Crestwood Equity Partners LP

Good morning and welcome to today's conference call as Crestwood Equity Partners provides third quarter 2020 financial and 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 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. Joining us today with prepared remarks are Chairman, President, and Chief Executive Officer Bob Phillips, and Executive Vice President and Chief Financial Officer Robert Halpin. Additional members of the senior management team will be available for the question and answer session with Crestwood's current analysts following the prepared remarks. As a reminder, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. At this time, I would like to turn the call over to Bob Phillips.

Thanks, operator. Good morning to everybody, and thanks again to all of you for joining us. I want to start every meeting as we typically do, hoping that everybody on the call, your loved ones, your family, are healthy and safe as we continue to navigate the pandemic and all of the issues that the country is facing right now. I want to most importantly compliment all the Crestwood employees that have continued to show dedication and resolve during the third quarter and during the pandemic. This has not been easy on anybody. Whether you work in the offices in Houston, Kansas City, or out in the field, across the 38 states where we operate. Our folks are doing a tremendous job for Crestwood and for our investors. And I really appreciate that. Health and safety is always our top priority at Crestwood. We want to protect our employees, our contractors, our business partners, the people in our local communities. That's always been our number one priority and will continue to be even during the pandemic. Now let's turn to the quarter. Another really strong quarter for Crestwood. We continue to knock them out quarter after quarter, notwithstanding the challenges we face in the market. Most important milestone that we achieved in the third quarter is generating positive free cash flow after capital investments and distributions to both our preferred and our common unit holders. I think the portfolio performed very well during the quarter, exactly as it should. Robert's going to give you more color around it. But we built this portfolio to be diversified and to not only mitigate against the risk of commodity volatility, which we can't control, but also in many cases to take advantage of the opportunities that commodity volatility creates in our market. So Robert's going to give you more color around that. We delivered adjusted EBITDA of $136 million. Distributable cash flow of $87 million. A leverage ratio I'm really proud of, 4.1 times. And a coverage ratio I'm also proud of, 1.9 times. We kept the distribution flat because of that. These results were up 5% over last year. Again, we beat consensus. And we're well positioned to exceed the midpoint of our revised 2020 guidance range. of $520 million to $570 million, and that midpoint implies 3% to 6% annual growth over 2019. When I think about that, I'm really pleased with where the company is, that we could actually grow the business during the pandemic. We're all going to look back on this in the future and be proud of that. All in all, we think that's very good results from the Crestwood portfolio, despite some obviously very large obstacles. this year for the industry and the country. Our year-to-date results, I think, also, again, demonstrate the diversity and the resilience of our asset base. In the third quarter, we had significantly lower shut-ins than we originally thought. Most importantly, we had new well activity in the Bakken and the Delaware, and that speaks to the quality of the acreage and the quality of the producers that are dedicated to the Crestwood portfolio. We had record gas volumes on the Aero system, gathering and processing volumes for natural gas at a record level. Very, very important. Gives us a really strong outlook for the future up there on the Aero system. And with strict pricing for natural gas at $3 in MCF and above, we're beginning to actually see active drilling in the Barnett. We've got a very positive outlook for the Powder River Basin. as Chesapeake starts to bring production back on in the fourth quarter as they're now receiving higher gas prices. And you know that they have been continuing through a bankruptcy process. So we're very pleased to see that positive step in 4Q and for 2021. And we also experienced record transportation volumes across our stagecoach pipelines located up in the Marcellus. That's the dry gas region in northeast Pennsylvania. Really pleased with the job that the guys have done there. Producers continue to view the Marcellus as very economic. at higher gas prices, and so we're seeing record volumes up there. And I guess, finally, our MSL team continues to capture margins in their business well in excess of our underwriting forecast for the newly acquired NGL assets that we bought from Plains back in April of this year. Importantly, we're also beginning to see a trend which I've been waiting for for years, seeing more demand around our 76 BCF of gas storage and our 10 million barrels of NGL storage And we think that's leading to a long-awaited margin improvement for storage as a business. All these things taken together shows tremendous balance and stable cash flows for the Crestwood portfolio. Now let's look forward. When I look at the portfolio, I see that 60% of our volumes are natural gas with about 20% NGLs and 20% crude. So we're obviously growing. very well leveraged to higher gas prices in 2021 and beyond. Our commercial teams are very active in all three downstream markets, gas, NGLs, and crude. They use our integrated system flows, our very efficient plant recoveries because our plants are all brand new, Our market area storage, they combine it with our truck, our rail, and our pipe transportation, and our extensive terminal business, and they optimize and market around all of our assets benefiting from demand pull. We know that's become a hot-button topic with analysts today. and investors. We're seeing improving overall margins and higher