Oasis Midstream Partners LP (OMP) CEO Taylor Reid on Q4 2019 Results - Earnings Call Transcript

Oasis Midstream Partners LP (OMP) Q4 2019 Results Earnings Conference Call February 26, 2020 12:30 PM ET

Company Participants

Richard Robuck - CFO
Taylor Reid - CEO
Michael Lou - President

Conference Call Participants

James Kirby - JP Morgan
Pearce Hammond - Simmons Energy

Operator

Good morning, my name is Branden, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the fourth quarter 2019 earnings release and operations update for Oasis Midstream Partners. [Operator Instructions]

I will now turn the call over to Richard Robuck, Oasis Midstream's CFO to begin the conference. Thank you. You may begin.

Richard Robuck

Thank you, Branden. Good morning, everyone. This is Richard Robuck, and today we are reporting our fourth quarter 2019 financial and operating results. We're delighted to have you on our call. I'm joined today by Taylor Reid and Michael Lou, as well as other members of the team.

Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions include statements that we believe to be forward-looking statements with the meaning -- within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those disclosed in our earnings release and conference call.

Those risks include, among others, matters that we have described in our earnings release, as well as in our filings with the Security Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During the conference call, we will also make references to certain non-GAAP financial measures and reconciliations to the applicable measures can be found in our earnings release and on our website. We will also reference our current investor presentation, which you can find on our website.

With that, I'll turn the call over to Taylor.

Taylor Reid

Good morning, everyone, and thanks for joining our call. We thought we'd start today by highlighting a handful of key points. First, it was another great quarter for OMP. Operationally, our company has really hit its stride and throughput was above the high-end of guidance across most commodity streams. EBITDA and coverage exceeded our guidance once again as we exited the year strong and look forward to delivering in 2020.

Second, in the fourth quarter, OMP finalized a dedication of certain Delaware acreage from Oasis Petroleum to OMP for oil and water. This dedication in our Panther DevCo is a huge win for both parties and demonstrates our support of OMP unitholders.

Third, the team has done a fabulous job on third-party opportunities, exceeding our lofty expectations since going public. We now have over 10 customers across the Williston and Delaware and are currently talking to a number of additional parties on different opportunities. Hats off to the team for their continued success on this front. Numerous opportunities we've secured help leverage our scale, improve the financial outlook and diversify our revenue stream. As a reminder, in the back half of 2019, approximately 20% of OMP's EBITDA came from third parties.

Finally OMP remains uniquely attractive investment opportunity. The combination of peer-leading distribution growth, strong coverage and a double-digit yield represent a compelling value to customers. We've greatly exceeded expectations since going public and look forward to continuing our track record of success.

Our gas complex is operating smoothly and volumes increased significantly over 2019. In the fourth quarter, third-party volumes approximated 30% of Bighorn total volumes. While you've seen the other plant start-up in recent months, overall processing in the Williston Basin remains tight. Gas captured in the basin was only 83% in the fourth quarter, but with our Wild Basin infrastructure in place, we were able to capture 97% of gas volumes for Oasis in the Wild Basin area.

North Dakota mandates 88% capture, which is scheduled to increase to 91% in November of this year. North Dakota gas production continues to hit new records and averaged over 3.08 Bcf per day in the fourth quarter, while basin processing ended the year at 3.16 Bcf per day. Gas production continues to grow in the basin, so total capacity will likely remain tight even with new projects online.

We continue to remain active with multiple parties regarding additional opportunities as we seek to reduce overall flaring in the Williston, while capitalizing on our strategic investment. Separately, in the Delaware, OMP's infrastructure a strong competitive positioning and is in close proximity to several regional oil hubs. We already signed our first third-party deal this year and think there is an opportunity to do a lot more.

I'll now turn the call over to Michael to go over a little more detail on our operations.

Michael Lou

Thanks, Taylor. OMP remains focused on executing our plan and adding value to its unitholders. Our sponsored plans include two rig programs in both the Williston and Delaware in 2020. In the Williston, a significant amount of activity is expected in OMP-dedicated areas including Wild Basin and Indian Hills. In the Delaware, our sponsor will begin to ramp up production in OMP-dedicated areas as well. Additionally, third-party business continues to be a significant contributor to our volumes and cash flow.

