Crestwood Equity Partners LP

Good morning and welcome to today's conference call to discuss Crestwood Equity Partners' second quarter 2021 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 EBITDA, 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 CNN management team will be available for the question and answer session with Crestwood's current analysis following, analysts following very much. Today's call is being recorded. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And at this time, I will turn the call over to Bob Phillips.

Thanks, Operator, and good morning to everyone. Thank you all for joining us early this morning. We're very excited to discuss our second quarter results. and our revised outlook for the second half of the year, which continues to be very positive due to strong commodity prices and recovering energy markets. We think the market's very constructive for a strong second half follow-up, a strong first half. Importantly today, I want to make sure that we highlight our financial strength and flexibility, which we've accomplished following some recently completed strategic transactions, including the first reserve buy-in which we closed in late March. Sometimes we call that the holdco transaction, but it's the same deal. And the recently completed stagecoach divestiture which we closed the first piece in early July. And so we'll be talking about pro forma debt associated with completing that stagecoach sale. I certainly think these deals now position Crestwood to take the next step in our long-term plan. And it's a plan that we've been very vocal about for the last several quarters to utilize our free cash flow, to return capital to our investors through our previously announced common and preferred equity buyback programs. But I also want to highlight the financial flexibility that this low debt, increasing free cash flow position gives us to pursue growth opportunities across our portfolio as well while maintaining our financial strength. So let's begin with the second quarter, where a large part of Crestwood's portfolio benefited, obviously, from higher commodity prices, which caused increased producer activity and drove adjusted EBITDA of $146 million and DCF of $86 million. That's up 14% and 15%, respectively, year over year, and both numbers exceeded consensus as well. As a result, we'll be generating more than $100 million of free cash flow after distributions in the first half of this year, and that clearly covers our organic growth capital program with a balance going to reduce debt. Robert will talk more about that in his section. As I mentioned earlier this month, we closed the first part of the sale of Stagecoach Gas Services to Kinder Morgan for $1.225 billion. Again, I think we've let you know previously it was a well-attended process. These were highly sought assets, and we're very pleased with the result of the process. I know our partner Con Ed is pleased with the result as well, and I'm proud of the fact that we know that those assets are going to a good home in Kinder Morgan. They're going to make good use of our stagecoach storage and pipeline business, and we're pleased as to how that happened. With our net 50% share of the proceeds, we paid down our revolver balance, and we now have on a pro forma basis 3.6 times leverage ratio and more than $940 million in available liquidity. So when you combine that pro forma second quarter leverage profile with the second quarter distribution coverage of 2.2 times, our balance sheet is very strong, our distribution is well covered, and we think that Crestwood offers its investors some of the best financial metrics, stability, and forward outlook in the entire MLP sector. So we're really pleased with completing all these transactions in sequence like that. As you know, we've got a diversified portfolio, and as our MS&L business and storage and transportation businesses carried us last year during the pandemic, our GNP sector has been carrying us this year with a strong pickup in producer activity across all of our systems. due to the higher commodity prices, and we continue to anticipate good momentum throughout the second half of 2021. Robert will talk a little bit more about our updated outlook for the second half of the year and full year. Crew prices have stabilized between $65 and $75 a barrel. Natural gas in excess of $3.50 per mcf. producers on our Bakken, Powder River, Delaware, and Barnett systems are all seeing excellent returns, and we're seeing better than expected producer activity as a result. We had drilling and completion crews active during the second quarter. Many of those completions or TILs occurred in the latter part of the end of the quarter, so we ought to see a good volume increase beginning in the third quarter. In the Bakken particularly, for the first time since early 2019, we're very pleased to report that our producers are finally seeing a significant positive net back on gas and gas liquids production. And we just highlight that with the current Bakken gas price. $3.66 and a Cal 21 strip you can buy out at $3.86 right now. So we expect our Bakken producers, oil production, gas and gas liquids production to be high returning for them for the balance of the year and into next year. When you combine that price outlook with enhanced gas capture practices, which we're all covering, but as you know, Crestwood's been on the forefront of gas capture in the Bakken play, and increased focus on flare minimization by our producers. And I want to compliment our producers for really driving home a lot of these ESG principles that Crestwood has been a leader on up in the area. Crestwood's aero gas gathering and processing volumes each increased nearly 60% compared to the second quarter of last year. as well as 6% quarter over quarter. So it's a real combination of greater producer activity, greater gas capture, and a real attention to flare minimization by our producers on the reservation. The quarterly increase in gas volumes, which we expect to continue to move forward primarily due to higher GORs, did offset lower quarter-to-quarter crude oil and relatively flat water volumes on the Aero system. That was largely due to increased producer shut-ins for frack protection, which we are beginning to see as a long-term trend in the business. So we do expect a short-term spike in volumes when those wells begin to return to service, and we're seeing that as we enter the second half of the year. So looking to the second half of 2021, we expect producers to maintain their capital discipline. We've been very pleased with with how our customers have been maintaining discipline and spending within cash flow. But we do expect that will, because of prices, result in more overall activity around our systems than even during the