Evolve Transition Infrastructure LP

Evolve Transition Infrastructure LP

$1.33
-0.04 (-2.86%)
American Stock Exchange
USD, US
Oil & Gas Midstream

Evolve Transition Infrastructure LP (SNMP) Q2 2016 Earnings Call Transcript

Published at 2016-08-12 17:00:00
Operator
Good morning and welcome to Sanchez Production Partners' Second Quarter 2016 Earnings Conference. My name is Nukul and I will be moderating today's call. [Operator Instructions] As a reminder today's call is being recorded; and if you object to such recording, you may disconnect at this time. I would now like to turn the call over to Chuck Ward, Chief Financial Officer of Sanchez Production Partners. Mr. Ward, you may begin. Charles C. Ward: Good morning and thanks for joining us. With me this morning is Gerry Willinger, our Chief Executive Officer; and Pat Sanchez, our Chief Operating Officer; and Tony Sanchez III, Executive Chairman of the Board of Directors of our General Partner. Before we get started, please note that the discussion this morning will include forward-looking statements, which are subject to certain risks and uncertainties. These are described more fully in our documents on file with the SEC, which are also available on our website. Additionally, we will use non-GAAP financial measures in this morning's discussion to help our unit holders and investment community better understand our operating performance. Our press release issued this morning includes a reconciliation of these non-GAAP financial measures to GAAP measures. I'd now like to turn the call over to Gerry Willinger for some introductory comments. Gerald F. Willinger: Thanks, Chuck. During the second quarter of 2016 we demonstrated the capability of both, our unique structure and relationships. To that end we exceeded our volume and revenue expectations on the Western Catarina Midstream system for the quarter, with throughput at a 138% and 136% of the minimum quarterly quantity for oil and natural gas respectively, and began to realize the benefits of continuing Catarina development, which includes some of Sanchez Energy's most prolific wells drilled today in the Southcentral region of the ranch. Our performance allowed us to declare a cash dividend -- distribution of $41.83 per common unit. This represents our third consecutive increase of 1.5% and a 6.1% annualized rate of increase over the initial distribution in the third quarter of 2015. Including the effects of the June 30, 2016 conversion of the Class A preferred units to common units. We had a distribution coverage for the second quarter of 2.97 times, excluding the Mid-Continent assets targeted for divestiture and 2.5 times including the Mid-Continent assets. In addition to significant headroom on our common event distribution we ended the quarter with a strong liquidity position of approximately $88 million, which consists of $87 million in borrowing capacity under our credit facility and approximately $1 million in cash and cash equivalents, and the pro forma leverage ratio calculated in accordance with the terms of our credit facility of 1.9 times. Taken together we continue to believe that we offer one of the most compelling investment opportunities in the Master Limited Partnership space today. We will continue to focus our near term efforts on midstream transaction development to take advantage of recent industry market conditions of liquidity and the strength of our balance sheet. As part of those efforts we have received instrumental support from both Stonepeak and our lending institutions. In July 2016 SPP purchased a 50% equity interest in Carnero Gathering LLC which operates a 45 mile high pressure gathering line in South Texas for approximately $37 million in cash and the assumption of approximately $7.4 million in future capital obligations. This asset will add approximately $7 million of annualized EBITDA to SPP. This is an accretive acquisition whereby we were able to acquire highly productive midstream assets at below a 6.5 times EBITDA multiple. The strength of the transaction further demonstrates our dedication to growing the midstream infrastructure at SPP at very attractive pricing. With that overview I'd now like to turn call back to Chuck for a closer look at our second quarter 2016 results. Charles C. Ward: Thanks Gerry. Our revenues totaled $12.3 million during the second quarter of 2016. Included in this amount is revenue for midstream sales of $14.3 million, revenue from Mid-Continent production of $2.6 million, revenue from other production activities of $3.2 million, $5.5 million related to hedge settlements, and a $13.2 million loss on mark-to-market activities, which is a non-cash item. Our total net production for the quarter was 304 MBoe for average net daily production, a little more than 3,300 Boe per day. Net oil and liquids production accounted for approximately a third of our total production during the quarter and was slightly more than 1,100 barrels per day, which was relatively flat quarter-on-quarter. Our operating expenses during the second quarter 2016 totaled $13.6 million, which includes $3.3 million in operating expenses related to the Western Catarina Midstream system and $1.3 million in production operating expenses not related to the Mid-Continent assets. Our general and administrative expenses during the second quarter 2016, excluding $2.7 million in non-cash items related to unit-based compensation and asset management fees, totaled $3.4 million, which includes a $0.5 million related to Mid-Continent assets. Our adjusted EBITDA for the second quarter 2016 was approximately $14.6 million, which compares to $13.5 million in the first quarter 2016, and $5.2 million in the second quarter 2015. Quarter-on-quarter we realized an increase in adjusted EBITDA of about 8%. Our capital spending during the second quarter 2016 totaled approximately $1.2 million and after closing the recent acquisition of the 50% interest in Carnero Gathering, we currently have $146 million in debt outstanding under our credit facility which is a borrowing base of $195.7 million. As noted in our press release, the Midstream portion of our borrowing base is scheduled for redetermination during this quarter. For the balance of 2016, we have hedged approximately 2 Bcf of our natural gas production at a fixed price of approximately $4.14 per MMbtu, and approximately 207,000 barrels of our crude oil production at a fixed price of approximately $74.03 per barrel. Additional information on our hedge positions can be found in the 10-Q which we expect to file later today after the market closes. With that overview of our results we'd now like to the moderator to open the line for some questions.
