Crestwood Equity Partners LP

Good morning and welcome to today's conference call to discuss Grassroots Equity Partners Second Quarter 2023 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 and that are based in assumptions and information currently available at the time of today's call. Please refer to the company's latest filing with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain no-gap financial measures such as EBITDA, adjusted EBITDA, distributable cash flow, and free cash flow will be discussed. Reconciliations to the most comparable gap measures are included in the news release issued this morning. Joining us today with prepared remarks are Founder, Chairman, and Chief Executive Officer Bob Phillips, President Robert Hoffman, and Executive Vice President and Chief Financial Officer Joni Black. Additional members of 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. 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. As a reminder, today's call is being recorded. At this time, I'll turn the conference over to Bob Phillips.

Thank you, operator, and good morning, everyone. Thanks for joining us today to discuss our second quarter 2023 results and our outlook for the second half of the year. Let me begin with a few opening remarks, and then I'll turn it over to Robert for an operational review of the quarter, and finally to Johnny to review the second quarter financial results in greater detail. To kick things off, I want to say that we had another strong quarter of producer activity and volume throughput across our entire GNP portfolio. Let me give you several of the highlights of the quarter from that perspective. One, we connected 73 new wells during the quarter, bringing the year-to-date total to 143 wells connected so far, which is slightly ahead of our expectations from the beginning of the year. Two, many of the recent wells in the Bakken and the Permian are exceeding type curves. As our producers continue to perfect their drilling and completion techniques to recover as much of the resource as possible, we're seeing some positive trends there. The combination of well connect growth and type curve outperformance drove quarter over quarter volume increases across substantially all of our gathering and processing assets. as well as achieving record processing volumes in the Delaware Basin. Three, we also brought online the first phase of our new three-product gathering system in the City of Williston and Painted Woods areas of the Rough Rider Asset in the Bakken. This project expands our three-product very critical infrastructure on the western side of the Williston and positions Crestwood to capture substantial future dedicated inventory development from Cord Energy and a number of other third party operators that are active in that area. We are highly encouraged by the early well results from Cord and excited about the productivity from this area going forward. Down in the Delaware, number four, we continue to see positive producer turnover on our dedicated acreage around our Delaware assets. Earthstone Energy during the quarter acquired Novo Oil and Gas, which is a large customer of ours on our Willow Lake and Sendero systems. And Callen Petroleum acquired Percussion, which underpins our Panther oil and water gathering asset over to the east. Earthstone is extremely positive about the Eddy County acreage it acquired from Novo, the vast majority of which is dedicated to Crestwood. It's been very productive for us in recent quarters. And the company has publicly stated that it plans to reallocate a rig from their Midland Basin operations to the Delaware Basin to immediately begin developing the Novo acreage. So we're really excited about bringing Earthstone into the portfolio. Callen has been similarly positive about the percussion acreage that they acquired. And we expect the company to accelerate development on our dedicated acreage later in the year. Over the last couple of years, we've seen a lot of our dedicated acreage trade hands in the Delaware basin, and we believe our producer portfolio has never been stronger, so we're excited about the future there. Now, let me shift gears and provide some high-level commentary on a few factors that negatively impacted the results of our quarter. As many of our producer customers and midstream competitors have experienced, we've seen a lot of volatility in the commodity markets this year, particularly in the second quarter. Give you some framework here, context. On the year-over-year basis, benchmark oil, natural gas, and natural gas liquids prices in the second quarter of this year declined 30%, 70%, and 50% respectively. And on a sequential first quarter over second quarter basis, natural gas and natural gas liquids declined by about 20%. So we're fighting much lower commodity prices during the quarter. The majority of our cash flow, as you know, is under fixed fee contracts. But we do have roughly 15% of our portfolio cash flow that is directly impacted by commodity prices. With the majority of that being percentage of proceeds contracts on our arrow gathering system in the Williston and to a lesser extent on our gathering and processing assets in the Delaware Permian. with realized natural gas, NGL, and crude oil prices during the second quarter well below our expectations by approximately 35% for natural gas, 40% for NGLs, and 15% for crude oil. Below our budgeted expectations, we estimate that our adjusted EVA DAW associated with our percentage of proceeds contracts was negatively impacted by about $8 million for the quarter due to price volatility. We've recently seen an increase in commodity prices from the lows of the second quarter with crude oil, gas, and gas liquids up approximately 10%, 20%, and 10% off the lows experienced in the second quarter, and that bodes well for the third quarter and the second half of the year. The second area where we faced some commodity exposure was within our NGO logistics business. As you know, NGO prices experienced a fairly substantial drop in the second quarter of the year, causing a widening of the forward curve as we look out towards the winter heating season. While this widening of the curve across the NGO markets did drive nice incremental value to be realized across our NGO storage inventories, The logistics business did underperform our expectations during the second quarter by approximately $5 million due largely to that drop in NGL prices during the quarter that caused us to take a net non-cash mark-to-market loss on our inventory position. Again, that non-cash mark-to-market loss of about $5 million for the second quarter. Now, given the widening of the curve and the higher carries on storage, We did have a chance to increase our inventories by about 50% more than we typically do at this point in time during the fill season or the inventory build cycle. And I also want to note that the impact of the market market losses on our inventory is this quarter is purely a timing issue as our NGL inventory positions are fully hedged with fixed forward sales contracts. So as we work through the curves headed towards the winter heating season and ultimately deliver all that product out of storage to the market, we expect to reverse those losses and actually pick up incremental margin on the excess inventory that we built at wider forward spreads. So hopefully in the second half of the year, it'll turn out very positive for us. But in the second quarter, it's a $5 million non-cash hit. The final factor that negatively impacted our results in the quarter was in the GNP North segment where we experienced approximately $6 million of lower adjusted EVA dock compared to our budget expectations, largely attributable to lower volumes at Arrow. It's a little complicated, but while the completion activity was right on schedule on the Arrow system, we experienced lower volumes across the system due to an increased number of wells being down or shut in for a variety of reasons, including mechanical maintenance, workovers, and most importantly, frac protection around new completion activity. When you add it all up, we saw an average of about 10% to 15% of legacy production shut down or offline at certain points of the quarter, which negatively impacted our results. Again, they're about $6 million. So considering the results for the first half of the year, But updated in positive growth outlook for the third and fourth quarter, we continue to anticipate full-year adjusted EBITDA within our previous guidance range of $780 million to $860 million. I think it's clear that with these results coming in in the second quarter, we expect results in the second half of the year to be on the lower half of that range due to the lower commodity prices than what we had originally forecasted. and some expected continued downtime for aero volumes for the balance of the year until our producers get all their production back on stream. I want to reiterate that the fundamentals of our business remain extremely strong with the well connects, the drilling activity, the production growth across all the assets during the quarter. And we are optimistic about the second half of 2023 and continue to have a very strong outlook for 2024. due to our capital program and the significant producer activity we've experienced to date and through the rest of the year. And finally, before I turn it over to Robert, I want to congratulate Joanne Howard and our sustainability team for publishing Crestwood's fifth annual sustainability report. The report highlights the year-over-year progress that we've attained across our ESG commitments, as well as achievements that we've made towards our second three-year sustainability strategy. Crestwood continues to make measurable progress on our carbon management plan and as a leader amongst our gathering and processing peer group in balancing growth with environmental, social, and governance objectives. And that was exemplified by the company receiving the Hart Energy 2023 ESG Award for the public midstream category most recently. Really excited about those things. Certainly, volatile commodity prices hit us hard in the quarter, but we're rebounding in the third quarter. And with that, I'll turn it over to Robert and Johnny to cover the quarter's operational and financial results. Robert.

