Rattler Midstream LP (RTLR) CEO Travis Stice on Q4 2019 Results - Earnings Call Transcript

Feb. 19, 2020 4:57 PM ETRattler Midstream LP (RTLR)
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Rattler Midstream LP (NASDAQ:RTLR) Q4 2019 Results Conference Call February 19, 2019 11:00 AM ET

Company Participants

Adam Lawlis - IR

Travis Stice - CEO

Kaes Van't Hof - President

Conference Call Participants

Michael Lapides - Goldman Sachs

Pearce Hammond - Simmons Energy

Jeff Grampp - Northland Capital Markets

James Kirby - JP Morgan

Ujjwal Pradhan - Bank of America

Spiro Dounis - Credit Suisse

Kyle May - Capital One Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Rattler Midstream Q4 2019 conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there'll be a question and answer session [Operator Instructions]. I would now like to hand the conference over to your speaker today Adam Lawlis, Vice President of Investor Relations. Please go ahead sir.

Adam Lawlis

Thank you, Josh. Good morning, and welcome to Rattler Midstream's Fourth quarter 2019 conference call. During our call today, we'll reference an updated investor presentation which can be found on Rattler's website. Representing Rattler today are Travis Stice, CEO and Kaes Van't Hof, President. During this conference call, the participants may make certain forward looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I'll now turn the call over to Travis Stice.

Travis Stice

Thank you, Adam. Welcome everyone and thank you for listening to Rattler Midstream’s earnings conference call covering results for the fourth quarter and full year 2019. Rattler's fourth quarter results ended the year on a high note as all four operated midstream segments exhibited strong quarter over quarter growth and our operating team continued to accommodate this exceptional volume growth both effectively and economically. Produced waters in the fourth quarter were 26% higher than just the first quarter of 2019 and 26% of the sourced water volumes in the fourth quarter of 2019 were recycled from Rattler produced water up from less than 10% in 2018 on much lower absolute volumes.

This performance reflects the strong relationship between Rattler and Diamondback as well as the benefit of just in time CapEx resulting in a high return on capital employed at Rattler. Fourth quarter financial results reflected the strong operational performance in the quarter as Rattler grew net income 7% quarter over quarter to over 52 million and adjusted EBITDA over 6% quarter over quarter to over 71 million in the fourth quarter. The company has also proved the fact that full year 2019 financial results exceeded pre IPO estimates despite what was an expected contribution from equity method investments, with full year net income of 186 million and adjusted EBITDA of 265 million. The company continued the build out of our various systems spending 54 million on midstream capital expenditures in the quarter and contributing 261 million to the equity method joint ventures including closing the previously announced joint acquisition of Reliance Gathering with Oryx Midstream.

Most importantly, Rattler today also announced a 16% increase to our quarterly distribution of $0.29 effective immediately, which is also ahead of pre IPO expectations. Looking forward to 2020 we are reiterating our previously announced guidance which implies 42% year over year adjusted EBITDA growth including base business EBITDA growth of over 25% year over year while reducing using base business CapEx by 12% from 2019. Furthermore, remaining contributions to equity method investments are expected to be 135 million to 150 million in 2020 and 178 or 185 million overall to complete all outstanding commitments on our equity method joint ventures including our newly announced Amarillo Rattler partnership. Rattler has entered into a 50-50 joint venture with Amarillo Midstream to own and operate a natural gas gathering, compression and processing system in our Spanish Trail North asset. The joint venture will also construct a new 60 million a day cryogenic natural gas plants for the system that is underpinned by an acreage dedication on the asset Diamondback required from Ajax Resources in 2018.

Together with the joint acquisition of Reliance Gathering with Oryx Midstream and Rattler's investment in Gray Oak and Epic Crude and Wink to Webster long haul pipelines, the Amarillo Rattler joint venture is another example of leveraging the Diamondback relationship and significant visibility as an upstream operator to pursue attractive investment opportunities. To conclude, Rattler will continue to execute on our core business of fulfilling its long term fixed fee contracts with Diamondback. The underlying organic volume growth on the Diamondback dedication combined with the declining capital expenditures as the various gathering systems approach peak required capacities is expected to drive earnings and free cash flow growth per share in the years to come. Rattler's conservative capital structure and low leverage is expected to allow us to prioritize return of unit holder capital through distributions as evidenced by our 16% distribution increase announced today. With these comments now complete, operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Lapides with Goldman Sachs. You may proceed with your question.