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gregg Abella of Investment Partners Asset Management. Please go ahead.
Gregg Abella
Good morning, guys. Gerald F. Willinger: Good morning, Gregg.
Gregg Abella
So chief in many investors' minds I think is the stability of the distribution and the ability to grow it overtime. And you've done a nice job at that, I think right out of the gate. So I'll give you credit there. With this level of debt, assuming no more dropdowns, this mix of assets, and I guess it's roughly $7 million you have to commit to the gas infrastructure project. Do you have a sense of what sort of forward EBITDA and distribution coverage you'll have for 2017? Charles C. Ward: No, we're not able to provide 2017 guidance. As Gerry spoke the adjusted EBITDA contribution forecast for next year is about $7 million. On the year I think with the recent increases in production that we're seeing through the Western Catarina, expect that the Carnero System which moves most of that volume will also see an increase. So I think the $7 million's a nice number. We will provide 2017 full guidance either later in this quarter or in connection with third quarter results. But that's kind of the time period in which we will try to give more specific guidance on 2017.
Gregg Abella
Well, then let me then ask it maybe a little bit different way that would be addressable. Do you feel comfortable with this level of distribution, that it's at least going to stay relatively stable if not grow over the next say 12 months? Gerald F. Willinger: We have been consistently growing and adding to our distribution in the past. Our forward plan has not changed. We view the ability to grow our business as highly attractive. As publicly reported we believe there is north of $800 million of potential acquisitions in the pipeline coming from Sanchez Energy. And we view our business as having a strong balance sheet and be able to increase our cash flow through accretive acquisitions going forward. Charles C. Ward: We're below two times.
Gregg Abella
Go ahead? Charles C. Ward: I'll just say we're below two times levered debt to adjusted EBITDA. Net of the Carnero, we're still inside of the 2.3 times on a simple pro forma. That's a really good position to be able to grow in the future. But also it means that we have a lot of degrees of freedom to operate even the existing business.
Gregg Abella
The reason I ask is that if you look at -- well, your largest investor, which is Stonepeak and we're obviously very happy that they're there. But there are some milestones that you have to sort of accomplish over a certain amount of time, or their interest expense paid to them goes up. So I guess what I'm worried a little bit about is can you continue to maintain this distribution if you're not able to hit every milestone that they have and their interest expense goes up? Can you at least keep the distribution at this level and grow it? Gerald F. Willinger: Yeah, first let me comment, Gregg is that all those milestones are achievable and they are something that through our business plan we're always actively addressing with our partner Stonepeak. Stonepeak has been and continuous to be an outstanding partner and a value added partner. And as we continue to successfully execute our plans through the -- our EBITDA growth historically, and going forward, we expect them to continue to be a good partner and address any issues that are outstanding. So we currently do not see any changes derived from any issues in our financial statements in our growth that will cause us to change our business model.
