Summit Midstream Partners, LP
Q3 2021 Earnings Call Transcript

Published: 4 Nov 2021

[Operator:]

Welcome to the Q3 2021 Summit Midstream Partners LP Earnings Conference Call. My name is Vanessa and I will be your operator for today’s call. Please note that this conference is being recorded. I will now turn the call over to your host, Mr. Ross Wong.

[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 will find it on the homepage, Events and Presentations section or Quarterly Results section. With me today to discuss our third quarter of 2021 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Marc Stratton, our Chief Financial Officer, along with other members of our senior management team. Before we start, I’d like to remind you that our discussions 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, other plans and objectives for future operations. Although we believe that 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 list 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 will turn the call over to Heath.

[Heath Deneke:]

Alright. Great. Thank you, Ross and good morning everyone. So this morning, Summit reported third quarter financial and operating results of $61.1 million of adjusted EBITDA, which for the third consecutive quarter, exceeded our internal expectations. We had 20 new wells connected during the quarter, which includes 7 wells in the Barnett and 6 crude and water wells in the Williston. The 7 Barnett wells are the first new wells that have been turned online on our system since 2019 and look, the well’s results are really the best that we have seen in the play. We saw – experienced 30-day IPs in excess of 55 million a day of gas in the aggregate. During the quarter, we also continued to utilize free cash flow to de-lever the balance sheet and achieved another $37 million of debt pay-down in the third quarter, which brings us up to $132 million of debt pay-down year-to-date. That enabled us to end the quarter with total leverage ratio of just under 4.9x EBITDA. As we look forward to the fourth quarter, we expect to continue building momentum with approximately 45 new wells that are scheduled to turn in line by the end of the year. So given that our financial outperformance to-date, together with a steadily improving outlook for the business overall, we now expect full year 2021 adjusted EBITDA guidance to be – or EBITDA results to be near the high end of our previously announced guidance range of $225 million to $240 million. Additionally, we expect our full year 2021 capital guidance to come in towards the low end of the range, which was $20 million to $35 million of guidance range. Subsequent to quarter end, we have made significant progress advancing our two top priorities for the year, which included, refinancing our $1 billion of debt that was maturing in 2022 as well as furthering the development of the Double E Pipeline. As noted in our earnings release, we’ve made significant progress on each of these and I’d like to spend some time and provide some additional details. So first, turning to the refinancing, on Tuesday, we announced the closing of our new 4.5-year, $400 million ABL revolver and a new $700 million second lien secured notes. The closing of these credit facilities really marks a turning point for Summit and it’s certainly a culmination of 2 years of effort to really transform the balance sheet and position for this refinancing. Since the end of 2019, we have employed a strategy centered around maximizing free cash flow and a prioritized debt repayment. With the new credit facilities, we further demonstrated this commitment to improving the balance sheet and we have structured the ABL revolver and the second lien notes in a way that really enables us to allocate up to $300 million of excess free cash flow, which is effectively cash generated from operations less capital expenditures that we can apply towards repaying our higher cost second lien debt. This structure reflects our commitment to focus on de-levering the balance sheet by targeting absolute debt reduction as well as growing our underlying EBITDA, which are really the top priorities that we are going to be focusing on going forward. And together, we think this focus will enable us to continue unlocking value, up and down the entire capital structure. The ABL revolver is also more covenant light compared to our recently retired cash flow base revolver and it provides us with not only ample liquidity, but also additional flexibility to continue to execute on our balance sheet transformation, while also providing an avenue to pursue value-added growth opportunities. With the net proceeds of the new credit facilities, we were able to extinguish the $725 million balance on the revolver, which was scheduled to mature in May of 2022 as well as $234 million principal balance of the 2022 notes, which was scheduled to mature in August of 2022. So effectively, this holistic refinancing solution eliminates our near-term refinancing risk. It creates a 3.5-year runway, if you will, until our next scheduled debt maturity and provides substantial covenant flexibility really to manage any kind of unexpected delays or downturn of development activities around our system. Turning now to Double E, our other top priority. Construction of Double E continues to progress very well. We are able to achieve mechanical completion of the pipeline in October of 2021 and we expect to be able to place the project in service during the fourth quarter of this year and potentially as early as by the end of November. And now that we are nearing the end of construction, we are pleased to announce further reductions that we are able to achieve on the project budget, which is now expected to be approximately $400 million in total, which is roughly $280 million net to Summit for its 70% interest in project. As a reminder, Double E has a Bcf a day under contract or approximately 75% of its initial 1.35 Bcf a day of total throughput capacity. These are committed commitments, long-term commitments, take-or-pay style commitments from some of the largest and most active producers in the Delaware Basin, including Exxon and Marathon Oil. Upon commissioning, Double E will begin service under the first annual contract period at roughly $600 million a day of FT commitments and those will step up throughout the first 3 years of service, such that by year 4, Double E, we are on take-or-pay revenue on the full 1 Bcf a day of contracts currently in hand. Furthermore, as activity levels and production in the Northern Delaware continue to build momentum with an improving commodity price outlook, we do expect to be able to fill the remaining $350 million a day of available firm capacity over the next several years. Upon initial service, we expect Double E to – well, Double E will be connected with 5 natural gas processing plants in the Northern Delaware Basin and it’s also interconnected with two of the largest and newest downstream pipelines originating in the Waha region, which will provide Double E’s customer with very desired access to growing LNG export markets in the Gulf Coast region. Beginning in year four following startup and assuming that Double E is fully subscribed at current market rates, we would expect Double E to generate approximately $45 million of EBITDA and that would be net to Summit’s 70% interest in the asset, which on a net basis, represents really a build multiple of around 6.25x. Look, relative to trading multiples of other long-haul pipes of this like, we expect Double E will contribute significant residual equity value to SMLP. Additionally, to the extent future demand exceeds the initial 1.35 Bcf a day of capacity, the Double E system has the ability to expand its capacity to approximately 2 Bcf a day on a very cost effective basis, simply just with the installation of midpoint compression. And of course, this would dramatically increase or improve the build multiple as well if we were able to achieve that 2 Bcf of subscription that – with the incremental cost associated with that expansion. And so look obviously, we are very excited to be able to not only announce that we are weeks away from being able to put the pipeline in service that we have made additional gains on the capital budget, reducing it by more than $100 million from the original FID, and just very excited about being able to commence operations and we certainly look forward to the prospect of continuing to grow our customer base and our subscription levels in the coming years, as we continue to see the Northern Basin – Northern Delaware Basin ramp up. So with that, I’d like to hand the call over to Marc and he will go through our detailed financial segment results.

