Summit Midstream Partners, LP
Q2 2021 Earnings Call Transcript

Published: 8 Aug 2021

[Operator:]

Welcome to the Second Quarter 2021 Summit Midstream Partners LP Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Ross Wong, Senior Director, Corporate Development and Finance. Mr. Wong, you may begin.

[Ross Wong:]

Thanks, operator, and good morning, everyone. If you don’t already have a copy of our earnings release that was issued earlier this morning, please visit our website at www.summitmidstream.com where you’ll find it on the homepage, Events and Presentations section or Quarterly Results section. With me today to discuss our second quarter 2021 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Marc Stratton, our Chief Financial Officer; along other members of our senior management team. Before we start, I’d like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy and other plans and objectives for future operations. Although I believe the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2020 Annual Report on Form 10-K, which was filed with the SEC on March 4, 2021, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. And with that, I’ll turn the call over to Heath.

[Heath Deneke:]

Great. All right. Thank you, Ross, and good morning, everyone. Thanks for joining us for our second quarter earnings call. This morning, Summit reported second quarter financial operating results that were well ahead of the original expectations that we established this past March and represented a solid beat for the quarter relative to the revised budget we set, when we updated our 2021 adjusted EBITDA guidance range to $225 million, $240 million back in late June. For the quarter, adjusted EBITDA turned out to $62.1 million, which was driven by the connection of 20 new wells during the quarter, together with the continued outperformance of wells that were connected in our earlier periods. Our results also benefited from reduced operating and G&A expenses, which were associated with the restructuring initiatives that we put and implemented towards the end of last year, as well as, our ongoing focus on capturing additional cost savings. Together with our disciplined capital program, we generated enough free cash flow to repay another $40 million of debt during the second quarter, which, since June 30, we’ve also been able to repay an additional $19 million to reduce our current outstanding revolver at the current level of $735 million net of cash. During our first quarter earnings call and early May, I have commented that there were several encouraging signs that could lead to a more bullish second half of 2021. However, we thought it was too early in the year, particularly under the circumstances at the time to make modifications to that original 2021 financial guidance. Since then, however, the overall market backdrop has materially improved, as commodity prices have shaped in, the U.S. economy has reopened and the depth and breadth of commercial discussions with it just being a new customers has elevated. To give these dynamics, along with our continued progress on call it manage initiatives we gained enough confidence in late June to increase our full year 2021 adjusted EBITDA guidance range by $12.5 million at the midpoint. So on the commercial front, generative continues to shift in a positive direction with improved commodity price outlook. As of now, we currently have five rigs working behind our systems, and we now expect roughly 87 to 96 new wells to be turned online in 2021 versus the 45 to 75 wells that we included in our original 2021 guidance. This fall is too early to begin projecting activity levels for 2022. What I can tell you is that we’re very encouraged by recent customer discussions that we had. This largely to point to further increases potentially in drilling activity around our footprint as we head into next year, particularly in our Permian, Willison and Uitca segments. As we outlined in our earnings release, we are making great progress on refinancing our 2022 debt maturities and with the construction of the Double E Pipeline, both of which were our two highest priorities this year. Our comprehensive refinancing plan is expected to include a new 4.5-year $400 million to $500 million asset-based revolver as together we had $700 million to $750 million of proceeds from a new high-yield note offering to refinance all of our 2022 debt maturities. This in the accurate, by the way, is currently $569 million. To-date, we’re pleased to announce that we have received $400 million of ABL revolver commitments from a syndicate of existing and new lenders. These commitments are contingent on the successful arrangement and closing of those high yield notes, along with other customary closing conditions. Look, at this point, that we view this initial commitment a critical first step of the process and one that has taken a fair amount of time to get completed, but we’re very happy to be at that level. So when completed, the new revolver and new high-yield notes we’ll provide a holistic financing solutions aside with enhanced financial flexibility, ample liquidity to grow the business and a long-term runway to continue harvesting a substantial amount of free cash flow that we intend to use to continue to delevering the balance sheet to drive significant long-term unitholder value. Completing this refinancing, which we expect to see about in the September is the top priority for our team, and we are excited about the prospect of closing a comprehensive solution that we believe will help move a major overhang on the value of the company that has been around for quite some time. Construction of the Double E Pipeline is also progressing very well, and we continue to track ahead of schedule, below budget and all this while maintaining remarkable project safety and compliance record. Double E is now approximately 60% complete, and importantly, we completed really all the major waterbody crossings and some of the really all of the other are one or two are complex area of construction. So we’re well on our way to place in the products and service during the fourth quarter of the year, and we also continue to expect that we’ll come in significantly under our revised 8x budget of $425 million, which, by the way, still includes about $30 million of uncommitted project contingency. I’m excited that we’re getting closer to bringing this world-class project online. I would like to thank and commend the team and our contractors for doing their really outstanding job to-date. I also want to comment on the very important press release that we issued regarding the global settlement when reached with the government on the previously disclosed, pretty large so that occurred on the near the Blacktail Creek region in Marmon, North Dakota. As is below result from a leak or a rupture and I introduced water gathering line on our Meadowlark system that we discovered in January of 2015. As we stated in the press release, the company has taken this matter very seriously from the very beginning. And frankly, it’s changed who we are and how we operate as a company. We’ve accepted the overall responsibility for this bill from the very beginning, and I can tell you, the company has been working very hard over the past seven years to make it right while making dramatic and drastic improvements to our operating systems, our processes, capabilities to ensure that an incident like this cannot happen again. Since 2015, we spent approximately $75 million on environmental remediation efforts to restore the areas impacted by themselves, and we made substantial investments in those systems and prevented the system improvements, which include, among other things, the state-of-the-art leak detection technology, centralized control room, monitoring and alarm systems, many additional changes to our company-wide operating practices and procedures. The global settlement now that we’ve reached with the government this week is an important final step to fully resolve the ongoing investigation and legal matters surrounding the Internet. It is important to note that the global settlement remains subject to court approval before become effective. Look, while we consider the overall monetary settlement payment fees at severe under the circumstances, particularly given our substantial remediation and mitigation efforts that we put forth today, we do believe that putting this matter behind us with manageable payment terms that we received over the next six years, is in the best interest of all of some of the stakeholders and employees. Our safety and the environment are of the utmost importance to all of us here at Summit. And while we deeply regret the incident, we’ve learned a lot from it, continue to serve as a tremendous catalyst over the years to redefine our culture and again, how we operate as a company. So with that, I’d like to hand the call over to Marc to review our financial results.

