Good morning, and welcome to Sanchez Midstream Partners Second Quarter 2018 Earnings Conference. My name is Debby and I will be moderating today’s call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded, and if you object to such recording, you may disconnect at any time. I would now like to turn the call over to Chuck Ward, Chief Financial Officer of Sanchez Midstream Partners. Mr. Ward, you may begin.

Good morning, and thanks for joining us. With me today is Gerry Willinger, our Chief Executive Officer; and Pat Sanchez, our President and Chief Operating Officer. Just a few quick notes before we get started. We released our second quarter 2018 earnings report this morning and we plan to file our 10-Q after the market closes today. Our second quarter 2018 earnings release is available on our website, www.sanchezmidstream.com. Also note that our 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. And finally, we will use non-GAAP financial measures during this morning’s discussion to help our unitholders and the investment community better understand our operating performance. The earnings release available on our website includes a reconciliation of these non-GAAP financial measures to GAAP measures. And with that, I’d now like to turn the call over to Gerry Willinger.

Thanks, Chuck. The Partnership continues to execute its 2018 operating and financial plan. Despite lower than expected throughput volumes on our midstream assets, our second quarter 2018 adjusted EBITDA increased by approximately 15% when compared to adjusted EBITDA for the second quarter 2017. As a result, our cash available for distribution in the second quarter of 2018 was approximately $7.7 million, which covered our distribution on common units by approximately 1.1 times. During the quarter, we also announced the execution of a series of agreements with Targa to form an expanded 50/50 midstream joint venture, operated by Targa, in South Texas. The Carnero JV enhances our midstream strategy, secures and expands our third-party volumes, and is expected to provide additional stable, fee-based cash flow to the Partnership. The structure of the transaction greatly simplifies our previous joint ventures with Targa, facilitates greater operating efficiencies, and provides a solid platform to capture benefits that are expected to increase over time as the joint venture services the needs of Sanchez Energy and other producers and marketers in South Texas. Importantly, with additional volumes expected through our expanded system in 2018 and the years to come, we have preemptively put ourselves in a position to continue to grow the Partnership, while being disciplined with capital. Accordingly, we see the Carnero JV as a key step in positioning the Partnership for continued growth in South Texas. Now back to Chuck for a look at our financials for the second quarter 2018.

Thanks, Gerry. Our revenue for the second quarter 2018 totaled $17 million. For this amount, a little under $15 million came from operated midstream activities, about $6 million came from production activities and about $0.5 million was the result of a loss hedge on settlements. The balance was a loss of about $3.2 million on mark-to-market activities, which is a non-cash items. Our operating expenses during the first quarter – during the quarter 2018, not first, second, totaled a little less than $18 million, including slightly more than $3 million in operating expenses related to midstream and about $2.3 million in production-related expenses and taxes. G&A and unit-based compensation expenses for the quarter totaled about $8.3 million. But this number includes $4 million unit-based comp and asset management fees, both of which in non-cash items. Also and that number is about $1.4 million for a one-time legal settlement related to the properties in Oklahoma, which we sold in 2016. Adjusted for these items and our quarterly – our quarterly cash G&A rate was below $3 million in line with our guidance. Including $5.5 million in cash distributions from our JV with Targa, our adjusted EBITDA for the second quarter 2018 was approximately $17.6 million, after backing out $2.5 million for cash interest expense, $400,000 for maintenance CapEx, and $7 million for the cash portion and distributions to our preferred unitholder, we generated approximately $7.7 million in cash for distributions, which as Gerry mentioned earlier, results in the distribution coverage ratio for the quarter of about 1.1 times. We currently have $184 million in debt outstanding under our credit facility, which has a borrowing base of $310 million and $210 million under commitments. As noted in our press release this morning, the midstream portion of our borrowing base, which is currently set at approximately $275 million, resulting Partnership’s midstream collateral coveraging – covering the $210 million elected commitment amount by approximately 1.3 times. There’s no change to our hedge profile during the second quarter 2018 and the details of our hedge positions are to be found in the 10-Q. With that overview of our results, we’d now like to turn over to the moderator to open the question – the line for questions.

We will now begin our question-and-answer session. [Operator Instructions] The first question comes from Georg Venturatos at Johnson and Rice. Please go ahead.

Hey, good morning.

Good morning, Georg.

Good morning, Georg.

My apologies. Georg, I lost you. If you would go back into the queue, again. I’ll put you on the podium. Okay, go ahead, please.