[Marc Stratton:]

Great. Thanks, Heath and good morning everyone. I am going to begin with a discussion of our quarterly financial performance around the segments that comprise our core focus areas. Starting with the Utica Shale, the SMU system averaged 396 million cubic feet a day in the third quarter and segment adjusted EBITDA totaled $8.3 million, which was down by $2.3 million or 22% from the second quarter of 2021. The variance here was largely due to natural declines of production from wells on the system, including the 4-well pad that was connected in March of 2021, which averaged just over 104 million cubic feet a day during the third quarter. We did have 2 new wells connected behind the TPL-7 interconnect during the quarter, and as of September 30, our Utica customers had 10 DUCs, including another 4-well pad that is expected to be turned in line later this month. For our Ohio Gathering segment, adjusted EBITDA totaled $6.7 million for the third quarter, which was approximately 2% lower than the second quarter, primarily as a result of a 2% decline in volumes across that system. 4 new wells were connected behind OGC during the quarter and we currently have 9 DUCs awaiting completion behind that system. Williston segment adjusted EBITDA totaled $11.3 million in the third quarter, a 17.1% increase from the second quarter, primarily as a result of a more favorable customer volume mix, together with increased margins on POP contracts and lower operating expenses. 6 wells were connected behind our liquids system in the third quarter of 2021, providing incremental volumes on that system. We do have notably approximately 30 Williston wells behind our liquids focused system that are all expected to be turned in line really by the end of the first quarter of 2022. Just to note, this compares to 8 wells connected year-to-date through September 30 of this year. Turning to the DJ segment, adjusted EBITDA here totaled $7.4 million in the third quarter, a $2.3 million increase from the second quarter of 2021 largely due to a $1.8 million benefit related to the settlement of a legal matter with a vendor during the quarter. Third quarter volume in the DJ averaged 23 million cubic feet a day, which was in line with the prior quarter volume throughput. We did have 1 new well connected to the system during the third quarter, and as of September 30, we had no DUCs behind the DJ system. However, we are currently in discussions with the third-party to increase volumes and system utilization through a long-term offload agreement. And now, for the last of our core focus areas

