CNX Midstream Partners' (CNXM) CEO Nick DeIuliis on Q3 2018 Results - Earnings Call Transcript

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About: CNX Midstream Partners LP (CNXM)
by: SA Transcripts

CNX Midstream Partners LP (NYSE:CNXM) Q3 2018 Earnings Conference Call October 30, 2018 11:00 AM ET

Executives

Tyler Lewis - VP, IR

Nick DeIuliis - CEO

Chad Griffith - President

Don Rush - CFO

Tim Dugan - COO

Analysts

TJ Schultz - RBC Capital Markets

Jeremy Tonet - JP Morgan

Ethan Bellamy - Baird

Tim Howard - Stifel

Chris Tillett - Barclays

Barrett Blaschke - MUFG Securities

Operator

Good day, and welcome to the CNX Midstream Third 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 Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Tyler Lewis

Thank you, and good morning, everybody. Welcome to CNX Midstream's third quarter conference call.

We have in the room today Nick DeIuliis, our CEO; Chad Griffith, our President; Don Rush, our Chief Financial Officer; and Tim Dugan, our Chief Operating Officer.

Today, we'll be discussing our third quarter results, and we've posted an updated slide presentation to our website. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we've laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We'll begin our call today with prepared remarks by Nick followed by Chad, and Don, and then we will open the call up for Q&A where Tim will participate as well.

With that, let me turn the call over to you, Nick.

Nick DeIuliis

Thanks, Tyler, and good morning, everybody.

I want to take this opportunity to introduce Chad Griffith. Chad was officially appointed as President of CNX Midstream back in September. We couldn't be happier to have Chad at the helm of this great company. He brings a vast array of experience to CNX Midstream. Most recently, he is the Vice President of Marketing at CNX. He has played an integral role in getting CNX Midstream to where it is today through his involvement in a series of transactions that we've executed over the past year. That includes the asset exchange agreement with CNX as well as HG Energy, also been a key author of our gas gathering agreements. Chad is going to continue to focus on further differentiating and growing CNX Midstream, as an industry-leading Midstream Company and with that, I'm going to turn things over to Chad Griffith.

Chad Griffith

Thank you for introduction, Nick.

I couldn't be more excited and honored to be in this new role and I look forward to meeting many of you in the near future. The future is brighter than ever for CNX Midstream. As Nick briefly mentioned and as many of you are already aware, CNX Midstream has gone through a series of transactions to get the company to where it is today and now we're positioned to organically grow distributions per unit by 15% annually through 2023 and we can do so under our base plan without any drops and without accessing to equity markets.

In addition to the gathering agreement commitments that provide the foundation for this growth, our sponsors' strong hedge book and balance sheet give us confidence that they will continue to execute on their plan. This level of protection differentiates us from our peers and makes us a very exciting place to be.

During the most recent quarters, CNXM had record throughput driven in part by sponsor strong well performance and our sponsor expects production to further increase during the fourth quarter.

In addition to supporting our sponsors continued growth, we are laser focused on expanding third-party business. In fact my top priority is President of CNXM behind only safety and compliance is to expand our third-party customer base. We've had some recent success with third-party business and began moving those volumes during the third quarter. We believe that there are substantial additional opportunities for CNXM can and should be the gatherer of choice.

To be clear, this additional third-party business is not in our projections or guidance, so similar to drops this is all potential upside to our plan and for CNX Midstream unit holders.

We completed a series of pipeline projects during the quarter that included two pipelines and a dehydration facility in CNX's Richhill area and Southwest PA and two pipelines in the Shirley-Pennsboro area in West Virginia. We also commissioned our Centralized Liquids handling and stabilization facility in the Shirley-Pennsboro field during Q3. This was approximately three months ahead of schedule.

We're also ahead of schedule on the expansion of our Southwest PA system. The previous expansion ahead of schedule, improve our system pressure sooner and result in improved throughput for CNXM. In support of that project, CNXM made a strategically an acquisition which mainly help shorten the pipeline route and will give us lots of options for later laid down yards and other surface used needs. We also upsized and accelerated some segments of this expansion to accommodate improved well results from CNX.

