Crestwood Equity Partners LP (NYSE:CEQP) Q1 2023 Earnings Call Transcript May 2, 2023

Crestwood Equity Partners LP beats earnings expectations. Reported EPS is $0.15, expectations were $0.13.

Operator: Good morning, and welcome to today’s conference call to discuss Crestwood Equity Partners First Quarter 2023 Financial and Operating Results. Before we begin the call, listeners are reminded that 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 and adjusted EBITDA, distributable cash flow and free cash flow, will be discussed. Reconciliations to the most comparable GAAP financial measures are included in the news release issued this morning.

Joining us on today’s call with prepared remarks are Founder, Chairman and Chief Executive Officer, Bob Phillips; President Robert Halpin; and Executive Vice President and Chief Financial Officer, Johnny Black. Additionally, additional members of the management team are available for the question-and-answer session with Crestwood’s current analyst following the prepared remarks. Today’s call is being recorded. [Operator Instructions] At this time, I will turn the call over to Bob Phillips.

Bob Phillips: Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2023 results and little discussion on how we’re positioned for the rest of the year. I’ll begin by a few opening remarks and then turn it over to Robert for an operational review of the quarter, and then finally, Johnny, to review the first quarter financial results in more detail. As I start, as a reminder, when we — we went into a lot of detail last quarter about our strategic M&A, but let me just give you a reminder that we have repositioned the Crestwood portfolio in the last couple of years through strategic M&A, specifically to bulk up our G&P assets in the areas that we operate and extend our long-term producer dedicated inventory in those core oil-weighted resource plays, which are the Williston, Delaware and Powder River basins.

Our producer customer portfolio continues to improve year-over-year through upstream consolidation. We believe all fundamentals will remain strong throughout the decade and natural gas prices, while lower today due to oversupply, will start to improve beginning in the second half of this year and on into 2024. We expect that to occur due to a pullback in gas-directed rig activity in the short term and LNG demand growth over the long term, so we’re bullish on gas prices going forward. As producers are becoming more disciplined in their development programs across the industry, we think our G&P portfolio is strategically located on or near some of the best undeveloped acreage in these oil-weighted basins with the lowest breakeven cost and the highest potential for production growth, and we think this is indicated by the 70 new wells that we connected to Crestwood assets in the first quarter.

So, let me give you a high-level update on our core areas. First in the Williston. We’re seeing the Arrow system slowly catch up to last year’s volumes, as we expect to connect more than double the new wells in 2023 than we connected last year. Our key producers, Devon, Exxon, Enerplus, are maintaining active new drilling or DUC completion programs, and they have a number of workover rigs coming back in the field, bringing weather-related shut-in production back online. So, a lot of activity around Arrow. On the Rough Rider system, Chord is spot-on on their 2023 development schedule and we just placed the very important city of Williston, three-product-gathering project in service last week, and this is critical infrastructure to support Chord’s 2023 and ’24 drilling program in the Western acreage dedicated to us.

And let me finally say that our Williston operations team continues to do a great job in reducing operating costs, continuing to find integration synergies and mitigating winter weather disruptions that we’ve experienced in the fourth quarter and the first quarter of this year. Now onto the Delaware. Now that our Sendero, CPJV, Willow Lake and Orla assets are fully integrated, we continue to see solid performance in producer drilling activity, new well connects, IP rates, system volumes and third-party processing opportunities. The efficient integration of our Delaware assets has allowed us to maximize available, gathering, compression and processing capacity while minimizing or delaying growth capital to capture new supplies. We have years of great Delaware inventory dedicated to our systems there with access to multiple competitive downstream markets we’re very well positioned for future growth in the Delaware.

With in-basin gas production continuing to hit record levels, the market for gas processing capacity has become very tight, which places a significant premium on unutilized processing capacity. Based on our current schedules, we expect to see a significant amount of organic production growth over the next 12 to 18 months that we think will drive near full utilization of our processing capacity. So, good timing on the Sendero and CPJV acquisition last year, great integration effort by our operations team, extremely well done build-out by our EPM team with new gathering, compression, and we’re beginning to utilize all of that processing capacity that we bought last year. Now to the Powder River Basin. The future continues to look bright. We’ve recently had meetings with Continental and they continue to ramp up their long-term development across all three dedicated acreage blocks.

We expect to see that continue to grow over the next few years. With excess gathering, compression and processing capacity on the legacy system that we built for Chesapeake pre-bankruptcy, Crestwood is very well positioned to compete for not only the growth of Continental volumes, but significant new producer supplies that are being developed in the PRB in and around our gathering systems. Now quickly to the finance side. Despite all the changes in our portfolio, Crestwood continues to maintain strong distribution coverage and conservative financial metrics compared to our peer group. To keep our balance sheet in check, we divested legacy low growth and non-core G&P assets in the Barnett and Marcellus. Plus, we sold JV interest in our gas storage assets at Stagecoach and Tres Palacios.

We got better-than-expected prices for those assets and are able to reduce our debt back to 4x leverage on a pro forma basis. We continue to believe that was a really good trade for Crestwood, as we scaled up our G&P portfolio with visible long-term growth in top-tier oil-weighted basins and we expect that to drive continued declines in leverage in 2023 and 2024. We’re also continuing to streamline the Crestwood organization through the efficient integration of these new assets, resulting in lower per unit operating cost and, importantly, reduced emissions on the newly-acquired assets using Crestwood’s leading carbon management plan. Our operations plan this year is now to focus on execution, optimization and value creation, while our capital allocation strategy for 2023 remains focused on utilizing free cash flow after distributions to pay down debt and enhance Crestwood’s financial flexibility.

So, a couple of final notes before I hand the call over to Robert. I want to reiterate that Crestwood is off to a great start in ’23. We’ve got volumetric growth on key systems. Our quarterly performance was very much in line with market expectations and we continue to enhance our financial flexibility, closing the Tres transaction and getting our leverage ratio back to 4.0x pro forma. After a busy ’22, we’re excited to focus on this year’s priorities to execute on our ’23 guidance, grow EBITDA and free cash flow by optimizing our asset base, and creating long-term value for our unitholders through deleveraging of the balance sheet and paying out our well-covered distribution of $276 million a year to common unitholders. We think the combination of all these strengths across the Crestwood organization will continue to represent a compelling total return opportunity for Crestwood investors and we’re really pleased with how we’re well positioned for the next several years to grow in all these areas.

And with that overview, happy to turn the call over to Robert and Johnny to cover the quarter’s operational and financial results. Robert?

Robert Halpin: Thank you, Bob, and good morning, everyone. As Bob mentioned, I am very pleased with Crestwood’s great start to the year and believe that the outlook for the remainder of the 2023 timeframe looks very strong across all of our assets. Starting in the Williston Basin. We connected 29 wells across the Arrow and Rough Rider systems during the first quarter, which was in line with our expectations as producers turned in line wells on schedule and on time. This was a fantastic accomplishment for our operations teams up in North Dakota as well as for our producer customers as this past winter proved to be exceptionally challenging as record snowfall and cold temperatures hit North Dakota and surrounding states. While we did experience some lingering volumetric impacts associated with the weather in the first quarter of this year, we are seeing positive trends across the assets as warmer weather has arrived.

Also important, it appears as though our customers have successfully mitigated some of the supply chain and labor challenges that we faced in North Dakota over the past year as D&C schedules year-to-date have been right in line and planned wells for Q1 and the early part of Q2 have turned in line on or even ahead of schedule. To that end, we continue to anticipate strong producer activity across the rest of the year and remain on track to connect between 115 to 125 new wells by year-end. The majority of these new well connections are coming from key Bakken operators, Devon Energy and Chord Energy. Our growth capital spend in the basin, approximately half of our 2023 budget, is progressing as planned and is focused on the western expansion of the Rough Rider system as well as incremental expansions on the Arrow system.

We are excited to bring our Rough Rider expansion into service as we are optimistic about the growth potential of the dedicated acreage and the third-party opportunity set in the western Wilson Basin. In the Delaware Basin, we connected 35 wells across our New Mexico and Texas gathering assets during the quarter, which drove natural gas gathering volumes of 495 million cubic feet per day, or over a 100% year-over-year growth. This is in part due to our acquisition of Sendero Midstream, but also as a result of substantial volume growth on our legacy Willow Lake system by both public and private operators, with gathering and processing volumes growing by 60% and 50% year-over-year, respectively. For the balance of the year, the development activity for our assets remains strong and we continue to expect 120 to 130 new well connections through the end of 2023.

And finally, our capital spend in the Delaware, approximately 40% of our 2023 budget, remains on track and is focused primarily on well connects, system expansions, and compression additions in New Mexico to accommodate continued development from our dedicated customers. Now moving to the Powder River Basin. We connected six wells during the first quarter and Crestwood remains on track to connect between 10 to 20 new wells throughout 2023. Additionally, we are actively pursuing commercial opportunities with large operators in the basin to bring new volumes onto the Jackalope system and capitalize on our unutilized processing capacity at the Bucking Horse facility. And finally in the Storage and Logistics segment, our NGL logistics business, which constitutes about 90% of segment earnings following the Tres divestiture, had a successful quarter, optimizing our NGL storage and transportation assets in response to increased demand from winter weather in the Midwest and East Coast.

The 10 million barrels of NGL storage in 13 terminals, the NGL logistics business is well positioned this year to capitalize on continued commodity price volatility and deliver a solid year of results. And now, I’ll turn the call over to Johnny to cover our financial results.

Johnny Black: Thank you, Robert. For the first quarter of 2023, Crestwood generated adjusted EBITDA of $193 million, a year-over-year increase of 11%, driven by our expanded operations in the Williston and Delaware basins. Additionally, Crestwood delivered approximately $104 million of distributable cash flow. For the first quarter of 2023, Crestwood announced a $0.655 distribution, payable on May 15 to unitholders of record as of May 8, resulting in a quarterly coverage ratio of approximately 1.5x. Looking at the segment results. In the Gathering and Processing North segment, first quarter 2023 EBITDA totaled $133 million, roughly flat to the first quarter of 2022 due to incremental cash flow from a full quarter contribution of the Oasis Midstream assets, offset by lower gas gathering and processing volumes and reduced commodity prices impacting Arrow’s percent of proceeds revenue contracts.

In the Gathering and Processing South segment, first quarter 2023 segment EBITDA totaled $41 million, an increase of 50% year-over-year. Segment growth was driven by a combination of the Sendero Midstream and CPJV acquisitions, coupled with volume growth from the legacy Permian assets, offset by the divestitures of the Barnett and Marcellus G&P assets. In the Storage and Logistics segment, EBITDA totaled $33 million for the first quarter, a year-over-year increase of 55%, driven by increased product demand from winter weather in the first quarter. Next, from a capital investment standpoint, during the first quarter, we invested a total of $37 million in growth capital projects, which was primarily related to the continued build-out of the three product gathering system for Chord Energy and other third parties on the western side of the Rough Rider system.

In addition, we also invested capital in the Delaware for well connects and to expand our compression capacity to support the substantial volume growth over the next 12 months from our dedicated producers in New Mexico. On a full year basis, Crestwood continues to expect 2023 growth capital investments to be between $135 million and $155 million. Turning to the balance sheet. Crestwood ended the first quarter with $3.3 billion of total debt outstanding, including $474 million drawn on our $1.75 billion revolving credit facility, resulting in a consolidated leverage ratio of 4.2x. As Bob mentioned, pro forma for the sale of Tres Palacios, which closed a few weeks ago in early April, Crestwood now has a leverage ratio of 4.0x and available borrowing capacity of approximately $1.2 billion as of the end of the first quarter.

Lastly, from a strategy standpoint, Crestwood’s number one financial focus going forward is maximizing free cash flow generation from our assets and minimizing costs and capital needs across the portfolio. We are forecasting free cash flow to ramp in the second half of this year and we remain committed to allocating all free cash flow after distributions to debt pay down in 2023, as we are squarely focused on the balance sheet and reducing our debt outstanding. We believe this strategy will create financial flexibility for the company to deliver incremental returns to our unitholders over the long term. With that, operator, we are ready to open the line up for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tristan Richardson with Scotiabank. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Spiro Dounis with Citi. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Neal Dingmann with Truist Securities. Please proceed with your question.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Operator: Thank you. There are no further questions at this time. I’d like to turn the floor back over to Bob for closing comments.

Bob Phillips: Thanks, operator. Just a point in time with the Tres transaction, which we closed in early April, we’re largely completed with our strategic repositioning. I think we’ve done a great job to restructure this company portfolio. We’re a top three gatherer and processor in the Williston, Delaware and the PRB, long-term inventory positions dedicated under long-term contracts, good terms, good margins, good access to additional supplies as technology improves and we go from two-mile to three-mile laterals. Diaco didn’t really talk about that, but that’s going to have a big impact on productibility in the areas that we operate. Almost all of our operators are either doing it or thinking about it or coring up acreage and swapping acreage to get ready for three-mile laterals.

We’re going to see improved IP rates from some of these wells. We think that the new G&P position in these basins gives us a competitive advantage. It’s still a very competitive business out there, and there’s still a catfight for undedicated acreage. And we’re in a good spot in all three basins to continue to drive growth of our systems. We’re going to do it with very disciplined capital spending, and Robert highlighted that and Johnny did too. Capital discipline this year and next is incredibly important to us. Our capital spend should be going down year-over-year, and that should generate increased free cash flow and reduce debt. And that is our simple business plan and it’s pretty darn simple. We’ve got great visibility, as I said, to the ’23 and we think ’24 drilling and development programs with our customers.

A lot of our capital spend today will make new acreage available to be drilled next year, particularly the — some of the new projects in the Williston Basin, the City of Williston and the Painted Woods. So, great visibility there. Now it’s about execution quarter-to-quarter. And I think the team is excited to be really focused on the drill bit and the wellhead and the connects and maximizing available capacity at minimal capital expense. I want to thank all of our investors for supporting us through that restructuring period. I know that wasn’t easy and it probably didn’t look like we knew what we were doing. But when you look back on it, it’s almost like a triple bank shot to have been able to bought good assets, integrated them, cored up our position in three oil-weighted basins and then selling the rest of our assets, which didn’t have any growth potential, to keep our balance sheet back in line.

And now, we’re on track to do what we do best, which is gather and process gas and market natural gas liquids. And I think the team is in good position. And the first quarter was a good start to the year. So, thanks to everybody for joining us. Thanks to all the analysts for the questions. I know you guys have a lot of work to do today, with a number of companies coming out. But we’re really pleased with our first quarter performance, and thank everybody for their time this morning. Thank you, operator.

Operator: This concludes today’s teleconference. You may disconnect your lines now. Thank you for your participation, and have a wonderful day.