[Heath Deneke:]

Thank you, Marc. Look, to recap, obviously, we’re very pleased with our third quarter performance, and we are certainly excited to be able to close the refinancing, and put the new credit facilities in place. Again, this refinancing of our maturities, 2022 maturities, is really a transformational milestone for the partnership, providing both the financial flexibility, and debt maturity profile, to run our business effectively. While we continue to maximize free cash flow, and continue to pay down debt, and achieve overall leverage reduction. Double E continues to progress well and very – have been very impressed with the overall project team for their top-tier execution, really at every step of the project. I’m proud that they have been able to progress the project in a safe and environmentally friendly manner, while staying materially below budget and within the expected timeline. And finally, when we look ahead to 2022, it’s still way too early to really have a concrete view, but we are encouraged by the strong commodity price backdrop. We’ve – as we’ve kind of alluded to, we’ve signed various new commercial arrangements that we’re excited about. And preliminary indications, we’re starting to see from customers or we are seeing some near-term increases, if you will, particularly in the Williston, the Permian, and the Utica segments. We have a lot of wood to chop, so we look forward to working with our producer customers between now and early next year, to get a little more solidified view on 2022. But as I said, we’re encouraged with what we’re seeing thus far. Look, we’d like to thank you for your time today. I look forward to continuing to execute on our strategic plan, and look forward to, continuing to provide updates in the future. So with that, operator, I’d like to open the call up for questions.

[Operator:]

Thank you. We have our first question from Gregg Brody with Bank of America. Please begin.

[Gregg Brody:]

Good morning, guys. Thank you for all the color. Just a few questions for you here. Some of your businesses, you were able to realize better margins. Can you talk a little bit what – that you mentioned sort of better mix. Can you talk about what’s going on there? Is there – have you been able to renegotiate contracts? Is it commodity driven?

[Marc Stratton:]

Yes. Hey, good morning. Gregg, this is Marc speaking. When we talk about customer mix, obviously, we have a wide array of customers with are already diverse operating footprint. Every one of those contracts have unique and different gathering contracts, terms and rates so when we talk about more favorable mix, what you should take away from that is higher customers who have a higher gathering rate, representing a larger share of the overall volume.

[Gregg Brody:]

Great. And then you touched a little bit on where you are optimistic about activity. Can you go into a bit more detail there, or – what are your customers indicating to you for next year in terms of increased activity?

[Heath Deneke:]

Yes. This is Heath. So, it’s still early on, right. I should think of what we have observed, and we have talked about on some prior calls, is we are certainly starting to see some pickup in activity in the first quarter like in the Bakken, in particular, but it’s really early to call. I think we are obviously in a $80 crude price environment and $5 to $6 gas price environment. Literally all drilling locations across our system are economic at those processes, right. It’s not a matter of drilling economics. I think what we are waiting to see is how, what are the producer budgets look like. Obviously, particularly the public E&Ps have been focused on, generating free cash flow, and de-levering the balance sheet, and returning dollars to shareholders. But I think ultimately, economics are going to win out. And when you are looking at particularly in the Bakken, the Permian, DJ, and Marcellus, Utica, it’s got to be very difficult to make a decision not to invest, and put new wells in the ground with those kind of – that type of commodity outlook. So, I think it’s not unusually – we typically won’t get enough firm development plans from our producers until mid to late in the first quarter. So, I think what we are signaling is, if you kind of look at how we have trended, we had 20 – mid-20 well connects in the third quarter, we have got 45 wells scheduled to come along in the fourth quarter, and we have seen just like in the Bakken, for example, we have more wells showing up in the first quarter already for next year than we had all of this year. So, I think the trends, we are feeling pretty good about it. But we want to let all the producers get their capital budgets, their programs together, and look forward to being in a position to give some more color on the year, but it probably will be first – probably towards the end of the first quarter before we have that data that we feel comfortable releasing.

[Gregg Brody:]

And what about some of your private operators, would you expect the same timing? And then I am just curious if…?