While we have seen some price pressure from our contractors, we’ve been able to mitigate most of those increases by providing our contractors a longer line of sight on future business. And because we're building these systems quicker and larger than we originally forecasted, we're now increasing capital guidance net to the MLP to a range of $135 million to $145 million compared to the previous guidance of $100 million to $110 million.

Our operations had a very strong third quarter and Don will talk about some of those details. But one thing I would like to highlight before turning it over, is the success we saw this quarter in health, safety, and environmental. HSE is critically important and affords us the social license we need to operate this great company. We had an exceptional quarter in HSE and despite having the highest monthly man hour rates in 2015; we had zero reportable injuries or notice of violations. That is a huge accomplishment and congratulations to the team for achieving those results.

We look forward to executing on our development plans in conjunction with CNX and our third-party partners. I'll turn it over to Don to go through some of the results of the quarter.

Don Rush

Thanks, Chad, and good morning everyone.

We posted a short slide deck to the website and I'll reference a couple of these slides in my prepared commentary starting with Slide 3. As you can see, our average net daily throughput through the third quarter was the highest it has been since our IPO back in 2014. And on top of that, we posted our lowest cost quarter across all metrics since the IPO. These phenomenal results drove a 32% increase in adjusted EBITDA in the third quarter of 2018 compared to the prior year quarter. And our cash distribution coverage ratio was a healthy 1.4 times for the quarter.

Shifting to Slide 4, you can see we have made some updates to guidance. The first being, we are increasing our EBITDA guidance to $160 million to $170 million compared to the previous guidance of $150 million to $165 million. This is possible due to the cost improvements we are seeing which are also driving an increase to our distributable cash flow estimates for the year. And as Chad has already discussed, we are raising our 2018 capital guidance.

Slide 5, simply highlights the fact that Noble sold all of their LP units this past quarter. We view this as positive for all involved and it removes a large overhang on the company. As you can see from the chart, the public now owns 41.9 million units.

I'll end with Slide 6, which is a slide we have highlighted many times before. This is the inventory of growth opportunities that exists at our parent CNX. However as Chad has already mentioned none of these are assumed in the base plan and none of these are needed to achieve our distribution growth targets. Any of these would be pure upside.

With that, I'll hand it back to Tyler.

Tyler Lewis

Thanks, Don. And operator if you can open the call for Q&A at this time, please.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions].

Our first question today will come from TJ Schultz of RBC Capital Markets. Please go ahead.

TJ Schultz

Great thanks. Good morning. Just first on the CapEx increase I know you pointed previously to 2019 as the peak year so to speak in CapEx and you've now accelerated for I guess the second consecutive quarter. So two questions really just as we think about 2019 as the peak year just any changes to that spend in the context of some of the contract or price pressure? And then is there any change to 2019 throughput expectations just given the accelerated spending?

Chad Griffith

Yes, thanks for the question. So when we think about capital budget, we obviously have a pretty big capital program underway and we're really sort of -- it's complete overhaul of our Southwest PA system. On top of that CNX wells are really outperforming. And so some of the early workflow we're doing is a little bit bigger, a little bit faster, than what we had originally expected which has shifted some of that capital into 2018. When we look at the capital program over the several years that it's going to take to get this done we're still right on track, so.

But as far as the specifics of 2019 I think we're going to kind of sort of hold off on that, so maybe January and we're going to talk a little bit more January about sort of what our revised capital is going to look like in 2019 and what our expected throughput is going to be.

TJ Schultz

Okay, understood. And I guess just moving to some of the sponsor driven growth opportunities, if you get still to around $200 in EBITDA by 2020 what is the most, I guess mature asset there that you would consider as a drop candidate, is that changing as you’re doing more in the Dry Utica and just how are you thinking about dropdowns now given your MLP growth plan doesn’t need them to drive that distribution growth?

Don Rush

Yes. So pretty much we're viewing on the same way we always have trying to find ways to kind of structure things to be win-win between CNX and CNX Midstream. And then whenever we do find that that magic recipe or ingredient we move forward to go ahead and execute it once we do see it.