throughput because of the job that our marketing teams in storage and transportation and marketing storage and logistics are doing around our assets. We're not just relying on producer drilling plans and our four-fee GMP services to drive our cash flow. And that's another point that I think Robert's going to provide some color on. On that front, as you remember, we spent a lot of expansion capital in 2017 through 2019 to build out excess capacity for our growth GNP assets to ensure that we could handle full inventory developed by our main producers at the price levels that we saw over 17, 18, and 19. Obviously, the market has changed a little bit. But in our analysis, at $40 a barrel and above, we feel very comfortable with our current volume profile. Over the next couple of years, we think that will continue to support Crestwood's free cash flow, our strong distribution coverage, and our continued debt reduction. And at $50 a barrel, it's just math, really. We can accelerate debt pay down and strengthen our balance sheet further, create more financial flexibility, that Robert and Will and the finance and corp dev team could use to take advantage of opportunities in the market. Now, speaking to GNP, while the pandemic has clearly pushed back the timing of some of that expected GNP growth, I actually see a silver lining in that. The good news is it extends our inventory runway pretty extensively. And obviously, we don't have to spend much additional capital to generate the cash flow that we originally underwrote when we built those gathering systems and processing plants. And that's allowing our investors to benefit from stable distributions and lower debt. and again, more financial flexibility. We think that our portfolio right now gives Crestwood a lot of financial flexibility going into 2021. Clearly, there's been a consolidation phase in the upstream sector. We think that's coming in the midstream sector. We think our unit price will reflect over time the ability to generate more free cash flow, pay down debt, have financial flexibility to invest in other opportunities as we see them. so now in our press release we did provide a preliminary view to 2021 robert's going to lay out a little bit more detail before i hand over the call to him i want to importantly address the current operating environment for our sector and where i think we see the industry headed energy is clearly in a transition notwithstanding how the election goes the industry could probably will continue to see continued pressure on social sentiment, regulations, permitting, and cost. And while those may have long-term effects on our industry, it won't change the way we do business today, the businesses that we're in, the value of our assets, or the domestic oil and gas industry's importance in bridging the United States to a low-cost energy supply to meet the needs of our consumers. I don't care what politicians say or how much the regulatory environment changes. This is still a vital, essential, critical industry, and we're proud to be a part of it. Now, undoubtedly, investment in renewables will increase over time, but the EIA still forecasts that natural gas and crude oil will comprise over 50% of domestic energy demand through 2040. That gives us a long runway of about 20 years to continue to make money for our investors. None of those changes are going to take place overnight. And Crestwood does not shy away from the business we're in or the value of services that we provide to our customers or the importance of the industry to the country. Instead, as the industry transitions to cleaner energy, and a lower growth model for fossil fuels, we believe natural gas will play a prominent role and the midstream sector will continue to improve our sustainability initiatives and be an important part of the energy supply chain. Since we became the first MLP and one of the first midstream companies to publish a sustainability report back in 2018, we've made a lot of progress. And I'm pleased to say that we're working closely with the Energy Infrastructure Council and industry leaders like Williams and other EIC member companies to create a standardized reporting template for ESG for the midstream sector. We're not following ESG trends. We're actually setting them. Crestwood's right at the forefront of that move. so in 2021 let me just close by saying we'll be starting our second decade as a company in the first 10 years we built an impressive portfolio of midstream assets we built a strong operating platform we've got some of the best people in the business some of the best young people in the business i'm the only guy old guy still left in the company and we built importantly we built essential credibility with our customers and our investors We're going to benefit from all that in our second decade. But more importantly, we want to be a leader in the industry in ESG. We want to lead the midstream and reduce emissions in the field. We want to be a leader in environmental stewardship and safety. We want to lead in promoting diversity and inclusion in the oil and gas industry. And, of course, we want to be a leader in financial and capital disciplines. All those things are our goals and objectives for the second decade of Crestwood Equity Partners. We're committed to being a leading MLP and a best-in-class midstream company, and we're going to do that through prudent management and a strong balance sheet, which will position us, we hope, to be a leader in sector consolidation, give us a chance to enhance our corporate governance model, allow our investors a greater voice, and create more value for our unit holders. And hopefully if we do that successfully through an industry leadership position, we'll help attract much needed capital back to the sector, to the midstream sector. So I know that's a lot, but we've got a lot going on in the industry and the country right now, and I hope our employees and our customers and our investors benefit from a little bit of forward thinking about the way we think about things here at Crestwood. And with that, I'm happy to turn it over to Robert to discuss the third quarter results.

