American Midstream Partners' (AMID) CEO Lynn Bourdon on Q1 2018 Results - Earnings Call Transcript

American Midstream Partners LP (AMID) Q1 2018 Earnings Conference Call May 15, 2018 10:00 AM ET

Executives

Mark Schuck - Director of Investor Relations

Lynn Bourdon - President and Chief Executive Officer

Eric Kalamaras - Senior Vice President and Chief Financial Officer

Analysts

James Spicer - Wells Fargo

Sanjay Aiyar - Coherence Capital

Operator

Good morning, and welcome to the American Midstream First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode, [Operator instructions]. After today's presentation there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mark Schuck, Director of Investor Relations. Please go ahead.

Mark Schuck

Thank you, Laura. And welcome to the first quarter 2018 earnings call for American Midstream Partners. This morning, we issued our press release, outlining our first quarter results, which can be found in the Investor Relations section of the partnership's website at americanmidstream.com. In addition, a replay of this call will be archived on the partnership's website for a limited time.

Please note the cautionary language regarding forward-looking statements contained in this 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, May 15, 2018. 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 list of risks and uncertainties that may affect future performance, please refer to partnership's periodic filings with the SEC.

We will discuss non-GAAP financial measures on today's call. Please refer to the table in our earnings release and presentation, both posted in the Investor Relations section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.

Leading out the call today will be Lynn Bourdon, President and Chief Executive Officer; followed by Eric T. Kalamaras, Senior Vice President and Chief Financial Officer. Lynn and Eric will discuss operational and financial results for the first quarter of 2018. And afterwards, we will open the call for questions.

With that, I'd now like to turn the call over to our Chief Executive officer, Lynn Bourdon.

Lynn Bourdon

Thank you, Mark, and we appreciate everyone joining us on the call this morning. Today, we will discuss a record setting first quarter 2018 results and provide an update on the ongoing transformation of AMID.

Our strong first quarter resulted in adjusted EBITDA of $52.4 million and was driven by a combination of continued solid performance from our core operating businesses and positive contributions from our 2017 organic capital projects and acquisitions. We expect this momentum to carry forward, as we progress through the rest of 2018 and into 2019.

Overall, with the exception of Delta House and the Destin pipeline, our business has dramatically improved year-over-year. The efforts we have put in to reducing our operating cost, increasing our asset density and internal investments to improve efficiency is delivering the expected results.

The ongoing stabilization of crude oil, natural gas and NGL prices has resulted in significant increase in activity in our gas gathering, processing and crude oil related business units.

For example, during the first quarter, our natural gas gathering producers brought on 15 new wells in the Eagle Ford and two new wells the Permian, bringing the total new wells brought online during the past six months to 30. We anticipate further increases in activity with our anchor producers guiding towards more than 70 additional well completions on these two systems in 2018.

This increase producer activity and associated production is anticipated to drive volume growth across our system upwards by more than 15% to 20% through 2018, which will drive gross margin higher across our Gathering and Processing segment.

Concurrently, we are also seeing an increase in on-system NGL volumes, as well as an increase in off-system gathered volumes. We expect to see both steadily increase as additional drilling continues across multiple basins.

Our crude oil gathering liquid pipeline associated trucking business is enjoying the benefits of this increased activity as well. Volumes in this segment have jumped more than 20%. This is partly due to the start-up of the new Cayenne NGL pipeline as well as new drilling in and around our systems.

Further, our trucking fleet is now operating at close to 100%, up from just 50% in the first quarter of 2017. We've also completed our extension and expansion of our Silver Dollar Pipeline system and volume flow has met our expectations as drilling from the dedicated producers continues to increase. We also started up an idle pipeline injection station and volume has continued to grow at that station as well.

We continue to work on several new organic growth projects that will further expand our reach and capacity to take on new production in the back half of 2018, and into early 2019.

