DCP Midstream LP : First Quarter 2021 Earnings Transcript

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EDITED TRANSCRIPT

DCP.N - Q1 2021 DCP Midstream LP Earnings Call

EVENT DATE/TIME: MAY 06, 2021 / 2:00PM GMT

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MAY 06, 2021 / 2:00PM, DCP.N - Q1 2021 DCP Midstream LP Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Michael Fullman DCP Midstream, LP - Director Corporate Development & Strategy

Sarah Sandberg DCP Midstream, LP - Senior Director of Communications & Public Affairs

Sean P. O'Brien DCP Midstream, LP - Group VP & CFO of DCP Midstream GP, LLC

Wouter T. van Kempen DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

C O N F E R E N C E C A L L P A R T I C I P A N T S

Christopher Paul Tillett Barclays Bank PLC, Research Division - Research Analyst

James Eugene Carreker U.S. Capital Advisors LLC, Research Division - Executive Director

Jeremy Bryan Tonet JPMorgan Chase & Co, Research Division - Senior Analyst

Michael Jacob Blum Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

Michael Raphael Cusimano Heikkinen Energy Advisors, LLC - Research Analyst

Shneur Z. Gershuni UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst Spiro Michael Dounis Crédit Suisse AG, Research Division - Director

Tristan James Richardson Truist Securities, Inc., Research Division - VP

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 DCP Midstream Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Sarah Sandberg, Senior Director of Investor Relations. Thank you. Please go ahead.

Sarah Sandberg - DCP Midstream, LP - Senior Director of Communications & Public Affairs

Thanks, Angela. Good morning, and welcome to the DCP Midstream First Quarter 2021 Earnings Call. Today's call is being webcast, and I encourage those listening on the phone to view the supporting slides, which are available on our website at dcpmidstream.com.

Before we begin, I'd like to point out that our discussion today includes forward-looking statements. Actual results may differ due to certain risk factors that affect our business. Please review the second slide in the deck that describes our use of forward-looking statements. And for a complete listing of the risk factors, please refer to the partnership's latest SEC filings. We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measure in schedules in the appendix section of the slides.

Wouter van Kempen, CEO, and Sean O'Brien, CFO, will be our speakers today. And after their remarks, we'll take your questions.

With that, I'll turn the call over to Wouter.

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Thank you, Sarah, and good morning, everyone. I appreciate you joining us.

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MAY 06, 2021 / 2:00PM, DCP.N - Q1 2021 DCP Midstream LP Earnings Call

Our team delivered solid first quarter earnings despite managing through the historic volatility created by Winter Storm Uri. First and foremost, I want to thank our team for tremendous execution through this event without a single safety incident or any employee or contractor injuries. This hard work helped us achieve adjusted EBITDA of $275 million and distributable cash flow of $175 million, which resulted in leverage of 4.1x and over $1 billion of liquidity at the end of Q1. We maintained our dedication to cost and capital discipline with a 22% reduction in cost and 55% reduction in sustaining capital versus the fourth quarter of 2020. In all, we generated a 5% sequential increase in excess free cash flow, totaling approximately $90 million in the first quarter.

This solid quarter is a testament to the multiyear strategic transformation of our business model. We balanced and diversified our portfolio, prioritized capital discipline and invested in DCP 2.0 to drive efficiencies in our business and restructure cost basis. These deliberate, strategic actions have positioned DCP to successfully navigate the historic supply and demand shocks resulting from a pandemic, compounded by adverse actions by OPEC and an epic winter storm and our assets continue to prove their earnings power, generating significant excess free cash flow throughout historically challenging environments, which brings me to Slide 4.

In total, Winter Storm Uri resulted in a $60 million adverse impact to our first quarter earnings. As a result of severe producer volume declines and record natural gas pricing, the storm created negative impacts on commercial settlements, including natural gas marketing swaps, which were partially offset by DCP's balanced portfolio and integrated value chain, including gas storage. The DCP team prioritized safety and proactively prepared our assets for the storm and maintained near-perfect reliability while gas was still being produced.

We were also able to leverage the DCP 2.0 platform and our integrated collaboration center to provide our teams enhanced visibility into our assets with real-time data, enabling an informed and proactive response. Our team's exceptional preparation and execution, supported by our leading digital platform, was instrumental in our ability to safely and effectively manage through the storm and maintain our 2021 financial guidance. As you can see on the slide, exit to exit, our G&P and NGL pipeline volumes have improved, and we're confident in our team, our strategy, our portfolio and ultimately our continued success.

