Summit Midstream Partners, LP
Q1 2022 Earnings Call Transcript

Published: 4 May 2022

[Operator:]

Welcome to the Q1 2022 Summit Midstream Partners LP Earnings Conference Call. My name is Vanessa and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I will now turn the call over to Ross Wong, Vice President, Finance and Treasure and Investor Relations.

[Ross Wong:]

Thanks, Operator and good morning, everyone. If you don’t already have a copy of our earnings release, 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 first quarter of 2022 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Bill Mault, our Chief Financial Officer, along with other members of our senior management team. Before we start, I would like to remind you that our discussion today may contain Forward-Looking Statements. These statements may include that are not limited to 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 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 2021 annual report on Form 10-K, which was filed with the SEC on February 28, 2022 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 will turn the call over to Heath.

[Heath Deneke:]

Thank you, Ross, and good morning, everyone. Summit reported first quarter adjusted EBITDA 56.8 million, which exceeded our internal expectations and provided a strong start to the year. We experienced over 20% percent quarter-over-quarter growth in crude oil volumes, which was driven by 25 wells that came online over the past six months. We also benefited from a full quarter contribution of seven large Utica Wells that produced over 200 million a day on average during the quarter. We also connected 15 wells during the first quarter, which was in line with our expectation and we had approximately 35 drilled, but uncompleted wells as of quarter end. Looking ahead, we were very encouraged by the increasing levels of producer activity, across many of the basins that we operate in. It has been quite a turnaround in the projected activity from our customers over the past few months. And now, we currently have seven rigs running by our systems and based on updated producer guidance, we now expect to bring on 30 to 40 new well connects during the latter half of 2022. With these additional wells, we are now projecting 105 to 150 wells for the year, which is nearly a 40% increase a relative to the assumptions we use in our original guidance range. Given the anticipated timing of these new wells, however, we expect this activity will mostly impact our fourth quarter results in 2022, but it will build a lot of momentum as we head into 2023. This new activity and combination with a strong Q1 gave us confidence to increase the bottom of our original adjusted EBITDA guidance range by $10 million and establish a new range of 205 to 220 million. We believe the increase in activity levels we are seeing at Summit and within the U.S. more broadly is a clear sign that producers are now beginning to build confidence and market fundamentals that support the back end of the forward price curves. Since the beginning of the year, we have seen a 17% increase in WTF futures. 29% increase in Henry Hub futures, along with an approximate 20% increase in U.S. grid count. With long-term natural gas and crude oil features currently trading around $4 per MMBTU and over $70 a barrel virtually all of the inventory behind our systems is economic to develop at current levels. As a result, we have certainly seen permanent activity levels increase and are having very encouraging conversations with producers regarding plans to further ramp activity levels on our systems in 2023, particularly in the Barnett, the Piats, the Utica and Williston basins. As an example, in the Barnett, we have 23 recently approved drilling permits, and in the Piats we are working with our customers on 170 well development program, which is scheduled to start in 2023. In the Utica, we are currently expecting a steady increase in UL connect activity next year, which could be further bolstered by upstream consolidation in the region. And in the Williston, we are excited about the commercial prospects related to an agreement we previously announced with a new customer that includes a new 50,000 acre area of dedication along our polar and divide liquid systems and we are also in the process of curing new commercial agreements that we think can add significant acreage to our (Ph) gas system later in the year. Last, but certainly not lease, the Permian basin continues to lead the way in the resurgence of producer activity levels in the U.S. which we believe will drive significant volume growth in the basin, and behind our lane system and the Double E pipeline. At the current level of rig activity and Ian, Eddie and Lee counties, our projections indicate that existing residue gas takeaway capacity out of New Mexico will become constrained in late 2023 to the early 2024 timeframe. And I'm sure many of you are also following the news regarding new pipeline expansions to increase residue gas takeaway from Waha, Texas to the Gulf Coast. Both of these dynamics put Double E in a great position to fill up the remainder of our current 1.35 bcf a day of capacity over the next couple of years. Additionally, we are advancing plans to potentially Double E to over 2 bcf a day via very timely and cost effective midpoint compressors from the project. We think we are very well-positioned to see meaningful growth out of this highly strategic Permian asset in the coming years. Before turning the call over to Bill, I also wanted to spend a little bit of time on M&A. So look, I think we all know M&A activity is certainly continuing to pick up momentum in the Midstream sector. We have had several GMP transactions that have been announced over the past several months. And at Summit, we continue to think that M&A will be an important part of this story going forward. We are pursuing both acquisition and divestiture opportunities that can help to streamline our port, while building invasive scale and synergies that we believe will lead to accelerated and highly-accretive growth in the coming years. As we have discussed previously, anything that we transact on, will be both credit accretive and long-term value accretive for our unitholders. While we are certainly encouraged with the opportunity set around our footprint both organically and through strategic and the opportunities, let me be clear that, we will remain fully committed to maintaining our capital discipline, growing free cash flow and continuing to improve the balance sheet. With that, I will hand the call over to Bill Mault to provide additional details on our financial results.

