Crestwood Equity Partners LP

Good morning and welcome to today's conference call to discuss Crestwood Equity Partners' fourth quarter 2020 financial and auditing results and 2021 outlook. 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 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 results to differ. Additionally, certain non-GAAP financial measures such as 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 analysis following the prepared remarks. At this time, all participants are in a listen-only mode. session, follow the formal presentation. If anyone should require assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bob Phillips.

Thanks, Maria, and good morning to everybody. Thanks for joining us on the call. Maria, you were cutting out just a little bit in the intro, so if my comments are cutting out as well, somebody please give us a message and we'll see what we can do about that. Again, good morning to everyone. Thanks for joining us. We're really excited about announcing our fourth quarter and 2020 earnings and giving you an update. on the business given everything that's been going on. I want to first say that we hope that everyone is still safe and healthy as we continue to navigate around the COVID-19 epidemic. And as we move into 2021, clearly the events of the last week or so, this recent winter storm has been uppermost on everybody's mind. So we hope everyone is safe and doing well and in the recovery mode. Crestwood continues to take these type situations very seriously. The health and safety of our employees, our contractors. Their families remains our top priority here at Crestwood. We do continue to monitor the state of the pandemic in our two corporate headquarters, Houston and Kansas City, as well as in all of our field locations across the United States. And we're continuing to monitor and operate according to local and state guidelines. So the pandemic is not going away anytime soon, and Crestwood continues to be focused on how to operate efficiently during this process. Even with all the challenges that we faced in 2020, our employees and our assets showed incredible resiliency. And I think that positioned the company to have the best year in its 10-year history. We generated $580 million of adjusted EVA DA and $360 million of distributable cash flow. Both of those were records, and they grew by more than 10% over 2019. They were well above the top end of our revised guidance range, above consensus across the board, and even above our internal budgets. And with our number one asset, the Aero system up in the Bakken, North Dakota, being shut in for 40%, over a two-month period in the second quarter, and Jackalope, our asset in the Powder River Basin in eastern Wyoming, being shut in for 50% for about six months out of the year, I think the results are even more compelling. It was good timing that in April of last year we acquired additional NGL logistics assets uh to expand our ngl platform and that provided an immediate step up in cash flow from those assets which fit seamlessly with our existing ngl logistics platform and as you know we talked about over the course of the last several quarters it added significant storage capacity to our portfolio which our team used very well during the pandemic Crestwood's diversified and integrated asset base performed very, very well in the face of last year's price volatility. And when combined with our strong balance sheet, it enabled the partnership to maintain a full distribution throughout the year while delivering very, very high coverage ratio of two times and a year-end leverage ratio of four times. Both of those metrics are best in class across our GNP peers. Most importantly, though, in 2020, we finally achieved our goal of generating positive free cash flow, and we expect to continue to grow that FCF throughout 2021. Now let's quickly take a deeper look at the results, starting with the Aero system up in the Bakken. It continues to be our primary driver here at Crestwood. It had an incredible fourth quarter outperformance. by achieving record volumes across all three products in that gathering system due to accelerated well connects, many of which were originally scheduled for 2021, but were brought forward by our customers into November and December. In addition to that, the wells continued to improve with IP rates that were consistently in the 5,000 a barrel equivalent per day range, and some were even as high as 10,000 barrels a day equivalent also. The wells have gotten bigger as producers continue to optimize their drilling and completion costs up there. The buck in play remains extremely economic. And as we look into 2021 in a $55 to $60 crude price environment, we anticipate a lot more activity in 2021. We expect 45 three-product wells to be connected to Arrow. 25 to 30 of those are ducts. and all of that new production is expected to drive growth in natural gas and produced water volumes year over year so we're looking for arrow to have a really good year in 2021. three issues that i want to touch on which impact the bakken first you might have noticed that we've had a lot of recent producer m a activity around our system and throughout the basin and that has put our customers many of our customers in very strong financial position to continue to drill and develop their acreage on the Fort Berthold Indian Reservation. And we think it also highlights, and if you look at some of those announcements, it highlights the great economics that our producers enjoy up there in the Bakken with the lower and lower drilling and development costs, the DNC costs coming down on a per-bud basis, and the well performance continuing to improve each year. Secondly, I want to talk about the Biden administration's ban on federal lands permitting. As you know, the Department of Interior has excluded tribal lands from those executive actions, and the BIA continues to issue new permits, new leases and right of ways. around