If you look at the assets that exists at CNX, there are at various stage of maturity, you've some that are already built, you've some that are Greenfield that hasn’t been build yet. So there's a mix of assets at CNX at different phases in their life cycle and how those or if those ultimately end up in the MLP will be matter of finding those right commercial agreements and right times that truly are benefits for both companies in order to do so.

So we keep our eye on it, we’re constantly working and looking and like I said, I think we’ve proven with our track record that once we figure out something that we want to do, we move quickly to get it done.

TJ Schultz

Okay, understood. Just lastly on the third-party business kind of described as a top priority, just any color on early successes there and do you have any longer-term goals on the mix of third-party business that you can expand on? Thanks.

Chad Griffith

Sure. So we've mentioned last quarter 20-inch high pressure line that was included as part of the drop as part of the HD package that happened at the end of Q2. Some of the early third-party business we brought on in Q3 was associated with that asset, it was basically an existing asset that had some capacity and we found some other third-party volumes that was looking for a place to go and we were able to provide that service for that customer. And so that’s an easy win and we’re targeting a lot of additional opportunities like that where it's really low hanging fruit. We've got existing pipes on the ground, we've got available capacity, other producers in the area, other shippers in the area have some tightness or constraints in their system and we're working with those folks to find ways to debottleneck their production and using our assets and really generating more revenue off existing assets.

So those are really the kind of projects we really like. And then the sort of the second bucket of projects are going to be really step out Greenfield areas where third-party opportunities are really synergistic with CNX gases plants and where they expect to go in the near future and I think there's a lot of opportunities there as well.

Operator

Thank you. Our next question will come from Jeremy Tonet of JP Morgan. Please go ahead.

Jeremy Tonet

Good morning. I know that you’ve said that for the 2019 look, you're really going to give more details in January here but just wanted to with the EBITDA guidance being lifted for 2018, just wanted to see is that more kind of earnings from 2019 kind of getting pulled forward on stronger activity or in the PRE talk about it being kind of also lower OpEx and if it’s lower OpEx, does that kind of mean EBITDA could be higher in the future than what you guys have anticipated if these cost savings are durable or how should we think about that?

Don Rush

Yes. So we did not update our increased any throughput guidance. So our throughput guidance for 2018 has remained the same and as we've seen kind of year-over-year quarter-over-quarter, the cost side of the equation continues to improve and get better and it's really looking for efficiencies and better ways to do things that help and drive further cost performance.

Chad Griffith

Yes, I can maybe provide a little additional color on the cost savings. This is really where the synergies of being single sponsored and restructuring the GGAs earlier this year that's really given CNX Midstream a lot longer amount of sight on what future business is and what future volumes are expected to be and it's allowed us to sort of optimize the workforce a little bit better which helps drive that cost down and similarly our data driven approach where we've got a state-of-the-art gas control room, really allows us to optimize the work force we do have to make sure that they're going where they need and we're actually optimizing, utilizing our work force the best as possible.

Jeremy Tonet

Great. So would it be fair to say kind of O&M as you see it now versus where you saw at the beginning of the year and we put out a multi-year budget, it's trending better now than what you expected in the past?

Chad Griffith

I don't think we're going to -- I don't think we’re not going to update guidance necessarily on that but it seems like things are heading in the right directions because of the synergies we talked about.

Jeremy Tonet

That's helpful. Thanks and then just want to dial in a little bit more in Shirley-Pennsboro and if you could just update us there as far as how results are tracking versus initial expectations and kind of the multiple compression that you’re expecting there with the drop before?

Chad Griffith

So the -- so CNX gas are on their first new path post-drop earlier this quarter, I believe earlier on Q3 the volumes are there. Really where we're seeing a lot of the upside as we brought the stabilization facility, the condensate handling stabilization facility on pretty much earlier than expected. That's a new revenue stream for the Shirley-Pennsboro asset, its facilities we were able to build as part of the drop package, we've got the commitment to use those facilities, we're able to build those facilities and now it's a really nice revenue stream for CNX Midstream on a go forward basis. And the point is I mean it came online pretty much earlier than expected.

