Crestwood Equity Partners LP (CEQP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to today's conference call to discuss Crestwood Equity Partners' second quarter 2021 operating results. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures, such as EBITDA, adjusted EBITDA and distributable cash flow will be discussed. Reconciliations to the most comparable GAAP measures are included in the news release issued this morning.
Robert Phillips: Thanks, operator, and good morning to everyone. Thank you all for joining us early this morning. We're very excited to discuss our second quarter results and our revised outlook for the second half of the year, which continues to be very positive due to strong commodity prices and recovering energy markets. We think the market is very constructive for a strong second half to follow-up a strong first half. Importantly, today, I want to make sure that we highlight our financial strength and flexibility, which we've accomplished following some recently completed strategic transactions, including the first reserve buy-in, which we closed in late March, sometimes we call that the Holdco transaction, but it's the same deal. And the recently completed Stagecoach divestiture, which we closed the first piece in early July. And so we'll be talking about pro forma debt associated with completing that Stagecoach sale. I certainly think these deals now position Crestwood to take the next step in our long-term plan, and it's a plan that we've been very vocal about for the last several quarters to utilize our free cash flow to return capital to our investors through our previously announced common and preferred equity buyback programs. But I also want to highlight the financial flexibility that this low debt increasing free cash flow position gives us to pursue growth opportunities across our portfolio as well, while maintaining our financial strength. So let's begin with the second quarter where a large part of Crestwood's portfolio benefited obviously from higher commodity prices, which caused increased producer activity and drove adjusted EBITDA of $146 million and DCF of $86 million. That's up 14% and 15%, respectively, year-over-year, and both numbers exceeded consensus as well. As a result, we'll be generating more than $100 million of free cash flow after distributions in the first half of this year, and that clearly covers our organic growth capital program with the balance going to reduce debt. Robert will talk more about that in his section.
Robert Halpin: Thank you, Bob. I would like to echo your comments on our financial strength and our solid positioning following our strategic and operational successes during the first half of the year. During the quarter, Crestwood generated adjusted EBITDA of $146 million, resulting in distributable cash flow of $86 million and positive free cash flow of $40 million. This results in an extremely conservative leverage and distribution coverage metrics, pro forma for the Stagecoach divestiture of 3.6x and 2.2x respectively. Driving these results was G&P segment adjusted EBITDA of $124 million, at a 48% increase year-over-year. At S&T segment adjusted EBITDA of $15 million, that representing a 6% increase year-over-year. Those results helped offset our MS&L segment adjusted EBITDA of $13 million, which is lower year-over-year due to market backwardation and limited storage opportunities when compared to the second quarter of 2020. I would also like to highlight and congratulate Crestwood employees on achieving these exceptional quarterly results while also lowering O&M expenses by 18% and G&A expenses net of unit-based compensation by 4% year-over-year. Consistent with our ongoing capital allocation strategies, Crestwood maintained its common distribution of $0.625 for the second quarter, which will be paid on August 13 to unitholders of record as of August 6. Now looking to our balance sheet. Pro forma for the first close of the Stagecoach sale, Crestwood had $274 million outstanding on its $1.25 billion revolving credit facility, resulting in more than $940 million in available liquidity. With $2.1 billion in total debt, Crestwood's pro forma leverage ratio has improved to 3.6x, now on the low end of our targeted range of 3.5x to 3.75x, allowing the company to continue investing in high-return bolt-on opportunities around our core growth assets and accelerate allocating excess cash flow generated toward common and preferred equity buybacks under our Board approved $175 million repurchase program. During the second quarter, with a continued focus on returns and capital discipline, Crestwood invested $6 million in growth capital and joint venture contributions, focused primarily on the southern expansion of Arrow's produced water gathering system and gas gathering debottlenecking projects, which are expected to drive exceptional returns. Despite having only invested $15 million in growth capital expenditures and JV contributions year-to-date, we continue to expect full year growth capital to be in a range of $35 million to $45 million for full year 2021 as we are seeing increasing development activity from our producers across most of our G&P assets and in 2021 and heading into 2022. And we have continued to have successes on a handful of our higher priority commercial opportunities. We still expect maintenance capital of $20 million to $25 million, which, along with our growth capital expenditures, will be 100% funded with retained cash flow. As we head into the second half of 2021, we are encouraged by the current commodity price outlook and the increasing activity around our gathering and processing assets. When adjusting $30 million out of the second half of the year for the Stagecoach divestiture, we now expect full year 2021 adjusted EBITDA to be in the range of $570 million to $600 million. Distributable cash flow available to common unitholders to be in the range of $345 million to $375 million and free cash flow after distributions to be in the range of $150 million to $180 million. These ranges reflect outperformance from our remaining asset base relative to our internal budgets and prior guidance ranges and are expected to drive a leverage ratio of 3.4x to 3.7x and a coverage ratio of 2.2x to 2.4x. With our financial targets now achieved, Crestwood is committed to utilizing its financial flexibility to maintain a strong balance sheet and enhance total returns to our investors. We plan to accomplish this by offering a secure and stable distribution, prudent investment in the highest returning expansions of our existing assets and opportunistic common and preferred unit repurchases with our excess cash flow. Now that we have received the proceeds from Stagecoach and are out of the earnings blackout window, we intend to allocate our free cash flow into optimizing our capital structure through opportunistic buybacks. We believe that this strategy best positions the partnership to maximize value creation for our investors going forward as well as positions Crestwood to evaluate and participate as appropriately on potential asset and corporate consolidation opportunities that we expect will occur across the midstream sector. Now before opening the line up for Q&A, we believe, after the first half of the year that our accomplishments further differentiate Crestwood as a best-in-class midstream operator with exceptional financial health and flexibility. We expect in the current macro environment, which benefits our strong asset base to see increased D&C activity for the remainder of the year, and we expect that momentum to continue into 2022. Based on the minimal capital requirements to support the increased volumes across our G&P assets, combined with the achievement of our long-term leverage goal, we expect to generate meaningful excess cash flow going forward that will enable us to drive increasing value for our investors. With that, operator, we are now ready to open the line up for questions.
