Crestwood Equity Partners LP

Good morning and welcome to today's conference call to discuss Prestwood Equity Partners' acquisition of Oasis Midstream and its third quarter 2021 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 Security and Exchange Commission 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, distributable cash flow, and free 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 Houghton. Additional members of our senior management team will be available for the question and answer session with Crestwood's current analysts following the prepared remarks. And at this time, I'll turn the call over to Bob Phillips.

Thanks, Josh. Thank you, Operator and President. Good morning to everybody. Thank you for joining us early today. This morning, we're very pleased to issue two press releases, and we've also posted a brand new investor presentation on our website, which I would encourage everybody to take a look at. It's got some good stuff in it. First, I want to let you know that we're very pleased to report another really good quarter in the third quarter, another consecutive quarter of outstanding financial and operational results. It again highlights our diversified midstream portfolio. And once again, we've seeded consensus forecast. So really proud of the quarter that we just announced. Importantly, during this quarter, we continue to operate the Crestwood way. We're optimizing our assets across all basins, maintaining our capital discipline, spending less than our budget, We generated free cash flow after growth capital and distributions for the fifth consecutive quarter. That's really important to us. And we kept our leverage at approximately three and a half times or below well within our target. All of this while keeping our momentum going to exceed the upper end of our 2021 guidance range, which was $570 million to $600 million of adjusted EBITDA. I do hope with all that we're announcing today that it's not lost in all of this, that while our Bakken operations, again, greatly exceeded our expectations and continue to really do very well up there, we've made really good progress in the Powder River Basin with our continental deal that we announced and in the Delaware Basin with a big expansion of our NOVO contract relationship. And both of those announced transactions will drive long-term growth. in those basements too. So we've got a lot going on at Crestwood across the board. I'm obviously also very proud of the great job that all of our teams did during the third quarter while we were working on the second press release where Crestwood announced that we entered into a definitive agreement to acquire Oasis Midstream in a stock and cash transaction valued at about $1.8 billion. I think Oasis Midstream is an excellent midstream operator in the Bakken. They've got very, very complimentary assets to both our Williston footprint and our Delaware footprint. We think the merger makes exceptional industrial logic as we smartly expand our footprint in those core basins. Makes a good deal of sense for both master limited partnerships as the midstream sector begins to consolidate, as we should. to generate better returns for our investors. And I can really call this a win-win-win situation for CEQP, OMP, and OAS. We're really pleased with this deal. The combination, as you'll read when you look through our materials, positions Crestwood as a top three midstream company in the Bakken. It adds another great Bakken producer to our portfolio in Oasis Petroleum, more than triples our dedicated acreage. doubles our inventory of Tier 1 drilling locations and creates numerous synergies, including about $25 million a year in cost savings and about $20 million a year in commercial growth opportunities or revenue enhancements. But most importantly, it saves capital by optimizing the excess oasis processing capacity for the increasing gas volumes on the aero gathering system. And I might note that Aero recently gathered 155 million cubic feet per day. This is all happening while Bakken-wide the GORs are increasing, as we all know, and flare capture is definitely improving in that basin, which bodes well for increased gathering and processing volumes in the future. Really excited about how this combination tracks our long-term strategy. We've messaged this for the last couple of years. We have some very important financial metrics, and this deal checks all the boxes for value creation. We think it's a great follow-up to the first reserve buyout early part of the year and the stagecoach divestiture, which we completed in July. And this deal is going to make a great 2021 for Crestwood. So let me give you some of the transaction specifics, and then I know you'll have questions for us. This is a cash and equity transaction, and it's structured to maintain our very conservative metrics. And please understand that we have worked hard to protect and preserve our balance sheet and our liquidity, and I think this transaction allows us to grow substantially in the areas that we know best, so preserves our balance sheet. Chriswood's going to issue 33.8 million new CEQP common units, and we're going to provide $160 million in cash in this deal, as I said, valued at about $1.8 billion. It's an at-market transaction compared to yesterday's close, and it gives Crestwood about a $7 billion enterprise value, so definitely checks the box on size and scale. The purchase price implies about a 7 to 8 times EBITDA multiple on 2021 cash flow, with clear opportunities to bring that multiple down significantly over the next couple of years in 22 and 23 as we realize cost synergies, we execute our strategies on integrating the businesses and commercializing the combined footprint. The deal is clearly going to be accretive in 22 and beyond. It maintains our target leverage ratio at three and a half times and driving that lower over time. It preserves our substantial liquidity and it enhances our overall credit profile. So, as I said, it checks all of our boxes from a strategic and financial standpoint. We think the rationale for the deal is compelling and think it will make logical sense for investors and industry players alike, which have all been calling for consolidation and optimization of existing midstream infrastructure. It still clearly hits the mark on all those points. Combination greatly expands our Bakken operating footprint, which is our most important and profitable core area. We know the Bakken well. We've been there since 2012 and 2013 with the acquisition of Colt and Arrow. We've got an outstanding group of employees up there that run our business well, great producer contracts and relationships. It really is our favorite place to do business. And importantly, the Bakken continues to trade at very high oil prices. In fact, Check