[William Mault:]

Thanks, Heath and good morning everyone. As Heath mentioned, we had a good start to the year that really positioned us to take the low end of our guidance range off the table. Starting in the Northeast, which is inclusive of our SMU system, proportionate share of our Hub gathering joint venture and our Marcellus system. The segment averaged approximately 1.3 bcf per day during the quarter, which is inclusive of approximately 600 million a day of (Ph) OGC volumes. And segment adjusted EBITDA totaled 20.1 million, which increased 1.1 million from the fourth quarter. This was primarily due to a 4.4% increase in volume on our wholly-owned systems and a 12.9% increase in volume on our Ohio gathering joint venture. We continue to be excited about the productivity of the wells in the region. There were four wells brought online, behind our wholly-owned SMU system in mid-November and these wells have produced over a 100 million a day since early December. As we have discussed previously, we generally expect these wells to hold flat for four to six months before they begin their decline. Our next slate of four wells is expected in the summer, and the rig is currently at work. These four wells will be the next volume metric catalyst behind our SMU system this year. There were also three new wet gas wells that came online late last year behind our OGC joint venture that also produced over a 100 million a day during the quarter, while we haven't heard of producers increasing activity levels in the Utica during 2022 at this point, we remain very excited about the natural gas price fundamentals, productivity of the wells in the region, and prospects for potential upstream M&A that could represent a significant catalyst behind our systems. The Rockies segment, which is inclusive of our DJ and Williston Basin Systems, generated the adjusted EBITDA of 15.8 million, which increased 0.9 million relative to the fourth quarter. Natural gas volumes averaged 29 million a day, and liquids volumes averaged 65,000 barrels a day. As Heath mentioned, crude oil volumes increased over 20% during the quarter, which was above our expectations and was driven by 25 well connects over the past couple quarters. The segment also benefited from a reduction in operating expenses quarter-over-quarter, but was partially offset by several operational and weather related interruptions that impacted volumes. We estimate that liquid volumes were impacted by approximately 200 to 3000 barrels per day, during the quarter, and natural gas volumes by approximately 0.6 to 0.8 million cubic feet per day, which we estimate equates to quarterly gross margin impact approximately $0.5 million for the quarter. While North Dakota continues to experience severe weather in April, we would expect the system and volumes to normalize during the second quarter. There are currently four rigs running and 19 ducks behind the system. And we now expect approximately 45 to 65 new wells on the system for 2022. This should drive segment adjusted EBITDA toward the high end of our original guidance range within the segment. In the Permian Basin segment, which includes our wholly-owned lane GMP system, and our 70% interest in Double E pipeline, reported adjusted EBITDA of $4.2 million, represented a $1.6 million increase relative to the prior quarter. This was primarily due to a full quarter contribution of our Double E pipeline, which went into service in November of last year. Volumes averaged 27 million a day the 100 GMP system, a three million a day increase relative to fourth quarter, and Double E volumes average 187 million a day on an basis for the quarter. Four new wells were connected to the GMP system and we saw an increase in volume from recently executed commercial agreements with a neighboring midstream company during the quarter. Based on recent upstream A&D activity, one of our new customers expected to bring on a couple new wells later in the year. We remain encouraged by the level of activity in the region and the increase in scarcity of our processing capacity relative to other processors in the area. Within the Piceance segment, we reported adjusted EBITDA 15.8 million in line with the fourth quarter. Volumes average 312 million a day, a decrease of the approximately 1.6% relative to fourth quarter, and this was primarily due to natural production declines, partially offset by volume from the new nine well pad that was turned online in October of 2021. We still expect 17 permitted wells to be turned in line in the latter half of 2022, and continue to expect a larger scale drilling program from this customer in 2023 with initial plans of over 70 Wells. Our commercial team is also advancing conversations with another operator in the area that has expressed an interest in over a 100 well connects behind our system beginning in 2023. This improving level of commercial discussions in the Piceance really illustrates just how economic it is for producers to develop in this commodity price environment. The Barnett segment, reported adjusted EBITDA 9.3 million, a decreases 0.9 million relative to fourth quarter, primarily due to natural production declines from the seven new wells that were brought online in late September, 2021. While those seven wells drove most of the sequential volume decline, we had another four well pad that was completed in late April that should help mitigate those declines beginning in the second quarter. In addition, one of our customers currently has a rig running behind our system on another four well pad that will be connected during the summer. Based on recent customer conversations, we now expect eight to 12 well connections in 2022 and have line of sight towards significant development activity in 2023. There are over 20 recently approved permits behind the system, and we had conversations with another customer regarding the potential for 16 additional wells in 2023. This is obviously early that this level of customer activity would be a major catalyst for SMLP in 2023. Quickly turning to the partnership, SMLP reported a first quarter net loss of $5,000 and adjusted EBITDA 56.8 million. We recognized a non-cash gain on derivatives of $7 million during the quarter, primarily due to changes in the fair market value of certain hedges we have in place behind our Double E related debt. Capital expenditures totaled 8.7 million for the quarter, which included 2.9 million of maintenance CapEx. Most of the CapEx was associated with growth capital to connect new pad sites in our Utica, Permian and Williston Systems. During the quarter, we also sold approximately two million of latent inventory. With respect to Summit is balance sheet, we had 233 million outstanding under our 400 million ABL credit facility, a decrease of 34 million relative to our year-end balance. our available borrowing capacity at the end of the first quarter, total, approximately 150 million, which included approximately 18 million of LCs. And with that, I will turn the call back over to Heath for closing remarks.