Operator

Our next question will come from Ethan Bellamy of Baird. Please go ahead.

Ethan Bellamy

Hi, good morning guys. How high would you take leverage to facilitate CapEx or dropdown?

Don Rush

Yes, so we've talked having sort of three times leverage is our sealing as we think about it here at the Midstream level. That being said we've been pretty consistent saying that hey if we have future line of sight of an opportunity to make use of our balance sheet and capital structure with future line of sight to get back below that three times with higher level of confidence, we're okay crossing over that threshold as long as we feel confident that there is line of sight to get back below it. So that’s kind of the balancing act we look at here at the MLP.

Ethan Bellamy

Okay. And just to be clear is the guidance laid out inclusive or exclusive of dropdowns?

Don Rush

So there is no dropdowns in the guidance, I mean any new ones it has the Shirley-Pennsboro one that we did that's it.

Ethan Bellamy

Okay. And assuming that you would do an accretive dropdown, how would you handle that, would you blend that in and have excess Bcf coverage going forward, would you step up the distribution commensurate with the accretion? How would you handle that and secondly what's teed in the near term for dropdowns if anything?

Don Rush

Yes, so the inventories, the same inventories that we laid out at our Analyst Day back in March, I think whenever you look at higher structure dropdown and what you do with any accretion that shows up is a function of whether or not you do the dropdown, so it's almost a little bit counterintuitive but because we don't need all of them because there's so many options and ways to do all of them, it's a little bit unique in the structure that you'd want to do -- to do it to have it makes sense.

So it's part of the balancing act as we look to, should we do it, when we do it, how we do it is what we do with the excess cash flows that are accretive by it. So it's all part of what we're looking at as we're trying to sort through the right approach to really create kind of win-win transactions between CNX and CNXM.

Ethan Bellamy

And do you need to complete the dropdown before you think about urging the IDRs and how much time are you if any, spending on sort of simplification IDR elimination transaction?

Don Rush

Yes, it’s definitely something we're monitoring, there's a lot of activity in the market around that topic, we've gotten to see some precedent transactions and what's been working, what hasn't. As far as sequencing an order, there is nothing set in stone, we look at this kind of the -- with a blank sheet of paper.

So it is something, we're spending time on fortunately we're still relatively young and the total IDR take isn’t cost prohibitive at the moment. So we do have time to figure this out how to do it and what makes most sense for CNX and CNXM. That being said, we're not waiting around at something that we’re always looking at trying to find something that makes sense and if we do find that we’ll work to get it done quickly as we've shown the ability to execute once we did, figure out what we want to do.

Ethan Bellamy

Okay. And then lastly, how would you describe the third-party and the environment, are bankers showing up to your door with reasonably priced assets or is everything still pretty pricey based on the amount of private equity money in the system?

Chad Griffith

Yes, I mean we’ve certainly seen a few books. I mean it’s something we're not going to turn a blind eye to it, we keep our eyes open, we look at the opportunity and we assess them as they come in and ultimately we’ll look at packages that make sense but nothing yet.

Don Rush

And a lot of just the internal opportunities, we have to generate returns on our capital are pretty significant, so it competes against what we have to spend our money internally.

Ethan Bellamy

That’s my favorite answer. Thanks very much guys.

Operator

Our next question will come from Tim Howard of Stifel. Please go ahead.

Tim Howard

Hi, thanks for taking the question. Just circling back on the expenses in the quarter, want to make sure there is no one-time benefits, reducing expenses and then lastly just kind of how to think about operating expenses as you get into the winter season, I think they typically ramp up some and is that still a fair expectation?

Chad Griffith

Yes, to answer your question, so there's no reason to not expect seasonality in the OpEx cost but I do want to reinforce the fact that, there are some like sort of systemic changes that have happened, the benefit of getting back to a single sponsor and having a synergy with the single sponsor and having the line of sight that the gathering agreement provides us that has allowed us to optimize workforce a little bit better and you're seeing that sort of translate through some of the cost savings.