Thank you, Bob. During the third quarter, our diversified assets continued to perform in line with expectations, generating adjusted EBITDA of $136 million and distributable cash flow of $87 million, up 5% year over year. As market conditions stabilized during the third quarter, lower shut-ins drove volumes higher and producers in the Bakken and Delaware Basin resumed new well completion activity. Our financial and operational results for the quarter drove a leverage ratio of 4.1 times and a coverage ratio of approximately 1.9 times. Based on these third quarter results, we announced a flat distribution quarter over quarter of 62.5 cents per unit, or $2.50 on an annualized basis, which is payable on November the 13th to all unit holders of record as of Friday, November the 6th. Now moving to our operating segments, In our gathering and processing segment, EBITDA totaled $108 million in the third quarter of 2020, an increase of 9% year over year. In the Bakken, we had one rig and one completion crew operating on Crestwood's footprint throughout the quarter. And with that level of activity, we connected 15 new wells to the aero system and drove new natural gas gathering and processing records across our assets. We expect an additional 20 new wells to be completed to the aero system during the fourth quarter, which when paired with the approximately 35 to 43 product and 20 to 25 water only drilled but uncompleted wells or ducts expected on the acreage at the end of the year, we will see incremental volumes heading into 2021. In the Permian, there are currently five rigs running on acreage dedicated to Crestwood, and we expect an additional 15 to 20 wells to be connected in the fourth quarter, and we are now forecasting new well activity in the Barnett Shale in early 2021, driving a year-over-year cash flow growth on that asset. Our storage and transportation segment EBITDA totaled $15 million for the third quarter of 2020, on average volumes of 2.2 billion cubic feet per day. As natural gas prices have remained strong throughout 2020, we have seen producers shift capital investment back to the Northeast, resulting in increased demand for storage and transportation assets in the area from the Marcellus producers as well as the Northeast utilities. Along the Gulf Coast, Crestwood's 32 BCF of natural gas storage capacity is optimally located to support Gulf Coast LNG markets, power generation, and the Mexican export markets. In the Bakken, the Colt Hub saw increased volumes over the second quarter of this year as a result of producers bringing shut-in production back online, completion activity resuming in the basin, and producers increasing utilization of crude by rail assets given the regulatory uncertainty around the dakota access pipeline as we monitor the dapple legal process the cold hub is a natural hedge and offers our aero customers flow assurance and our commercial team continues to identify new pipeline connections for alternative takeaway capacity Finally, in the marketing supply and logistics segment, EBITDA totaled $12 million in the third quarter of 2020, benefiting from the successful integration and continued optimization of the recently acquired NGL assets. The new assets increased Crestwood's market share by expanding its geographical footprint and providing incremental access to the Conway and Montbellevue markets, further diversifying the NGL marketing and logistics platform. As we move into the fourth quarter, Crestwood expects the MS&L segment to benefit from strong seasonal spreads, increased downstream market opportunities, and further integration of these recently acquired assets. Now moving to the balance sheet, as of September 30th, Crestwood had approximately $2.6 billion of long-term debt outstanding, including just under $1.8 billion of fixed-rate senior notes, and $780 million of outstanding borrowings on our revolving credit facility. At the end of the quarter, we had approximately $450 million of liquidity on our revolving credit facility, and we have no debt maturities until 2023. Based on current forecasts, we now expect our year-end 2020 leverage to be below 4.25 times, which was the lower end of our revised guidance range that we provided back in May of this year. During the third quarter, we invested $11 million in growth capital, and as a result of the significantly reduced capital investment during the quarter, Crestwood generated meaningful free cash flow after distribution, and including the proceeds from the sale of our Fayetteville gathering system in Arkansas, Crestwood generated in excess of $50 million of available cash to continue accelerating our debt reduction initiative. The divestiture of our Fayetteville assets furthered our strategy of divesting non-core assets to strengthen our balance sheet and to enhance our liquidity. During the quarter, Crestwood used a portion of its free cash flow to opportunistically repurchase a portion of our outstanding 2023 senior notes at a discount to Barr. Our number one priority will continue to be on strengthening our balance sheet and driving leverage at or below our 4.0 times target over the next 12 to 18 months. we remain focused on liquidity and continuously evaluate opportunities to optimize our capital structure. Before moving on to the Q&A section, I wanted to provide some preliminary color on what we expect heading into 2021. Based on current conversations with customers, we expect our 2021 guidance range to be similar to 2020 as a result of ongoing activity in the Bakken and Delaware basins, incremental well connects, and year-over-year cash flow growth in the Barnett Shale, and strong demand for our natural gas, crude oil, and NGL storage assets. Benefiting from our previous three years of capital investments, and based on current customer activity forecasts, we expect growth capital to be less than $40 million, and maintenance capital to be $20 million or less in 2021. With the resiliency in our portfolio driving relatively flat year-over-year cash flow and the significant reduction in year-over-year capital expenditures, we expect to generate meaningful free cash flow after distributions in 2021, which we will continue to allocate towards accelerating debt reduction to achieve our long-term targets. We will continue to work closely with our producers in the coming months to finalize our 2021 plans and will provide our full outlook and guidance for 2021 during our fourth quarter call in February. I am very pleased with the work that Crestwood has done so far through the challenges presented in 2020. The resiliency of our portfolio has allowed us to achieve a key milestone of generating positive free cash flow after distributions this quarter, and we expect full-year 2020 results to exceed the midpoint of the revised guidance that we provided earlier this year. Crestwood's diversified portfolio has been an advantage during this year of volatility, and we continue to take steps to strengthen the balance sheets. While our sector is in the midst of a transition, we continue to see signs of improving fundamentals across the industry and on our business specifically, which will position us to continue executing on our strategies to build further strength across the company heading into 2021. At this time, operator, we're ready to open the lineup for questions.