Michael Lapides

Hey guys, just curious, how are you thinking about, you're setting yourselves up to be in a significant cashflow position coming to second half of 2020 and really into '21, How're you thinking about utilization of that cashflow for 2021 and beyond?

Travis Stice

Yeah, Michael, you know, I think when we turned, when we went public, we were very focused on establishing that we were going to grow the distribution while staying under two times leverage. You know, I think we'd added some projects here on the joint equity investment, the equity side of the business that's going to allow for, you know, significant free cash flow over time. And I think for us, you know, excess free cash flow is going to go towards growing that distribution while we, you know, we addressed the distribution here three quarters in, you know, in the future if free cashflow looks really good and there's not capital to be spent on other growth projects, then we'll return it to shareholders.

Michael Lapides

Got it. And, just curious on the Amarillo, how can you, the new JV, how do you think about, or what's the potential and what's the physical room actually for incremental gas, gas gathering and processing and especially on the processing side meaning is there room inside the fence if you needed to add another planner to, is it easy to do under the structure or would you do it outside of it?

Travis Stice

Yeah, we'll have the site set up to be able to add capacity should we need it. I think the unique part about that, that plant and where it's located is that, you know, Diamondback has a lot of other acreage that is dedicated to other people right now, which the JV will have a, you know, a nice opportunity to get that business over time. Right now Diamondback's contribution is going to fill up almost two-thirds of the new plant. So, on top of that, there are opportunities to fill up that plan and add more if the opportunity arises.

Michael Lapides

Got it. Thanks guys. Much appreciated.

Operator

Thank you. Our next question comes from Jeremy Tonet with JP Morgan. You may proceed with your question.

James Kirby

Hey, good morning guys. James on for Jeremy. Hey, just want to start with Epic in terms of the

cadence, kind of how you guys modeled that throughout 2020, including how guys figure out 1Q.

Travis Stice

Yeah. Well, you know, we're modeling a little bit of a drag in the first quarter and then, you know, some solid contribution going forward. I can't speak for all the operators on the system, but I know Diamondback's going to be, you know, sending, you know, 80,000 plus barrels a day, which is above our take or pay commitment for most of the year. So, you know, we're excited for early, for full start up. Also excited for full start up on the Gray Oak side, as you know, Diamondback not shipping on that today, but we'll be a large shipper on full startup of both Gray Oak and Epic.

James Kirby

Great, thanks. And then it looks like fresh water utilization stepped up, presently over 80%, in terms of modeling that also for 2020 -- is that a good run rate or are there other drivers there?

Kaes Van't Hof

Yeah, fresh water still moves around a little bit because some of the assets still sit at Diamondback, you know, the Energyn operated freshwater assets, and that dedication still sits at the Diamondback level. So it's really about where the frac spreads move as operated by Diamondback. I can say for the first half of the year, you know, there is a big heavy Pecos County component as well as a rework component from the Diamondback side. So that's going to contribute, you know, solidly to the fresh water volumes. But you know, those do move around a little bit, but if we do at some point get all of those assets drop down, then you can more accurately model freshwater as being essentially a hundred percent of Diamondback's needs for, you know, eight to nine frac spreads.

James Kirby

Okay. And just one more the Amarillo footprint kind of looks like it overlaps with the Reliance Gathering system. Is there any like synergy there or what's kind of the thinking in terms of the footprint there?

Kaes Van't Hof

No, I mean, you know, just a little background on the Amarillo, on the Amarillo story here. We inherited a dedication when we bought the Ajax assets at Diamondback to the old Inmed, was a public company. The gas plant there at the time just can't satisfy the needs of the growth plans that we have. And that's why we, you know, when we talked to the Amarillo guys we just basically flipped that contract into a new contract which improve the recoveries for Diamondback, but also allows for the growth that we have planned in the area. I think this just tags on to the lessons we've learned when we entered the Delaware basin that we do want to control the pipes in the midstream for what we are good at, which is, you know, the oil gathering, water and water disposal side. And we want to leverage that size and scale to, you know, have partnerships and let the experts do what they do best, particularly on the long haul side and now on the gas gathering and processing side.

James Kirby

Great. Thanks. That's it for me.

Operator

Thank you. Our next question comes from Pearce Hammond with Simmons Energy. You may proceed with your question.

Pearce Hammond

Good morning and congrats on a good quarter. My first question is I wanted to get your thoughts on capital allocation in light of the JVs and equity investments that you've made. Should we expect more such JV formations in the future? Or are you comfortable with your current asset footprint? And the priority on cash moving forward will be less on investment, more on returning cash to shareholders?

