Diamondback Energy, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Rattler Midstream 3rd Quarter 2020 Conference Call. At this time, all participants' lines are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during that time, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to our first speaker for today, Mr. Adam Lawless, Vice President for Investor Relations. Thank you, sir. Please go ahead.

Thank you, AJ. Good morning, and welcome to Rattler Midstream's third quarter 2020 conference call. During our call today, we will reference an updated investor presentation which can be found on Rattler's website. Representing Rattler today are Travis Guy, CEO, and Case Vantoff, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial conditions, 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 a 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 gap 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's midstream third quarter earnings call. The third quarter of 2020 witnessed a normalization of Rattler operations after the disruption caused by the historic volatility during the second quarter of this year. With Diamondback resuming completion operations in the third quarter, sourced water volumes rebounded strongly and volumes in the produced water, crude oil and natural gas gathering segments stabilized after declining sequentially in step with Diamondback's volumes in the second quarter of 2020. This normalization was reflected in the 32% quarter over quarter increase in EBITDA to over $71 million in the third quarter. Net income of almost $39 million also more than tripled quarter over quarter. This level of activity and cash flow can be seen as a baseline for Rattler's business for the coming quarters as Diamondback plans to maintain relatively flat production and activity levels at current commodity prices. Moving forward, Rattler is well positioned due to the strength of its parent company, Diamondback, who has a strong balance sheet, an industry-leading cost structure, and downside protection offered by its hedge book. Even when discounting the potential for Diamondback to resume volume growth in the future, Rattler will grow free cash flow through its declining operated CapEx program in completion of its equity method investments build cycle. We currently estimate Rattler's 2021 operated CapEx program will be approximately half the level of the 2020 program in less than a third of the 2019 budget. Additionally, with three of five equity method investment joint ventures in full service, distributions from these projects should exceed the remaining contributions by the first quarter of 2021. Wink to Webster will further add to this cash flow inflection when it enters into full service in late 2021. Turning to capital allocation, this quarter, the board of directors of Rattler's general partner elected to reduce the annual distribution by 31% from $1.16 to 80 cents per unit. While we believe the current outlook would have supported the distribution while keeping leverage around our two times leverage target, the current distribution yield of our equity indicated that such a view was not supported by the market. Accordingly, We elected to reduce the distribution and offensively reallocate the retained cash flow to a common unit repurchase program with 100 million authorization through year end 2021. To be clear, this is not a buy-in of Rattler by Diamondback and Diamondback will not be selling its position as part of this program. This is instead a reallocation of capital to the best returning project in our portfolio, which is retiring units with an over 18% forward return. Should the dislocation between the internal view of our forward outlook and the market perception of that outlook realign, we will return to distributing more cash flow on a per unit basis than prior to the implementation of this buyback program. We have studied the relationship between E&P parent companies and captive subsidiaries in our industry very closely and hope this buyback program is seen as further aligning the interests of parent and subsidiary. With this buyback, our partners are presented with an option. Remain partners and hold or increase your position or sell to us. In conclusion, When we created Rattler to build out the infrastructure necessary to develop Diamondbacks assets, we envisioned a midstream entity that combined conservative financial management, visibility to bonds, and a clear and honest relationship with its sponsor, the low-cost independent producer in North America. We still believe that each of these attributes apply today and is a clear advantage as Rattler adapts its business model from accommodating growth to optimizing operations. The resiliency of this business model will be proven out in the quarters ahead. With these comments now complete, operator, please open the line for questions.