CNX Midstream Partners LP  (NYSE: CNXM) Q1 2020 Earnings Call Transcript

CNX Midstream Partners LP  (CNXM) Q1 2020 earnings call dated Apr. 27, 2020

Corporate Participants:

Tyler Lewis — Vice President of Investor Relations

Nicholas J. DeIuliis — Chairman of the Board and Chief Executive Officer

Chad A. Griffith — Executive Vice President and Chief Operating Officer

Donald W. Rush — Chief Financial Officer

Analysts:

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

Christopher Paul Tillett — Barclays Bank PLC — Analyst

Presentation:

Operator

Good morning. Welcome to the CNX Midstream Partners First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Go ahead.

Tyler Lewis — Vice President of Investor Relations

Thank you and good morning to everybody. Welcome to CNX Midstream’s first quarter conference call. We have in the room today Nick DeIuliis, our Chairman and CEO; Chad Griffith, President and Chief Operating Officer; and Don Rush, our Chief Financial Officer.

Today, we’ll be discussing our first quarter results and we have posted an updated slide presentation to our website. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks which we have laid out for you in our press release today as well as in our previous Security and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick, followed by Chad and then we will open the call for Q&A.

With that, let me turn the call over to you Nick.

Nicholas J. DeIuliis — Chairman of the Board and Chief Executive Officer

Okay. Thank you, Tyler. Good morning everybody. I hope that everybody’s doing well out there and managing through this. I just wanted to take a minute at the front, really just to highlight two things that we’ve been talking about both internally with our team, as well as externally with all of our stakeholders. Both of them coming very apparent I think with the last couple of weeks and month and a half or so nationally and globally. First one is, that the teams and the individuals and the workers that you find in the industries that work with midstream, energy in general, has been absolutely phenomenal. I don’t think that comes as a great shock to many of us who’ve been familiar with these industries and these individuals over our careers or through time, but it is certainly something that was to behold in a really stressful crisis period, not just for our nation, but again globally.

And that sort of leads into the second sort of comment at the start, which is this crisis has once again highlighted how crucial, how foundational, how essential the energy, natural gas, petroleum, midstream processing industries are to our way of life. So, when you think about all the things that really, really matter during this recent time period, hospitals and what’s powering them, you think about just the logistical supply chains to transport essential goods to and from the manufacturers or producers of them to the consumers of them, everything’s driven off of the products that we’re transporting and processing at CNX Midstream. Food, you think about what’s fertilizing the food, how it’s being transported to processing, what’s processing the food, what’s preserving it at the grocery store and what’s ultimately cooking it, all of it again really dependent upon the industry that CNX Midstream operates within and in even things like the masks and hand sanitizer, so it’s really the end product use opportunity that petroleum and natural gas provides. So it’s been, I think in some ways, this challenge has been, as stressful as it’s been, it has been I think very rewarding to see our industry play a crucial role and underscore once again how important it is.

The other things that I wanted to really highlight before turning it over to the team, Chad in particular, I want to talk about how in these times it’s also become a very strategic, crucial and I think it highlights the very good relationship that CNX Midstream enjoys and the alignment that it enjoys with CNX Resources. To have a strong anchor and a strong shipper, strong defined by reserve base, strong defined by footprint, but also strong defined by balance sheet and financial wherewithal, to have that as our anchor shipper with our largest customer, that puts us in a position to do some great things and navigate and also thrive during these challenging times. So we’re strategically linked to the right upstream partner and that wasn’t by accident of course, that was by a methodical effort over a long period of time and we’re happy that that’s the situation today.

Another thing I wanted to hit upon is how our capital intensity has been changing and improving frankly dramatically. The build-out of course is completed of these midstream assets. We’ve been talking about that towards the end of ’18 and all through ’19 and that is largely completed now. I think slide three in the deck that we posted this morning sort of shows in the lower left of that slide what the capital intensity is doing quarter-by-quarter. It almost looks like an exponential decline, and that’s the type of things that we objected and the type of thing that we wanted to see and it’s good to see that coming to manifest at just the right time.