[Heath Deneke:]

Great, alright. Thank you, Bill. So as you can tell, we are very happy to see the pickup in our customers 2022 development plans since the beginning of the year. And we are particularly encouraged by the continuing strengthening of longer-term fundamentals that support a more robust outlook for Summit and our stakeholders as we look ahead to 2023 and beyond. We are actively working, with our customers across many of our systems to evaluate further price response drilling activities both in late 2022 as well as early 2023 and we will continue to provide updates throughout the year as these plans further materialize. We are very excited about the prospects surrounding Double E which we expect will drive significant growth for Summit in the coming years. And we will also continue to evaluate M&A opportunities across our footprint, which we think can further accelerate de levering, help streamline our portfolio and create long-term value for the Company. Lastly, I wanted to remind everyone of the upcoming annual meeting of limited partners, which will be held virtually on May 10, 2022 at 2

[Operator:]

Thank you. . And we have our first question from James Carreker with US Capital Advisors.

[James Carreker:]

Hey, guys, it is James. Just thinking about the rest of the year, after 57 million of EBITDA in Q1 and that kind of annualizes, above the high end of your guidance range and that is with some weather impacts and before you kind of added some new wells to the forecast. So, just any thoughts about other things to keep in mind as we progress through the year.

[Heath Deneke:]

Hey, James. This is Heath. Look, I mean, we certainly, when we set the guidance range, we factored in the new wells that, that were currently know about that are scheduled to come on in the second half of the year. And, we do think that, there is a good chance we will kind of finish towards the high end of that range based on that activity levels. But it is still a little bit early, we still want to kind of make sure that producers are hitting their timing and alike. So I think we try to maintain what we believe to be a conservative range. I think the key thing to watch for though is, as we have kind of talked about, and we certainly have built up a lot momentum here over the past few months, since we have set original guidance. We have ongoing discussions with producers. We could see some additional acceleration of wells into 2022 or frankly, as importantly, or more importantly, we are starting to see some pretty robust activities setting up for early 2023. So, I think those are kind of the key things to watch for and like we said, we will certainly keep the market updated as we get new information, but we feel comfortable of sticking with the range that we guided to this morning.

[William Mault:]

Yes and James, I just would add, like, as a specific example, in kind of my prepared remarks I talk about the rig that is currently working on that four well pad in our SMU system, that is obviously a good sign as it relates to timing that, that is likely going to hit or potentially even exceed kind of our - the producers expected timing. What is still outstanding obviously is where those IP and performance goes well. So I think we are going to get a lot more line of sight. I think the key takeaway though, is based on kind of permitting rig activity, how we are seeing things kind of progress so far through here early May, everything is kind of shaping up for producers to be hitting their targets, which we kind of outlined would push this towards the high-end and we will kind of see how that shapes up over the next couple months and hopefully be able to update the market even further here in a few months.

[James Carreker:]

I appreciate the color. And then, I guess moving over to Double E. Pretty positive outlook there. I wonder if you could just help us to understand kind of the playing field, what are the big pipe takeaway options currently for New Mexico producers? How quickly those fill up? And then I guess, can you juxtapose that against kind of relatively low current utilization rates for Double E?