In the first quarter, our Southeast Natural Gas Transportation assets performed very well, establishing a new throughput record of over 835 million cubic feet a day. This segment experienced 75% growth in gross margin over 2017, as a result of the acquisition of the Trans-Union pipeline in the fourth quarter of 2017 and strong demand as a result of exceptionally cold weather across the Southeast United States.

We were encouraged by the continued strong industrial demand and higher fees across these assets, which continues to justify new organic growth projects. As a result, we anticipate deploying approximately $10 million in new organic capital in this segment during the second half of 2018 and into 2019.

Overall, our offshore segment continues to perform very well, especially the newly acquired Viosca Knoll and Panther pipelines that we acquired late in 2017. The Okeanos pipeline saw volumes up over 10% from the first quarter of 2017 and up 6% alone from last quarter due to additional volumes from dedicated wells tied into the system.

Similarly, we are seeing recovery and growth in the crude oil volumes being transported on the Main Pass Oil Gathering System. Volumes on that pipeline have increased by over 12,000 barrels a day from the fourth quarter and are expected to increase by an additional 10,000 barrels per day by year end.

The partnership remained steadfast in the tremendous potential that the Gulf of Mexico has on and around our assets, as the deepwater Gulf of Mexico continues to increase production.

In February of this year, the Gulf of Mexico produced 1.7 million barrels per day of crude oil and 2.6 Bcf a day of natural gas. To put this in perspective, the Gulf of Mexico is the second largest crude oil producing base in The United States behind only the Permian Basin. It is producing roughly 30% more oil than either the Bakken or the Eagle Ford basins and 3 times ore than the Anadarko basin, home of the SCOOP.

Recently, new discoveries, some of which include oil reserves in excess of 575 million barrels of oil equivalent and net pay zones of up to 1,400 feet further support, while the deepwater Gulf of Mexico remains one of the leading basins globally. And according to the EIA, by 2019, that production will average 1.8 million barrels per day and account for about 16% of all U.S. production.

Now as it relates to the Delta House's and Destin pipeline's performance, you may remember that in the fourth quarter of 2017, the partnership was notified by the operator of the Delta House floating production system or FPS, for short. The third-party owned upstream infrastructure would require some remedial maintenance work. This work continues to progress on schedule, and we are already starting to see volume start to ramp back up.

Current production is just under half of pre-maintained levels or about 55,000 to 60,000 barrels a day equivalent. However, by July, we anticipate the crude oil and natural gas volume should increase from current levels by 64% and 155%, respectively.

That will also reiterate the communication we made during the fourth quarter earnings call that we have a support agreement in place with our sponsor, ArcLight Capital Partners, regarding the monetary shortfalls related to this event.

As we get into the late third quarter and early fourth quarter of 2018, we anticipate that four new wells will be tied in and flowing, which will bring the facility up to full capacity utilization of approximately 135,000 barrels a day equivalent.

As you can tell, we are pleased with our first quarter operating results, as we continue to build a fully integrated midstream company. And we are excited about the opportunities that we are developing, which will drive continued organic growth. We remain focused on executing and operating our assets effectively and efficiently, all while creating meaningful value for our unitholders.

I would like to highlight the progress we have already made in generating meaningful value through capital investments and organic projects. In the first quarter of 2018, we deployed approximately $26 million in new growth capital across our assets.

These projects accomplish certain strategic objectives to grow our customer base, connect to new demand outlets, access premium markets and further building out our interconnected asset base.

We've identified more than $120 million of additional new capital projects, which we intend to deploy throughout the remainder of 2018 at accretive mid-single digit multiples.

Now I would like to provide an update on the Southcross transaction. We have crossed multiple milestones in the past 6 weeks as it relates to the merger. On March 27, we received an overwhelming support for the Southcross merger from nonaffiliated unitholders with over 95% of the votes cast voting for the proposed merger.

In addition, on April 10, we received the final state-level regulatory approval for the merger. And at this time, we expect to close this transaction during the second quarter.