On Slide 5, I'll highlight the versatility of the DCP portfolio and the connectivity of our fully integrated value chains as a critical component of our success during these recent challenges. We generate diversified earnings from multiple basins and revenue streams, from wellhead gathering and processing, to fractionation and storage, the DCP portfolio is positioned to maximize earnings across the value chain.

Over the past decade, we have invested in expanding our logistics portfolio and strategically connected Sand and Southern Hills to our G&P business. We also were able to leverage our G&P footprint to vertically integrate fee-based natural gas transportation pipelines like Gulf Coast Express and the Cheyenne Connector.

Since 2010, we have stabilized our cash flows as we grew our L&M earnings share from 10% to 60% of adjusted EBITDA. In 2019, we anticipated the industry's super cycle of growth coming to an end and employed a capital-efficient supply long capacity short strategy to mitigate overbuild and utilize existing third-party capacity and infrastructure rather than build new assets.

Along with shifting and optimizing the asset base, we took additional transformative action to better position DCP for a sustainable future. DCP was a first mover in the industry's digital transformation, investing in DCP 2.0 since 2016 to drive efficiencies, enable real-time improved decision-making and enhance safety, reliability and asset optimization.

We have reinvented the way we operate our business, which has helped to reduce our annual cost by $155 million, or 15%, since 2015 while absorbing inflation and investing in transformation initiatives and improving our culture and employee experience. Combined, these dedicated strategies have stabilized our cash flows and positioned DCP to generate excess free cash flow, which has enabled us to delever the balance sheet and provide increased financial flexibility through even the most challenging environments.

I'll now turn it over to Sean, who will walk us through the financial details of our first quarter.

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MAY 06, 2021 / 2:00PM, DCP.N - Q1 2021 DCP Midstream LP Earnings Call

Sean P. O'Brien - DCP Midstream, LP - Group VP & CFO of DCP Midstream GP, LLC

Thanks, Wouter, and good morning, everyone. I also want to thank our team for the incredible hard work in the past quarter year.

In Q1, we generated adjusted EBITDA of $275 million and DCF of $175 million, resulting in leverage of 4.1x. As Wouter mentioned, we added $60 million adverse impact due to Winter Storm Uri, which was primarily due to lower volumes, gas marketing losses associated with financial swaps and higher costs due to increased labor and utility expenses at some of our affected assets.

Key drivers offsetting the headwinds created by Uri include the strong performance of our Spindletop natural gas storage business, cost and capital discipline, as well as a favorable commodity price environment. Outside of the storm, G&P margin was impacted by lower volumes quarter-over-quarter, which includes the expected contract expirations in the Eagle Ford.

The Logistics and Marketing Segment was impacted by lower Sand Hills volumes, attributable to continued ethane rejection by third parties during the quarter, which was partially offset by stable Southern Hills volumes due to incremental supply from the DJ. For the quarter, costs came in at $187 million, which was the lowest quarter spend in over a decade. Commodity pricing for the quarter was also favorable by $36 million, primarily due to strong NGL and crude pricing.

Looking to the second quarter, G&P and logistics volumes in April improved relative to Q1. Average Sand Hills volumes were up 29% in April compared to the first quarter due to improved ethane recovery and increased third-party volumes out of the Permian. We are also seeing improved G&P volumes across the footprint approaching Q4 levels. During the second quarter, we anticipate some cost and sustaining capital that was deferred due to the storm. With this solid quarter of earnings, we expect to be in a great position to meet our 2021 guidance and remain on track to continue to reduce debt.

On Slide 7, I'll highlight that our stable cash flows, which are 88% fee-based and hedged, along with our focus on cost and capital discipline has DCP well positioned. In the first quarter, we generated $89 million of excess free cash flow, which was $121 million increase from Q1 of 2020. With a strong start in Q1, we continue to expect to retire our upcoming September bond maturity, primarily utilizing excess cash. Debt reduction continues to be our top capital allocation priority as we remain committed to our mid-3s leverage target in the midterm.

And with that, I'll turn it back over to Wouter.