the aero system. So I want to make sure that you're very clear about the impact of that executive order, the non-impact of that executive order on our aero system. And third, I guess we should talk about DAPL. It's been an issue for about a year now. We continue to monitor the legal developments around DAPL. Over the past six months, our customers have worked collaboratively with us and other pipelines to ensure that we have very attractive takeaway options on the Aero system in the event of a disruption in the future. The Aero system has current interconnects with Tesoro's High Plains pipeline, Kinder Morgan's Highland pipeline, in addition to DAPL. And I'm pleased to announce today that our commercial team up there recently added a new interconnect with the True Company's We're tying into the Bridger for Bears pipeline system, and when combined with High Plains and Highland, provides three pipeline outlets with capacity exceeding 120,000 barrels a day for our aero producers. As you know, in addition to that, Crestwood's integrated Bakken footprint provides our aero producers with access to trucking alternatives, and they can easily get over to our Colt hub, which has seen a big increase in new contracting and demand over the last few months. We think as a result of the uncertainty around DAPL. Just a reminder, Colt offers 160,000 barrels a day of rail capacity, 1.2 million barrels a day of crude storage. and connections to additional pipelines out of the basin. So while we expect the uncertainty around Bakken's full takeaway picture to continue until the DAPL situation is resolved, Crestwood does not anticipate any impact on our operations, and we remain well positioned to continue to provide our customers with attractive access to markets at very good netbacks. So I hope we've dealt with some of those issues in giving you that update. Moving down to the Powder River Basin in eastern Wyoming, as you know, Chesapeake Energy successfully exited bankruptcy. At the beginning of the month, they've got a new capital structure, lower operating costs. sufficient liquidity to operate their business. As you know, they got rid of a ton of debt. We think they're a bigger, better, stronger company, and that's going to work well for Crestwood in the future. During the fourth quarter, our commercial team proactively signed a new agreement with Chesapeake, which puts the company in a very strong position to develop and produce its acreage in the Powder River Basin with reduced fees in the short term that mitigate shut-in risk given all the price volatility we have out there, but incentivize rates that leverage new capacity additions to support new development over the next few years. Approximately 60% of Chesapeake's mineral acreage is located on private or state lands, and the company does have a significant number of approved federal permits in hand to continue to drill and develop over the next few years. And in the current price environment, our commercial teams are starting to have discussions with other producers in the basin for incremental activity, which we think will drive additional volumes through the jackalope system and the bucking horse processing plant. So we're pretty optimistic about the future of the Powder River Basin, particularly now that we're out of the Chesapeake bankruptcy. We have a really good contract, and we continue to have a good relationship with them and provide great services to them. Moving down to the Delaware Permian, we had a lot of activity in 2020. We connected 47 wells to our gathering systems. and we expect to connect uh 50 percent more than that in 2021 our systems are supported by strong counterparties as you know shell concho recently merged with conoco newbern one of the top independents out there in the basin and we have seen a lot of activity and expect more activity in 2021. our system is fortunately located on largely on private lands But even so, our producers have proactively applied for and received numerous permits on federal lands, ensuring that the executive action should have limited impact on our Delaware Permian system over the next few years. In addition to our gas and gathering and processing business out there, we continue to develop our produced water infrastructure business, which we built and got up in service in 2020, and we expect that system to continue to grow in 2021. With the anchor producer out there, a major of that development program, we expect material growth year over year for that. So that'll be a good contributor to that joint venture with First Reserve. uh in 2021 we like the delaware we like the acreage that we have dedicated to us we like the financial strength of our customers and the long-term runway that they have in developing the inventory and as you know the economics are better in the delaware than they are in any other shell play in the u.s so just to recap and maybe for those that haven't followed the company for a long time We've had to pivot Crestwood multiple times during the 10-year history of the company, which we started back in 2010 in a very high gas price environment. I remember natural gas was trading for about $5.50 in MCF back then when we purchased the Barnett and the Fayetteville gathering assets in 10 and 11 years. Then when gas prices dropped, we had to pivot to rich gas plays. We acquired the Southwest Marcellus system from Antero in 2012. And then in 2013, we pivoted to crude oil basins with the acquisition of the Jackalope Gathering System in the Powder River Basin and the Arrow Gathering System in the Bakken. We have continued to pivot when we needed to strategically to fulfill our mission. We did that again in 2017 when we started expanding our gas processing business in the Delaware, in the Powder, and in the Bakken. We spent more than a billion dollars to build out gathering and processing capacity in those three basins, and we really benefited from that in 2020 with all of that capacity. We