Summit Midstream Partners, LP
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Welcome to the First Quarter 2021 Summit Midstream Partners LP Earnings Conference Call. My name is Jenny. I'll be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Ross Wong, Senior Director of Corporate Development and Finance. Mr. Wong you may begin.

[Ross Wong:]

Thanks operator and good morning everyone. If you don't already have the 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 first quarter 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.

[Heath Deneke:]

Thanks Ross. Good morning everyone. Thank you for joining us for our first quarter 2021 earnings call. So this morning, Summit reported first quarter 2021 financial and operating results which exceeded our internal expectations including adjusted EBITDA of roughly $60.4 million. Our results were primarily driven by volumetric outperformance in the Utica Shale segment and continued gains from our focus on cost management. During the first quarter we generated $51 million of free cash flow from operations which enabled repayment of $55 million worth of debt on our revolver during the quarter. This repayment represents nearly 40% of our full year debt reduction guidance target. Although we still expect 2021 will be a trough year for new well activity certainly relative to historical periods, we are off to a very strong start and we do see several encouraging signs that we think could lead to a more bullish second half of 2021 than we initially planned. However at this time, we are maintaining our full year 2021 adjusted EBITDA guidance range of $210 million to $230 million for the year. Our customers continue to deliver very impressive wells particularly on the acreage behind our Utica system which certainly helped contribute to the outperformance in the first quarter. As example in early March new four well Utica pad came online ahead of schedule and has outperformed roughly producing about 20% higher than our internal expectations. These are some of the largest wells that we've seen brought on really anywhere in the Utica.

[Marc Stratton:]

Thanks, Heath, and good morning, everyone. I'll 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 410 million cubic feet a day in the first quarter and segment adjusted EBITDA totaled $7.7 million, which was down $1 million relative to the fourth quarter of 2020. A 7.4% quarter-over-quarter volume decrease was primarily driven by natural production declines, partially offset by volumes from a new four well pad that came online ahead of schedule in early March. This four well pad has averaged 180 million cubic feet a day since inception and these are the largest volumes per well we've ever seen in the Utica. Each of the wells in this pad were drilled using three-mile laterals and production per lateral foot is in line with the 2.5 mile lateral wells on a nearby pad that drove strong segment results for us last year. If these new wells continue to produce at their current daily rate, we should see a material throughput and EBITDA increase in the Utica for the second quarter, relative to the first quarter of 2021. In addition, due to these encouraging results, we're currently in discussions with our customer to accelerate the connection of a nearby pad and could see those wells turned in line during the fourth quarter of this year, instead of our prior expectations for the first quarter of next year. At the end of the first quarter 2021, there were six DUCs behind our TPL-7 interconnect, which have now all been turned in line and should add incremental volumes to our second quarter results. For our Ohio Gathering segment, adjusted EBITDA totaled $6.9 million for the first quarter, a $1.6 million decrease from the fourth quarter of 2020, largely driven by a 10.2% decrease in volume and higher spend on repairs and maintenance. Four new wells were connected to OGC during the quarter and there were five DUCs in inventory as of March 31. In April three of those DUCs were turned in line and based on the latest customer forecast, we expect the other two DUCs to come online in the third quarter of this year. Williston segment adjusted EBITDA totaled $10.8 million in the first quarter, a 5.5% decrease from the fourth quarter of 2020, primarily due to reduced volumes and the impact of a now expired MVC contract that contributed $3.8 million in shortfall payments in 2020.

[Heath Deneke:]

Great. All right. Thanks, Marc. So, look as we talked about, I think Summit is really off to a great start for 2021. We've got one quarter in the books that meet our internal expectations and while there's no change to our guidance, I am optimistic about the remainder of the year. I think, we can really gain some further momentum to the extent that our customers accelerate activity that was originally planned in 2022 into the fourth quarter, so could be a nice tailwind for us second half of the year. But as Marc just shared, our expense control has really started to show up in the first quarter results and we've made great progress again on completing the Double E pipeline. From a macro perspective, things are looking more positive. Commodity prices continue to strengthen, leverage finance, and bank markets are opening, and economy appears to be headed in the right direction through the administration of vaccines and alike. So, look additionally, I'd say that the dialog around both corporate and asset level M&A is increasing across the midstream sector. And I think the industry is really praying for activities as companies continue to adjust or adapt to a little more mature model going forward. And we think that the requirements to really grow and add value in the future are going to be centered around increased efficiency skills and generating obviously greater returns. So, following our 2022 refinancing, we think M&A will take on even more significance for Summit in particular as we keep looking for ways to enhance our scale and deliver value and credit accretive growth. So, in the meantime, we're extremely focused on creating additional financial flexibility and balance sheet strength. We're going to achieve that through a comprehensive refinancing of our 2022 notes and credit facility and we will continue to work diligently on this with the goal of completing all of these efforts ahead of our next earnings call. So, with that I want to thank you again for your time today. Super excited about Summit's results to-date our go-forward trajectory and look forward to capitalizing on future opportunities that are ahead of us. So, with that, operator, I'd like to open the call up for questions.