I'll give a bit more color on the fourth quarter before diving into 2020 projections. At Bighorn, both crude and gas volumes exceeded the top-end of guidance during the quarter, reflecting strong volumes from our sponsor and third-parties, as well as high utilization at our gas complex. Utilization for the gas complex was around 80% for the fourth quarter. At the Bobcat DevCo, volumes exceeded guidance across the board. And at Beartooth, water volumes were within our guidance range.

Looking forward to 2020, we provided a preliminary EBITDA range suggesting double-digit growth year-over-year. While we've exceeded our expectations on this front for multiple years, we typically take a conservative approach to guidance and challenge the team to deliver above and beyond our plan.

On a quarterly basis, we would expect first quarter EBITDA to decline a bit versus the fourth quarter, reflecting typical seasonality of the Williston and well timing in the Permian. In the second quarter and beyond, volumes and EBITDA should ramp significantly, with the fourth quarter 2020 being the highest. We've provided gross EBITDA guidance by DevCo in our investor presentation on Page 11 consistent with how we report.

On capital, net-to-OMP, we're expecting a range of $68 million to $75 million with the majority of spending being in the Bobcat and Panther DevCos. The 64% decline in spending versus 2019 reflects the completion of several major projects and the end of the capital expenditures agreement with Bobcat. The budget includes some capital for third-party projects we have in hand.

As the year moves along, we have the potential to bring in more third-party agreements. This would result in higher spending, but obviously increased cash flow as well once the projects commence. Lastly, in 2019, OMP concluded the capital arrangement with Oasis, which resulted in OMP owning approximately 35% of the Bobcat DevCo.

With that, I'll turn the call over to Richard.

Richard Robuck

Thanks Michael. OMP's financial position and forward outlook remained strong. EBITDA has grown from $43 million when we IPO'ed back in 2017 to a $159 million in 2019, driven by a combination of support from our sponsor, as well as growing third-party business. The 2020 outlook calls for double-digit growth yet again and continued strong coverage which supports our 20% annualized distribution growth. We declared fourth quarter distribution of $0.54 per unit, growing our distribution 5% versus the prior quarter. Distribution coverage was well above our guidance at 2.2 times in the fourth quarter.

Net debt to fourth quarter annualized EBITDA was 2.3 times with $459 million drawn on our revolver. We plan to maintain a similar leverage ratio as we exit 2020. Finally, in November, OMP began servicing Oasis and third-parties in the Delaware Basin. OMP reimbursed Oasis approximately $25 million and assumed approximately $10 million of liabilities incurred by Oasis prior to the effective date. This transaction further diversifies our revenue stream and enhances our financial outlook. In closing, we're very pleased with OMP's results this quarter and look forward to delivering strong performance in the future.

I will now hand the call over to Brandon for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Jeremy Tonet with J.P. Morgan. Please go ahead.

James Kirby

Hey, guys. This is James on for Jeremy. Just wanted to start off with -- it's on the slide that you guys have a 50% target for third-party contribution. Do you guys have a timeline in terms of when you expect to meet that target?

Taylor Reid

Yeah. We've been able, James, to really grow that third-party business. Obviously, we've gone from when we IPO'ed this thing about two years ago to really no focus on the third-party side. Really started building into that in 2018. And what you're -- where you see us now is kind of 25% of revenues on the third-party side. So we've made really good progress. Obviously, we'd like to continue that progress. We don't have an exact timeline on that, but we're working very hard toward continuing to diversify our customer base.

We've really grown the customer base pretty significantly. It's not just one or two guys, it's double-digit type number of new customers which is significant. We're doing that across the basins as well and across commodities. So we've really got just a ton of great momentum on that front. We've been able to service those customers really well and we'll continue to do so and hopefully continue to grow our market share with those customers, as well as new customers.