Gregg Abella
That's also good to hear. And this is the last question, but little more subjective, just because I personally believe that the units aren't reflecting the value proposition that exists here. Is there still room at all, under the buyback plan or does management intend to maybe step in and purchase some equity -- some stock at these levels, sort of give a level of confidence to other unitholders that this is a good entry point? Gerald F. Willinger: Yes. So Gregg, the way I would answer that is, to-date, since we've initiated our distribution, we've put approximately $11 million of cash back to our unitholders through distributions and buybacks. We did $5 million of buybacks accomplished last -- in the first quarter. The response to that in the market has created a liquidity in our -- on our position, and we're trying to assess how that affects the stock. If we do additional buybacks, the viewpoint is it creates additional liquidity and people can get their hands on the security to trade, because of the supply demand issue in the units. We're addressing any and all scenarios to improve the liquidity and trading performance of our units. We agree with you that the yield is not reflective of where we think the stock should be or the units -- the price should be. And we think our value proposition is the best, if not the best, one of the best in the MLP space. And if you look going forward, if we maintain this rate, the capital return to the investors at this price would be actually paid back in less than five years. And so we're struggling as you are with the response to our unit price. But that being said, we're focused on executing the business. We try not to let our unit price affect our decision-making on what's best for the business going forward, and just try to execute and hopefully, people will wake up and realize the value proposition that we're offering.
Gregg Abella
Well, I guess, to that end, I personally would like to see if management and the board, on a personal level, I know Chuck in the past has bought stock, but to the degree people actually part with their hard earned dollar and buy it, it sends a lot of confidence to the market. So I'd ask you to consider that. Gerald F. Willinger: In the past, the management team has and will continue to invest in the company. We will still evaluate all the needs for liquidity in the marketplace to evaluate the soft price performance. Right now, I think the most important thing we can do is continue to drive liquidity in our units and offer component value proposition. So we will continue to, like I said, evaluate any and all options to continue to drive our unit price.
Gregg Abella
Fair enough. Thanks, guys. Gerald F. Willinger: Thanks.
Operator
[Operator Instructions] Our next question comes from Jay Abella, Investment Partners. Please go ahead.
Jay Abella
Hi, guys. You get two heads of Ohio [ph] here today it appears. So congratulation on another good quarter. Operationally things look great. I was going to ask two questions -- I was going to ask one question about your lease operating expenses of the legacy assets, which are now discontinued or now sold. So from a run-rate standpoint and on the cost saving standpoint, what type of cost savings can we see now on the lease operating line that these assets are gone? And do they -- and are they more than the revenues you were generating, and if so, by how much? Charles C. Ward: So we don't go [indiscernible] upon a breakdown. Here is though a general way to think about the transaction. We sold a third of the operated Mid-Con properties revenue, and we're able to discharge two-thirds or so of the operating cost associated with those properties. But that gives you a feel for probably then what the financial impact was certainly in a sub $3 gas market. These are predominantly gas properties. So we will certainly enjoy as we’ve retained about two-thirds of the production for about one-third of the operating cost, we certainly will enjoy an uplift and I’ll say positive operating cash flows out of the remainder of the properties that we have, though we still would qualify those assets as assets that we have for sale in the market.
Jay Abella
Okay so if that's the case then should you not have adjusted your forward EBITDA guidance for the year higher to some degree? It’s the same as it was five quarters ago. Charles C. Ward: Yeah we made the affirmative election to keep our forecast guidance the same irrespective of either of the sale of asset. Just remember our forecast guidance excluded any contribution of the Mid-Continent assets. So what happened on there relative to our guidance that we provided wouldn’t be instructive. But it also at same time as we’re in the -- technically in the back half of the year at this point and we’ve maintained the steady increase in the distribution, we elected to keep the guidance in place even after the Carnero acquisition.
Jay Abella
Right and I think the reason why Gregg and I are harping on this so much is that there are so many moving parts and from a pro forma basis it looks like it's hard to get your head around what’s really happening here. And so and that leads I guess back into his last point with respect to unit price liquidity and Gerry’s comments, when you attend conferences and don’t present, or attend conferences and possibly don’t really have as much of an audience either directly after you either meet with people or give a presentation, is there another investor group outside the oil and gas MLP folks that you could possibly tap into that you haven’t already? And the reason I'm asking guys is getting a cost of capital which is lower than what you have now on the equity side can’t hurt. And so the whole thing comes back to having an audience and then being able to tell them on a pro forma basis, what the company is going to look like going forward. And without that type of communication I think even people that have followed us for a long time have a hard time putting together all the moving parts. So I know it was sort of long winded but if you could comment on that, I’d appreciate it. Gerald F. Willinger: Well, thanks for your suggestion, Jay. What we view as important here right now is to continue execution of the growth of our business. We came out with 2016 projections. I’ll remind everybody it was in probably the worst market in MLP history back in February. At least the forecast was continued growth in our business. We’re still forecasting that continued growth in our business and we’re holding our volumes consistent and our year-end EBITDA forecast and distributable cash flow range to the consistent measures that we said at the beginning of the year. So we view this as just executing the business. On our go forward pro forma plan is again we’re looking at accretive transactions that will grow our EBITDA and continue to grow our EBITDA. If people follow SN operating disclosures they should note that SN is continuing outperforming in Catarina, on both volumes and development side. And obviously our volumes in the Western Catarina asset are tied to volumes and development on the Catarina Field. So if you follow volume development and what’s happening at SN at least a significant portion of our business which is gathering system is tied to that, you can understand what our volumes look like going forward in our gathering system. As we publicly reported we are at 1.36% and 1.38%, a 138% above, a 136% above the minimum required quantities, which I think demonstrate the underlying strength and the performance of the wells that SN is drilling in that area.