the quotes this morning. It's trading a little bit over WTI, probably has the best oil price and netbacks of all the major oil plays across the country. With approximately 535,000 acres dedicated to us after close, our assets will extend well beyond the aero system on the Fort Birchhold Indian Reservation. And that expanded reach is going to give us a much more competitive position for third-party opportunities as we see Western development across the Williston Basin. The merger clearly gives us Bakken scale, makes Crestwood a top three midstream player in the Williston Basin. And importantly, on a combined basis, we will have four processing plants, and about $430 million a day of processing capacity. That will be 76% utilized, giving us a lot of excess capacity, about $100 million a day of immediately available processing capacity to utilize for increasing gas production from our aero customers. That has continued to exceed our expectation and is now pushing up against fair den plant capacity. great synergy in the combination of our aero business, our aero plant complex, and the Oasis Gathering System and Wild Basin processing complex. Based on current production forecast, if you follow the BACA, and I know many of our investors do, the North Dakota Petroleum Association expects Williston Basin processing capacity to be constrained as early as as 2024, so we're getting ahead of the curve, not only solving for increasing volumes on Arrow, but the opportunity to really be aggressive and chase third-party volumes that are in the area that we know about, would like to do business with. A lot of that's current existing customers with additional acreage that we just don't have room for at Bear Den, so this is going to be a great opportunity for us to expand our platform and be more competitive with third-party supplies. We're clearly going to avoid or alleviate potential constraints on the gas on the harrow production system. The third-party business is something that we've been looking at for a while, but we didn't want to expand the barricade plant, so this is a great fit for us. The estimated $25 million a year of cost savings and the $20 million a year of of commercial synergies or revenue enhancements to us is just icing on the cake for this strategically important transaction. And as I said, the macro environment in the Bakken and across the entire industry is ripe for additional growth in the near term. Let's don't forget about the Delaware Basin. That wasn't just a throw-in through this acquisition. We're also gaining crude oil gathering system with about 95,000 barrels a day capacity in the Delaware Basin. and a produced water gathering and disposal system with about 60,000 barrels a day of disposal capacity. I might point out that the asset map on slide 9 of our latest investor presentation illustrates the complementary fit with our existing Nautilus and Desert Hill system down in the Delaware area. Additionally, these assets are supported by a dedication with a very high-quality producer that we're excited to partner with on their development plans going forward. So a great combination of Bakken and Delaware really expands our footprint in both core areas. Now, the transaction clearly has a meaningful impact on Crestwood's overall financial position and scale. Pro forma, our enterprise value, as I said, will grow from about $5 billion to $7 billion. Our annual pro forma 2021 estimated adjusted EBITDA will grow to more than $820 million. Our leverage ratio will continue to be in the three to three and a half times by the end of 2022, which is where our leverage is today. So it's a leverage neutral transaction. And we believe that both rating agencies will view this transaction very positive given the enhancement to scale coupled with the strong balance sheet and the substantial total deleveraging of Crestwood if you factor in our preferred equity as Standard & Poor's does in their total leverage calculation. So going to be leverage neutral to bank and deleveraging to total leverage across our capital structure. And given the confidence and the growing free cash flow profile of this combined business, our ability to quickly integrate and bring those cost savings out, Crestwood will accelerate our previously announced plans to return capital to our unit holders. And we're going to be increasing the distribution by about 5% after the merger closes beginning in 2022. And I want to remind people that with all that free cash flow, we do have $175 million common and preferred equity buyback program that the board approved a couple of quarters ago, and that allows us to further enhance returns to investors and lower our cost of capital opportunistically as we enjoy the benefit of that growing free cash flow over the next two to three years. And I guess lastly, before I turn the call over to Robert, I really want to take a personal moment and compliment the Crestwood deal team led by Robert Haufen, our CFO, Will Moore, runs our corp dev, Jaco Beeky runs our tool group, Kurt Van Horn runs our back-end ops. These guys and all their support staff, too many to just work tirelessly over the last couple of months to get this deal done. We have a great Bakken team. We think we have the best Bakken team in North Dakota. They're chomping at the bit to integrate these assets and build Crestwood a bigger, better, stronger Bakken platform. I also want to compliment my counterpart, Danny Brown, the CEO of Oasis Petroleum and his team. They're going to become our largest producer customer and a major unit holder of Crestwood. Danny and I on both teams have developed good relationships through their acquisition of the Diamondback acreage on the FDR, on our aero system. And we have a good, strong working relationship. We really dug into each other's businesses through this process. We're going to work very well together. Oasis Petroleum is a financially strong, as you know, first-class E&P Bakken operator, and they share our vision of how to develop the Williston Basin both safely and responsibly. We're proud to be partners with them. and I know they are as well. And additionally, I should point out that they have assembled a first-class group of North Dakota employees across their Midstream franchise. It's a veteran group. They've been working up there for a while. These are great assets. They're going to fit well with us, and we're very excited to welcome those OASIS Midstream employees into the Crestwood family following this transaction. So I know you'll have questions on that note. I'm going to turn it over to Robert to discuss our outstanding third quarter and our financial outlook. And I just want to say go Astros today as we kick off the World Series here tonight in Houston. Okay, Robert, tell us about the third quarter. Thank you, Bob.