Are we back on line?

Yes, we hear Georg.

Hey, guys. Yes, Gerry, you talked about the Carnero JV expansion. Just wanted to see if you could elaborate more on the opportunity set there, which seems to fit really well and obviously continue to partner with Targa. But related to the assets that were spoken about back in the initial release relative to silver up to what kind of capacity opportunities we have there and just kind of expectations for potential cash flow generation longer-term?

Yes, certainly. With expanding the JV, we brought the Carnero pipeline volumes up to approximately 400 a day capacity without compression, bring in SO2 processing capacity of approximately 200 a day into the JV as well, which set us up to to manage the volumes from both Catarina and the Comanche assets that are SN operated that have other working interest partners in there as well. So as volumes continue to perform and go slightly at Catarina and the new volumes in that dedicated acreage that comes with the Comanche volumes, we feel like as we approach 2019, end of 2018, those volumes are going to increase and now they’re just starting to come into the system. So we’re just starting to see the benefit of some of the Comanche volumes through the pipeline to be processed a little bit over at Silver Oak, too. We do view this as a growth play on volumes because of the entirety of the dedicated acreage coming from Comanche with the multiple working interest partners and set this up for the future, while spending very little capital in the near-term to accept those volumes into our system.

Got it. I appreciate that, Gerry. And just wanted to get an update, I know we had thrown out volume guidance for Catarina at least from the gas side, given where we are year-to-date, do you guys still feel comfortable with that range?

Hey, Georg, this is Chuck here. Yes, I think, we obviously as well watch the volumes out of Catarina. But I think, [indiscernible] listened in on their call, what it seems like is going to continue to occur on the Sanchez Energy basis is a pivot more towards investment in Catarina. We’ve already expected at the back-end of the years where we have quite a bump in Catarina volumes, obviously, with SN discussing that more formally. We think that expects to roll through and has made us to stick with our guidance as we put it out there and feel very comfortable certainly about that midpoint of that range that we put out there.

Yes. As you know, through the six months, you’ll write in the middle of our year-end guidance range if you annualize it. So we do feel comfortable that we’re going to be inside of guidance at some level, and trying to manage through the potential growth coming from Catarina as well and looking forward to additional volumes from Comanche.

Perfect. Thanks, guys. I’ll requeue.

[Operator Instructions] The next question comes from Jamie Stone with Baron Capital. Please go ahead.

Good morning, guys. Can you just talk a little bit about what the potential is for additional third-party volumes as a result of the expanded Targa JV? And how that might impact us, say, in 2019 and beyond? And how that may impact us from a DCF and coverage perspective?

I don’t have a forward-looking beyond 2018, obviously, right now. But when we look at the expanded JV, the Carnero lines capacity to us increased from 288 a day to 400 a day, and the processing capacity through this system in the JV went from 260 a day to 400 a day, excuse me, to 460 a day. And so when we look at that potential and having acreage dedication with the working interest partners in Comanche and expansion – the drilling that’s going on throughout South Texas right now, we expect volumes coming off other commitments to roll into our system and look for those expansions going forward. As we’ve been seeing some of the displacement coming from the Permian to – on pipeline systems and processing plants, particularly out of the Eagle Ford, we think there’s opportunity coming in 2019 to potentially pickup, not only just the working interest partners dedicated acreage volumes, but also other volumes coming from the Eagle Ford in the area because of that displacement and volumes coming from the Permian.

[And just to make] [ph] to frame things, based on where you think you’re going to exit the year, what would you think our utilization of that capacity in the plant and on the pipeline will be like how much excess capacity do we have going into 2019?

Excess capacity going into 2019, as we’re currently operating Raptor plant at full capacity approximate – right at full capacity of 260 a day, which means on the Carnero JV, we were approximately at that same level, the pipeline JV. So we’re going to have an incremental without compression on the pipeline 140 a day on the pipeline JV portion of the JV, another 260 a day in the – and it starts with another 200 a day in the Silver Oak plant. So we had compression. Obviously, we can fill both up if those volumes are available to bring through it.

Okay. And all of that is theoretically available for to bring through volumes as of the beginning of the year?

Correct. Well, as of today, it’s available for the volumes.

Great. And so as you see rigs showing up in the area, we should start expecting to see volumes building, I would say, ex-Sanchez volumes building as we go into the end of the year and into next year?

