn the call over to Daniel Rice IV, Chief Executive Officer of Rice Midstream Partners.

Daniel Rice

Thanks, Julie, and good morning, everyone, and thank you for listening to today's call. We're pleased to discuss Rice Midstream Partners' results for the second quarter 2016, which highlight strong execution, remarkable growth, and financial strength.

We're quickly establishing a track record of top-tier throughput and distribution growth, while maintaining a clean balance sheet and undersized DCF coverage.

We’ve demonstrated strong performance year-to-date, as highlighted in our results and our updated guidance reflects our expectations of continued strong performance for the remainder of the year.

Let's take a look at the quarter in more detail. Throughput for the second quarter averaged 934,000 decatherms per day, an increase of 43% over the prior-year quarter and a 12% increase above the first quarter 2016. Third-party volumes accounted for 27% of total throughput. The throughput increase was driven by our sponsor in third-party growth ahead of expectations.

In addition, compression volumes for the quarter averaged 564,000 decatherms per day, an increase of 872% over the prior-year quarter and a 271% increase above the first quarter 2016.

Third-party compression volumes comprised 42% of total volumes. The substantial increase in compression volumes was due to new compression capacity placed into service during the quarter ahead of schedule.

Going forward, as compression volumes continue to ramp, we expect to compress all of our third-party volumes and about 75% of Rice volumes by yearend 2016.

Our freshwater business delivered 335 million gallons, or an average of 3.7 million gallons of water per day, which was an increase of 106% year over year, and a 28% decrease relative to first quarter 2016.

The anticipated decline from first quarter 2016 was driven by fewer wells completed in the second quarter relative to the first quarter.

We recently announced a second quarter cash distribution of approximately $0.22 per unit, an increase of 17% over the prior-year quarter and 6% higher than first quarter 2016. This marks the fifth consecutive quarter of a distribution increase. And we continue to remain on track to hit our 2016 forecasted distribution of $0.92 per unit, which is 20% above the 2015 annual distribution.

Shifting to our sponsor, Rice Energy reported strong second quarter results of record production and midstream throughput growth from Rice Midstream. Rice's production increased 43% year over year to an average of 750 million cubic feet of gas per day, with the majority of production from RMP-dedicated areas.

Rice Midstream Holdings' throughput averaged 658,000 decatherms during the quarter, 184% increase over the prior-year quarter, and a 45% increase relative to first quarter 2016.

On the operational front, Rise continues to achieve meaningful reductions in well costs and operational expenses. Second quarter well costs were approximately 20% lower than the first quarter.

And cost reductions were driven by operational efficiencies and service cost savings, further enhancing their strong well economics and returns. These cost improvements have continued to increase Rice's single well returns strip from 65% up to 95%. And Rice's average breakeven development cost is now down to $1.90 per MMBtu.

In addition, Rice's upstream cost savings and development efficiencies are being reinvested into additional development, which directly benefits RMP.

The increased Utica completion activity Rice announced this morning contributes to our higher 2016 water EBITDA. Rice's clean balance sheet of $1.4 billion of liquidity and consolidated leverage of 1.3 times at the end of the second quarter, sets the stage for continued economic development in 2016 and 2017.

Rice's balance sheet is well protected with 89% of remaining 2016 production hedged at $3.25 per MMBtu, and the majority of 2017 production is hedged at $3.12 per MMBtu.

RMP has a long runway of visible growth opportunities, driven by prolific organic and attractive drop-down opportunities.

Our sponsor's growing backlog of drop-down candidates at Rice Midstream Holdings includes two large-scale dry gas gathering systems providing midstream services in the dry gas core of the Utica shale Ohio.

This extensive backlog of attractive development opportunities, underpinned by ample liquidity and low leverage, helps provide certainty to future growth at the partnership throughout commodity cycles.

So with that, I'd like to turn the call over to Gray to discuss RMP's second quarter 2016 financial results and updated 2016 outlook.

Gray Lisenby

Thank you, Danny. For the second quarter, we reported adjusted EBITDA of $38 million and distributable cash flow of $34 million, with substantial coverage of 1.86 times.

This strong performance was a result of solid throughput growth during the quarter, repeatable operating expense efficiency gains, as well as accelerated timing of new compression. In addition, we delivered higher water volumes than expected due to accelerated completions.

Though we do expect our water EBITDA profile to be lower in third quarter and then pick back up in the fourth as a result of Rice's additional completion activity in the fourth quarter.

During the quarter, we invested $25 million of expansion capital, including $23 million in gathering compression infrastructure and $2 million to develop our water services asset.

Glancing at our balance sheet and liquidity, in May we entered into an ATM program and raised $16 million during the second quarter. In June we completed a successful equity offering raising $164 million of net proceeds.

We exited the quarter with $450 million of availability on our revolving facility and $15 million of cash, resulting in $465 million of total liquidity and an unlevered balance sheet to execute our remaining capital plan.

In regards to the anticipated Ohio gathering drop from Rice, we will be opportunistic in the coming months and the rest of the year, as we pre-funded the acquisition with proceeds from our ATM program and recent equity offering.

We expect to fund the remaining portion of with our undrawn credit facility without the need to return to the equity market.

Shifting to our 2016 outlook, we updated our full-year guidance yesterday, which reflects our execution year-to-date and expected performance for the remainder of the year. We’re increasing our expected throughput for the year to 900,000 decatherms per day.

In addition, we’re now forecasting adjusted EBITDA of $130 million to $140 million, and distributable cash flow of $110 million to $120 million, or an increase of $20 million, resulting in substantial coverage ratio between 1.5 to 1.6 times.