And we’ve talked a lot in this about maximizing free cash flow. In very complicated stressful times like these, sometimes things get very simple with respect to what works best. So generating free cash flow, obsessing on spend, whether it’s OpEx, capex, overhead, but obsessing on our spend and trying to make that as efficient as it possibly can be, in paying down debt, increasing liquidity, lowering leverage ratio, those are the hallmarks of what’s going to be a successful entity versus those that would not be successful in an environment like this. It preserves value I think for the unit holders and it sets CNX Midstream not just in the position as I said to navigate these tough sometimes, but actually to thrive in them and that’s what we’re prepared to do.

So with that, I’m going to turn it over to Chad now who’s going to go into a little more detail with respect to the quarter and what we are seeing.

Chad A. Griffith — Executive Vice President and Chief Operating Officer

Thanks Nick. CNXM had a strong quarter was $60.4 million of adjusted-EBITDA and $46.9 million of distributable cash flow. The quarter’s capital expenses were down 57% sequentially as we closed out the major system overhaul we began last year. The two major Greenfield stations, Dry Ridge and Buckland are both now online and moving gas. Moving forward, we expect to step down the business’ capital intensity, as we’ve been describing the past several quarters. We ended the quarter with 3.1 times leverage ratio and $258 million of liquidity. Echoing Nick’s comments, lower leverage, ample available liquidity and cash flow generation define our position and are essential in this kind of uncertainty caused by the global pandemic.

In response to COVID-19, we rolled-out social distancing and quarantine protocols to our fuel operations and construction locations to protect the health and safety of our employees and service providers. So far, our ability to move gas and our capital projects have not been materially impacted by the virus.

Slide four looks at our major capital projects in Southwest Pennsylvania. Now that Dry Ridge and Buckland are both flowing gas, we are working closely with our shippers on the timing of Phase II, which includes the installation of additional horsepower at those two locations. We currently expect to install this additional horsepower this year and it is included in the year’s capital guidance. We are also in the process of expanding our tap capacity at Dry Ridge, giving our shippers some additional delivery capacity into leach express, where they can expect to receive slightly better pricing. We have a handful of pad connects in the plan for the year end, including our first two on-plant New Pad Connect which we expect to have completed during Q2. We expect these projects to have long utilization profiles and are essential to provide existing capabilities for our shippers and it further improves our operational leverage. We do not have any expenditures in our plan that bank on improving markets and volumetric growth levels or capacity over both.

Turning to slide six, we have updated guidance and capital allocation to reflect the ever changing environment.. We’ve reduced our planned capital expenditures for the year by 16%, driven largely by improved bid prices for the work we have planned for the balance of the year. Our EBITDA guidance reflects a potential expected range of line deferrals from our customers in 2020. Late in the first quarter, we saw non-CNX shippers begin to defer flow-in volumes from NGL-rich fields. The COVID-19 pandemic has created unprecedented man loss for certain fuels, which has reduced the demand for certain NGLs. This has resulted in significantly depressed NGL pricing and as a result, the economics for wet-gas production are challenged and some of our shippers have begun to defer production to later periods.

Fortunately. we see two reasons to be optimistic about these flows resuming soon. First, the gas strip is very strong heading in the winter in 2021. The producers with wet-wells, both gas price and NGL price play a role in the equation. So strong gas prices can offset weaker NGL prices or vice versa. Second, we see the oil price and fuel demand loss is temporary. We are already beginning to see signs that the US is ready to begin returning to some level of normalcy and we expect demand to recover alongside. Meanwhile, the collapsible oil prices has resulted in significantly large reductions in rig and frac activity in oil plays such as the Permian, which also provides significant amount of NGLs and associated gas in direct competition with the NGLs and gas from Appalachian. The recovering demand and declining supply should push commodity prices higher and wet-gas well economics to recover to the point that our shippers should resume any deferred production. But the energy markets are more dynamic than ever and we will continue to update the public with our best view of performance expectations.