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Thanks, Sean. Wrapping up on Slide 8. The DCP team and portfolio continued to perform very well as evidenced by our ability to offset 3 separate and remarkably challenging black swans in the past 14 months. Through stress test after stress test, we have proven the benefits of our long-term capital allocation strategy; the quality of our assets and their earnings power; the competitive advantage of our DCP 2.0 digital transformation; and our ability to quickly adapt, control what we can control, and effectively manage any environment. We will build on this momentum and remain focused on safety, operational excellence and customer service while maintaining our cost and capital discipline.

And although we will speak to our sustainability efforts in more depth on our second quarter earnings call, we're excited to be making considerable progress on our ESG efforts. With a 15% reduction in Scope 1 emissions from 2018 to 2020, increased diversity of the Board of Directors, continued leading safety metrics, many, many other advancements, we look forward to sharing our progress on our second -- in our second annual sustainability report this summer.

In all, with a strong base business, demand recovery in sight and a constructive commodity price environment, we're well positioned to build on our first quarter performance and meet our 2021 commitments to increase excess free cash flow and strengthen our balance sheet.

And with that, we're looking forward to taking your questions.

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MAY 06, 2021 / 2:00PM, DCP.N - Q1 2021 DCP Midstream LP Earnings Call

Before that, I want to thank Sarah Sandberg. Sarah has been with us for 2 years in the Investor Relations role. Sarah, really appreciate everything that you've done. You've set the bar really, really high for people that come after you. And Mike Fullman is going to take over from Sarah. And I'm absolutely 110% confident that Mike will do a fantastic job. So Sarah, good luck and all the best. I know you're going to do great things for the company. And with that, I'm handing it over to Angela for the Q&A section.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Your first question comes from Jeremy Tonet with JPMorgan.

Jeremy Bryan Tonet - JPMorgan Chase & Co, Research Division - Senior Analyst

I just wanted to kind of start with, I guess, the recovery here coming out of the storm and into the second quarter. It seems like things are really improving here. Just wondering if you might be able to expand a bit more on that, I guess, as far as drilling cadence over the rest of the year. And are you seeing kind of different trends from privates versus publics there? And how does that impact you guys?

Sean P. O'Brien - DCP Midstream, LP - Group VP & CFO of DCP Midstream GP, LLC

Jeremy, it's Sean. I'll start a little bit and let Wouter talk about the -- what's going on with some producers. But from -- in terms of a trend perspective, we are definitely seeing some really good trends. Obviously, it's good to get Uri behind us. A couple of things to consider. We are seeing -- we've been in recovery since last year. But we are starting to see third parties go into recovery. So some of my comments alluded to some pretty good volumes on Sand Hills, and you'll see that and hopefully continue through the rest of the year, but definitely a trend in Q2.

In terms of -- there was a little bit of a lag in some of the volume growth that we were expecting this year in a couple of regions. We are seeing those start to tick up. So the Permian, Delaware Basin, you're seeing volumes coming in a little bit stronger. I'll remind you that, that's another plus for Sand Hills, not only recovery but you're seeing incremental volumes. And then on Southern Hills and the DJ, we are seeing volumes definitely start to improve and pick up, again, post-Uri and into Q2. And that bodes well for the G&P business up there as well as the Southern Hills pipeline.

So as we sit here today, the outlook in Q2, I think you're reading it right, is definitely improving and looks pretty good.

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Yes, Jeremy, a couple of things to add. I -- in general, I'm very proud of the team and how the team continues to perform. I think the assets are running very well right now. Obviously, it took a while getting out of the storm. But if I look at all of our operational excellence KPIs around safety, around reliability, things are going well. So that is a -- that's a nice way to kind of get out of the storm and get things set up nicely.

From a volume point of view, I think the trend is kind of the same as it's been here for the last couple of months, really good discipline by, I would say, the larger public producers. And I think that is a really, really good thing. Having discipline, making sure that we don't kind of overextend ourselves quickly, overshoot the market, flood the market with supply, I think that is a very, very good thing for our industry overall. So the discipline around free cash flow being measured, absolutely seeing that with our large producers.

At the same time, we're definitely also seeing them looking into the second half and say, "Hey, maybe there's an opportunity to add some crews, add some rigs and things alike." And then what we're seeing, like I think many others are seeing as well is the smaller producers, the private producers are definitely adding rigs and volumes. So there's -- there are -- you definitely see a bit of a discrepancy between those 2 players.

But overall, I'm pleased in general with everything that I see around the company and looking forward to a good rest of the year.

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