Oasis Midstream Partners LP

Good morning and welcome to OASIS Midstream second quarter conference call. All participants will be in listen-only mode. For any assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Richard Roebuck, CFO. Please go ahead.

Thanks, Nick. Good morning, everyone. This is Richard, as Nick mentioned. Today we're reporting our second quarter 2021 financial and operational results. We're delighted to have you on our call. I'm joined today by Taylor Reed and Michael Liu, as well as other members of the team. Please be advised that our remarks on both OASIS Petroleum and OASIS Midstream Partners, including the answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that we describe in our earnings release as well as the filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, We'll also make reference to certain non-GAAP financial measures, and reconciliations to the applicable GAAP measures can be found in our earnings release and on our website. We'll also reference our current investor presentation, which you can find on our website. With that, I'll turn the call over to Taylor.

Good morning, everyone, and thanks for joining our call. O&P delivered another great quarter, as the team has done an amazing job controlling costs and maximizing operational reliability, which supports strong financial performance. Additionally, the business development team continues with new third-party contracts, which support our long-term outlook. Importantly, OMP's safety record has been great year-to-date, and we applaud the team for all their hard work and progress here. I'd like to start today's call by highlighting a handful of key things. First, OMP's second quarter performance exceeded expectation on volumes and cost control, leading to EBITDA and coverage outperformance. Second, the team has secured multiple third-party contracts across the Bakken and Delaware. In the Delaware, OMP recently expanded its third-party business, which includes building a new pipeline connection to Wink. This is a major milestone for OMP as it connects our infrastructure to a key hub in the Delaware Basin, which greatly expands our third-party opportunity set. As you've likely noticed, rig and permitting activity have increased in both the Bakken and Delaware. Much of this expected activity is around OMP's key infrastructure, and we continue to work a robust pipeline of new opportunities in both basins. Third party business accounted for about 17% of our revenue in the second quarter, treating 100% of the Delaware revenue as third party to account for OASIS divestiture. Third, we declared cash distribution of 56 cents per unit in the second quarter, representing a one cent increase from first quarter levels. We continue to have confidence in our new opportunities and business as we move ahead. We'll discuss those opportunities a bit more on this call. Fourth, our sponsor Oasis Petroleum expects its Williston Basin acquisition to close late in the third quarter. As we highlighted last call, this strategic move provides additional value to OMP. Oasis has indicated that post integration it expects similar or higher volumes in OMP dedicated areas. We have already seen the pivot, as evidenced by our Capturing the City of Williston Acreage dedication from OASIS. The dedication includes crude oil, natural gas, and produced water services. We added a case study in the OASIS and O&P investor presentations that highlight the strength of the City of Williston asset. The upstream economics are fantastic, allowing O&P to invest incremental capital at attractive build multiples. Volumes under each services offering will flow as soon as late 2022. OASIS is becoming an even stronger anchor tenant with more size and scale and a deeper inventory, along with its peer leading financial position, allowing for a steady, resilient development program. We also have a right of first refusal in the Painted Woods project area, which is expected to be developed right after City of Williston and is one of OASIS' core operating areas. Painted Woods is also part of the case study in the investor presentations. Finally, both OASIS' recent strategic moves and OMP's success in capturing new business translate into differential value creation for our unit holders. Our outlook coupled with our strong balance sheet have us excited about the future of OMP. I'll now turn the call over to Michael to get into a little more operational detail.

Thanks, Taylor. O&P delivered another remarkable quarter with both volumes and EBITDA beats. Capture rates remain at very high levels as O&P's system experienced a little downtime and allowed our sponsor to maintain its peer-leading performance in gas capture as well as oil and water captured on pipelines. While basic gas capture was about 99% in the second quarter, Natural gas-related business is the primary driver of O&P's financials, accounting for over 60% of our fee-based revenue. Our sponsor announced it will publish its first sustainability report in August, which among other things outlines its strong gas flaring performance, as well as minimizing the number of trucks needed to move its oil and water volumes. O&P is proud to play a critical role in ensuring OASIS meets its objectives on this front. Quarter over quarter volumes were generally flat or declined slightly across most commodity streams, reflecting limited completion activity from our sponsor and others, which was expected. However, OMP exceeded expectations versus guidance on aggregate gas, oil, and water volumes. As we move to the second half of 2021, volumes are expected to grow in the third quarter before declining in the fourth quarter, reflecting the planned turnaround at the Wild Basin gas complex. This turnaround is expected to last just over a week as we're taking the opportunity to accelerate maintenance into the fourth quarter of 2021 to ensure strong operating reliability in 2022 and beyond. Given the anticipated downtime related to accelerated maintenance, our four-year EBITDA range was adjusted to $218 to $224 million Excluding the turnaround, our new guidance range would have exceeded our original guidance midpoint by roughly $1 million. Third quarter EBITDA is expected to range between $56 and $59 million, with fourth quarter EBITDA expected to decrease by $6 million, reflecting the turnaround. Coverage for the fourth quarter is expected to be about 1.2 times as maintenance capex increases for the turnarounds. Given the excitement around anticipated volumes from South Nessun and the recent City of Williston dedication, along with OASIS's development program focused on OMP's asset base, it's worth spending some time on our preliminary outlook for the next couple of years. The volume trajectory from the fourth quarter into the first quarter of 2022 suggests flat to slightly down EBITDA versus the fourth quarter of 2021 in similar coverage levels. First quarter of 2022 should be the low point for 2022. Volumes and EBITDA thereafter are expected to accelerate sharply in the second quarter and beyond as the South Nessun project comes online. The fourth quarter of 2022 should be the highest of the year. On average, we're currently expecting 2022 EBITDA to be up high single digits versus the full year of 2021. That outlook is pro forma for the first quarter simplification. 2023 EBITDA has the potential to increase mid-teens versus 2022 based on OASIS's current plan. And assuming OMP receives the acreage dedication for Painted Woods, where we captured a ROFR on this area during the simplification process. Additional third-party business would represent upside to our plan. On the capital side, second quarter spending of $13.2 million was in line with our guidance. Concurrent with the new City of Wilson Acres dedication and additional third-party business, we expect spending will increase to $73 to $78 million in 2021 as O&P begins construction on key infrastructure. 2022 capital spending is expected to increase versus 2021 levels as O&P invests in critical infrastructure to support that strong EBITDA growth. With that, I'll hand the call over to Richard. Thanks, Michael.