[Heath Deneke:]

Yes. Certainly, I mean, I think generally speaking, we have got what 90 plus rigs running right now in New Mexico. And when we look at the current takeaway options, which largely includes El Paso natural and trends Western, and of course the Double E pipeline and few others. But when we kind of stack up the available capacity and we look at and throw in some type curves associated with that rig activity, we see that the existing infrastructures are going to start getting constrained here in the call, it late 2023, early 2024 time period, right. So I think that is frankly what we are seeing. Sorry, we are getting a little feedback there. So I think that is the timing of when we start to see some pretty material constraints there. As it relates to Double E volumes today, I mean, look are certainly seeing volume starting to pick up. I do think that the customer base certainly, those contracts are going to step up over time, and we do think that we will continue to see volumes increase throughout the year. So I think the key takeaway though with Double E is I think we are just really well positioned. I think to sustain that level of rig activity, it is only a matter of time before new take solutions are going to have to be offered up. We think we are very well positioned to fill up the remaining 300 million to 350 million that we have available for subscription today. And then kind of fast forwarding. If you look at the downstream takeaway that is being developed out of Waha, we think that is going to keep a pretty positive incentive for producers to want to get their gas out of the New Mexico and to the Waha market. And I think that kind of positions us well for an expansion project that we think we can get done in the next couple years if market demand warrants.

[James Carreker:]

And then I guess you have previously talked about $45 million net to Summit, if Double E fills up, is it reasonable to kind of extrapolate that number if you do at some point move forward with the expansion up to (ph)?

[Heath Deneke:]

Yes. What we kind of obviously James, so at the BCF, we kind of indicated 30 million bucks from that to Summit, so at 2Bcf, just multiply that by two, that probably gets pretty close.

[William Mault:]

And what we have been guiding to towards James, just in general, think about that as a sub four times project. So if we are going 45 up to 60 that is a net Summit, right. That incremental 15 million, if you gross that up by 70%, and then, assume that it is somewhere between a three to four times build multiple, that will kind of get you a general sense of the CapEx for that midpoint compression project that Heath mentioned.

[James Carreker:]

Got you. Helpful, thank you.

[Operator:]

We have our next question from Gregg Brody with Bank of America.

[Gregg Brody:]

Just a few follow-ups on some of the things you said. So just to follow-up on Double E, and it seems like you are not seeing much inflationary pressure on the area that would drive the multiple as you mentioned, sort of three to four times, is there any part of your business where you are seeing inflation that you are not able to pass through?

[Heath Deneke:]

I think the inflationary impact thus far has been somewhat limited. We haven't seen anything that really drives a material step change in our operating expenses, as an example. Clearly, we do see pipe prices are up and that is one of the advantages that we think we have with Double E, we have got the large diameter 42 inch pipe already in place. And so what we are looking for to expand that system to get up to that call it 2BCF to 2.2 BCF a day is really just to be a point compressor project. And while certainly we are seeing a little bit of cost creep, if you will on some of the contractors that we have hired to install that compression, it is pretty limited in terms of what - it is not like we are having to go out and build a long diameter or significant amount of pipe mileage, if you will to kind of get to those volume levels.

[Gregg Brody:]

Great. And you anticipate that you can fund all that within the Double E structure.

[Heath Deneke:]

We do. Yes.

[Gregg Brody:]

And you mentioned that you are optimistic about potential mergers in the Northeast on M&A, I think you said - and how that - as you think about, let's say that producers can start to increase -- decide to increase production. What becomes the bottleneck for you in terms of getting gas EBITDA market that they want to sell to, or just out of the basin? Is there some limitation or do you feel like there is ample pipeline capacity or just local demand to meet to be met?

[Heath Deneke:]

Yes, I mean, we think that -- I mean, clearly you could start to see some in basin price seeing just depends on the magnitude of the step up, but I think for what we are seeing and the connectivity that our assets have to downstream takeaway, I mean, we are not anticipating there initially be a physical limitation. That, I mean, clearly, they will be at some level, but I think we have got a lot of run room to grow. And the comment that making around the upstream, consolidation and how that could be a positive thing for us is certainly two or three of our customers have been fairly dormant over the past few years, even in these hyper inflated gas prices and just aren't drilling. And we think an acquirer that the likely buyers up there to the extent they were to take on this acreage position, which we have a development plan that would help drive some additional volumes to the system.

[Gregg Brody:]

And just one last one for you, you highlighted that M&A has picked up. Are you seeing opportunities for acquisitions as you kind of talk about the size of them?

[Heath Deneke:]

Yes. I mean, I think what we are focused on and we are seeing opportunities for acquisitions. Of course, as we have said, we are going to make sure that anything that we transact on is going to be credited creative and certainly has to be valued creative to our unit holders, but we are seeing opportunities around our footprint. I think what we are focused on or are things that could help us maybe gain some scale in some of the basins that we operate in. And we also are evaluating potential divestitures as well. If we can get to the right price point that could accelerate de-levering and provide some proceeds for us to kind of redeploy in other areas. So I think, we are just actively looking at it. We do think there is a lot of opportunity on the buy and sell side and we are certainly going to evaluate those opportunities.

[Gregg Brody:]

Great. That is it for me. Thanks for the time.

[Heath Deneke:]

You bet.

[Operator:]

And thank you. And we have no further questions in cue at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.