Kaes Van't Hof

Yep. Pearce, I think we've done as much as we possibly can here on the JV side, leveraging anything that was available. You know, I don't think you won't see us being a large acquirer of third party assets on the water side or, there are very limited opportunities left on the oil gathering side. So I think we're done on JVs for now, with the asset base where it is, you know, we're excited that the base business CapEx is going to decline double digits year over year, while the EBITDA from the base business is going to grow 25%, that's a trend we need to see continue, which will allow us to continue to grow this distribution consistently over time.

Pearce Hammond

Okay. Thanks Kaes. And then my follow up is, can you provide some additional color about the JV with Amarillo about Midstream. How did it come about? What attracted you to form the JV and how do you see it benefiting Rattler shareholders over time?

Kaes Van't Hof

Like I said a little bit earlier it came out of the Ajax deal and turning what was a negative or poor performing contract and poor performing plant into a modern 60 million a day cryo, with a qualified partner. So, you know, I think for, for Rattler shareholders we are now partners with a qualified operator to handle the growth that's going to come out of that area from a Diamondback perspective, has the most or one of the most undeveloped inventories in our portfolio.

Operator

Thank you. Our next question some Jeff Grampp with Northland Capital Markets. You may proceed with your question.

Jeff Grampp

Hey guys. Was curious, if we could talk a little bit about kind of the volume ramp expectations for 2020. Looks like for 4Q '19 volumes came in quite a bit higher than where our model was at. And it seems like they're already kind of maybe in the range for the full year 2020 guide. So I was just kind of wondering, I know we're barely a couple months into the year, but seems potentially conservative there on the volume front. So was just trying to I guess frame expectations for how we just think about volume growth throughout 2020.

Travis Stice

Yeah. Jeff, I mean, if there's one thing I can say it's while forecasting oil is pretty difficult as an operator, forecasting saltwater disposal volumes is even more difficult. So we've always erred on the side of caution there. And water has continued to surprise us to the upside. I think as you know from our history together at Diamondback, we like to have a being raised type story. And Rattler here, through its first three quarters to gain investor confidence in the story and gain investor confidence in what we're trying to present, which is a business that has a 20% return on capital and our 7% dividend yield and you know 40% EBITDA growth. We're trying to prove that this water business, which, most of Rattler's EBITDA is water, should compete with the best midstream assets in North America.

Jeff Grampp

Got it. Appreciate that. And, my follow up, I was looking at slide 14, I think here that goes through the oil gathering system that you guys just recently closed on. Seems like there's maybe some, undedicated saying acreage that wouldn't be too much of a stretch to tie into the system. So just kind of wondering is that a fair conclusion and is there any capital that you guys are contemplating in kind of the near medium term to expand that system?

Travis Stice

Yeah, on the Martin County side on the East side of our position that's all dedicated to planes today. And that was, you know, inherited from Energen. Uh, you know, I will say the Kimberley area, which was Southwest Martin County, we're working right now to get that hooked up and eventually get hooked up to Reliance. I think that'll be a nice piece of business for the combined Reliance Rattler JV or, sorry, the Oryx Rattler JV, excuse me.

Jeff Grampp

Got it. Appreciate it guys.

Operator

Thank you. Our next question comes from Ujjwal Pradhan with Bank of America. You may proceed with your question.

Ujjwal Pradhan

Good morning guys. Thanks for taking my question. Just first one on your distribution program. Obviously we got a small surprise here yesterday with the step up earlier, this is scheduled, can you share some thoughts on that decision and if we could expect similar unplanned step ups in the future, given where your free cashflow is? And maybe what do you think the right distribution yield is for Rattler?

Travis Stice

Yeah, I'll let Kaes answer that in detail but just like we communicated on Diamondback, you know, when we think about dividend increases, we're looking at ways to drive both current and long term shareholder value and dividend decisions are typically addressed on an annual basis. Kaes you want to finish that one.

Kaes Van't Hof

Yeah. You know, I think we're near to the midstream business. We tried to address it on the annual basis. Should leverage standard two times in the business outperform, and we start getting some free cash from our JV investments over the course of the next couple of years. We, with my other hat, as 70% owner of the business, are looking to get cash out via the distribution. So we're going to keep pushing that. I think it was too early to push it more than we did with the announcement today. But you know, as capital continues to decline and our JV commitments decline and we start getting free cash from there it's certainly going to be part of the story.

Ujjwal Pradhan

Thanks for that. And small follow-up on the Amarillo JV partnership there. Can you discuss the current volume profile in that acreage and what type of earnings contribution do you expect in '21, 2020 this year and '21. And also are there other operators in the area?