The O&P's financial position remains compelling, and our outlook is differential. As you can see on slide 12 of our investor deck, O&P's EBITDA has grown from $43 million when we IPO'd in 2017 to an expected $218 to $224 million in 2021. As Michael discussed, this is set to increase further in coming years as we receive additional acreage dedications from our sponsor, and grow third-party business as well. With our press release, we announced that O&P is increasing our distribution one penny to 56 cents per unit. While still delivering strong coverage, our operating and financial projections have improved significantly from where we were a year ago, and we'll continue to make distribution decisions quarter by quarter based on recent performance and a go-forward outlook. A big part of the decision around the distribution is our leverage targets. We seek to maintain prudent distribution strategy with long-term leverage within our target of 2.75 times to 3.25 times. Michael outlined our EBITDA trajectory earlier, which will translate into leverage in the beginning half of 2022 at slightly above the high end of our long-term target leverage range. We are comfortable with this tick up since leverage should quickly fall into the middle of our range or about three times in the fourth quarter of 2022. As of June 30th, O&P had $213 million drawn on its $450 million revolver, along with $450 million of unsecured bonds and $9.7 million of cash. Leverage based on the second quarter 2021 annualized EBITDA was approximately 2.9 times. In closing, O&P executed well during the quarter, and I'd like to congratulate the team for keeping margins high, which supported our outperformance. O&P is in a position of strength as our go-forward outlook is impressive. which should drive attractive returns and cash back to our unit holders for years to come. I'll now hand the call over to Nick to open up the line for questions.

I'll begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. The first question comes from Jose Cassidy of JP Morgan. Please go ahead.

Good morning, guys. I just wanted to ask about the preliminary guidance for 2022 and 2023. My understanding was OASIS was looking forward to a flattish production outlook in 2022 and beyond. But you also noted a big addition in the second half of this year. So I want to understand how that would translate to volumes upside at OASIS midstream. And also, what kind of completion activity are you expecting in the second half versus what you would see in 2022?

Yeah, sure. That's a great question. As you know, OASIS is expecting to close on its acquisition of the the Diamondback assets at the end of the third quarter. That asset, we're not putting rigs on in the near term, and so naturally that means it's going to be declining over time. So OASIS will be keeping volumes flat, as you mentioned, over time, which means that it's going to be putting its rig activity and completion activity on other assets. Those other assets are specifically the OMP assets. So on an overall basis, those would be necessarily growing as it related to kind of the overall profile for OASIS. So that's a great clarifying question, which was why we were so excited when OASIS announced that acquisition and then directed more capital towards the OMP asset base. The other thing that's important to note is kind of two things. One is that our forecast is conservative as it relates to third-party volumes. But the flip side is by putting in that incremental capital into both that South Messon area as well as the City of Williston and Painted Woods area, there's potential for third-party upside to our numbers for that, which is extremely highly capital-efficient capital to put into the ground.

Got it. So just picking up on the last comment you made there, the guidance assumptions baked in for 2022 and 23, is that primarily OEL says, or do you also bake in some kind of third party assumptions? I mean, you did note it's conservative, but just want to get a little more thoughts there.

You know, I mean, because we have, as was noted earlier, around 17% of our revenue is from third parties, the way we think about it is that's good contracted revenue. And so we get volume forecasts and expectations from our third party customers, which we roll into our forecast. And then we have a very, like I was mentioning earlier, conservative wedge of incremental contracts, it's already really kind of like the final negotiation stage of the process. So we've got a lot more behind that stage, like stuff that we're talking term sheets and working on incremental prospects that is not included in our forecast. So that's where, that's kind of three buckets, if you will, that we categorize our third party opportunity and what we're doing is really the signed and the forecast that we get and then stuff that's like super close to being nailed down.