Thanks, Bob. And good morning, everyone. First, starting in the Williston Basin, we connected 44 wells across the Arrow and Rough Rider systems during the second quarter, bringing us to a total of 73 new well connects year to date. I'm very pleased about the level of activity we've seen across our systems so far this year, and we continue to anticipate strong producer development through the balance of the year, keeping us on track to connect between 115 to 125 new wells by the end of 2023. Now looking more closely at Arrow, overall volumes for the quarter came in lower than expectations as we experienced higher than anticipated levels of producer downtime negatively impacting existing well production. As Bob addressed in his comments, it is customary to see some amount of downtime on producing wells as operators take measures to enhance long-term production, most notably the utilization of frac protection, where producers will shut in or curtail producing wells in close proximity to a nearby wellbore that is being fracked during the completion stage. We have always factored these periodic disruptions into our forecast, but experienced greater levels than usual this quarter than what we have historically observed from our operators as completion activity picked up coming out of the winter season. Along those lines, from a new completion standpoint, we were very pleased to see a handful of recently turned in line wells substantially outperform tight curves, which in addition to offsetting some of the quarter's downtime challenges, continues to highlight the productivity of the FBIR acreage. Now turning over to the Rough Rider system, we placed into service our new three-product gathering system in the City of Williston and Painted Woods areas. To date, we've brought online 13 wells in that area, and we are very pleased with the production results, which have been performing noticeably above budgeted type curves. We remain very bullish around the volume outlook from our dedicated acreage in this area and the productivity on the western side of the Williston Basin. This year's growth capital investments in the Williston are progressing on time and on budget and are primarily focused on the continued build out of the infrastructure on the western side of the Roughrider system. Now turning to the Delaware Basin, we connected 24 wells across our New Mexico and Texas gathering assets during the quarter, bringing us to a total of 59 new well connects year to date. strong producer activity through the first half of the year drove quarterly gas gathering volumes of 535 million cubic feet per day, a year over year increase of about a hundred percent. In addition to the contribution of Sendero midstream on a year over year basis, gathering volumes on our Willow Lake system have grown approximately 25% when compared to last year due to strong activity levels from both our public and private producer customers. On the processing side, Volumes hit a record high this quarter of 444 million cubic feet per day, resulting in just over 80% utilization across our 550 million cubic feet per day of total processing capacity. We continue to pursue the strategy of accelerating the utilization of our processing plants in advance of the organic production growth from our dedicated producer customers. And I am pleased to report our commercial team has successfully executed and signed two high pressure gas onload agreements that will help optimize our excess capacity over the next year or so. As we look to the balance of 2023, we now expect between 110 and 120 new well connections for full year 2023, that being a reduction of 10 wells from the midpoint of the previous guidance range, which is largely the result of producers shifting activity into 2024 due to some of the recent A&D activity, which has driven turnover from our producer customers and has corresponding asset integration efforts ongoing. From a growth capital perspective, our spend in the Delaware continues to be on track and remains focused on well connects, system expansions, and compression additions in New Mexico. Now moving to the Powder River Basin, we connected five wells during the second quarter and 11 wells year to date. We remain on track to connect between 10 to 20 wells through the balance of 2023 from our existing customers. We continue to be in active commercial discussions with large operators in the basin to bring incremental volumes onto the jackalope system and to increase the utilization of the bucking horse processing plants. Now, finally, in the storage and logistics segment, our NGL logistics business had been particularly active this quarter in response to the significant commodity price volatility that we experienced in the NGL market. Due to the widening of the spread between summer and winter prices, We have opportunistically increased our physical inventories across our NGL storage assets by more than 50% when compared to this time last year. This will add incremental margin on a full year basis as we roll forward in the year and into the winter hitting season. As a result, we expect the S&L segment in total to perform at or above the high end of our previous guidance range. And now with that, I'll turn the call over to Johnny to cover our financial results.