first half of the year, which, as we said, is up compared to last year in quarter over quarter. In North Dakota, the aero gas volume should remain high. Crude oil and water volume should reverse course during the second half. as we expect a fairly wide range of 20 to 35 new well connects to come online between july and november many of those are waiting on either completion crews or working with the producers to optimize our system to create more capacity at the wellhead so a lot of that will be uh very exciting for us as as we see that new production come online in the second half of the year Turning to the Delaware Basin, where we can see somewhere between 40 to 50 new well connects across the Nautilus and Willow Lake systems. We're excited about the second half of the year in the Permian. We expect our oil and gas processing plant volumes to be up to about 75%. of its 200 million a day capacity by the fourth quarter a lot of active work in and around making well connections on nautilus and building new pads and new extensions and adding compression around the willow lake system we're getting that done at or under budget we're getting it done on time and we're seeing a lot of producer well activity in that area we've also seen a modest increase in utilization of our Desert Hills Produce Water System, and we expect that to continue in the second half of the year as we have a few projects to complete around that. Moving to the Powder River System, Chesapeake, our primary customer there, generally held second quarter volumes relatively flat. across really the first half of 2021. If you look back over the last three or four quarters since the rebound out of COVID, those volumes have remained relatively flat, which is not a bad outcome given that they went through bankruptcy last year and emerged this year and we expect that to continue through the second half of the year we are having good luck though in adding some third-party wells on new production we did add some wells in the third quarter and have a few more tils on the schedule in the second half of 21 from those third-party wells so we're looking for a slight increase in volumes there And we're actively engaged with a number of Powder River producers as they begin to restart their activity in the basin and look towards 21 and 22 development plans. We're excited about that. We're in a very strong competitive position. to be able to utilize our expansive jackalope gathering system and fill up excess capacity that we have at our bucking horse processing plant complex. So very excited about the outlook for second half 21 and 22 for the Powder River Basin assets. Overall, as we mentioned, given current commodity prices, anticipated activity from our existing customers and some of the deals that we know that we're working on that we're likely to get wrestled to the ground in the second half of the year. We expect to see continued improving cash flows. We'll be maximizing our cash flows across these systems with optimal utilization of our existing facilities and minimal future capital. And we expect to be able to capture some new high-quality long-term supply dedications in some of these areas with what we expect to be very high return incremental expansion projects that are immediately accretive as they're filling up existing capacity on our systems and our plants. We think that's real operating leverage and it's a real winning strategy in this market. So Crestwood's going to continue to operate our GNP business in that manner. We continue to believe that our GNP portfolio has some of the best producers, the best rock, the lowest operating costs, and some of the best margins in the GNP sector, and we think that gives our partnership some of the best operating leverage to higher prices in the midstream industry as we look out over the next two to four quarters. Before I hand the call over to Robert to discuss our revised guidance and capital allocation plans, I want to commend all of our employees on what we think was an extremely successful, active first half of 2021. When I look back and think about what we have accomplished as an organization in just a very short period of time, coming out of a tough year last year with COVID. When you think back about in January, we refinanced $700 million of long-term debt that extended our maturity stack out to 2025 we locked in a lower interest rate that was opportunistic and accretive in march as i mentioned we bought back and retired 11 and a half million common units from first reserve while i think providing a well orchestrated and very elegant exit for our long-term partner first reserve they've been a good partner over 11 years they were very supportive during our build out and acquisition years And we're pleased to see them be able to exit very successfully without any real disruption to our stock in our balance sheet. And that puts us in great position to move towards an elected board of directors. We're in the process of filling those two empty board seats and conducting a good search. We'll be excited to announce the results of that later in the year. In June, as you know, we published our third annual sustainability report, and I want to call out the importance of that, particularly as we continue to progress our sustainability journey. When you combine that with the financial strength that we've created through all these transactions, the improved governance, the unit holder alignment, and our clear commitment to environmental stewardship and lower emissions, We saw our most recent ratings and scores from Moody's, S&P Global, Sustainalytics, and MSCI, all the top rating agencies for ESG scores. They all substantially improved over the last several quarters, and that should result in a lower cost to capital ultimately for Crestwood and its partnership. And then finally, in July, as I already mentioned, we successively announced divested the SageCoach asset, had a great multiple, redeployed the proceeds to create an exceptional balance sheet, really drive our financial flexibility forward, which allows Robert and the finance team to begin to opportunistically execute on our buyback plan and build value for our unit holders. I think when I look back over the last 11 years since we started the company, I don't think our capital structure has ever been cleaner. Our financial health has never been better. We've never had this much flexibility to execute on the plan that we think drives value for our unit holders. And we're very excited about how we're positioned today to start to run return capital to those investors. So I know that's a quick wrap-up. There's a lot of detail in all of the materials. I ask you to go look at those. Robert, I'm going to turn it over to you, and you can talk about some of the financial highlights.