[Operator:]

Thank you. And our first question comes from Elvira Scotto from RBC Capital Markets.

[Elvira Scotto:]

Hi, good morning everyone. I just wanted some clarification on that last comment you made with respect to M&A, so is -- where do Summit sit in terms of M&A? Are you an acquirer or a seller? Because I thought you were looking to sell some legacy assets, but it sounds like from that last comment you made that once you sort of shore up your balance sheet with your 2022 debt maturities that you could be looking to increase scale, so any additional comments there would be helpful. Thanks.

[Heath Deneke:]

Yes. Thanks Elvira. This is Heath. So, I would say it this way I mean we have for well over a year -- probably the last couple of years we've been more focused on divesting assets and we said we didn't have to but we are going to be focused on opportunities to further de-lever. If we get to the right value then we would consider selling assets and so I don't think any of that necessarily changes. But what we have seen in the market is there is really not an abundance of buyer of quality buyers out there and so we're really thinking about pivoting here. We're not going to go out and do anything splashy necessarily. We're certainly not going to do things that we feel will put the balance at their score lever up necessarily. I think what we're going to be looking to do is be a suite provided around our footprint. I mean we have operations in seven basins across the US, there is a lot of assets that are around our footprint that we think would be nice opportunity of tuck-in acquisitions that have some synergies associated with our footprint. And so, we're definitely going to be evaluating those opportunities particularly on the back end of this refinancing effort. But let me be clear we're -- our focus and will continue to be our focus is to improve the balance sheet. And so any transaction that you look at we're going to want it to -- from day one at least is the potential credit accretive. And I think going forward I think that is going to be important part of our strategy going forward. I mean, this industry whether you're talking public-to-public or you're talking some of the private assets that are out there needs consolidation. And I think the operating synergies, the commercial synergies, capital synergies are going to be hugely important going forward.

[Elvira Scotto:]

Thanks. That's super helpful. And then my other question is just around your cost reduction efforts. Looks like you've done a great job on reducing OpEx, how do we think about that kind of going forward? I mean, is 1Q a good run rate to use, or do you think you could drive additional efficiencies, and what specifically have you done or are you doing that driving these cost reductions?

[Heath Deneke:]

Yes. So look since I joined back in September of 2019, we immediately just prioritized looking at the organization finding ways to streamline it. We've had two major initiatives and I would point to one that they frankly we implemented early in the first quarter of 2020. Then of course, the pandemic hit and quickly we kind of stalled the second wave of our planned cost reductions just didn't feel right about cutting jobs in to the pandemic. As we kind of got through the year and towards the end of the year, we implemented phase two of that initiative, and the combination of the two we've used our controllable OpEx and G&A by about $20 million a year the aggregate. Now most of our -- that has come through headcount reductions streamlining the organization, but a lot of it has come in the people just being more focused around operating efficiency and reducing cost that can come through procurement, that can come through batching overhauls and other work that we do that in the past has been a little bit more display if you will as opposed to looked at as a broader company. We've also consolidated our offices. I think one point we had four different corporate offices and throughout the country, and frankly, for a company our size that's just too much. So the guidance that we gave you, I definitely feel like that $20 million per year is very sustainable. I do think that we will continue to find ways reduce cost, as we go forward. I don't think that you're going to see that magnitude available. I think we've gotten a lot of what I would call the low-hanging fruit captured, but particularly in our legacy areas where you see declining -- PDP type decline that's where we're really going to be focused going forward to make sure that we're optimizing both the hydraulics, how we run crushing, how we manage staff to try to head off if you will EBITDA declines that the volumes are going to decline, but hopefully we can improve margins or at least kind of have a disproportionate decrease in our operating expenses, as some of those systems decline. So I think that's where you're going to see more. I don't anticipate there being much more on the headcount front. So I think really everything else is going to have to come through continued operating efficiencies and gains that we can have in our maintenance capital and operating expense programs.

[Elvira Scotto:]

Great. That's very helpful. Thank you very much.

[Heath Deneke:]

You bet.

[Operator:]

We have no further questions at this time. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.