As we have stated numerous times, the Southcross transaction is a strategic acquisition that allows AMID to obtain a meaningful footprint in the Eagle Ford basin, while also linking complementary assets across the entire midstream value chain. This interconnectivity ultimately drives meaningful organic growth opportunities, which we believe will drive long-term sustainable and predictable cash flows.

The combined assets allow us to participate in connecting to both indigenous NGL supply and cross basin NGL volume flow to our growing fractionation complex strategically located in Corpus Christi.

As crude and product exports continue to reach all times highs, these strategically located assets in South Texas, all for an ideal position to participate in the growing export markets offshore and to Mexico.

This is a unique opportunity, and we strongly believe the Southcross assets will transform AMID into a leading supplier to the many petrochemical, refinery, industrial city gate [ph] and power generation markets in the South Texas and Corpus markets.

During the past several months, we've been hard at work on both the integration aspects as well as developing new commercial business, both the efforts have been very successful. The team from both AMID and Southcross have done a fantastic job on getting these two companies ready for Day one so that we are off and running as one company.

And on the commercial front, we believe, we are on track for being able to demonstrate the kind of growth we are projected as part of the transaction, in addition to the new opportunities that the Southcross team has already been working on. We look forward to executing on these identified opportunities as soon as the ink dries on the documents.

As it relates to our capital redeployment strategy, we announced in the first quarter the execution of agreement to sell our refined products terminals in North Little Rock, Arkansas and Caddo Mills, Texas for $138.5 million.

The transaction has received a second request for additional information from the Federal Trade Commission, and we continue to review the additional request and coordinate an appropriate response.

In addition, we had also previously outlined, we would also pursue the sale of our marine terminal assets. We are in the final stages of this process and expect to complete and close this transaction in the third quarter as well.

Our goal is to simplify the American Midstream's business while building an effective and sustainable foundation from which to grow. We're also working to establish a growth strategy that hinges more on a capital growth versus acquisitions.

The more than $120 million in organic growth projects we have identified is an example of our ability to execute towards this goal and should further enhance our current asset performance and drive meaningful EBITDA and distributable cash flow growth.

In order to fund these growth projects, we will continue to rely on creating internal capital, particularly in light of the challenging equity capital markets. To this end, we will continue to divest the smaller non-contiguous assets and redeploy this capital into creating more asset density in our core operations areas.

As you all know, we have not tapped the equity markets for the past three years despite having completed or announced over $1.8 billion in accretive growth transactions. And depending on different investment opportunities, we may consider divesting other super high valued assets in order to invest in lower multiple priced assets that have higher growth potential, increase our asset density, simplify the business and enhance our balance sheet.

Importantly, we also expect to generate significant free cash flow. Following the closing of the Southcross acquisition and combined with a positive impact of recent growth initiatives, we remain on track to generate pro forma annualized EBITDA in excess of $300 million and approximately $140 million in distributable cash flow.

Now, I'll turn the call over to Eric to discuss our financial performance.

Eric Kalamaras

Thank you, Lynn. And good morning, everyone. I want to reiterate the strong quarter we had with record setting EBITDA and meaningful growth across our core segments.

For the first quarter of 2018, adjusted EBITDA was $52.4 million, a 12% increase over first quarter of 2017. While gross margin was $64 million, a 5% increase over last year.

For the quarter, distributable cash flow was $21.9 million, distribution coverage of one times, which includes 100% cash paying of our preferred equity. We announced our 27th consecutive distribution of $0.4125 [ph] per common unit or $1.65 annually to unitholders record as of May 7.

With this distribution, American Midstream will have returned approximately $280 million of capital back to unitholders, since our initial public offering in 2011.

In the Offshore segment, gross margin was $25.3 million for the first quarter of 2018, a decrease of 2% compared to the same period last year. However, quarterly cash distributions from our equity investments were $21.6 million, a 6% increase compared to last year.

Our cash distributions increased due to additional equity ownership in two of our strategic investments, Delta House where we increased ownership to 35.7% and in Destin, where we increased our ownership to 66.7%.