Operator: . Our first question is from Brian Reynolds with UBS.
Brian Reynolds: This is Brian on for Shneur. When looking at the guidance provision for Stagecoach, there appears to be a slight guidance increase on the base business. Can you just talk about the change in assumptions from the 1Q guidance update, specifically around the 45-plus Arrow system well connect target, just the backwardation in MS&L business and higher commodity deck assumptions?
Robert Halpin: Yes, absolutely. Thanks, Brian. And, yes, as you alluded to, I think when you take out the $30 million of expected contribution from Stagecoach in the back half of the year, we are seeing an upward revision in the remaining asset base reflected in our revised range at $570 million to $600 million. Some of the moving pieces around that, as we've talked about on the call, our continued outperformance in our G&P portfolio, which we now expect to be comfortably at the higher end of our previous guidance range for G&P. Offsetting that to some small extent, we do expect some continued pressures around the MS&L segment, largely attributable to the backwardation that we alluded to on the call earlier. So I think all in all, we expect G&P to really be the shining star for the year and help drive that upward revision to our overall range when you back out the $30 million from Stagecoach.
Brian Reynolds: Great. I appreciate all the color. Switching to capital allocation and the buyback commentary from the prepared remarks. Can you just provide some details on how we should think about the preference between buying back the preferred units versus the common units, given both are yielding roughly 9% at the time?
Robert Halpin: Yes. I think it's a balance of really kind of overall financial objectives. And obviously, with both of those instruments being publicly traded, the return profile changes every single day. I think while you commented on the common yield and kind of where it sits, obviously, we look kind of all the way through to distributable cash flow and the all-in return profile on the common. I mean, I think that as we sit here today, we see probably greater amount of value in the common unit, but obviously have the flexibility through our repurchase program to bounce back and forth as that potentially moves over time. The one thing we are 100% committed to is maintaining our balance sheet strength. So while we have all the flexibility in the world and have now fully achieved our long-term leverage target at being in the 3.5x to 3.75x range, we expect to start allocating some of that excess cash flow towards enhancing returns, but we'll always be mindful of balance sheet as we navigate that.
Operator: Our next question is from Tristan Richardson from Truist Securities.
Tristan Richardson: Just wanted to say congrats on the Stagecoach transaction. Bob, you've been pretty vocal over the years about this industry's need for consolidation. Does this new found ample flexibility offer you guys opportunities to scale your business that maybe weren't necessarily available previously?