Finally, we are lowering our capital budget to $140 million for 2016, due to increased savings on compression.

In summary, our unique story is driven by our midstream footprint in the dry gas core of Appalachia, an attractive portfolio of organic and accretive drop-down opportunities, and active high-quality customers.

We continue to believe RMP is a unique mix of strong distribution growth, coupled with substantial coverage and an unlevered balance sheet, sets up the partnership for continued predictable undifferentiated growth.

We would now like to open up the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Tristan Richardson of SunTrust. Please go ahead.

Tristan Richardson

Good morning, guys.

Daniel Rice

Good morning.

Tristan Richardson

Just curious, Greg, could you talk a little bit about the dynamic where you've got D&C spend at Rice unchanged for the year, but you've got wells turned to sales up in Pennsylvania? Could you talk about just sort of what's driving that? Is that all efficiencies or is there something else going on?

Gray Lisenby

Nope, just efficiencies. Drilling and completion activity is going quicker and cheaper than expected, which brings the whole schedule forward.

Tristan Richardson

Okay. And then, do you have, can you give us an update on the current quarter in terms of wells turned either in July?

Gray Lisenby

Yes, we, are you talking about at the Rice level?

Tristan Richardson

Yes.

Gray Lisenby

Yes, we don't give that sort of detailed information. But I will say at the Rice level, we guided on the call that production will be roughly flat in the third quarter and growing into the fourth quarter.

On the completion side, for water services, again, pretty steady completions throughout the year with the new news that RMP, being that Rice is accelerating 11 Ohio completions that weren't in our previous figures, which is what's driving up RMP EBITDA guidance.

Tristan Richardson

Great. And then in terms of RMH EBITDA outlook unchanged but a higher throughput volume, does the guidance include activity from your new third-party customer that you announced earlier this year?

Gray Lisenby

It does. That'll be pretty minimal in 2016, and growing into 2017 and 2018.

Tristan Richardson

Great, thank you. I'll turn it over.

Gray Lisenby

Thanks Tristan.

Operator

Our next question comes from Brandon Blossman of Tudor Pickering Holt & Company. Please go ahead.

Brandon Blossman

Good morning everyone.

Gray Lisenby

Good morning.

Brandon Blossman

Quick detail question. The compression savings that drove the drop in CapEx expectations in ‘16, was that equipment savings, installation costs, or something else?

Rob Wingo

Yes. This is Rob. It was mainly savings on installation costs. We were just able to install them for less money than we originally expected.

Brandon Blossman

That's pretty straightforward. And then a bigger picture question, obviously the business has been running very well, a lot of flexibility in terms of balance sheet and coverage here, not so much ‘16, but as we look into ‘17 and beyond, just a broad capital allocation question. Philosophically, how are you guys approaching that process in the out years?

Gray Lisenby

In terms of allocating in what nature?

Brandon Blossman

Yes. I mean is it a backwards or trying to back into kind of continue distribution growth expectations, but also any thoughts that you have around inorganic M&A or some incremental things that perhaps we're not thinking about.

Gray Lisenby

No, got it. That's helpful. I think there are three legs, as you described organic, acquisitions, and drop down's another.

On the first, on organic, it's really the same plan that we've had, continue to build out our infrastructure. I think you'll see next year us continue to build out our West Greene gathering infrastructure. That will be where most of our capital is allocated. And then the remainder of our capital will be earmarked for drops in the back half of ‘17 and the back half of ‘18.

So we've got a great runway and it's a pretty clear plan of continuing to build out organic gathering, with most of that capital spent, frankly, in doing an additional four to five drops, with three from Ohio and one to two from Strike Force. So we've got a great runway to keep growing distributions by 20% with strong coverage, and expect to do that for a number of years going forward.

Brandon Blossman

Awesome. All right. Thank you very much.

Operator

[Operator Instructions]. Our next question is a follow-up from Tristan Richardson of SunTrust. Please go ahead.

Tristan Richardson

Sure. Why not? Gray, I think your comments about spend in ‘17 on the Western Greene is unchanged. But is that in anticipation of the sponsor's activity there? Or will you do that ahead of activity or will it really be concurrent with any D&C activity there?

Brandon Blossman

Yes. No. This is Rob. Yes, it will be concurrent with the upstream Rice activity. I mean, we're always spending money on Midstream slightly ahead of when we think the wells will come online. And it's no different in West Greene.

Tristan Richardson

And, Rob, is that the area where it's the first 20 a day goes to a third-party gatherer?

Rob Wingo

Yes, it's the first 40 a day goes to Williams. And because we were able to get that acreage released from Williams, we're now able to gather it ourselves over 40 million a day.

Tristan Richardson

And is that currently where volume's at in that area?

Rob Wingo

No. We've got a little bit less than that today. But it won't take very many new pads to meet that 40 million a day. And we'll quickly surpass that once we start developing it.

Tristan Richardson

Great. Thanks, Rob.

Operator

Our next question comes from Jerren Holder of Goldman Sachs. Please go ahead.

Jerren Holder

Hi, good morning. How should we think about the outlook for compression volumes, say the rest of the year and into 2017, given the big step-up in 2Q?

Gray Lisenby

This is Gray. It'll continue to track Rice's and third-party volume. It'll be pretty close for one-for-one on the throughput to compression side for third party and about 75% of Rice's volume.

Jerren Holder

Okay.

Gray Lisenby

It'll continue to grow along with both of those customers.

Jerren Holder

Thanks.

Operator

And this concludes our question-and-answer session. I'd now like to turn the conference back over to Daniel Rice for any closing remarks.

Daniel Rice

Thanks, everyone, for joining us this morning. We look forward to talking with you all next quarter.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.

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