In addition, partnership acquired a 100% of both Main Pass Oil Gathering and Panther Operating both of which expanded our oil gathering in the Gulf. We also last year in an agreement with ArcLight substantially offset near-term financial impacts led to the maintenance work associated with Delta House. That during the first quarter, ArcLight contributed approximately $9.4 million offsetting the reduced Delta House distribution as a result of maintenance work.

Gas Gathering and Processing gross margin was $12.7 million for the first quarter, an increase of 12% compared to the same period last year. The increase reflected increased NGL sales in our East Texas and Permian assets attributable to higher prices, continued producer development activity and improved operational efficiencies.

In the first quarter, our anchor producer in the Eagle Ford brought online 13 new wells but plans to bring on additional 40 to 45 wells through the remainder of 2018, which will drive 125% volume growth over last year.

The partnership anticipates further growth across this entire Gathering and Processing segment during the second half of 2018 and in the 2019, as we expect producer activity to continue increasing primarily in the Permian and the Eagle Ford basins.

Liquids Pipeline gross margin was $7.3 million for the first quarter 2018, an increase of 10% compared to same period in 2017. Cash distributions from equity investments were $2.2 million, a 67% increase compared to the same period last year.

The increase was primarily due to increased distributions from our Tri-States and Wilprise equity investments, along with slightly higher volumes across those assets.

Now further, the partnership's interest in Cayenne pipeline, which commenced operation in January, will provide additional growth for the segment as we progress through the year.

Now given the first quarter of those operations, we have now received the economic benefit from cash distributions, but will begin to receive those in the second quarter. Meaning, we will have greater upside from the levels we just reported.

Our covered plan - pipeline provides the partnership with the ability to transport virtually all of our NGL volume - all the NGL volumes produced from the Mississippi Cayenne block of the deepwater Gulf of Mexico.

Natural Gas Transportation gross margin was $10.7 million for the first quarter of 2018, an increase of 75% compared with the same period of last year. The increase was primarily due to the acquisition of the Trans-Union pipeline in November of 2017, that further strengthened our growing Southeast gas transmission assets along with new marketing contracts and significant colder weather, which drove the regional demand much higher.

We have identified several organic growth opportunities across these assets, which we believe will drive continued strong performance throughout 2018 and into next year.

Gross margin from our Terminalling segment was $8.1 million for the first quarter of 2018, a decrease of 28% compared to the same period in 2017. The decrease was primarily due to reduced market rates for storage and utilization at Cushing, as well as required tank inspections, partially offset by the increase in throughput revenue at our Caddo Mills terminal as a result of facility enhancements.

Direct operating expenses for the quarter were $23.4 million, up 34% compared to the same period last year. This increase is primarily from the acquisitions of Panther and Viosca Knoll gathering systems.

As we continue to grow and scale our business, we have seen meaningful reduction in these expenses relative to our growth in cash flow. The first quarter of 2018 represents a 10% reduction in these expenses relative to our cash flow compared with the first quarter last year. And as we continue to scale and realize increased efficiencies, we anticipate additional reductions in costs.

Recurring corporate expenses for the first quarter were $12.8 million compared to $20.2 million for the first quarter of last year. The reduction in expenses is direct result of cost synergies that we've been able to capture as we have continued to simplify the partnership and increase our scale.

Interest expense for the first quarter was $13.9 million, down 22% from last year, largely due to the positive impact of our interest rate swaps. Excluding gains and losses from interest rate derivatives, quarterly interest expense was $17.7 million, which is higher than last year and a result of a $125 million add-on to our existing 8.5% senior unsecured notes in December of 2017.

The hedge against rising rate exposure, the partnership had $550 million of interest rate swaps and average rate of LIBOR-plus 130 basis points extending through 2022.

For the quarter, non-acquisition capital spending totaled approximately $26 million, including $4 million from maintenance capital. The majority of this capital was spent on reaching an upgrading system capability across our core operating segments in both the Permian, Eagle Ford and the deepwater Gulf of Mexico, which allow us to increase the breadth and reach additional customers.