[Heath Deneke:]

Yes. I mean there – yes, I would say, generally speaking, so I mean we are having a lot of discussions now. So, it’s not like we are not getting any information at this point. It’s just everything is pretty fluid, and people are still kind of settling into this higher environment. So, I would say, we would expect the private guys to probably move a little more quickly, putting rigs to work, and bringing new wells online, then they are public, just given the public sentiment around producers generate free cash flow, and the private guys are certainly going to be more just looking at economics and making decisions on that basis. So – but yes, I do think that I wanted to – other benefits we talked about is the diversification of customers that we have and we have not only a wide mix of basins that we are exposed to, but also a good slug of private and public operators on our system.

[Gregg Brody:]

Great. And then just one more for you, so, you have mentioned Double E is coming in below budget.

[Heath Deneke:]

Yes.

[Gregg Brody:]

Where do you expect the amount drawn on the term loan to be, when you complete the transactions? And how do you think about the pick feature of the preferred, whether you pay that? And are you – how you allocate the distributions you will receive from that as a – for a repayment this day?

[Heath Deneke:]

Go ahead, Marc.

[Marc Stratton:]

Yes. Hey Gregg. So, we do expect to utilize the full amount of that $160 million term loan that we have in place there to fully finance and bring Double E in service. We tried to provide a little more detail about how cash flows would work here in our earnings release, but let me just see if I can summarize it here. Cash is going to be distributed from Double E to its partners. Obviously, some will get 70% interest. We will use that – those cash distributions, to not only service the interest but also amortize the principal balance of that $160 million term loan. Residual cash, and there will be residual cash, will then be distributed up to an entity where the subsidiary Series A preferred equity sits, and that cash flow will then pay the stated 70% cash distribution on that pref, and residual cash beyond that will be used to amortize down that preferred equity. And so as you think about it, that credit chain, if you will, will be de-levering over the next several years as cash is distributed up from Double E.

[Gregg Brody:]

So, it’s – I heard your opening comment and that’s really helpful. Just – once you amortize the term loan, you will not necessarily start to determine them to pay down debt, but what would be to pay down the preferred once you have achieved your outlook?

[Marc Stratton:]

That’s right. Yes, it’s a higher – it’s obviously a higher cost of piece capital in that credit chain. So, we will be motivated and incentivized to pay that down. So look, that’s just the mechanics of how it works. I think the key takeaway is that we will be de-levering that whole credit chain at the same time as we are de-levering the SMLP’s recourse credit facilities on its balance sheet. Creating a situation where we will have a visible opportunity over the next several years as Double E is ramping up to bring it on balance sheet in a very credit accretive manner. I would also just add, as you think about that Double E asset, it is truly an asset. Every dollar of debt that we pay down, every dollar of subsidiary Series A preferred equity that we pay down is another dollar of equity value that accrues to SMLP and its stakeholders. I just find it a little interesting, and kind of scratch our heads just around the value of Double E, and how that’s either included or not included in our current market cap. It would appear that the value of that Double E asset is de minimis here, particularly if you think about values, multiples, that other long-haul regulated pipes have commands in the market here recently.

[Gregg Brody:]

And you are pointing out the value disconnect. I appreciate it’s sort of a long-term asset. Is it something you would consider divesting as somebody…?

[Heath Deneke:]

Yes. I mean, certainly – I mean, look, we are – I mean, look, our priorities are pretty clear, right. We are looking to accelerate de-levering the balance sheet. And we will also kind of focus on top line EBITDA growth. So – but to your point, if someone comes in and offer the value that we thought was reflective of the equity value of the company, we would certainly take a look at it. But it’s not a kind of the base case, but it is something that we would obviously entertain it, a bigger drive. It is pretty notable. I mean when you just look at the EBITDA and the additional color we provided here, and you do the math on what assets like that work. You could look at Double E being just – the equity value in Double E is probably as much or more than what our market cap is today, right. So, what we are really focused on is just looking to make sure that, that valuation is understood, and eliminated our unit price. But yes, would clearly be – we would look at the economics if there was a bit more and nothing that we are proactively out looking to do. Our long-term goal, near to long-term goal, is to get the pipeline fully subscribed, potentially get the expanded capacity subscribed, and then eventually kind of rolling that into the balance sheet. And we think that’s kind of the base case, and what we think will drive the most value for some at this time.

[Gregg Brody:]

Got it. Thank you for the time and helpful answers. I appreciate it.

[Heath Deneke:]

Great. Thank you.

[Operator:]

And thank you sir. And we have no further questions in queue at this time. Ladies and gentlemen, thank you. This concludes our conference call. We thank you for participating. You may now disconnect.