Rattler Midstream LP (NASDAQ:RTLR) Q1 2022 Earnings Conference Call May 4, 2022 10:00 AM ET
Adam Lawlis - Vice President of Investor Relations
Travis Stice - Chief Executive Officer
Conference Call Participants
Charles Bryant - Credit Suisse
Michael Lapides - Goldman Sachs
Good day and thank you for standing by. Welcome to the Rattler Midstream’s Q1 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Adam Lawlis, Vice President of Investor Relations.
Thank you, Andrea. Good morning and welcome to Rattler Midstream’s First Quarter 2022 Conference Call. During our conference call today, we will 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 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.
Thank you, Adam. Welcome, everyone, and thank you for listening to Rattler Midstream’s first quarter 2022 earnings call. The first quarter of 2022 was another exceptional operational quarter for Rattler. And together with the effect of a full quarter of post the recent transactions showcases the Rattler business going forward. This is reflected in the operating results with a sequential increase in adjusted EBITDA of 8% quarter-over-quarter.
Despite limiting volume growth in the near-term, the flat production guidance of Rattler sponsored Diamondback Energy allows Rattler to efficiently manage its business and minimize unnecessary operating and capital outlays. With inflationary pressures on both the capital and operating expenses resulting from a tight labor market, and materials derived from hydrocarbon and steel based commodities. The operating team at Rattler performed admirably in controlling costs.
Our focus for the rest of the year is holding the line on costs wherever possible, and continuing to provide the highest level of service as responsibly and economically as possible. The outlook for the equity method joint ventures is also extremely positive. The entirety of the joint venture portfolio consisting of long haul and intra-basin oil and gas transportation systems is now in full service and the overwhelming majority of the expected capital contributions have been made.
Additionally, in keeping with the expected growth of the overall Permian Basin volume and years to come, these projects are expected to continue to grow volumes and accordingly cash flow for years to come. In combination with the operated CapEx, which is expected to decline dramatically once Rattler completes the construction of its centralized gathering system. The return of capital from these joint ventures will bolster Rattler’s free cash flow as the gap between equity method distributions and the growing equity method of EBITDA converges.
With Rattler’s peer-leading leveraged position limiting the need for principal reduction. We expect to return this growing free cash flow to unitholders in the form of either the distribution and the common unit repurchase program as the market conditions warrant.
With these comments now complete, operator, please open the line for questions.
Thank you. [Operator Instructions] Our first question comes from Spiro Dounis from Credit Suisse.
Hi, this is Chad on for Spiro. Starting off, it sounds like you are entering a more stable period following the active M&A over the past few months. Do you view any incremental M&A is unlikely in this environment? Or are there still some smaller opportunities around your footprint that you’re seeing?
Yeah, Chad, good question. I certainly think large scale M&A or new equity method JVs are off the table today, given what we’ve done in the last 9 months or so. There are little deals here and there that could make our systems a lot more efficient. It’s not really anything that’s going to move the needle much on the corporate level, but certainly can help at the asset level and that’s kind of where we’re focused. So, building out our system, but also making sure we have great connectivity, particularly in the Martin County area as we build that out.
Okay. Understood. That’s helpful. And then, I guess, just with a few expansion projects being announced for Permian gas takeaway. Just want to get your latest thoughts on how conversations are developing on participation in a Greenfield Permian gas pipeline from the Rattler perspective?
Yeah. That’s good question too. I think just like you’ve seen over the course of Rattler’s public history, we are focused on JVs in participating somewhere where Diamondback has a significant amount of volume or acreage dedicated to that particular JV or system. And, right now, on the Greenfield side, Diamondback doesn’t have control of enough gas molecules to contribute to a Greenfield pipe. We’re certainly pushing, putting my Diamondback hat on, we’re certainly pushing the G&Ps to commit to a new long haul pipe, but it won’t be through the Diamondback gain or the Rattler investment alongside it. But we think it’s going to happen. It’s just we won’t be a major participant in it.
Okay. Understood. Thanks for the time today.
Thanks a lot.
[Operator Instructions] Next step, we have Michael Lapides from Goldman Sachs.
Hey, guys, thanks for taking my question. Real quick, when you think about just organic growth CapEx on your systems. Can you talk about chose to cadence like when you’re thinking about this year relative to maybe what the next 2 years bring? How dramatically different should we be thinking about the cadence of organic CapEx to build out the system? And if one part is up, one part is down or if they’re moving in lockstep? Like, I’m just trying to think about it given a little bit of the focus on having more recycled water capability just trying to think trajectory?
Yeah, good question, Michael. This year is certainly a heavy year for operating CapEx, $80 million to $100 million, I think, we still feel good about that range, despite inflationary pressures. I would say that that’s going to encompass the majority of our necessary build out across our Martin County system, and then things will kind of move back down into a [blocking and tackling] [ph] maintenance/new battery connection type of capital. So, if you look back at kind of where we were last year, before we started building these new systems in Martin County is kind of a – $8 million to 12 million a quarter of CapEx. I would think that we’re probably moving back towards that in 2023 and beyond.
Got it. And then, when you think about capital allocation of the Rattler level. How do you – how does the team think about? Like, what’s the most accretive way to return the capital? Like, what are the metrics you guys are using? You’re sitting around talking and saying, hey, what we ought to bring forward maybe a greater pace of distribution hikes versus, hey, at a certain metric or certain valuation level, the right thing to do with buying the units?
Yeah, good question. It’s certainly become a harder debate as the stock has improved in price, the flip between distribution and buyback. We’re very aggressive on the buyback back half of the year last year, it’s still out there. We didn’t get as much done in Q1 as maybe we’d like you to trading days and blackout periods. But, it’s still out there in times of weakness. I think, generally, we think the distribution is the primary return vehicle for Rattler as well as other midstream companies. But we’re not afraid to lean in the buyback if we see weakness.
And there’s the concept of doing onetime upside think of the distribution meaning specials. Does that [didn’t have] [ph] the Rattler portfolio?
No. I just think, this year, we spent some money in Q1 on the BANGL pipeline and we got a lot of CapEx relative to the forward outlook which is coming down. So, I think, a distribution increase is certainly something the board is going to discuss as we get more confidence in the free cash flow. I think we’re in a good place on debt today. Why we don’t need to pay down too much more debt and we’re certainly not going to sit on the cash. So, I think, there’s discussion to be had in future quarters on raising the distribution quarterly or more consistently.
Got it. Thank you, guys. Much appreciate it.
I’m showing no further questions at this time. I’d now like to turn the conference back to Travis Stice, CEO.
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.
This concludes today’s conference call. Thank you for participating. You may now disconnect.
Thanks, guys. Good job.