At March 31, 2018, we had total debt of approximately $1.2 billion, inclusive of $713 million drawn under our senior secured revolving credit facility. $418 million outstanding under our 8.5% senior unsecured notes and $85 million in nonrecourse senior secured notes.

Partnership also ended the first quarter with approximately $156 million of notional available borrowings under our revolving credit facility and total leverage of approximately 5.2 times

As we move to the next phase of our growth strategy, you'll begin to see us executing on organic growth projects, which should prove to have not only higher returns, but also allow us to pace our capital deployment in the steadier fashion toward these opportunities.

In addition, we will also take steps in evaluating asset sales that can serve as not only an important source of capital but also allow us to increase the quarterly strengthen our balance sheet and further concentrate our asset base.

It's important to note that the partnership's transformation to even more simplified business with the greater asset scale and density, we have effectively relied almost entirely on generating and reallocating our internal capital while relying on nominal external capital.

And as Lynn mentioned over the past few years, we have substantially transformed our business with minimal, if any equity. As such, this has put short-term pressure on our balance sheet, as our growth opportunity has simply outpaced our ability to create internal cash.

And this has placed the partnership capital structure leveraging that really above our targets. And in the next few weeks, we'll provide the 2018 guidance pro forma for the Southcross transaction and a defined plan to align our balance sheet in a way that facilitates through and enables us to continue to build a business that has significant long-term value.

Our guidance will outline a defined approach to increasing EBITDA and distributable cash flow, reducing leverage and allocating capital towards growth assets with tangible targets for reaching our desired long-term goals.

As we shift to more internally focused organic growth projects to more controllable pace of capital deployment on hand will lend itself to a more normalized capital structure.

In summary, as we continue to build the American Midstream, we are absolutely focused on creating value for all our stakeholders, while prudently managing our business.

And with that, I'll turn the call back over to Lynn.

Lynn Bourdon

Thanks, Eric. And I'd like to reiterate the exceptional performance American Midstream was able to produce in the first quarter. The momentum we have established should continue to propel us through 2018 and into 2019.

We continue to witness significant increases in producer activity across our systems, and combined with the Southcross assets, we have identified numerous organic growth opportunities, which will further drive volume and EBITDA growth across our business.

Growth in key supply basins translates directly into growth for our demand-driven position along the Gulf Coast, specifically Corpus Christi. While lack of infrastructure development in recent years has proven to be a bottleneck in this rapidly growing basins, the combination of our growing supply-side, the need for infrastructure, record-setting crude and product exports and our strategic position within the premium demand of Corpus Christi creates the fundamentals for a unique and successful investment strategy. These circumstances offer a tremendous opportunity set for American Midstream to participate in a growing need for midstream infrastructure assets and capacity.

I would like to close with a commitment on our continued commitment to safety. It would not be possible to efficiently and effectively operate our assets without the dedicated commitment to safety from all of our employees. We closed 2017 with a phenomenal record amidst significant improvement over 2016.

We work very hard to ensure that our employees know that management is focused on safety being our number one priority, and I'm confident that as we progress through 2018, we will remain focused on maintaining a best-in-class safety record.

Our commitment to safety is a direct reflection of the professionalism and commitment of all of our hard working employees, as we continue to believe a safe company is a reliable company and ultimately, the type of company our customers want to do business with.

Before we open up the call for questions, I also want to take a moment and thank all of our hard-working employees for the continuous improvement efforts to make AMID a best-in-class midstream company.

Their tireless commitment to our success does not go unnoticed, and again, I thank you. We also look forward to welcoming all of the Southcross employees to the AMID family here very shortly. We are confident that the combination of these hard working employees will continue the success of American Midstream.

Thank you, operator, and we will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from James Spicer of Wells Fargo.

James Spicer

Yeah. Hi, good morning. So ArcLight recently bought Midcoast Energy from Enbridge, I was wondering whether some or all those assets could potentially be considered as possible drop downs into American Midstream?