[Marc Stratton:]

Thanks, Heath, and good morning, everyone. I’ll begin with a discussion of our quarterly financial performance around the second that comprise our core focus areas. Starting with Utica Shell, the SMUs system averaged 496 million cubic feet a day in the second quarter, and segment adjusted EBITDA totaled $10.7 million, which is up $2.5 million or 38% from the first quarter of 2021. The 21% volume increase was largely driven by the four-well pad that came online in March, but was also positively impacted by six new wells that were turned in line behind our TPL-7 interconnect during the quarter. The four-well March pad that I just referenced averaged more than 170 million cubic feet a day in the second quarter and outperformed our internal expectations by more than 20%. As a result of the compelling production results and strong commodity price environment, this customer has accelerated drilling plans for four additional wells that are expected to be turned in line in the fourth quarter of this year, which is a quarter earlier than originally planned. And we recently received a connection notice for another oil well pad in mid-2022 from the same customer. So I can tell, there are a number of near-term catalysts setting up for this system. For our Ohio Gathering segment, adjusted EBITDA totaled $6.8 million in the second quarter, which was in line with the first quarter, largely due to lower operating expenses, which is partially offset by a 7.9% decrease in volume throughput despite three wells being connected during the quarter. At the end of the second quarter, there were four DUCs behind the OGC system, which are expected to be turned in line in the third quarter, and we’re optimistic about new commercial opportunities behind OGC beginning in 2022. Williston segment adjusted EBITDA totaled $9.6 million in the second quarter, a 10.5% decrease from the first quarter, primarily due to lower liquids volumes and higher OpEx during the quarter. There were six DUCs in inventory behind our liquid system as of June 30, all of which are expected to be turned in line by the end of the third quarter. Similar to our other core focus areas, we’re seeing both an acceleration of expected customer well connections as well as strong indications of new upstream activity on the forefront. Based on recent discussions, one of our customers has confirmed that they plan on bringing seven new wells online behind our liquids infrastructure in the fourth quarter, which is sooner than their original plans. We’re also in advanced discussions with multiple customers regarding new well activity that could add up to 19 new wells before the end of the first quarter of 2022. DJ Basin segment adjusted EBITDA totaled $5.1 million in the second quarter, a 4.5% decrease from the first quarter of 2021, primarily due to changes in customer volume mix. Second quarter volume throughput averaged 23 million cubic feet a day, which was in line with the first quarter. There are no DUCs behind our DJ Basin infrastructure, and we’re currently awaiting details from our customers regarding specific plans for development in the airport area for 2022 and beyond. Permian segment adjusted EBITDA totaled $0.5 million in the second quarter, a decrease of approximately $200,000 compared to the first quarter, primarily due to increased operating expenses for compressor-related maintenance and property taxes, despite flat quarterly throughput volumes of 99 million cubic feet a day. No new loans were connected during the quarter, and there are no DUCs currently behind the Permian system. However, we are in advanced commercial discussions with several counterparties that have the potential to increase utilization of the lane processing plant of 60 million cubic feet a day of nameplate capacity to nearly 80%, which is a substantial increase relative to the realized throughput utilization of 48% in Q2. I look forward to sharing more details about these opportunities once they have been finalized. Our legacy areas, which include the Piceance, Barnett and Marcellus segments, generated $35.6 million of free cash flow in the second quarter. Upstream