Jay Abella
So what you just said though, between now and this time in possibly November we’re not going to really have a clear picture of all good things that you’ve done in the past from a modeling standpoint. I think that it’s -- yes, that’s a struggle at least internally here, and with the technical answer that you just gave with respect to having the link, Sanchez Energy's production profile and operational results back to this and whatever, it's complicated, it is. And if you want to attract a new audience that is outside the MLP or oil and gas space, you're going to have to, I think for what it's worth make that story a lot more understandable than it currently is. Or otherwise your cost-of-capital will maybe possibly stay high relative to some of the -- let's call them Wall Street aspects that are challenging right now. Gerald F. Willinger: We appreciate the comments Jay and like we keep continuing to say we're executing on the growth plan of our business. We think we have a pretty simple business model that focuses on volume growth at Catarina and our other midstream assets and our production assets. We don't view them as complicated and continue to share the story with anybody that follows us. So we appreciate it.
Jay Abella
Okay, thank you.
Operator
[Operator Instructions] Our next question comes from Matt Niblack of HITE. Please go ahead.
Matt Niblack
Hey, thanks for taking the question and congratulations on continuing to execute here. So just wanted to clarify the Midstream volumes, looks like those are going quite well, above plan, as you stated and that's really exciting to see. Could you comment on how much that above plan volume level is reflected on your trajectory versus one-time offloads from another system or timing of completions? And how we should think about those Midstream volumes evolving in that system over the coming months and quarters? Charles C. Ward: Sure, I think so that is the reason that Gerry referred to looking really what's happening with SN inside of Catarina, and the drilling there. Recently they announced that they've increased the capital budget for drilling and that is going to be headed into Catarina. And then that will turn around and actually incrementally drive volumes relative to where we sit today. So I think to us that seems to be a clear linkage to watch and observe, the timing of when we do operational updates and public reporting, as we're always a couple of days behind them. So we think that provides a good kind of informative timeline. But yes, we're at plan relative to where we thought we would be probably for a little bit later in the quarter already at this point.
Matt Niblack
Okay, so that's not caused by any sort of temporary bumps but it sounds like the way you described it, this is more reflective of a more quickly ramping trajectory? Charles C. Ward: That's correct.
Matt Niblack
Great, yeah, that was it. Thanks. Charles C. Ward: And the great thing is that that's going to -- sure and the great thing Matt for us is of course that will also flow through the Carnero system as well. So we kind of get a double bang for our buck.
Matt Niblack
Right, and then actually one follow-up to that is it looks like the CapEx you've described if I'm not mistaken hasn't changed despite the ramp. Is there -- despite this is a somehow quicker ramp, is there a possibility CapEx will need to move up or is there such capacity on the system that there is really a lot of runway to continue exceeding plan before you would need to bump CapEx above the prior disclosure? Charles C. Ward: Actually the way the system is structured, it's SN who is doing the building and development of essentially their own gathering assets hauling across and then hooking into our existing system. So of the little bit over $1 million of this quarter, most of that actually went straight to a stress [ph] treatment improvement that we're able to do that had a nice rate of return, and wasn't really associated with the incremental hook up or gathering. Gerald F. Willinger: And additionally Matt we've done some modifications through design work that has increased the capacity of system marginally from about 200 to about 240 units per day. So we feel like the design work that we're doing with compression and what have you is allowing us to maintain that increased capacity flow.
Matt Niblack
Great. I appreciate that. I -- hopefully, the market over time will recognize that despite the broader declines in the Eagle Ford that you guys and your parents are kind of a diamond in the rough over there. So keep up the great work. Gerald F. Willinger: Thanks, Matt.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Ward for any closing remarks. Charles C. Ward: Well, thanks again for joining us this morning. We really look forward to speaking with you again very soon this next quarter.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.