Thank you, Bob. I would like to echo your comments on our financial strength and our solid positioning following our strategic and operational successes during the first half of the year. During the quarter, Crestwood generated adjusted EBITDA of $146 million, resulting in distributable cash flow of $86 million and positive free cash flow of $40 million. This results in extremely conservative leverage and distribution coverage metrics pro forma for the stagecoach divestiture of 3.6 times and 2.2 times respectively. Driving these results was GNP segment adjusted EBITDA of $124 million, that a 48% increase year-over-year, and S&T segment adjusted EBITDA of $15 million, that representing a 6% increase year-over-year. Those results help offset our MS&L segment adjusted EBITDA of $13 million, which is lower year over year due to market backwardation and limited storage opportunities when compared to the second quarter of 2020. I would also like to highlight and congratulate Crestwood employees on achieving these exceptional quarterly results while also lowering O&M expenses by 18% and G&A expenses net of unit-based compensation by 4% year over year. Consistent with our ongoing capital allocation strategies, Crestwood maintained its common distribution of 62.5 cents for the second quarter, which will be paid on August 13th to unit holders of record as of August 6th. Now looking to our balance sheet. Pro forma for the first close of the Stagecoach sale, Crestwood had $274 million outstanding on its $1.25 billion revolving credit facility, resulting in more than $940 million in available liquidity. With $2.1 billion in total debt, Crestwood's pro forma leverage ratio has improved to 3.6 times, now on the low end of our targeted range of 3.5 times to 3.75 times, allowing the company to continue investing in high return bulk fund opportunities around our core growth assets and accelerate allocating excess cash flow generated toward common and preferred equity buybacks under our board-approved $175 million repurchase program. During the second quarter, with a continued focus on returns and capital discipline, Crestwood invested $6 million in growth capital and joint venture contributions focused primarily on the southern expansion of Arrow's produced water gathering system and gas gathering de-bottlenecking projects, which are expected to drive exceptional returns. Despite having only invested $15 million in growth capital expenditures and JV contributions year-to-date, We continue to expect full-year growth capital to be in a range of $35 to $45 million for full-year 2021, as we are seeing increasing development activity from our producers across most of our GNP assets in 2021 and heading into 2022. And we have continued to have successes on a handful of our higher-priority commercial opportunities. We still expect maintenance capital of $20 million to $25 million, which, along with our growth capital expenditures, will be 100% funded with retained cash flow. As we head into the second half of 2021, we are encouraged by the current commodity price outlook and the increasing activity around our gathering and processing assets. When adjusting $30 million out of the second half of the year for the Stagecoach divestiture, We now expect full-year 2021 adjusted EBITDA to be in the range of $570 million to $600 million, distributable cash flow available to common unit holders to be in the range of $345 million to $375 million, and free cash flow after distributions to be in the range of $150 million to $180 million. These ranges reflect outperformance from our remaining asset base relative to our internal budgets and prior guidance ranges and are expected to drive a leverage ratio of 3.4 times to 3.7 times and a coverage ratio of 2.2 times to 2.4 times. With our financial targets now achieved, Crestwood is committed to utilizing its financial flexibility to maintain a strong balance sheet and enhance total returns to our investors. We plan to accomplish this by offering a secure and stable distribution, prudent investment in the highest returning expansions of our existing assets, and opportunistic common and preferred unit repurchases with our excess cash flow. Now that we have received the proceeds from Stagecoach and are out of the earnings blackout window, we intend to allocate our free cash flow into optimizing our capital structure through opportunistic buybacks. We believe that this strategy best positions the partnership to maximize value creation for our investors going forward, as well as positions Crestwood to evaluate and participate as appropriately on potential asset and corporate consolidation opportunities that we expect will occur across the midstream sector. Now, before opening the line up for Q&A, We believe after the first half of the year that our accomplishments further differentiate Crestwood as a best-in-class midstream operator with exceptional financial health and flexibility. We expect in the current macro environment, which benefits our strong asset base, to see increased DNC activity for the remainder of the year, and we expect that momentum to continue into 2022. Based on the minimal capital requirements to support the increased volumes across our GNP assets, combined with the achievement of our long-term leverage goal, we expect to generate meaningful excess cash flow going forward that will enable us to drive increasing value for our investors. With that, operator, we are now ready to open the lineup for questions.