(EDGAR Online via COMTEX) -- Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Annual Report"), as well as the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition or provide forecasts of future events. Words such as "may," "assume," "forecast," "position," "predict," "strategy," "expect," "intend," "plan," "estimate," "anticipate," "believe," "project," "budget," "potential," "continue" and other similar expressions are used to identify forward-looking statements. Forward-looking statements can be affected by the assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements discussed below and detailed under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Actual results may vary materially. Although forward-looking statements reflect our good faith beliefs at the time they are made, you are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and you should not consider the following list to be a complete statement of all potential risks and uncertainties. In addition, our forward-looking statements address the various risks and uncertainties associated with the extraordinary market environment and impacts resulting from the novel coronavirus 2019 ("COVID-19") pandemic and the actions of foreign oil producers (most notably Saudi Arabia and Russia) to increase crude oil production and the expected impact on our businesses, operations, earnings and results. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include but are not limited to: the continuation of a swift and material decline in global crude oil demand and crude oil prices for an uncertain period of time that correspondingly may lead to a significant reduction of domestic crude oil and natural gas production, which in turn could result in significant declines in the actual or expected volumes transported through our pipelines and/or the reduction of commercial opportunities that might otherwise be available to us; developments in the global economy as well as the public health crisis related to the COVID-19 virus and resulting demand and supply for crude oil and natural gas; uncertainty regarding the length of time it will take for the U.S. and the rest of the world to slow the spread of the COVID-19 virus to the point where applicable authorities are comfortable easing current restrictions on various commercial and economic activities; such restrictions are designed to protect public health but also have the effect of significantly reducing demand for crude oil and natural gas; uncertainty regarding the future actions of foreign oil producers such as Saudi Arabia and Russia and the risk that they take actions that will prolong or exacerbate the current over-supply of crude oil; uncertainty regarding the timing, pace and extent of an economic recovery in the U.S. and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for the midstream services we provide and the commercial opportunities available to us; the effect of an overhang of significant amounts of crude oil and natural gas inventory stored in the U.S. and elsewhere and the impact that such inventory overhang ultimately has on the timing of a return to market conditions that support increased drilling and production activities in the U.S.; an inability of Oasis Petroleum or our other customers to meet their operational and development plans on a timely basis or at all; the execution of our business strategies; the demand for and price of crude oil and natural gas, on an absolute basis and in comparison to the price of alternative and competing fuels; the fees we charge, and the margins we realize, from our midstream services; the cost of achieving organic growth in current and new markets; our ability to make acquisitions of other midstream infrastructure assets or other assets that complement or diversify our operations; our ability to make acquisitions of other assets on economically acceptable terms from Oasis Petroleum; Table of Contents our inability to perform our obligations under our contracts, whether due to non-performance by third parties, including our customers or other counterparties, market constraints, third-party constraints, legal constraints (including governmental orders or guidance), or other factors; the lack of asset and geographic diversification; the suspension, reduction or termination of our commercial agreements with Oasis Petroleum; labor relations and government regulations; competition and actions taken by third party producers, operators, processors and transporters; outcomes of litigation and regulatory investigations, proceedings or inquiries; the demand for, and the costs of developing and conducting, our midstream infrastructure services; general economic conditions, including the risk of a prolonged economic slowdown or decline, or the risk of delay in a recovery, which can affect the long-term demand for natural gas and crude oil and related services; the price and availability of equity and debt financing; operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; potential effects arising from cyber threats, terrorist attacks and any consequential or other hostilities; interruption of our operations due to social, civil or political events or unrest; changes in environmental, safety and other laws and regulations; the effects of accounting pronouncements issued periodically during the periods covered by forward-looking statements; changes in our tax status; uncertainty regarding our future operating results; and certain factors discussed elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by securities law. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Some of the key factors which could cause actual results to vary from our expectations include, but are not limited to, commodity price volatility, inflation, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in projecting future throughput volumes, cash flow and access to capital, the timing of development expenditures and the other risks described under Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Overview We are a growth-oriented, fee-based master limited partnership formed by our sponsor, Oasis Petroleum Inc. ("Oasis Petroleum") /zigman2/quotes/207530975/composite OAS +6.52% , to own, develop, operate and acquire a diversified portfolio of midstream assets in North America that are integral to the crude oil and natural gas operations of Oasis Petroleum and are strategically positioned to capture volumes from other producers. Our midstream operations are performed within the Williston Basin and the Delaware Basin. We generate the majority of our revenues through long-term, fixed-fee contracts pursuant to which we provide crude oil, natural gas and water-related midstream services for Oasis Petroleum. We expect to grow acquisitively through accretive, dropdown acquisitions, as well as organically as Oasis Petroleum continues to develop its acreage. Additionally, we expect to grow by continuing to offer our services to third parties and through acquisitions of midstream assets from third parties. In the Williston Basin, we divide our operations into two primary areas with developed midstream infrastructure, both of which are supported by significant acreage dedications from Oasis Petroleum. In Wild Basin, we have acreage dedications from Oasis Petroleum in which we have the right to provide crude oil, natural gas and water services to support Oasis Petroleum's existing and future volumes. Outside of Wild Basin, we have acreage dedications from Oasis Petroleum for produced and flowback water services and freshwater services. In the Delaware Basin, we have acreage dedications from Oasis Petroleum for crude oil gathering and produced and flowback water gathering and disposal services. We have also received certain commitments and acreage dedications from third parties in the Williston Basin and the Delaware Basin, in which we have the right to provide our full suite of midstream services to support existing and future third party volumes. Table of Contents We conduct our business through our ownership of our DevCos, two of which are jointly-owned with Oasis Petroleum. As of March 31, 2020, we own a 100% equity interest in Bighorn DevCo LLC ("Bighorn DevCo"), a 35.3% equity interest in Bobcat DevCo LLC ("Bobcat DevCo"), a 70% equity interest in Beartooth DevCo LLC ("Beartooth DevCo") and a 100% equity interest in Panther DevCo LLC ("Panther DevCo"). As of March 31, 2020, Oasis Petroleum owns a 64.7% and 30% non-controlling equity interest in Bobcat DevCo and Beartooth DevCo, respectively. We are party to long-term, fixed-fee contracts with wholly-owned subsidiaries of Oasis Petroleum for natural gas services (gathering, compression, processing, gas lift and natural gas liquids ("NGLs") storage), crude oil services (gathering, stabilization, blending and storage), produced and flowback water services (gathering and disposal) and freshwater services (fracwater and flushwater supply and distribution). We are also a party to the long-term, Federal Energy Regulatory Commission ("FERC") regulated transportation services agreement governing the transportation of crude oil via pipeline from the Wild Basin area to Johnson's Corner. The amount of revenue we generate primarily depends on the volume of crude oil, natural gas and water for which we provide midstream services. We generate a substantial majority of our revenues through these contracts, which minimizes our direct exposure to commodity prices. While we have increased our customer diversification by entering into multiple agreements and transactions with third parties to provide our full suite of midstream services, we are largely dependent on Oasis Petroleum as our most significant customer. Based on the current commodity price environment, Oasis Petroleum has expressed substantial doubt about its ability to continue to operate as a going concern, and financial distress at Oasis Petroleum could have a material adverse effect on the Partnership's results of operations (see Item 1. "Financial Statements (Unaudited) - Note 2 - Summary of Significant Accounting Policies - Risks and Uncertainties"). However, an event of default or bankruptcy of Oasis Petroleum would not trigger an automatic acceleration of indebtedness under our Revolving Credit Facility, as there are not any cross-acceleration or cross-default provisions between the Oasis Petroleum credit agreement and our Revolving Credit Facility. Our operating and financial results are substantially dependent on our ability to maintain or increase existing throughput volumes on our systems. Throughput volumes are affected by changes in the supply of and demand for crude oil and natural gas in the markets served directly or indirectly by our assets. Beginning in the first quarter of 2020, commodity prices declined significantly as a result of macroeconomic factors, including demand impacts due to global disruptions resulting from COVID-19 and supply impacts related to production increases by members of the Organization of Petroleum Exporting Countries ("OPEC") and other non-OPEC, oil producing countries, including Russia. In response to these events, U.S. onshore producers have announced plans which could adversely impact our ability to maintain or increase existing throughput volumes, including reductions to capital spending, changes to development plans and delays in production. We cannot predict whether or when crude oil production and economic activities will return to normalized levels. The commodity price environment is expected to remain depressed based on over-supply, decreasing demand and a potential global economic recession, discussed further below. Ultimately, a prolonged period of lower commodity prices may adversely affect our operating results and cash flows through lower throughput volumes on our assets, which could result in future impairment charges. If constraints continue such that storage becomes unavailable to our customers, including Oasis Petroleum, or commodity prices remain depressed, they may be forced or elect to shut-in some or all of their production or delay or discontinue drilling plans, which would result in a further decline in demand for our services. In addition, we generate the majority of our revenues pursuant to fee-based agreements, and producers could seek to amend existing contracts to reduce the volumetric fees we charge. We routinely evaluate the existence of triggering events which could indicate the carrying amount of our property, plant and equipment may not be recoverable. Impairment indicators include, but are not limited to, sustained decreases in commodity prices, a decline in customer well results and lower throughput forecasts, changes in customer development plans and/or increases in construction or operating costs. We determined that lower forecasted throughput volumes, resulting from changes to customers' development plans due to expected sustained significant decreases in commodity prices, which began during the first quarter of 2020, was an impairment indicator and completed a Step 1 impairment analysis by comparing the undiscounted future cash flows to the carrying amounts for each of our crude oil, natural gas, freshwater and produced and flowback water asset groups in the Williston Basin and the Delaware Basin. We determined the carrying amounts of our crude oil and freshwater asset groups in the Williston Basin and our crude oil and produced and flowback water asset groups in the Delaware Basin were not recoverable and recorded impairment charges of $101.8 million (see Item 1. "Financial Statements (Unaudited) - Note 6 - Property, Plant and Equipment"). If commodity prices continue to decline or remain at depressed levels for a prolonged period of time, if there are shut-ins of production from our customers' existing producing wells or if there are significant changes in the future development plans of our customers, including Oasis Petroleum, to the extent they affect our operations, such circumstances may necessitate assessment of the carrying amount of our affected assets for recoverability and may result in additional impairment charges in the future. If the United States oil and gas industry continues to experience an imbalance of supply and demand as it endured during the first quarter of 2020, it is likely that our operations will be so affected and future impairment charges will be incurred. Table of Contents COVID-19 On March 13, 2020, the United States declared the COVID-19 pandemic a national emergency, and several states, including Texas, North Dakota and Montana, and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. These containment measures, while aiding in the prevention of further outbreak of COVID-19, have resulted in a severe drop in energy demand and general economic activity. To the extent COVID-19 continues or worsens, governments may impose additional similar restrictions. We have taken, and continue to take, proactive steps to manage any disruption in our business caused by COVID-19. For instance, even though our operations were not required to close, we were early adopters in employing a work-from-home system and have deployed additional safety protocols at our operating sites in order to keep our employees and contractors safe and to keep our operations running without material disruption. The rapid and unprecedented decreases in energy demand have impacted certain elements of our distribution channels. We are also experiencing impacts from downstream markets, as certain pipelines no longer have the ability to transport production as refineries reduce activity or exercise force majeure clauses. Additionally, inventory surpluses have overwhelmed U.S. storage capacity, leading to a further strain on the supply chain. The constraints to the supply chain could force our customers, including Oasis Petroleum, to shut in production of certain U.S. onshore wells in the future, which would result in a further decline in demand for our services. Due to a combination of the foregoing COVID-19 pandemic-related pressures and geopolitical pressures on the global supply and demand balance for crude oil and related products, commodity prices have significantly declined in recent months. In response, we have revised our planned capital program for 2020 and will continue to evaluate our level of capital spending throughout the year. Please see "Cash flows used in investing activities - 2020 Revised Capital Program" below for a further description of our revised 2020 capital program. Highlights: Significant financial and operating results for the three months ended March 31, 2020 include: Net cash from operating activities was $61.7 million. Adjusted EBITDA was $72.9 million and Adjusted EBITDA attributable to the Partnership was $46.4 million. Adjusted EBITDA is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below. Declared the quarterly cash distribution of $0.54 per unit for the first quarter of 2020. Natural gas processing volumes were 242.4 MMscfpd, and approximately 30% of these volumes were from third parties. Commenced third-party produced water gathering and disposal services in Wild Basin. Table of Contents The following table summarizes the throughput volumes, operating income (loss), depreciation, amortization and impairment and capital expenditures of each of our DevCos for the three months ended March 31, 2020 and 2019. The amounts shown in the table below are presented on a gross basis. Three Months Ended March 31, 2020 2019 (In thousands, except throughput volumes) Bighorn DevCo Crude oil services volumes (MBopd) 44.0 50.6 Natural gas services volumes (MMscfpd) 242.4 193.0 Operating income $ 1,325 $ 10,564 Depreciation, amortization and impairment 21,644 3,735 Capital expenditures 3,629 6,955 Bobcat DevCo Crude oil services volumes (MBopd) 33.0 42.5 Natural gas services volumes (MMscfpd) 280.3 241.0 Water services volumes (MBowpd) 61.4 51.2 Operating income $ 12,422 $ 23,914 Depreciation, amortization and impairment 21,343 2,919 Capital expenditures 11,776 34,533 Beartooth DevCo Water services volumes (MBowpd) 133.4 133.1 Operating income (loss) $ (19,903) $ 13,509 Depreciation, amortization and impairment 35,656 2,275 Capital expenditures (575) 8,955 Panther DevCo Crude oil services volumes (MBopd) 4.1 0.5 Water services volumes (MBowpd) 30.2 26.2 Operating income (loss) $ (32,060) $ 1,295 Depreciation, amortization and impairment 33,321 63 Capital expenditures 9,610 5,665 Oasis Midstream Partners LP DevCo operating income (loss) $ (38,216) $ 49,282 Public company expenses 844 900 Operating income (loss) (39,060) 48,382 Depreciation, amortization and impairment 111,964 8,992 Equity-based compensation expenses 66 119 Capitalized interest 249 62 Maintenance capital expenditures 2,004 4,390 Expansion capital expenditures 22,436 51,718 Total capital expenditures 24,689 56,170
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Three Months Ended March 31, 2020 2019 Change (In thousands) Revenues Midstream services - Oasis Petroleum $ 81,993 $ 77,063 $ 4,930 Midstream services - third parties 3,846 1,127 2,719 Product sales - Oasis Petroleum 20,788 15,652 5,136 Product sales - third parties - 10 (10) Total revenues $ 106,627 $ 93,852 $ 12,775
Three months ended March 31, 2020 as compared to three months ended March 31, 2019
Three Months Ended March 31, 2020 2019 Change (In thousands) Operating expenses Costs of product sales $ 8,432 $ 8,065 $ 367 . . .
May 18, 2020
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