Ladies and gentlemen, thank you for standing by, and welcome to the Altus Midstream Company Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Patrick Cassidy, Director of Investor Relations. Thank you. Please go ahead.

Good afternoon, and thank you for joining us on Altus Midstream Company’s third quarter 2020 financial and operational results conference call. We will begin the call with an overview by Altus Midstream’s CEO and President, Clay Bretches and Ben Rodgers, CFO, will summarize our financial performance and outlook. Our prepared remarks will be approximately 15 minutes in length with the remainder of the call allotted for Q&A. Remarks during the call may also refer to the Altus Midstream investor presentation, which can be found on our Investor Relations website at altusmidstream.com/investors. On today’s conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted. Finally, I’d like to remind everyone that today’s discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the investor presentation on our website. With that, I will turn the call over to Clay.

Good afternoon and thank you for joining Altus on its third quarter 2020 conference call. We had another good quarter as we saw commodity prices recover and many operators resume production activity in the Permian Basin. While there are still headwinds in front of us, it’s encouraging to see signs of stability and progress, and we are cautiously optimistic about the outlook for the fourth quarter and 2021. On today’s call, I will discuss how Altus has evolved since going public 2 years ago provide an update on our joint venture pipeline projects and our gathering and processing operations and comment on expectations for the remainder of this year and 2021. Ben will cover our financial performance and outlook, and then we’ll take any questions from analysts in the queue. Altus Midstream has evolved significantly to adapt to a rapidly changing operating environment since becoming a public company in 2018. Since then, NGL prices have degraded by nearly 60%, which led to reduced drilling at Alpine High and a review of the opportunities in front of us. We adjusted quickly, shifting our business focus and capital investment from gas gathering and processing facilities in the Delaware Basin to the long-haul joint venture pipeline projects and options contributed to the company by Apache. We implemented new operational and commercial initiatives with the concentration on cost structure, pursuit of new revenue streams and elevated efforts to identify and evaluate strategic alternatives. This year’s global pandemic and its impacts to commodity prices further validated those decisions. Through all the macro fluctuations, the company’s assets haven’t changed. We’re nearly equally invested in our two businesses: gathering and processing and long-haul pipelines. And our growth capital commitments are decreasing significantly across all of our assets. Altus remains a competitive Permian Basin focused midstream company. While…

Thank you, Clay. In my prepared remarks, I will briefly review our financial results for the third quarter, update our guidance for 2020 and 2021 and conclude with comments on our financing outlook through 2021 and plans to implement a dividend next year. As noted in the press release issued yesterday, Altus reported third quarter net income, including non-controlling interest of $29 million. This included approximately $4 million related to an unrealized embedded derivative loss, which reflects a technical accounting revaluation of the embedded derivative in our preferred units at the end of the quarter. Excluding this and other items, Altus generated third quarter adjusted EBITDA of approximately $53 million, a 21% increase over the preceding quarter, which was impacted by both planned and unscheduled production curtailments. Approximately 71% of third quarter volumes were rich gas. Capital investments in midstream infrastructure during the quarter were approximately $134 million. This included approximately $119 million for the Permian Highway pipeline which, as Clay mentioned and Kinder Morgan recently announced, is nearly complete. On to guidance, which you can also review in the quarterly presentation, posted on our website yesterday, capital spending for 2020 will decline significantly in the fourth quarter as the Permian Highway pipeline moves into its commissioning stage. Consequently, our growth capital for this year is being refined to $330 million to $360 million. A slight increase in the midpoint but still under the upper limit of the range provided earlier this year. As we have done in the past, our guidance reflects our gross proportionate share of capital without taking project finance into account. EPIC Crude is the only JV pipeline that has project level financing and the upside of that debt earlier this year funded a portion of the project’s capital overruns. Therefore, we expect our share of…

[Operator Instructions] Your first question comes from the line of Spiro Dounis with Credit Suisse.

Hey, Clay. Hey, Ben. How are you doing?

Hey, Spiro. Doing great. Thank you.

Yes. I can tell by my screen. Going to shock you and start out with the dividend announcement. I was wondering if you guys provide a little bit more color on why $1.50 is the right amount? Why you ultimately reach that conclusion? I think another approach, of course, would have been a more gradual uplift over time or a ramp up, obviously, you decided against that, at least for now. So would just love to know a little bit more about how that process went and why you landed here?