didn't have to spend near as much capital, and we're going to benefit from that even more in 2021 since our major expansion projects are now complete. And when we do spend capital, it'll be expansions of our gathering systems to existing or production that's being drilled under existing contracts and existing rights. We've got a lot of excess capacity out there, and it's aligned with our producer forecast. So as we pivot again to a lower capital spend model, we're going to be focused entirely on free cash flow generation. This year, we expect our capital investment to be 72% less than last year at the midpoint. And most importantly, and I highlighted that in my opening comment, our free cash flow is expected to be between $90 and $160 million this after capital expenditures and distributions, and the finance team is going to use that to continue to delever and enhance our liquidity so that we can continue to be in a growth mode here at Crestwood. A couple of final notes, importantly, on ESG and sustainability. We had a great year in 2020 advancing our commitment to sustainability throughout the organization, and we were a leader in the midstream sector. Our ESG initiatives will be crucial to Crestwood and other midstream companies during the energy transition as it evolves. And Crestwood continues to encourage enhanced transparency and disclosure from the midstream sector. I'm proud to have worked with colleagues on the first ever midstream ESG reporting template. which we put forward through the Energy Infrastructure Council and the GPA and other industry trade associations and leaders. And Crestwood was one of the first companies to publish our performance using the new EIC ESG reporting template, and we did that in December. So that was quite an achievement for our team and our industry. At Crestwood, we continue to focus on diversity and inclusion initiatives. We've recently been recognized at Crestwood and have become one of only three midstream companies which were included in the inaugural Bloomberg Gender Equality Index. In addition, we've recently welcomed Ms. Fran Vallejo to our board of directors this month. Fran joined us in February. She's an experienced veteran of the industry, spent years at Conoco in finance, treasury, and strategic planning. She brings a lot to our board. We continue to seek ways to improve the delivery of energy safely and sustainability across our footprint. We also know this has to be an industry initiative. Therefore, we joined One Future, which is a coalition of 37 energy companies, which voluntarily worked together to reduce methane emissions to 1% or less by 2025. And to further showcase our commitment to methane emissions reductions in 2021, we're going to be tying a portion of our employee compensation to our methane emissions intensity reduction goal. We think this will help drive innovation and help us measure the impact of our footprint at Crestwood so we can continue to reduce emissions over time. And finally, while we still see volatility in the sector in 2021, We're increasingly optimistic about the year, and we see a lot of potential for increased activity. We're looking at a $55 to $60 a barrel crude price for the year. We're beginning to hear more and more positive outlooks from producer customers, and we anticipate a pickup of activity in our crude basins driving incremental volumes. We're also seeing very high gas prices and we've seen elevated natural gas activity over the past six months and expect that to continue as well. When we combine that with our stable cash flow contributions, not only from our GMP business but our bottle storage and transportation business and our NGO marketing supply and logistics assets, our outlook for 21 is increasingly bright. I think you'll see that in our guidance. I'm very pleased to have Robert review the 2020 financial results and give you some details around our 21 guidance. And we have the entire team here available to answer questions if you all have any. So, again, very optimistic about 21. And, Robert, I'll turn it over to you.

Thank you, Bob. As Bob highlighted in his prepared comments, I could not be more proud of the Crestwood organization and the financial results that the company delivered in 2020, a year that certainly brought its fair share of challenges on a number of fronts. Our diversified asset base generated record full-year 2020 adjusted EBITDA of $580 million. that up 10% year over year, and distributable cash flow of $361 million, that up 18% year over year, both above the high end of our revised guidance range. These exceptional financial results position Crestwood to maintain its distribution at $2.50 per unit for the full year, resulting in a full-year coverage ratio of approximately two times and a leverage ratio of four times. As we completed our major growth projects in the middle of 2020, the company also reached an inflection point of beginning to generate positive free cash flow in the third quarter and into the fourth quarter. Now moving to the quarterly operating segment results, in the gathering and processing segment, fourth quarter EBITDA totaled $128 million, an increase of 13% over $113 million in the fourth quarter of 2019. These results were driven primarily by the aero system in the Bakken. As producers accelerated 2021 well connections into the fourth quarter, at the same time, enhanced well completions continued to drive higher IP rates, resulting in record-gathering volumes in the fourth quarter for all three products, crude oil, natural gas, and produced water. During the fourth quarter, Crestwood had producer rig activity in the Bakken, in the Delaware Permian, and in the Barnett Shale, which will drive incremental volumes and momentum heading into 2021. In our storage and transportation segment, fourth quarter EBITDA was $15 million compared to $17 million in the fourth quarter of 2019. At the Stagecoach joint venture with Consolidated Edison, increased producer