Understood. Maybe if I could, and again, one last on distribution here. So you are kind of seeing higher activity and then CapEx creep from 2021 and 2022. And then leverage still in the manageable range, like you said, kind of hitting the top end in 1Q22. But just to understand like, keeping the distribution flat versus modestly increasing? What levels of leverage is comfortable and where do you see keeping it? How do you think about distribution growth guidance given the current CapEx outlook?

Yeah, I think that's, you know, the balancing act that we've been going through for a while now. And, you know, our long-term targets have been 2.75 times to 3.25 times were unique compared to a lot of midstream businesses that it's in that kind of neighborhood. So it gives us a lot of flexibility. It gives us flexibility to, in the near term, spend a little bit of incremental capital. And then the capital we're spending is on volumes we understand very well. And so we have the ability to understand and predict where leverage is headed. And so we see that leverage, as you noted, at the end of 2022 coming down around three times. And so it actually, as we march forward, we see it coming down even below those levels over time, given what we know right now and not making any incremental third-party upside. And so the way we think about it is like we feel really good about our plan. And so We see the ability to increase distributions and we've been doing it at a very moderate pace. We just, as you heard in our prepared remarks, do not commit to, we haven't committed to a distribution growth because we just want to make sure that we stay conservative on that front and remain flexibility kind of quarter in and quarter out. Just given some of the volatility that we've seen over the past couple of years, we just want to make sure that we're in good shape. I guess the offset to that that we feel really good about is Oasis has a really strong hedge book, and so their cash flows are locked in for the next couple of years. And so the activity that they will be delivering to OMP gives us a lot of comfort in our numbers and the ability, if we decide to, to continue to increase the distribution.

Got it. That's very helpful. Thanks, guys. That's it from me. Have a good day.

All right, thanks. Thank you. The next question is from Kyle May of Capital One. Please go ahead. Hey, good morning, everyone.

Appreciate the initial outlook for 2022 and 2023.

Yeah, for sure. Where did we lose you? I think we lost. Hey, Nick, are you still there?

Kyle, we can't hear you if you went on mute by chance.

Yes, I am here.

Okay.

Mr. May, are you still with us on the line?

Let's let him dial back in and go to the next question if that works.

Thank you. Next question will be from Neil Pigman of Truist. Please go ahead.

Morning, all. Thanks for getting me in. First question is just on, you know, obviously you had a lot of nice beats on the quarter, but particularly, can you talk a bit about, you know, the CapEx, not only beat, but the improved sort of CapEx guide for the remainder of the year? I know you talked a little bit on efficiencies, but just talked about what you all are doing to continue to come in under cost there. Very nice last you had.

Hey, Neil, are you talking about on the OASIS side?

Yes, sir. Yes, sir. Thanks, Mike.

Yeah, okay, so this is the O&P call, but on the OASIS side, we talked about on the last call that you're exactly right. On the CapEx side, we had strong beats. You saw that in the second quarter. Really, if you look at the full year, we brought CapEx down 7% on the E&P side. A lot of that's around a combination of things, but think about that as kind of frack efficiency was one of the larger pieces of that. The second quarter was a little bit more kind of, you know, a combination of frack efficiency, timing, and interest in wells, et cetera. But kind of the overall kind of year look, think about it as efficiency-driven, is kind of the cost of that 7% lowering of the capex side.

Got it, got it. Thanks for that, Mike. And then just a follow-up on, you know, I know you've got a lot of options you, you know, sold down. Could you talk about the potential for you know, just deals out there or what, you know, I know you've got a lot of options on OMP out there on the table. Maybe just talk about is the M&A market improved or, you know, what's going on with that?

Yeah, you know, we talked and you heard on the prior call, you know, there's a lot of options from an OAS perspective. What I'd highlight are, you know, for OMP, some of the, the fantastic deals that have really been shareholder friendly to both sets of companies. It's really been super thoughtful about all the deals. The simplification is just a great example of being able to take the midstream assets of the parent, drop them at a very attractive price for OMP and really set up both companies going forward and played well with both sides. of the equation, so you've seen us do that regularly. Michael and Richard both talked about some of the projects we've just added in the queue, so dedications in South Nessun, also dedication in the city of Williston. Again, two important projects for both companies that are very helpful and creative for both of them, so we'll continue to evaluate and look for those opportunities that'll help both companies going forward.

Yes, sir. It does seem like there's a lot of options. Look forward to it, guys.

Great. Thanks, Neil. Okay, Neil.

Thank you. And again, if you have a question, please press star, then 1. We have no further questions at this time, and I'll turn the call back over to Mr. Tyler Reed, CEO. Please go ahead.

Thanks, Nick. In closing, second quarter results were solid, and the go-forward outlook is attractive, supported by additional acreage dedications and a growing third-party business. O&P is in a differential position to create value for unit holders, and we look forward to continued execution.

Thanks, everybody, for joining. Thank you. Conference is now concluded. Thank you for attending today's presentation.