Robert Phillips: Well, certainly closing the Holdco transaction and converting the company from a traditional private equity, G&P controlled entity to now an entity that's being run by the Board of Directors with the management team, certainly creates at least a wider scope of opportunities for us than maybe we had in the past. Not having to deal with a GP that was at 25% shareholder that was ultimately going to get out and wanted to be the first guy out of the door probably prevented us maybe from looking at some transactions in the past that maybe we would have taken a harder look at. But that's easy for everybody to see. And that created the overhang on the stock, and we always believe that if we could eliminate that capital -- that structural governance problem and eliminate that overhang, then we would see a lot more opportunities to do some interesting things in the business. But having said that, Tristan, we're really looking from the inside out right now. We are laser-focused on a big circle around our 3 big assets, Bakken, Powder and Delaware. For the first time in the history of the company, in the last 4 quarters, LTM, we had almost $200 million of free cash flow, and we delivered an average coverage ratio of about 2.25x. And now we finally have a pro forma balance sheet of 3.6x. We have never ever in the history of this company, and there have been a lot of ups and downs, the collapse in '14 after the merger with Energy and '13 was tough on us. We had to make some tough decisions. We got smaller to survive. The collapse in '16 was tough on us and forced us into selling the first half of Stagecoach for almost $1 billion to get on the road to recovery of the balance sheet. And then don't forget, we spent a ton of money in that '17 to '20 time period to build out the capacity in these 3 areas where we were totally committed to the producers, the rock, the contracts, the low operating costs and the margins. So we're really benefiting from the operating leverage that we put ourselves in position to benefit with. Now that we're seeing higher prices, better returns for our producers, more solid long-term drilling activity instead of peak-ish type activity that causes guys to drill up inventory locations quickly and then move on to the next one. We actually think in an odd sort of way that the COVID did us a little bit of a favor in terms of slowing down the development pace of a lot of the core acreage that's dedicated to us under long-term contracts. We actually think that was a better thing in terms of creating long-term value. So I'm not dodging your question. We built this company around acquisitions, and we have been quite, I think, successful in our divestiture strategy. We sold assets that either became noncore or were essential to achieving our financial goals. Stagecoach was always core. It was always a great asset. We loved owning it and operating it and building it out. We love the partnership with Con Ed, but it became central to our primary financial thesis, and that was to build financial strength and financial flexibility. I am certain, in a consolidating market, that we are going to wind up seeing a lot more opportunities than we would have if we hadn't done the Holdco deal and done the Stagecoach divestiture. So I'll leave it at that. We are laser-focused in the areas that we operate on bolt-ons, on extensions, on really maximizing our operating leverage without having to spend a whole lot of capital. And I love the free cash flow. I love giving the finance team a chance to return capital to our shareholders. We think, ultimately, that's a great formula for success and people are going to want to own the Crestwood stock because of that, not necessarily because we're out there actively looking for some big consolidation play. That opportunity will come when it does and when it does, we'll take advantage of it because we can, not because we want to.
Tristan Richardson: Always appreciate the perspective. And then just a quick follow-up to your point on capital efficiency. You guys have been able to grow on such a lean capital budget this year. But you mentioned increasing D&C activity for the remainder of the year in your core areas, pursuing commercial developments in the PRB. And also just focusing on your highest returning expansions, could you give us a sense of maybe what a normal run rate of growth capital looks like in this more constructive environment.
Robert Phillips: Well, I'm going to let Robert answer that of the actual 2021 second half, '22 kind of first look at capital budgets based on the things that are on our plate right now. But before I do that, I want Diaco Aviki who runs our G&P business, to really give you a sense for the type of expansions, optimizations, compression additions, line loops that we're doing to meet our producers' near term objectives. We're not building out any major capacity for some long-term play. We are optimizing our systems in those 3 areas to add current drilling programs. And honestly, I am shocked at how good the wells are, particularly in the Delaware, but we're seeing new third-party wells come on in the Powder that are better than the ones that we saw before. And clearly, we've just been blown away by the continued improvement by our Bakken producers on IP rates and how strong these wells are after 3, 4, 5, 6 months of production. Diaco, just give them a sense for what we're doing in those 3 areas.
Diaco Aviki: Yes. Thank you, Bob. When you spent the amount of capital we spent over the last 3 years, you've got the backbone of a major system that's already predominantly built out. So what you're looking at is minor, minor expansions, as you can see for our quarterly capital numbers, to be able to bring on a significant amount of volume. It's really the last mile that we're touching. The rest of the road trip has already been built out, and it's just leveraging the incremental rate of return. And as you can appreciate, our operating leverage is outstanding. We're a great operator. That's one of the strengths that Crestwood has. So that margin that you see is quite strong. I'll take an example, Bob didn't even bring up, the Barnett. Brought on 8 wells in the Barnett. The producer was right beside us. When I say right beside us, I mean right beside us with $150,000 of capital. We brought on those wells. They're some of the best wells we've seen in the Barnett. They've exceeded type curves by 20%. And that's the sort of thing that as a company that's got extensive systems in key basins, and I'm bringing up one that's not a core basin of ours that we haven't spent a lot of money on recently, but that's the operating leverage that you're seeing coming out of our G&P results. I hope that helps.
Robert Halpin: And maybe, Tristan, just to put numbers to it, to answer your question specifically, I think we are reaffirming our 2021 outlook at $35 million to $45 million. We spent about $15 million year-to-date. So we're obviously a little bit back-end loaded. Largely tied to that acceleration of activity that we mentioned, but it's all, as Diaco just alluded to, pretty low capital line items as we kind of just bring incremental wells to the system and add compression and capacities where needed. As we look forward into 2022, we do expect some successes on some of the commercial opportunities we've been pursuing in advanced stages on some of those and feeling really good about it. And I would think that kind of with where things are shaping up at this point in time and what we've seen from producers, we'd expect to kind of still be within that kind of $40 million to $50 million mark for 2022, kind of consistent with what we had previously communicated around that. So I think the benefit is, as we see accelerated activity, we've got the backbone built out. It's really just laterals and small compression additions to be able to add that incremental capacity to bring those wells into the broader systems.