development driven by stronger dry gas economics resulted in record transportation volumes. At the Colt Hub, rail loading volumes increased 4% over the third quarter of 2020 as production from the basin continued to increase from the trough, which we experienced back in the second quarter. And finally, at Trace Palacios, Crestwood has continued to see increased demand for Gulf Coast storage assets and recently completed a connection to the Permian Highway pipeline that has already driven incremental producer interest. Finally, in the marketing supply and logistics segment, fourth quarter EBITDA totaled $28 million compared to $19 million in the fourth quarter of 2019. For full year 2020, the MS&L segment benefited from nine months of contribution from the NGL assets that Crestwood acquired from Plains All-American back in April of 2020, and that drove full year EBITDA of $89 million. Now, looking to 2021, Crestwood expects the NGL logistics business to continue to benefit from the integration of the Plains assets and additional opportunities to capture incremental market share. In 2020, Crestwood invested $144 million in growth capital, that at the low end of our revised guidance range of $140 million to $160 million. And our 2020 growth capital was front-end loaded, which allowed Crestwood to expand our GNP system capacities to meet long-term producer development activity, minimizing all future capital investments to WellConnects and minor gathering system expansions as needed around our systems. Now, moving to the balance sheet, at year-end, Crestwood had approximately $2.5 billion of long-term debt outstanding, including just under $1.8 billion of fixed-rate senior notes and $719 million of outstanding borrowings on our evolving credit facility, resulting in a leverage ratio of four times as of December 31, 2020. In January of this year, we opportunistically took advantage of a favorable high yield market by successfully issuing $700 million of new 6% senior unsecured notes due 2029. And in connection with the transaction, Crestwood tendered approximately $400 million, or just under 60% of our outstanding 6.25% 2023 notes. After closing of these transactions, Crestwood had approximately $2.1 billion of senior notes outstanding and $430 million drawn on its revolving credit facility, but will plan to repay the remaining 2023 notes still outstanding in April of 2021 when those notes become callable at par. This transaction allowed us to push our next nearest term senior note maturity out to 2025 and reduced our annual interest expense by around $2 million per year. Now, looking forward to 2021, we expect producers to remain disciplined in their spending and focused on measured growth that supports balance sheet strength and free cash flow generation. Based on current producer forecasts and our forward outlook for commodity prices, we expect our assets to generate adjusted EBITDA in the range of $550 million to $610 million for 2021 and driving distributable cash flow in the range of $320 million to $380 million, and between $90 million and $160 million in free cash flow generation after total capital expenditures in our current distribution. As discussed in our press release this morning, our guidance range generally factors in our estimates for cash flows under various sensitivity cases of commodity prices and ranging from $45 to $50 per barrel on the oil side at the low end of our range up to approximately $60 per barrel on the high end of our range. At the current crude oil prices of approximately $55 to $60 per barrel average for the year, we anticipate that our producer customers will connect approximately 140 wells across our gathering assets driven by the completion of duct inventories and incremental rig activity in the Bakken, ongoing rig activity in the Delaware Permian, as well as the current rig activity that we're seeing in the Barnett. In the S&T segment, our Stagecoach assets are almost fully contracted for the year, and the Pult Hub continues to benefit from increasing demand for rail loading services as customers plan around the potential event of a short-term DAPL shutdown. In the MS&L segment, the MGL logistics team continues to optimize our expanded asset base, which we acquired in 2020, and maximize opportunities to further gain market share here in 2021. In 2021, Crestwood will continue to focus on maintaining our strong financial position and estimates the full-year distribution coverage ratio at the current distribution level of 1.7 times to 2 times based on our guidance range and a leverage ratio of 3.75 times to 4.25 times, which is nearing our long-term objective of 3.5 to 4 times as we have consistently communicated over the past several quarters and years. Our total capital investment for 2021 is expected to include $35 million to $45 million in growth capital and $20 million to $25 million in maintenance capital. At the midpoint, this represents a 72% reduction in growth capital year over year and includes the optimization and enhancement projects at Arrow and WellConnect Capital in the Powder River Basin and the Delaware Permian. Crestwood intends to finance the entirety of its 2021 capital budget through retained operating cash flow. So despite the many challenges in 2020, Crestwood had one of its most successful years to date, and we certainly intend to build on that momentum in 2021. With the improvements we've seen in commodity prices here at the first start of this year and the very positive momentum from our producers, we continue to get increasingly optimistic around the range of cash flow that we've put out and expect to deliver a very solid year's Our dedicated employees, our diversified asset base, and our strengthening balance sheet continue the company to continue to execute on its plan to deliver strong results year over year and drive continued increasing value to our unit holders. At this time, operator, we are ready to open the lineup for questions.