Travis Stice

Yeah. So the way we have it right now is we won't have any contribution in 2020 because the existing plant will operate under the existing contract. You know, when the new plant is put in place is when the JV ticks in, in mid '21, and that time we should be producing almost 30 million a day on the Diamondback side to contribute to that plant, it'll be a meaningful contributor to the back half of '21. So I think the way we have it set up on the JV side is, you know, the Oryx JV is contributing today. The Epic and the Gray Oak JVs, will start meaningfully contributing in the second quarter of 2020, and Wink to Webster comes on in '21 and then in the back half, you add the final JV. So we're really setting up a, you know, this backlog of cashflow coming our way over the next couple of years.

Ujjwal Pradhan

Got you. And maybe one last one. We saw that you increased your 2020 fresh water volume guidance. Was there anything in particular that drove that increase that led you to that decision?

Kaes Van't Hof

We just have more clarity on the, on the Diamondback completion schedule and where those completion crews are going to be moving around, as we're now closer to the 2020 plan. So that's just boosted the fresh water volumes that we saw in the model versus, you know, where we were three months ago.

Ujjwal Pradhan

Great. Thanks. That's helpful. I appreciate it.

Operator

Thank you. Our next question comes from Spiro Dounis with Credit Suisse, you may proceed with your question.

Spiro Dounis

Hey morning, gentlemen, just want to follow up on some of the questions around returning capital. What are your thoughts around the special dividends? Seems like maybe buybacks aren't unappealing from a flow perspective. I imagine you wouldn't want to overextend on the dividend yield side and then leveraged your point earlier is already fairly low and then probably stays fairly low going forward. So, does that kind of put you into a special dividend or something you consider?

Travis Stice

It's not something we're considering right now. Certainly buy backs are off the table, given we want to float, you know, to, to improve or increase versus, you know, where it's been. We tried to do a large IPO, to get the float off, you know, we're very proud of the shareholder roster that we have and that's a lot of sticky money. So, I think for us growing that distribution is certainly first and foremost. You know, I'd say second would be slight debt reduction and you know, in great bowl scenario where we don't have any cash to allocate to growth projects to return to shareholders, we would, we would maybe consider a special, but that's not on the table today.

Spiro Dounis

Okay. That's fair. High class problem to have. And then just switching back to the Amarillo JV, sound like you've got a little bit of room to grow there. And realize that maybe you can't talk to the cadence yet, but just any color around the trajectory there as you kind of grow that footprint. Is it one plant a year from here too aggressive. And just how to think about the cadence of that growth.

Travis Stice

Yeah, I'm really focused on one plant right now. You know, I'm, I'm hoping that the JV can be competitive to get some other dedications in the area from both Diamondback and other operators and should those dedications head the way of the JVs and then we will be more aggressive on the growth front. I think we have a well-capitalized partner that's focused on growing this business and incentivized to do so and will be a supportive partner if those opportunities come up. But for right now, we're kind of just assuming the benefit of this one plant.

Spiro Dounis

Got it. That's it for me. Thanks guys.

Operator

Thank you. Our next question comes from Kyle May with Capital One Securities. You may proceed with your question.

Kyle May

Hey, good morning guys. You had talked about 26% of the source water volumes were from recycled produced water. Is this a good indicator for 2020 and then also how does this impact the financial results for Rattler?

Travis Stice

Yeah, Kyle. So I'll, I'll speak to the financial results. You know, it certainly helps improve margins. You know, Rattler takes possession of the produced water barrel and then sells it back to Diamondback at a much cheaper rate than the freshwater barrel. So that's a win win for both companies there. From a percentage perspective, it really depends on where you're operating, right? I mean, in Pecos County, in some cases we can use 100% recycled water for our fracs in that, you know, in that area because there's so much water production but then you go to an area like Spanish Trail or Midland basin where there's so little water production that you're pulling all the water that you're producing, but you still have to supplement that with some fresh water to complete the frac. So 26% was a really good number. You know, I think for us, we're targeting, you know, on average somewhere in the mid teens percent, on a yearly basis and upside to there would be a benefit for Rattler.

Kyle May

Got it. That's helpful. And then one more for me on the Amarillo JV and Oryx JV, do you have any opportunity to add incremental midstream services to those?

Travis Stice

Not from a service perspective, but certainly from an acreage perspective.

Kyle May

Okay. Got it. Thanks you guys.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Travis Stice, CEO for any further remarks.

Travis Stice

Thanks again to everyone participating in today's call. If you've got any questions, please reach out to us using the contact information provided.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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