activity in our legacy areas included nine new well connects behind our Mountaineer Midstream system in the Marcellus as well as a consistent pace of workovers and completions in the Barnet. We expect seven new Barnett wells to be turning the line during the third quarter that are expected to meaningfully increase volumes behind the system. We’re also evaluating a multiyear development program with one of our larger customers in the Piceance, which is currently contemplated, would result in the first new wells turn the line behind our Piceance infrastructure since late 2018. Now turning back to the partnership. SMLP reported a second quarter net loss of $19.7 million, adjusted EBITDA of $62.1 million and DCF of $46.5 million. Our net loss was driven by $31.5 million of non-cash expense related to a $19.3 million loss contingency accrual related to the Meadowlark Midstream and $12.2 million related to Energy Capital Partners’ recent exercise of its warrants in full for 414,000 new SMLP common units. Capital expenditures totaled $3.4 million for the second quarter, which was $700,000 higher than the first quarter and included $1.2 million of maintenance CapEx. The majority of second quarter CapEx was associated with growth capital to connect new pad subs in our Utica and Williston segments that are expected to commence production in the second half of 2021. During the second quarter, Sumit funded all $42.8 million of its Double E capital calls for a 70% interest in the JV with borrowing under the non-recourse credit facilities that we put in place in March at Summit Permian transmission. Utilizing these credit facilities to fund the development of Double E Pipeline is extremely impactful to so strategy of continuing to delever while simultaneously progressing the project towards its in-service date. If this funding option were not available, SMLP wouldn’t had to draw on its revolver rather than paying down the $40 million we did in the second quarter. As of June 30, there was $53.5 million borrowed under the Permian transmission credit facilities. With respect to SMLP’s balance sheet, we had $762 million outstanding under our $1.1 billion revolving credit facility at June 30, which is down by $95 million since year-end 2020, as I mentioned, down $40 million from the end of the first quarter. Subject to covenant limits, our available borrowing capacity at the end of the second quarter totaled approximately $138 million, and with cash on hand, we have approximately $145 million of total liquidity. Total leverage at June 30 was 5.0 times compared to a maximum limit of 5.75 times, and first lien leverage was 3.0 times compared to a maximum limit of 3.5 times. As mentioned earlier, subsequent to June 30, we’ve already paid down an additional $19 million under the revolver, and we expect to continue making good progress on our debt repayment plan for the foreseeable future. As Heath mentioned, refinancing our 2022 debt maturities is a top priority for our team, and we’re working diligently and quickly to execute on our holistic refinancing solution. Our objective is to establish a new pro forma capital structure that extends our debt maturity profile, provide ample liquidity to grow our business and includes a significant amount of pre-payable debt, which we plan to continue reducing with the robust free cash flow that our business generates. I’m especially thankful for our lending partners that have committed $400 million to the new ABL revolver that is based on the value of our above ground mission credible assets. The borrowing base governing the ABL is currently and is expected to remain significantly higher than the $400 million to $500 million ABL facility growth of 4.5-year term. In addition, the high-yield bond markets continue to be robust, and we plan on closing and funding the new ABL revolver and high-yield notes concurrently by September 30 this year. Refinancing our 2022 debt maturities is a critical event for Summit, and I believe that we will see immediate benefits across our capital structure upon solving this overhang. With that, I’ll turn the call back over to Heath for closing remarks.