And then also by like I said earlier, the control room we have allows us to sort of -- we've got a centralized dispatch, we've got a state-of-the-art control center, we can see where the problems are, we can send the workforce where it needs to be, it's a very cool tool, it allows to optimize that cost.

Operator

Our next question will come from Chris Tillett of Barclays. Please go ahead.

Chris Tillett

Hi, guys. Good morning. Just to circle back quickly on the CapEx raise, is there any way you might be able to break down for us, how much of that was related to some of the pricing pressures you mentioned that you're seeing versus just a pure shift in capital into 2018 from 2019?

Chad Griffith

It's a capital budget, it’s a bucket of stuff, there's lot of wins in there, it’s a lot of acceleration, it's a lot of upsizing. At the same time, we've been able to optimize some build-out in later years and so like on a project basis even though we've accelerated a little bit, but the project as a whole was still on pace. Really, we look at CNX Gas is outperforming on their wells, they're asking us as our number one shipper to build things bigger and faster and we've got the balance sheet and the team that they've actually executing go out and actually do build things quicker and faster.

I don't know there's a lot of other pipeline companies that love to have that same ability, so they're asking for bigger and faster and we're able to get it done.

Like I said earlier, we've been able to mitigate most of the contract or inflation, having just long pipeline of projects this multi-year pipeline of projects has allowed us to sort of work with those service providers and say look, you can jump, ship and go to these other projects and it's a flash in hand. And you might be able to get a little bit of premium on this immediate project or you can stick with us and now you've got multi-years of project ahead of you. And so we've -- our contractors have been receptive to that and that’s really helped us mitigate some of those costs.

Chris Tillett

Okay, that’s great. Thank you and then you've also touched on this a little bit already but I guess given that Noble is now out of their position, how do you think about funding potential dropdown. Particularly in light of what hasn't necessarily been the most forgiving equity market.

Don Rush

Yes, no definitely aware and again that's eyes wide open why we've built the company and the balance sheet the way we have and why we've really taken the need to access equity markets off the table. And we have the ability to execute our plan without any of these drops and if you refer back to Analyst Day and different information the funding levels of debt versus equity in order to do things change dramatically out into the future potentially. So it's a constant mix of blend as times change, we change but eyes wide open on equity and how to do or what not to do. So it's just part of the variables that we're using to sort through on the drop inventory that we have and how and when and what structure to do them in.

Operator

[Operator Instructions].

Our next question will come from Barrett Blaschke of MUFG Securities. Please go ahead.

Barrett Blaschke

Hey guys. I appreciate the color you've given so far on the third-party volumes. But could you give us kind of -- is there a target level that you're seeing for over the long term is it getting close to 50:50 or what’s the ultimate goal there?

Chad Griffith

Obviously 50:50 mix would be great. I think we don't have a firm target set a stone; we really assess every opportunity as they come and we’re going to try to grow that third-party business as much as we can. Like I said earlier, lot of its driven off of using existing infrastructure where we have space and it’s next to other producers that are looking for capacity, those are easy but a lot of the future stuff is further down the pipe, it’s a little bit more Greenfield, it’s tough, it’s going to be synergistic with CNX Gas and we’ll just have to see how that plays out over the next several years.

Barrett Blaschke

Okay. And I think I know the answer to next one how do you view contract quality on and sort of your contract targets for when you’re working with third-party are you looking for something very similar to what you already have?

Chad Griffith

Well, it's going to vary based on the situation. There is a lot of different ways to structure a gathering agreement from a commercial perspective and we’re really open to all of them, right. So a lot of that comes down to how much capital is involved, how much risk is involved and so it’s a multitude of factors that go into it and then we shape the commercial terms accordingly.

Barrett Blaschke

But am I correct in assuming that you’re trying to stick to the 100% fee based structure?

Chad Griffith

Yes, I think I mean I don’t think we’re seeing anything from that pretty standard.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Tyler Lewis for any closing remarks.

Tyler Lewis

Great. Thanks, Alison. Thank you everyone who joined us this morning. We look forward to speaking with you again next quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.