Operator: Our next question is from Vine Vinay Chitteti with JPMorgan.
Vinay Chitteti: I just wanted to follow-up on capital allocation philosophy here. So I think it's understood you guys have been focusing on buybacks as a priority for the short-term. But I just want to understand given what's going on with Shell in the Permian assets, I want to understand how, any -- if you could share any broad comments on how the JV simplification could impact any of your buyback timing and how we should think about it?
Robert Halpin: Yes. I think that, Vinay, it's a great question on capital allocation. I think as we've talked about, balance sheet strength is kind of at the top of our priorities. We now have achieved that objective and feel really good about the outlook, given the capital commentary we just gave. And so obviously, returning that capital through accelerating our buyback and repurchase program kind of becomes nearest term, highest priority. But we are still absolutely focused, as Bob mentioned, on enhancing our competitive positions in the 3 core growth areas where we operate, the Bakken, the Powder and the Delaware. One of the unique elements of the Delaware Basin is we do own those assets through 2 joint ventures, one with Shell, as you alluded to, and one with First Reserve. And I do think that it is our strategy, absolutely, over time, to consolidate that joint venture and own more of that entity going forward to help optimize our positioning there. And so I think that we aren't involved in any active discussions, but that is a central piece to the strategy, the Delaware Basin. And I think something that we will work towards execution around over the next, call it, couple of years.
Vinay Chitteti: Maybe just wanted to follow-up on gas capture and opportunity in the Bakken. So it does appear to me like you guys are pretty much tied to utilization on the gas gathering and processing side. Given the incremental volumes through GORs or higher gas capture rate, what kind of leverage does Crestwood have on the gas side and how we could meet those producer demand? And also, just trying to understand like, how much is the current capture rate? I did look through your Williston slide deck from May. And it sounded like you are about 10%, which is kind of above average. And so that appears to be a lot of opportunity.
Diaco Aviki: Yes. Thank you, Vinay. This is Diaco Aviki. To answer your question, we track that every month. And as Bob mentioned in his highlights, we work actively with our producers on those opportunities. And you're right to say, our past performance was around 10%. I could tell you our recent month is around 6%. So we incrementally improve those opportunities as we tackle each one of them with each customer. They're quite technically driven from infrastructure perspective, where we have to work hand-in-hand with each other and have the appropriate subpoints across the system that drives that increased utilization. So there's significant amount of upside. You can refer to the NDPA for what they forecast for gas oil ratios to progress in the basin. And we see that as continued upside for our asset infrastructure because it's essentially zero capital, cash all that up.
Operator: And we have reached the end of the question-and-answer session. I'll now turn the call back over to Bob Phillips for closing remarks.
Robert Phillips: Hey, thanks, operator. Well, again, I want to complement our team for executing on the long-term plan. We started talking about getting down to 3.5x to 3.75x leverage maybe 2 years ago. As we near the end of our 3-year build out program, we could see forecasted volumes increasing cash flows improving and debt pay down. We certainly didn't expect a COVID year last year. And frankly, we're excited to have the opportunity to complete the 2 very strategic transactions this year. It does reposition the company. And maybe I should have answered Tristan question that way, not to downplay the consolidation opportunities out there, but those transactions in sequence have repositioned the company. And so we're always going to be looking for opportunities to grow our business, grow our portfolio. We like our portfolio. We think that diversity creates a hedge against market forces. And you can just look at what we did in the second and third quarters of last year versus the second quarter of this year and see that our G&P was down last year due to reduced activity and shut in volumes, but it carried the load this year. We think that's the way the portfolio is supposed to work. And we like our position in the business and would like to continue to grow that. As I said, though, our primary focus is in the 3 areas that we operate. And we're going to continue to invest capital there because we have long-term contracts, great producers, none with any real financial issues, all now showing real capital discipline, which we think lengthens our inventory position and allows us better utilization of capacity and more operating leverage as volumes grow. So we think that's a winning strategy, a winning formula in this business. We're going to continue to execute on that plan. We've got the team to do it. We've now got the balance sheet to do it, and we're in a great position in those 3 areas to continue to grow. So we have not thrown the growth word out the window yet, but it's going to be slow, steady type growth that you can see visually from quarter-to-quarter. And we think that's a great position for an MLP that's generating over 2x coverage and 3.5x leverage to be in. So thanks for everybody joining the call today. We look forward to hearing what you all have to say and feedback for our IR team, and I know I'll be reaching out to you later on today. Thanks, everybody.
Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