[Heath Deneke:]

Thank you, Marc. Look, so we’re pleased with Summit’s performance for the first two quarters of the year there. And we do remain very optimistic about the core trajectory, given the improvement in the macroenvironment, the signs of increased upstream activity by our systems that we talked about and also the line of sight to completing our top priorities, our top two priorities for the year, which again, includes the successful near-term refinancing of our 2022 debt maturities and completing the Double E Pipe and starting operations by the end of the year. We’re also very excited about the rekindle discussions that we’re having new and existing customers that Marc alluded to around our core assets in the Permian, Willis and Utica, and look, I also continue to think that M&A activity will increase, both in the public and private sectors, as companies continue to focus on ways to gain scale and create commercial and operation synergies and then enhance overall returns. Given our diverse footprint, it stretches across multiple attractive basins, along with great progress that we made to simplify our structure and improve the overall balance sheet, I do believe that Summit is very well positioned to participate in that M&A efforts. That said, I can assure you that maximizing free cash flow and delevering the balance sheet continues to be top of line for us. We’ll remain extremely disciplined on the M&A front, and we’ll only consider transacting on opportunities that we’re convinced with our long-term value that can be accomplished on a credit accretive basis. So with that, I’d like to thank everyone for their time today. I look forward to providing additional updates, as we continue to move forward with our refinancing plans and some of the other key milestones throughout the year. So with that, operator, I’d like to open up the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. We have a question from James Carreker from U.S. Capital Advisors.

[James Carreker:]

Hi, guys. Thanks for the question. You talked about five rigs behind your system currently. Can you talk a little bit about how that compares to kind of recent historical levels, and also kind of what level of rig activity was assumed when you refreshed your guidance recently?

[Ross Wong:]

Yes. Thanks, James. I’ll let Marc give you some specifics, but definitely it’s been a pickup in activity relative to what we assumed for 2021. As we kind of highlighted, our overall tolling connections of wells is even in the – I think it was in the mid 87% to 96% range or so, that was a substantial pickup relative to the midpoint. We – a midpoint of what we expected for the year was closer to like 54 wells. So I think that certainly reflects a pickup in activity for 2021. I mean, relative to historical levels, what I can tell you, obviously, this is still a very much a trough year for us. I think if you look over the past several years, sort of pre-COVID, it would be difficult for us to connect somewhere around 200 to 300 wells per year. So – and I think when we fast forward and look into 2022, while it’s – as I said, it’s too early to call, but I think what we’re seeing is momentum that leads us to believe that 2022 well connection activity is going to increase relative to where we think we’re going to close the year this year.