Sure. I think, first and foremost, the $1.50 per quarter, it does have kind of a sticker shock to it. But when you actually look at our cash generation from our underlying assets and kind of step back, it’s really very manageable. The inverse of that from an annual standpoint, when you look at next year is a 1.8x coverage to our distributable cash flow. And I think that’s kind of where a lot of our midstream peers have been trending as kind of in the higher ones. And really just feel like that is prudent from a return of capital for our shareholders when we look at the amount of leverage that we’re going to have, which is extremely cheap debt kind of in and around 1%. The preferred is – has the 7% distribution rate. And so we feel like that level sets us up to where we can have a decent yield. I think the yield that, that implied based on closing price last week was just outlining really the disconnect that we thought was implied in our share price. I didn’t think that we were trading at a fair value. And so it’s a very manageable dividend, and we think that, that provides us enough flexibility. When you look into next year, Spiro, really the only variability that we may have is associated with Shin Oak, and we’re not making herculean assumptions around Shin Oak. And think – and it’s performed very, very well even through COVID. And so that’s going to be the material driver to any type of variability. But even with the 1.8x coverage, again, if you look at the inverse, we’ve got flexibility in there to manage through that and keep that dividend flat.

Got it. That’s helpful. And so maybe expanding on that a little bit further, I totally agree, you guys have plenty of capacity here in the near-term to cover that. And Clay, you alluded to this a little bit in your prepared remarks. It sounds like some of this was covered during the strategic review, but just thinking about what the complexion of Altus looks like longer term, pursuing growth opportunities, pursuing third-party business and M&A. I guess with this dividend, consuming a good amount of your free cash flow in Alpine High then on next year and potentially after that without any new investment. How are you guys weighing the ability to use the remaining free cash flow you have to continue to grow that business to make sure that this is a sustainable and growing dividend over a longer period of time?

No, it’s a great question. And as Ben stated, what we have here is a good base level of cash flow to cover our current dividend for now and into the foreseeable future, but when it comes down to potential upside. We view two of our key assets as having that potential upside. Shin Oak being one of them because we believe that additional growth in the Permian Basin can grow that flow rate and ultimately, the EBITDA that comes from Shin Oak and then also EPIC for that matter. But then a big piece of this is our gathering and processing business. We have some of the best assets in the Permian Basin. And while we’re a little bit south of some of the Delaware Basin activity, we still feel like we’re in throwing distance and the ability to go after some of this third-party business that will come our way once there is a return of activity to the basin. So we do believe that there is growth potential on the G&P side, state-of-the-art of equipment and it’s – from an ESG standpoint, it’s some of the very best in the basin and when you think about how other plants, other G&P processors in the basin with much older equipment and potential for regulations into the future, that’s really going to cause some problems for them. What we will see is that Altus is going to become one of the most attractive alternatives for gathering and processing. So we think we’re sitting in a really good position. We continue to lower our cost structure on the gathering and processing side. So I think the upside is very good, very bright. And what we’re covering right now with the $1.50 per quarter dividend, that’s baseline, but we really believe that we’ll have the ability to generate additional cash flow either for an increased dividend or some type of additional business, be it additional processing or additional gathering that we need to put into place, M&A type activity, but we think we’ll be prepared for that one.

Great. Makes a lot of sense. Really appreciate the color toady guys. Congrats, take care.

Thanks, Spiro. You too.

Your next question will come from the line of Timm Schneider with Citi.

Hey, good afternoon guys. Hey, just quick question. Obviously, your dividend announcement today could raise a lot of I guess confidence in future cash flows, a lot of that obviously coming from your JV project. Can you just maybe run us through by asset? How much of that cash flow is kind of locked in under longer term contracts versus what has spot exposure?

Hey, Tim. So as we have done in the past, we’ve not outlined EBITDA or DCF contributions by JV. You can see a large ramp next year coming from PHP. We aren’t including any additional wells turned online in Alpine High or any third-party. And so you can look at the percentage that our GMP is contributing this year compared to next year. And so it’s over 50%, I believe, of our EBITDA comes from both GCX and PHP, but we haven’t provided a breakdown beyond that.

Okay, got it. So sort of read-through basically, and you don’t have to get specific than this, kind of assuming Alpine High, it is what it is for now. But going forward, do you guys have a pretty – a lot of confidence those cash flows will come in. There wasn’t a lot of – you’re not skating close to the edge, having announced a big dividend is basically what I’m getting at in terms of cash flow from those JVs?

No. Timm, we’re not skating close to the edge at all. We take a look at this and we take a look at our present production and decline at Alpine High. We’re not – as Ben stated, we’re not adding any third-party. We’re not adding additional activity at Alpine High. So it’s really – the whole thing is substantiated by what we’ll have coming from Alpine High in its present state with no additional – no new drills. And then also very conservative views of what these pipelines will be able to deliver in terms of EBITDA as we go forward.

Yes. And just to add on to that, for PHP, same operator, fantastic operator that – with Kinder Morgan that we’re partners with on GCX. And so having gone through the startup of GCX and experience the time that it takes to get that up and going for such a large 2 Bcf a day pipeline. It’s a pretty good blueprint for what’s going to happen with PHP. So very confident around everything that they’ve announced, that they’ll get there on time. So that does provide a lot of stability to our cash flow Shin Oak, great partner in enterprise, doing a lot to get the volumes on that pipe up as well. And to Clay’s point, from a third-party standpoint, even though this is a, I think, a big dividend from a per share basis, the – if you look at the amount of cash that we’re able to put aside or which we can use for third party. We can pay down debt. We’ve also got upwards of $200 million plus of liquidity on our revolver. And you think about third party, we already have over 600 million a day of processing. And so that’s where a lot of new capital, as you know has to go into. And so then you’re just looking at gathering. So we could swallow some third-party deals without having to outlay a bunch of capital, which would then be accretive to cash flow. Anything we look at is going to be accretive to cash flow and keeping our leverage in check-in. And so we feel like we have a prudent amount of debt. There is a lot of our peers that also have preferred equity just like we do, and thought that the dividend was very prudent, and it still doesn’t close the door on anything as we look into the future.

Got it. And maybe last one here real quick. I’m assuming this decision, obviously, didn’t happen overnight, but it took you guys a couple of weeks, months, however long to reach that conclusion. So I’m assuming outcome of this presidential election. Looks like it is Biden at this point, is not – doesn’t have anything to do with this on the regulatory front or anything else, I mean, in terms of – were you guys being worried about it?

No. From the political landscape, we feel like that the assets are going to do well no matter what. And perhaps it might even do better under a Biden presidency just because of what could happen from a regulatory standpoint on federal land. But if you take a look at the throughput through all of our equity ownership positions in the pipelines, and you take a look at the gas throughput through our plants and our gathering systems. None of that is related to federal lands and maybe a small portion on the pipelines but a very small portion on the pipelines. So we really feel very insulated from that. And again, it may be a little bit more of a bullish scenario in terms of overall basin activity with the Biden presidency.

Got it. I appreciate all the color. Thank you.

[Operator Instructions] We do have a question from Heather Gornik with Barclays.

Hi, good afternoon, Heather.

Hi, good afternoon. I appreciate all the commentary on the dividend. Naturally great to see that announcement out yesterday, I just wanted to touch base on the preferred to get your latest thinking there in light of the anticipated dividend policy. I think the latest messaging has been the potential peak out in the late ‘21 or early ‘22 timeframe. But wanted to see if there is any shift in timing or financing considerations there?

Heather, this is Ben. Not really a shift. We’ve got the capacity under our revolver and with the preferred. I think, again, when you look at that Excel math, the crossover, the MOIC and the IRR puts it kind of late ‘21 or early ‘22. So we’ve got, I think, plenty of time to work through our refinancing alternatives on the preferred. And in the meantime, it’s a very manageable 7% distribution rate. And so public company, we’ve got plenty of different options as you think of capital markets. And obviously, anything we do with the preferred and our balance sheet in a whole is going to make sure that we do it in a prudent fashion and not over-lever ourselves and obviously, with the dividend starting – hopefully, starting next year, protecting that the viability of that moving forward. Our cash flows and the business that you can – as you can see from how we’ve done very well this year on EBITDA and DCF and expect to continue that into next year. The cash flows from our assets, obviously, can support a balance sheet that we have plus a dividend, and we’re going to make sure that any financing instruments we put in place continue to do that.

Okay, got it. Makes sense. That’s it for me. Thanks for taking the question.

Sure. Thanks, Heather.

[Operator Instructions] And there are no further questions at this time. I will turn the call back over to Clay Bertrand for closing remarks.

Okay. I would like to thank everyone for dialing into our call today. I’d like to leave you with the following thoughts about Altus Midstream. First, our outlook has improved considerably with the expected startup of the Permian Highway pipeline. Like Gulf Coast Express, it is fully subscribed with minimum volume commitments. However, we have a more material 27% ownership in PHP. We have revised upwards several of our guidance items for 2020 and 2021, including adjusted EBITDA and distributable cash flow. These estimates do not include new third-party business nor additional wells turned online at Alpine High, including the 3 DUCs mentioned on Apache’s call this morning. Finally, I would note that last month, we announced that Joe Frana has joined Altus Midstream’s Board of Directors. We welcome him to the Board and look forward to working with him. I would like to thank Doug Johnson, who retired from our Board in September for his service to the company. Now I will return the call to the operator.

Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.