There continues to be tremendous uncertainty with respect to the COVID-19 virus situation and how the global economy will recover from this unprecedented shutdown. How things play out over the coming weeks and months will factor greatly into how commodity markets perform and play a huge role in the availability of capital. Due to this uncertainty, the Board of CNXM has decided to temporarily reduce cash distributions by 80%, beginning during the first quarter of 2020. We expect to use this incremental retained cash to strengthen the balance sheet and to pay down debt.

With that, I’ll hand it back over to Tyler to open Q&A.

Tyler Lewis — Vice President of Investor Relations

Yeah. Thanks Chad, and operator, if you can open the line-up for Q&A at this time please.

Questions and Answers:

Operator

Okay. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Jeremy Tonet from JPMorgan. Go ahead.

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

Good morning. I was just wondering if you could dive into kind of what’s happening in Appalachia and a bit more detail on the liquids rich side. When did you start to see this happen exactly and just kind of thoughts on duration and also really how much of this is CNX versus third-party producers here, where you are seeing the reduced activity?

Chad A. Griffith — Executive Vice President and Chief Operating Officer

So to the first part of your question, sort of some of the broader macro-context, even before the OPEC Russia oil supply situation and then the demand destruction caused by COVID-19, I think a lot of Appalachian producers were already challenged by lower gas prices. And then to be hit with plummeting oil prices from the oversupply of oil from Russia and OPEC as they went into their price war and then get hit by demand destruction from COVID-19, this is really a perfect storm of just negative factors that weighed heavily on wet-gas economics, really across the country. And I think we’re seeing that really across the US, really across North America in any kind of oil production or wet-gas production.

It’s beginning to become apparent that with the demand destruction, no one is traveling, no one’s flying, there’s a lot demand destruction associated with those things, like the refined fuels that go into those activities, so that’s backing up our refinery runs and that’s resulting in a reduction in condensate demand, that’s resulting in declines of butane demand and CPI plus demand. And unfortunately with wet-gas, you can’t just cherry pick which of those products you want to produce. It sort of all comes out of the ground together. And if you don’t have any place to move some of that gas flow, it becomes very challenging to produce the rest, even if the rest comes out at favorable pricing.

So we’ve been working with our producers to try to find ways to keep this gas flowing. It’s just unfortunate right now, it’s very tough to move some of these products and even if you can move those products, the prices are pretty low. I know folks are looking at storage options, they’re looking at different ways of blending the stuff and using the stuff, but right now for the year now, there’s just a lot of uncertainty about what is going to happen with wet-gas, with condensate of NGLs. So that really played a lot. You know that’s one of the many factors of why we decided to retain a little bit more cash and try to start with the balance sheet, at least until we get through this summer and really a lot of the uncertainty and risk associated with what the wet-gas market is going to do and the commodity market is going to do over the course of the summer.

Donald W. Rush — Chief Financial Officer

And from the mix, CNX had our earnings release earlier. They kind of walked through the different production profiles that could happen up there. So can’t get in to third-party specifics, but at least gives you some color of how much could be on the CNX side. And as Chad touched on earlier, delay of a couple of months or a couple of quarters changes a little bit of 2019’s profile, but the gas isn’t going anywhere —

Chad A. Griffith — Executive Vice President and Chief Operating Officer

2020.

Donald W. Rush — Chief Financial Officer

Sorry, 2020’s profile, but the gas is not going anywhere. It will be there as we move into 2021, the cash flows that were expected from these wells will be hardest hit by next mid-stream and net-net it is very, very difficult to predict how the next months and quarters unfold and even as you roll into ’21, but CNX midstream is set to generate a substantial amount of free cash flow and really focused on making sure that free cash flow is put in the best place possible. So near term patience prudence is focused on balance sheet, liquidity and debt management, makes a lot of sense, long-term for CNX Midstream it’s a phenomenal business with a lot of free cash flow and a lot of allocation opportunity to put it to work in many, many years to come.