James Kirby

Got it. Thanks. And then just on Panther, you mentioned the opportunity to pursue produced water recycling. What is the kind of capital requirements there? And is that a 2020 event do you think that would be in the transfer?

Taylor Reid

We don't have an exact number on produced water recycling, the costs. We're still looking into all of that. That's likely not a 2020 event. That's a little further out than that. But we think it is a big opportunity in the Permian, in the Delaware in particular. Obviously, there is a lot of produced water that comes out. It's actually a little bit easier to work with than produced water from other basins. And so there won't be quite as much that you need to do to get it ready to reuse. So we're still looking into it. It's a big opportunity, but it's probably a little further out for us.

James Kirby

All right. That's it for me. Thanks.

Taylor Reid

Perfect, thanks.

Operator

Our next question comes from Pearce Hammond with Simmons Energy. Please go ahead.

Pearce Hammond

Good morning, and thanks for taking my questions. Richard, right now you're about 80% drawn on the revolver. And do you anticipate exercising the accordion figure? And if so -- feature, sorry. And if so, what are the conditions that you need to meet to increase the revolver by the $200 million call it for with the accordion?

Richard Robuck

Yeah. Pearce, that's a great question. You know the good news from our perspective is we're really at basically the peak of where we think we're going to be drawn. Right now as we ramped up business last year and drew for the acquisition of the Panther DevCo, spending to grow that Bobcat asset and then also doing that Bobcat capital arrangement, we were -- we outspent a little bit last year. But right now I feel good about the $450 million -- $459 million drawn on the revolver.

And so the way we think about it is if there is incremental third-party opportunity or there's large projects come out along our way, we'll just go back to the bank group. The way the process has worked in the past is you just show your bank group your thoughts on the future and they look at leverage profiles and they're willing to extend capital to you if you -- if it makes sense and you have a leverage profile like we do, we think there is -- we have a lot more capacity for growth if we need it. But right now I don't feel like we definitely need it.

Pearce Hammond

Okay, perfect. Thank you. And then my follow-up. Given the level of the distribution yield right now and the fact that OMP is not being rewarded for that level of distribution, does it make sense to cut the distribution and use the funds for deleveraging?

Richard Robuck

Yeah. Pearce, this is something that we continue to discuss and analyze internally. There are many factors that come into play. And so as we look at what OMP has done over the past few years, our accomplishments in growing the business have more than supported the growth rate that we've had. So from barely over one times coverage ratio when we went public to what 2.2 times in the fourth quarter of 2019. We've had no trouble more than outpacing our distribution growth rate. EBITDA has been up like 3.7 times since going public. And we continue to see decades of inventory at Oasis and we're closely linked with that drilling operations from Oasis, as well as the opportunities from third-party customers.

Additionally, we have two slides in our investor deck, Slide 8 and Slide 9 that focus on what we've been able to do to the benefit of our unitholders since going public. And every key transaction that we've done has really been extremely accretive for the unitholders. And we believe we have a proven track record of being aligned with all of our unitholders. I think that we'll probably continue to try to find ways to do the right thing for our unitholders as we analyze options around the growth rates going forward and we'll work through this in the coming quarters. The second part of your question was about leverage and with industry leading leverage like 2.3 times, we feel really, really good about the way that the year sets up and even as we exit the year with leverage.

Pearce Hammond

Great. And then finally, any updates, in the past you guys had talked about maybe selling a DevCo or JV or just anything on the strategic front?

Richard Robuck

Yeah. So we're -- obviously we're looking at stuff all the time. Right now, we've got a good asset diversification among the basins. We think we're in the right part of those basins. So really looking for continued operation -- opportunities to grow with our sponsor, as well as build that third-party business, Pearce. So that's kind of the main focus. Obviously if there is opportunities here and there to pair off assets and opportunistic basis. We'll take a look at that, but we're not focused on that right now.

Operator

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

Taylor Reid

Thanks, Brandon. In closing, fourth quarter results marked another strong quarter for Oasis Midstream Partners. We continue to deliver on our promises and exceed expectations. Thanks again for joining the call today. And as always, we will make ourselves available for any follow-up questions that you might have. Thank you.

Operator

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