Lynn Bourdon

Thanks for the question, and that's a good one. I don't think the answer is, yes. I would say, that's probably not something that's in the next couple of week type of thing. But I think, over time, there is no reason to think that those assets couldn't be dropped into AMID.

James Spicer

And are there any specific assets there that you think would be better fit with your footprint in infrastructure?

Lynn Bourdon

Well, I would tell - at this moment, we really have not spend a lot of time looking at those types of details. I mean, if you look through all of their assets - I mean frankly, all of their assets are type of assets that could fit very well into American Midstream.

There is something that or either more geographically located better or easier, may make more sense. But generically speaking that - they all are that - that whole complement of assets could be a good fit.

James Spicer

Okay. Thank you very much.

Lynn Bourdon

Thanks, James.

Operator

The next question comes from David Rothschild of [Technical Difficulty] Mr. Rothschild, your line is open. Is it possibly your phone is on mute.

Unidentified Analyst

Can you hear me now? Can you hear me?

Lynn Bourdon

Yes, we can hear you.

Unidentified Analyst

Yes, I was wondering if you guys are comfortable where the distribution is at right now or it sound like you might be reevaluating that for a cut?

Lynn Bourdon

Well, look, I would say this about the distribution is - as you know, as an MLP, this is a decision that's made every quarter. We sit down, we look at all of the available information. We take into account what we are trying to achieve, we take into account the needs of the company and the objectives that we have in front of us.

And we look at that again every quarter, and I would anticipate that we're going to go through the same process this quarter as we do with all the other quarters and make that determination.

Unidentified Analyst

Okay. Thank you.

Operator

[Operator Instructions] Our next question comes from Sanjay Aiyar of Coherence Capital.

Sanjay Aiyar

Hi. Thanks for taking my question. Good quarter guys. Just as far as those Enbridge assets, I understand that you said it's not a near-term focus, and over time, it could be dropped down. When you think about drop downs in that case or in general or adding assets inorganically, is the focus to kind of do that in a leverage neutral way as you've always done and then continue to use some sort of equity type of funding to do that?

Eric Kalamaras

Thanks for the question. I think we've - short run, we've put it - we put about as much leverage on the balance sheet that we would prefer to. I think, as always, there's even more we could periodically do there. But I think the issue we have is, really putting the balance sheet in the spot we can grow efficiently, and that's really the most important thing.

And if you look at what we've done over the past couple of years, we've really done very little. If any, as in equity. So certainly, no comment, and very little preferred. And so I think we have to look at the balance sheet on a case-by-case basis, and we will make that determination.

I think our view based upon the comments that we have indicated in this call is that we're looking at ways to reduce leverage, not ways to add to it. And so I think what you'd see us do is moderate the pace of that, try to be flexible in the capital structure and look at those on a case-by-case basis.

Sanjay Aiyar

Got it. Perfect. And then as far as just the Southcross logistics of closing it, you'd mentioned the asset sales should be wrapping up by third quarter and closing Southcross second quarter, just as far as timing, how should we think about the remaining any Delta in the financing that you need just to actually close that? And how do you - when do you think any financings would launch?

Eric Kalamaras

That's a good question. We - I appreciate it. We can't certainly comment on forward capital markets transactions. What I can say is this, we will - there are variety of mechanisms that we could fund that on a short-term or bridge basis, to do that, call it temporarily until we put our permanent financing plans in place.

In a few weeks, we'll come out with a broader strategy and around all of that. So I ask you to wait for that, but, of course, I can't comment specifically on any forward capital market activity.

Sanjay Aiyar

Okay, great. That's it from me. Thanks a lot, guys.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Lynn Bourdon for any closing remarks.

Lynn Bourdon

Thanks, operator. Listen, thanks for everybody for joining us today on the call. We definitely appreciate your interest and your support as we continue to transform AMID. Our business is solid, and our business is growing. We've accomplished very, very much in a very short period of time, and we look forward to sharing more success stories with you as we go forward. And with that, we will conclude the call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.