Rattler Midstream LP

Good day and thank you for standing by. Welcome to the Rattler Midstream Q3 2021 conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. And now, I would like to hand the conference over to your first speaker today, Adam Lawless, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Paul. Good morning, and welcome to Rattler Midstream's third quarter 2021 conference call. During our call today, we will reference an updated investment presentation, which can be found on Rattler's website. Representing Rattler today are Travis Stagg, CEO, and Kate Spanthoff, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, 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 GAAP measures can be found in our earnings release issue yesterday afternoon. I'll now turn the call over to Travis Spice.

Thank you, Adam, and welcome, everyone, and thank you for listening to Rattler Midstream's third quarter earnings call. The third quarter of 2021 was another strong operational performance for the Rattler team as the business generated $60 million in free cash flow. While the volumes were lower, with Donovac completing eight Delaware Basin wells outside of the Rattler dedication during the quarter, the Rattler team did an incredible job managing expenses, and limiting CapEx to more than offset the impact to free cash flow. The best practices implemented in our operations are beginning to bear fruit and are expected to have long-term benefits to Rattler unit holders despite inflationary headwinds hitting the industry. Rattler also announced recently a series of strategic transactions that collectively repositioned the Rattler portfolio in line with Diamondbacks' shift to Midland Basin Development where 75% of its drilling capital is currently being allocated. The WTG transaction gives Rattler exposure to a growing gas gathering and processing business in the Northern Living Basin, and the new plant currently under development by WTG will help enable Diamondback and other producers to continue their highly economic development there. The drop-down transaction with Diamondback is largely a sale of complementary adjacent assets and gives Rattler additional scale, in the Midland Basin particularly, with which to apply its learnings in building out large integrated systems in the Delaware Basin. Additionally, by purchasing the available water assets and increasing the exposure to Diamondback development across the produced and the source water segments, Ratner expects to limit the volatility in volumes and earnings. Finally, the sale of the Pecos gas system presented a unique opportunity to divest an asset with little expected growth to the logical buyer of the system at an attractive multiple in order to fund the previously discussed acquisitions and maintain the conservative financial management. With greater capital investment, expected in the near future as Rattler integrates the acquired drop-down assets and constructs a new system in southeast Martin County, the proceeds from the gas gathering divestiture enhance Rattler's flexibility in continuing to return capital to unit owners. Altogether, after a year and a half of reducing expenses, limiting capital expenditures, and focusing on free cash generation, Rattler is once again finding attractive investments that we believe fit within our operating expertise and align with our strategy of leveraging the down and back relationship to generate value for our union holders. With these comments now complete, operator, please open the line for questions.

Thank you, sir. As a reminder to all participants, if you have a question, please press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. Stand by while we compile the Q&A roster. Your first question comes from the line of Vinay Chitteri with JP Morgan. Your line is open.

Hi, good morning, guys. I just wanted to follow up on the volumes commentary for next year here. So FANG kind of assumes a maintenance mode for 2022. And then considering the activity shift in different regions for FANG, maybe if you could share on how that would translate to Rattler, do you expect the volumes next year to be same or better than what FANG is guiding right now?

Yeah, you know, good question. I mean, with the drop-down, the volumes are certainly going to go up, you know, on a consolidated basis. And I think you may have a couple slides that show, you know, what percent of Diamondbacks completions will be dedicated to Rattler on the source water side as well as the disposed water side. And I think that, you know, the drop-down certainly cleans up the consistency of volume performance. we should see a pretty substantial increase from where we are today, pre-dropdown to the pro forma business in 2022.

Got it. Thanks. And then maybe on the multiple guidance on the transactions here, I think you kind of mentioned what the EBITDA expectations for the drop-down assets are, but any details you could share on the JV and the other asset sales which you guys had?

Yeah, I mean, we talked about $25 to $35 million of EBITDA for the drop-down in 2022 set to increase pretty dramatically in 2023 as capital is deployed to build out these recycling systems. And then I'd say generally on the equity method EBITDA contribution next year, definitely going up with the WTG deal as well as Wink-Webster coming on in full force and And our own log JV, you know, humming on all cylinders, I think volumes on that system are up 40% from where they were a year ago. So I think generally, you know, we kind of hint that we have 40 to 45 million distributions this year, you know, a little bit more on EBITDA side. I bet you that number goes up, you know, 20 to 30% next year.

Got it. Yeah, that's it from me, guys. Thanks. Thank you.

Once again, ladies and gentlemen, if you have a question, please press star 1 now. Again, it's star 1 instead of the phone keypad. Your next question is from Kyle May with Capital One Securities. Your line is open.

Hey, good morning, guys. Maybe just one question to start on the recycled water side. I believe in the release, you highlighted that 23% of source water volumes during the quarter were from recycled produced water. Just curious if you have the ability to grow the amount of recycled water and kind of how much that could potentially grow.

Yeah, good question, Kyle. It's very topical. You know, we're spending a lot of money on recycling, particularly in the Midland Basin. You know, we kicked off our recycling program in the Delaware where you have so much water production that you're able to pull, you know, 100% of the water you need for a frack, you know, from recycled sources. As we move into the Midland Basin, Diamondback consolidated with Rattler to make commitments to recycle at least 55% of water by 2024, 2025. The key to that is going to be us building these large recycle pits in the Midland Basin. We acquired a few of those from QEP. I think we're going to build some larger ones throughout the course of next year to be able to move and recycle water across all of Martin County. And, you know, other areas too, particularly, you know, Spanish Trail in that area as well. So it's picking up and we set the contracts up where recycling is incentivized because Diamondback pays less for recycled water, but Rattler makes a higher margin. And, you know, that's where we're headed in 22 and beyond.

Got it. Thanks for that, Case. And then maybe just one more. Now that Rattler has increased and extended the share buyback program, Just wanted to get your latest thoughts about balancing dividend growth with buybacks going forward.

Yeah, good question. You know, I think we didn't touch the distribution this quarter because there's a lot of cash, you know, going out for the drop-down as well as the WTG deal. And then, you know, a little bit of cash coming in from the grabs of sale to offset that. You know, I think we need to see where leverage settles post all of that. And then we'll continue to look at, you know, the touching the distribution. I think the buyback's been a good weapon for us at Rattler as well as our other two companies. And the board recognized that having it out there is a good sign of defense in times of market weakness. And I think we were pretty consistent last quarter using it. And I think that's a decent run rate going forward.

All right. That sounds great. Appreciate the time.

Thank you, Kyle.

I don't see additional questions at this time. I will now hand the conference back to Travis Stice, CEO for Closing Remarks.

Thanks again to everyone participating in today's call. If you've got any questions, please contact us using the contact information provided.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining Human Hour Disconnect. Have a great day. Stay safe.