As rigs come up into the Eagle Ford, we expect the opportunity to pickup some additional volumes in 2019.

Okay. But nothing is in the near-term, it’s more – it’s what we’re seeing in 2019?

Yes, nothing, nothing in the near-term today. The drill plans from what we see out in the market are still increasing. But when we look at our biggest opportunity, obviously, with Sanchez and its other working interest partners in Comanche, we still look at Catarina driving a lot of the volume coming through in the additional drill plan there. And then picking up the incremental Comanche volumes as they work through their system and things roll off commitments there. So as we look out in 2019 and beyond, we’re really trying to pickup the volumes into the working interest partners and then outside another Eagle Ford areas.

Okay. And just lastly, I mean, clearly, obviously, the market has gotten very concerned about what’s – what’s been going on with Sanchez’s own volumes and performance and – I know Georg sort of asked this as well. Could you just refresh to us sort of what you were – the level of security we have around our transportation agreements with Sanchez? Should they have a financial difficulty?

Yes. So I’ll let Chuck answer and then I’ll follow-up.

Sure. So I’d start with, I guess, the gathering and processing agreement surrounding the Western Catarina portion of the Catarina field, which is obviously our primary source of revenue for the midstream activity. That’s a field level gathering, three phase splitting contract. It’s obviously coming and running with the land type of thing. So it was – the contract was promulgated post kind of the ugliness from the earlier downturn in oil pricing. So we have to say, we used the technology available at that time when we divide that contract between the parties. We feel very comfortable in the firm with that contract as does our Preferred, when they did their own analysis before they made their investment. So we thought about that a lot when we put that in place. The next incremental agreements are the Targa JV agreements. And I’d say, how I think about that as what’s market and what’s a market test? As you’re aware, the working interest partners all several who signed off on their own analysis on those contracts for the processing and the gathering in there and that was just recently is the spring. So that’s a pretty good study of what the long-term market rate is. I would say, having multiple parties agree to a rate structure, that’s pretty – that’s a pretty robust examination of what the current market rate would be. And so while there’s, as you know, there’s a acreage dedications falling again the structures – the contract structures, which we all feel more comfortable with them different legal premises. And then from there, the Seco Pipeline on a back-end of that, the pipes – the pipe that’s sitting there in the ground, we believe has a good firm value as there’s incremental dry gas construction going on around that neighborhood. So we’re there to be tariff reexamination on that, because that’s a volume commitment currently that we publish the daily – the average daily volumes inside of our financials. That’s a volumetric commitment right now with us. And so while there’s that volumetric commitment they have some noise around it. It’s a very effective dry gas takeaway to other markets away from the typical markets that are available inside of the area. And with all the dry gas construction for long haul pipelines out of the Permian headed to the coast going on to the neighborhood, we’re much – we’re pretty happy that we actually built that pipe at a theoretical 400 a day capacity as opposed to the 85 day – a day that we have currently in place with us. And so we kind of like the options that we have around there. We certainly like the contract structure that we put in place for all those incremental volumes. So I think, that’s a easiest way to do a little bit of curve analysis for you.

Yes, and I’ll add to that. Obviously, somewhat driven by essence performance in the field. But we do benefit disproportionately by production in Catarina versus Comanche just by having that field level of gathering system bringing more volumes. As we understand and as we looked – followed the transcript as well from the earnings call, Sanchez Energy is redoubling its efforts in Catarina, which in our view, directly benefits the gathering system to takeaway some Catarina. And so when we look at that, that’s important to us, and we feel like that underpins some of our volume forecasts going forward.

Okay. I mean, it’s clearly a very big disconnect between how you guys see your business and the level of surety that you think and where the market is pricing the stock and thinking about the sustainability of your distribution?

Certainly. I mean, we evaluate at the Board level cash distributions every quarter and take into account our financial performance and cash reserves, among other things. And it would be remiss for us to ignore what’s going on in the capital markets and the conversions and everything else that are taking place. But as we approach this quarter, we looked at it specifically and felt that at 1.1 time coverage ratio and holding back a little bit cash for some opportunistic CapEx projects that, that related to the JV was appropriate and continue that distribution. So it’s something that we look at obviously on a quarterly basis and are very aware of market conditions.

Thank you very much. I appreciate it.

Thank you.

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

Well, thanks again, everybody, again, for joining us this morning, and we look forward to catching up with you again very soon in the coming quarters.

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