[Marc Stratton:]

Yes. Good morning, James. This is Marc speaking. Just to give you a little sense as to where the rigs are working behind our systems right now. So we’ve got one rig working in the Utica, two in the Williston, one in the Permian, and believe it or not, one, in the Piceance, in which we mentioned, we’re talking to a customer about a multiyear development program there, which would be really the new first wells, first new wells that we’ve seen on that system in several years. So look, I’d say five rigs working today are certainly in excess of what we expected when we set our original guidance in March. And I think that has also contributed to our optimism about the second half of this year and heading into next year. But I would tell you, over the last 1.5 years, so really since the beginning of 2020, we’ve seen anywhere from zero to five rigs working with really right now being peak across that this over time period.

[James Carreker:]

Thanks. And it kind of leads me to my second question, which is north of $120 million of EBITDA year-to-date, increased rig activity, increased well connects, supportive commodity prices. I guess, what would you need to see in order to feel more optimistic about raising the guidance range for 2021 just given all those factors?

[Ross Wong:]

Yes. I think it’s a good question. I mean, I think we still feel like this is the right range what I would tell you is just based on the second quarter, we did kind of beat the underlying quarterly budget that we had envisioned when we put that in place. But I think we’re at a point that there’ll be maybe you have something come within the range, hopefully, topping a little bit more to the upper end of the range. And a lot of that has to do, too, as you kind of get further into the year. I mean, it takes time for these guys to complete wells and bring them online, so I think we’ve got a really, really good look at what the second half of the year is going to look like from a turn in line perspective. So I think most of the upside, if you will, or we could see the higher impacts, I think, is as you get into 2022 with those wells kind of coming online, then that makes sense. So we feel pretty good about guidance and we’re just feeling pretty good about going into 2022 with substantially increased activity relative to what we’re having this year.

[James Carreker:]

Thanks. If I can – one more in. Maybe just talk a little bit about this expected high-yield bond offering in the new revolving commitments. What – any type of restrictions or anything that you would expect to be placed on those in regards to either resuming payments of your preferred equity or resuming dividend payments at some point in the future? Or any other kind of covenants that you think may be relevant that will be in those new pieces of paper.

[Ross Wong:]

Yes. You bet, James. And look, I’ll give you kind of the high-level and then the Marc can kind of fill in the details. Looks we’re very excited to kind of get this new ABL facility. I think it’s going to give us a tremendous amount of financial flexibility, and it’s going to be relative to a cash flow based revolver, which is why we kind of switched over to the ABL structure. Over the 4.5-year term, we think that the covenant package that’s going to come along with it really kind of solidifies the runway for us almost in any kind of financial scenario or activity.

[Operator:]

We’re experiencing technical difficulties. Please standby. We’ll resume with your answer. Thank you, and please standby. We thank you for your patience. We will now resume. Mr. Wong, please proceed.

[Ross Wong:]

James, hopefully, you’re so long from now. We got disconnected from the call. So yes, just to kind of start back and answer your question, very excited about the new ABL revolver. We definitely see it given us a tremendous amount of flexibility vis-à-vis a more traditional cash flow-based revolver. I’ll let Marc kind of get into the details on the covenants. But what we really set out to do, and we talked about this in May is that there’s still uncertainty out there, right? I mean we still have different variance of COVID and different levels of projection on the environment and different outlooks on the commodity prices. And what we really wanted to do was solidify a long-term runway, a 4.5-year runway that almost in any kind of outlook, we feel comfortable it will give us enough time to harvest a substantial amount of free cash flow and continue to delever over that window. So I think that the – with this ABL, I think we’ve accomplished that. Marc can get you to the RPs. I do think that we are – our focus is going to be to continue to delever the balance sheet. We love to be in a position to be able to turn on distributions at the appropriate time, but this point, we’re kind of focused on getting this high-yield offering done, getting the ABL complete in September. And as I said, we’ll have a lot of headroom under our covenants, and we think we’ll have very reasonable restricted payment baskets that is the kind of current outlook kind of prevails, and we stay in the 60 to 70 prudently mid and $3 to $4 gas, I mean, I feel confident sometime in the next few years, we would be able to kind of reinstate levels of dividends. So Marc, do you want to maybe elaborate a little bit more on the covenants?