The OASIS midstream transaction combined with our strong third quarter results and new commercial contracts in the Powder River and the Delaware Basin make this a very exciting time to be at Crestwood. To touch on the results first, Our diversified asset base continues to outperform our expectations. This quarter, we generated $140 million in adjusted EBITDA, $86 million in distributable cash flow, and $18 million in free cash flow after distribution payment. We also completed the sale of Stagecoach gas services to Kinder Morgan and used our net proceeds to pay down outstanding borrowings on our revolver, which resulted in a leverage ratio of 3.5 times and accelerated the achievement of our long-term stated financial targets. Based on these exceptional results, the Board of Directors declared a distribution of 62.5 cents per common unit for the quarter, and on November 12th, the unit holders of record on November 5th. Now, looking at our operations for the quarter, the gathering and processing segment continued to benefit from favorable commodity prices and increased producer activity, resulting in EBITDA of $131 million, representing a 22% increase over the third quarter of 2020. During the quarter, Crestwood saw material increases in gas gathering volumes, highlighted by increases across the Bakken, the Powder River Basin, the Delaware Basin, and the Barnett systems. Additionally, commodity prices increased substantially over the quarter, which drove increases on our POP contracts in the Bakken and our POI contracts in the Barnett. While a majority of our GNP contracts are fixed fee, we do have a meaningful upside potential when commodity prices catch a tailwind. Conversely, as a part of a conservative risk management program, we have an active hedging program which appropriately manages downside exposure if prices were to reverse. Now moving to the S&P segment, as part of the divestiture of Stagecoach Gas Services this past July, we expect to close on the sale of the final subsidiary, TwinSeer Pipeline, in November. This will result in an additional $30 million in proceeds or $15 million net to Crestwood that we will use to pay down the revolver. In the MS&L segment, EBITDA totaled $12 million, which was flat when compared to the third quarter of 2020. As we prepare for the upcoming winter season, we are well positioned to optimize our asset storage capacity and inventory to meet the increase in demand despite MGL market backwardation during the third quarter. As we look forward to year-end, based on our strong year-to-date performance and the current favorable commodity price environment, we would expect Presswood to meet or exceed the high range of our adjusted EBITDA guidance of $570 million to $600 million for 2021. As Bob said at the beginning of the call, we have been very busy these past few months. In addition to the OASIS midstream acquisition, our commercial teams have done an exceptional job leveraging our existing assets to generate some big commercial wins in the Powder River Basin and in the Delaware Basin. In the Powder River Basin, we entered into a long-term agreement with Continental Resources to support them in the development of a large acreage position in Converse County, Wyoming. We have begun construction on a high-pressure transportation line to connect Continental's acreage position into our bucking horse processing complex. Continental is an exceptional operator, and we look forward to building a long-term relationship with them in the coming years. On the investment front, based on the size and timing of the initial capital outlay for this project, Crestwood still expects our 2021 growth capital to come into the previously announced range of $35 million to $45 million all of which will be funded with pertained cash flow. In the Delaware Basin, we are pleased to expand our relationship with Novo that will result in over 90 new welcome actions to our willing system over the next 24 months. Based on the expected volume growth, Crestwood is relocating several compressor stations from our southwest Marcellus system to meet increasing demand for gathering services in the area and drive project returns. I want to congratulate our commercial, technical, and operations teams for working closely to manage our asset portfolio. Based on year-to-date financial results and the recent strategic initiatives, Crestwood has differentiated itself as a best-in-class GNP operator with significant financial strength. As a result of our dedicated employee base, and their track record of execution, we have set a strong foundation that provides the backdrop for Presswood to participate in industry consolidation with a logical acquisition of Oasis Midstream. This transaction makes Presswood larger and more relevant in our core basins and also enhances our financial scale and relevancy with our investor base. As we move into the final quarter of the year and work to close the Oasis Midstream transaction over the next several months, We are encouraged by the current commodity price outlook and the implications around our gathering and processing assets. We are excited about the enhanced scale, the operating leverage, and financial strength that the combination with Oasis Midstream provides, and we look forward to using our expanded platform to create value for both our legacy and new unit holders in the future. With that, operator, we are ready to open the lineup for questions.