Chad A. Griffith — Executive Vice President and Chief Operating Officer

And I think also we got a correlation between the comment of when you look at what’s happening with liquids not going anywhere, right. It’s been deferred for a different time, it also correlates with respect to what we’re doing with our free cash flow at CNX Midstream, whereas we are basically storing that, not in the ground, but we’re storing that effectively on our balance sheet, which I think is one of the terms we used actually in the slides on slide six. So again, the value is basically being allocated and is being allocated into a place where that flexibility and that optionality will be available to us if and when so we choose to use it.

Nicholas J. DeIuliis — Chairman of the Board and Chief Executive Officer

And I think, just to sort of wrap it up, the oil situation, the oil price, the condensate price, NGL price is weighing heavily upon oil producers really across North America, right. So we’re seeing a dramatic drop of rig activity in frac crew activity in a lot of oil plays. Permian, Bakken and D&C [Phonetic] activity is down dramatically in those areas. That’s going to bring a lot of the stuff off the market, supply of these products are going to decline. It’s just the big question is when does demand recover and when does storage levels work down to the point that you begin seeing a good price for these products. We know its coming; it’s just a big question of when. And then, this is also a big benefit on the associated gas side, right. So as the oil plays come off, the associated gas comes off, it brings a lot of strength in the gas market. You see that strength in the forward strip with winter pricing and 2021 pricing improved materially. CNXM has positioned — its future is weighted heavily toward the dry gas areas. A lot of the investments we’ve made over the last year and a half has been focused on dry gas areas. CNX, our principal shipper is focused on dry gas. So all these things that are happening, that are potentially negative in the oil space and NGL space is actually positive for the dry gas play, which is where CNXM and its principal shipper CNX is focused.

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

That’s helpful. Thank you. I was just wondering, as a follow-up if you could remind us of what you said publicly with regards to how much of your business is third-party and who your larger third-party business is with?

Chad A. Griffith — Executive Vice President and Chief Operating Officer

So we try to stay away from naming actually any of our shippers, other than CNX. I WILL say the flows are roughly a third of the third party, about two-thirds CNX.

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

Got it. And then just want to turn to the distribution real quick here. I mean it seems to us that the leverage was not that high and so just curious on the level of the cut, 80%. Have you had conversations with the rating agencies or from the banks? Was there kind of pressure there to reduce it to that degree or what were some of the driving factors there?

Donald W. Rush — Chief Financial Officer

Yeah. I think Nick talked and mentioned in the opening here that this is something where unprecedented times, where our capital markets sit with COVID-19 and just the whole situation that exists around us. We wanted to be thoughtful and try to just maintain it as much, call it liquidity and balance sheet strength as we can, not knowing how long these situations may or may not last in our minds, right now bolstering your balance sheet and making it stronger is a good near term risk based decision and as Nick said, it creates even more optionality as we roll forward into whatever normalcy looks like post this situation.

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

Got you. The last one if I could, I think the IDR has been taken out recently. I think there were some deferred payments or there’s some contingency payments. Could you just update us on how that stands I guess and any thoughts on the reduction in the cut coming right after.

Donald W. Rush — Chief Financial Officer

Yeah. So the schedule payments are laid out at $50 million end of this year, $50 million at the end of ’21 and $35 million at the end of ’22.

Jeremy Bryan Tonet — JPMorgan Chase — Analyst

That’s it from me. Thanks for taking my question.

Operator

Our next question is from Chris Tillett from Barclays. Go ahead.

Christopher Paul Tillett — Barclays Bank PLC — Analyst

Hi guys, good morning. I guess first from me, there were some comments out from CNX, your sponsor, with their release this morning that they are looking at entering maintenance mode from ’22 to ’26. Just curious to know I guess from a Midstream perspective, sort of what that looks like and what that means for volumes on the Midstream system.

Nicholas J. DeIuliis — Chairman of the Board and Chief Executive Officer

Yeah. And we’ve provided — the upstream deck has a lot of information. So for Midstream, we’ve build out a pretty big system to be ready to call it have a lower capital program going forward.’ So from CNX Midstream, the capital intensity is much less and the big build is set up, so Midstream is in, call it, an enviable position to generate a bunch of free cash flow in that type of a world, and just going back to the CNX call from earlier, if there would be gas price increases or any kind of growth up there, that’ll just be incremental of future plans. So capital intensity is lower, a maintenance plan with our 2.5% escalation on our feed profile. CNX Midstream still allows us to produce substantial free cash flow due to the capital intensity being so low, our OpEx being best-in-class, and like I said, that fee contract increasing is escalating as years move on.

Christopher Paul Tillett — Barclays Bank PLC — Analyst

Okay, that’s helpful. Thank you. And then maybe turning to the distribution for a second. It sounds like from some of the comments you guys have made on this call that you’re viewing the cut there as sort of or possibly temporary. I guess is that a fair way to characterize it and if so, when you return to something — a situation that resembles more normalcy, do you think we should expect to see no stair step up in the distribution from the re-rated level or just a straight return to where it was last quarter.

Nicholas J. DeIuliis — Chairman of the Board and Chief Executive Officer

Yeah. So not to get into any kind of future guidance. As we talked, it’s around — right now where the world sits and call it a unclear nature of how long this lasts and when capital markets and the like get back to normal, it’s hard to say. Over the long-term we do think right now the prudent decision is just to bolster liquidity, to use incremental cash flow to pay down debt. As we’ve always said, we view ourselves as a capital allocator and we like to allocate free cash flow to the best place, so that is something we’ll stay true to here and right now the best place for cash flow is to really pay down debt and bolster the liquidity of the business and when normalcy comes, whenever that may be and whatever that looks like, we’ll make sure we keep a playbook that follows the variables and tries to allocate the dollars into the best places that they can be allocated to.

Christopher Paul Tillett — Barclays Bank PLC — Analyst

Okay. And then maybe just last from me to follow-up on something Jeremy touched on. With the distribution cut coming after the IDR transaction and you still have the deferred payments coming up in the next couple of years. Is there any opportunity there to adjust those payments or renegotiate those payments given that the IDR transaction is now seemingly more expensive given the distribution cut.

Chad A. Griffith — Executive Vice President and Chief Operating Officer

A couple of thoughts there. One, if you look at how we’re assuming the world to look with Midstream and being free cash flow positive and there’s a lot of moving parts, right. There is all kinds of different gathering rate, there’s the payments issue you’ve mentioned, there’s many different components to what constitutes those cash flows. We assume that basically everything in that remains at a steady state, so no assumed changes to gathering rates or contractual gathering agreements or installment payments tied to the IDR transactions. Second thought is that, it is my way of looking at this from a CNX Midstream perspective. The IDR transaction basically took what was the largest unit holder at that time and we saw them double down with respect to their holdings in units, which was a big vote of confidence in the long-term prospects of CNX Midstream. So with respect to the distribution policy or the distribution levels that we announced today, CNX resources, 53% give or take of the units is in the same shoes as the other unit holders and that’s what we wanted to see when we’re trying to contemplate what an IDR transaction would do or not coming out of it.

Christopher Paul Tillett — Barclays Bank PLC — Analyst

Okay, I understood. Thanks guys. That’s it from me.

Operator

At this time, there’s no more questions. So we will conclude the question-and-answer session. I would now like to turn the conference back over to Tyler Lewis for closing remarks.

Tyler Lewis — Vice President of Investor Relations

Thank you, operator, and thank you all for joining us here this morning. We look forward to speaking with you after the call if you have any questions or next quarter’s call. Thank you.

Operator

[Operator Closing Remarks]