[Marc Stratton:]

Sure, James. So look, I think as you think about the ABL facility, I would think about financial performance covenants that provide more financial flexibility relative to a traditional cash flow-based revolver or so. Think about a first lien leverage covenant in the 2.5 times area, which would be our primary leverage-based governor going forward. With respect to RPs, look, if we certainly understand that it’s top of mind for our lenders, including our banks and bondholders, and we recognized that the environment has changed. So our focus right now, James, is on paying down debt and using our free cash flow to make good headway there, that’s what you’ve seen us do. And I think at the appropriate time and we feel like we’ve made enough headway, we’ll consider a distribution. But at this point, our focus continues to be on paying them debt.

[James Carreker:]

Yes. I don’t know if you guys can hear me, but thanks for the answers.

[Ross Wong:]

All right. Thanks, James.

[Marc Stratton:]

Thanks, James.

[Operator:]

Thank you. The next question comes from Elvira Scotto from RBC Capital Markets.

[Elvira Scotto:]

Hi, good morning, everyone. Thanks for the comments that you made on M&A. My question is, a while ago, you guys had separated your assets in core versus legacy, with the goal of divesting those legacy assets, but now it looks like activity is picking up in the Barnett, and you’re even having conversations in the Piceance. So I guess my question is, how should we think about those legacy assets? I mean, are they still divestiture candidates? Or do they move to core? I mean, just any way you could frame that?

[Ross Wong:]

Yes. I mean, look, I think what – the way I’d answer that question, obviously, in the Barnett, we are continuing to beat Barnett is I think there is one think their once I’ve talked to Barnett to be the client. The seven new wells that we’re going to be bringing online here in a few weeks. I mean, as well as just continuing operating improvements that are occurring out in the field, we think that we can do better than natural declines and maybe even in a more flattish outlook for the Barnett. When you think of the other legacy basins, I mean, we still have a substantial amount of free cash flow generation, the systems are built out, they require very little maintenance capital to operate and can provide a significant amount of free cash flow for us. So we’re comfortable holding those assets and operating those assets, but look, if there there’s an opportunity to add nest of an asset on a valuation that makes sense and to be – accelerate our delevering, we’re certainly open to having that conversation. But I will say our viewpoint, what we’re seeing in the market is there’s just not a lot of cash bids out there, and it doesn’t matter if you’re in the Permian, the Bakken or the Piceance. And we think that consolidation makes a lot of sense, and we think that whether we are divesting of an asset for someone that could potentially create some additional commercial synergies or operating synergies make sense. And likewise, we’re looking at assets around our footprint that we think we can kind of apply our extreme focus on cost and driving synergies, both on the commercial and operating front. So I think the overall point is that we could be acquirers. We could be look at divesting assets. And it really is just going to be value-driven, and it’s really going to be looked at to the end of improving the balance sheet.

[Elvira Scotto:]

Thank you very much.

[Operator:]

Thank you. We have no further questions. I would like to turn the call back to Mr. Heath Deneke for final remarks.

[Heath Deneke:]

Great, thanks. And thank you, everyone, for joining. Obviously Joe on the Tom were feeling pretty good about knocking out our two main priorities this year and very optimistic with the outlook as we kind of start peaking into 2022. So look forward to continuing to keep you all updated as we make additional progress on the refinancing on Double E, and appreciate everyone’s time this morning. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect.