Summit Midstream Partners, LP
Q1 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

Welcome to the First Quarter 2019 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 [Operator Instructions]. Please note that this conference is being recorded. And I will now like to turn the call over to your host, Mr. Blake Motley.

[Blake Motley:]

Thanks, operator and good morning, everyone. If you don’t already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.summitmidstream.com, where you’ll you find it on the homepage or in the News section. With me today to discuss our first quarter of 2019 financial and operating results is Leonard Mallett, our Interim President, Chief Executive Officer; Marc Stratton, our Chief Financial Officer, along with other member 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, 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 2017 Annual Report on Form 10-K, which was filed with the SEC on February 26, 2019, 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 will 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 Leonard Mallett.

[Leonard Mallett:]

Thank you, Blake and good morning everyone. Thanks for joining us on this call. Yesterday, we announced our first quarter 2019 operational and financial results. Adjusted EBITDA for the first quarter totaled $69 million with the distributable cash flow of $40 million. First quarter results were negatively impacted by temporary operational issues upstream of our SMU system, and we experienced significant weather events in Williston. Still these results were generally in line with our expectations and we are affirming our full year 2019 adjusted EBITDA guidance range of $295 million to $315 million. As we discussed last quarter, we continue to forecast significant adjusted EBITDA growth over the course of 2019, based on the following key themes. First, our DJ Basin volumes averaged 21 million a day in the first quarter of 2019. This is the second consecutive quarter the existing plant operated at full capacity. And with one rig actively working and 25 duct and inventory, there is a meaningful amount of high margin natural gas supply behind our system. We are currently in the process of completing and commissioning our new 60 million a day processing plant in the DJ Basin. And we expect to see an immediate increase in volumes upon full start up of the new plant. In addition to volume growth, SMLP will also benefit from meaningful monthly demand payments, starting the first month after commissioning. With the new plant, we expect adjusted EBITDA in 2019 for our DJ segment to nearly triple 2018 levels. This segment represents the primary area of growth driving our 2019 financial guidance. Second and as mentioned previously, we began our operations at our new 60 million plant in Permian Basin last December. Volumes began to ramp up on the system as we completed our commissioning throughout the first quarter. We currently have five rigs working on dedicated acreage that will enable volume growth and higher utilization throughout 2019. We expect this system to reach full capacity by the end of 2020. Next, and we’re going to touch on this topic in more detail later in the call, but high margin volumes that originate on pads directly connected to the SMU system increased over 20% relative to fourth quarter 2018. And we expect continued growth and high margin volumes throughout 2019. There are four ducts behind the systems that are expected to come online later this quarter and our anchor customer brought the rig back to the system to drill eight additional wells that are expected to come online in the second half of 2019. Lastly, rig activity in the Williston basin remained robust with four rigs currently operating upstream of our systems, that’s up from two rigs in January and February of this year. We expect over 70% of our 65 expected well completions in the Williston to occur in the second half of 2019. Our team is focused on doing what is necessary to achieve these exciting and highly incremental themes. With 14 rigs currently drilling in our core focus areas and over 100 ducts behind our system, we believe our customer activity is where it needs to be to archive our financial guidance for this year. We also have one rig operating in each of our Barnett and Marcellus segments, both of which will generate higher volumes for SMLP with no incremental CapEx. Beyond 2019, we remain encouraged by the growth outlook in our core focus areas with the most notable opportunity being our Double E pipeline project. We continue to make variable progress on project development, regulatory transmittals. And we continue to work with our anchor shippers and expected equity partner on FID. I’ll touch on Double E in more detail later in the call. In addition to adjusted EBITDA growth, we continue to take steps to strengthen our balance sheet. These steps include any evaluation of non-core asset sales as a means of streamlining our portfolio, redeploying capital from legacy areas to higher growth core focus areas and enhancing our capital position by effectively and strategically scaling our capital investments. We will also evaluate other opportunities to inject equity into the business and accelerate deleveraging. Our distribution coverage for the first quarter of 2019, which was 1.7 times, gives us the financial flexibility to execute these initiatives. Total leverage at March 31st was 4.28 times, and includes approximately $215 million of debt on the balance sheet relative to our processing plants in the DJ and Permian basins. These assets have yet to generate material revenue, which is skewing leverage higher. Both assets ramp up through 2019 and 2020 and with this ramp, we expect meaningful deleveraging. If we exclude the $215 million of debt related to these projects, our leverage ratio at March 31st would have been approximately 3.6 times. With that, I’ll hand it over to our CFO, Marc Stratton, to review the quarter results.

[Marc Stratton:]

Thanks Leonard and good morning everyone. I’ll begin by walking through the segments that comprise our core focus areas. Starting with our Utica Shale segment, the Summit Midstream Utica system, or SMU system, averaged 286 million cubic feet a day in the first quarter, which was down 7.4% from the fourth quarter of 2018. Despite the volume decline, segment adjusted EBITDA was up 6.2% over the same period as a result of favorable volume mix. First quarter volumes included 205 million cubic feet a day from pad sites directly connected to the SMU system. These pad level volumes increased 22.8% from the fourth quarter of 2018. The remaining 81 million cubic feet a day of volume originated behind the TPL7 connector, which was down 43% from the fourth quarter of ’18. As Leonard mentioned, this shift in volume mix is important to understand, given that the volumes gathered directly from the pad site generate a gathering fee that is approximately 3 times higher than volumes of the TPL7 connector. In April, our anchor customer moved the drilling rig back on to our SMU acreage. And over the balance of 2019, we expect eight new well completions on pad sites directly connected to SMU. We expect that this activity together with four wells commissioned in the first quarter of 2019 to be the primary catalyst for volume growth behind Summit Utica. First quarter SMU volumes were negatively impacted by approximately 44 million cubic feet a day of temporary volume curtailments, including 18 million cubic feet a day associated with a customer experiencing operational issues upstream of our system, and 26 million cubic feet a day associated with in-field completion activities on existing pad sites. The customer's operational issue was resolved in the first quarter, and pipeline flows have been restored. However, we estimate that volume curtailments associated with the operational issues negatively impacted our first quarter results by approximately $700,000. And with respect to in-field drilling and completion activities, while this activity negatively impacts our near term results, over the long term, in-field drilling represents very incremental growth for us as it requires no new capital investments. We expect in-field drilling and completion activity to continue into 2020 as our anchor consumer executes its drilling plans behind our system. Turning to our Ohio Gathering segment. Gross volume throughput in the first quarter 2019 averaged 711 million cubic feet a day, down from 780 million cubic feet a day in the fourth quarter of 2018. Natural production declines were partially offset by 22 new well completions in the first quarter of 2019, including 12 new wells that were connected at the very end of the quarter and will have a more meaningful impact on volumes and segment adjusted EBITDA in the second quarter of 2019. Our customers are currently operating three drilling rigs upstream of OGC, and we expect producer activity to remain steady with one to three rigs operating at any given time in 2019 with a continued focus on the condensate window of the play. This level of activity is expected to add 40 new wells over the next three quarters, and supports our expectation for volume growth throughout the balance of 2019. In the Williston segment, as a reminder, we closed our $90 million of sale Tioga Midstream on March 22nd. Our Williston results include contributions Tioga Midstream through that date. First quarter liquid volumes averaged 1,003 barrels a day, down 5.5% from our record volume throughput in the fourth quarter of 2018. Only four new wells are connected in the first quarter, which is not unusual for those who understand winter weather in North Dakota. We’re seeing increased drilling activity behind our systems with four rigs currently operating and 49 ducts in customer inventory. We expect that our customers will commission over 65 wells behind our liquids gathering systems over the remainder of the year with more than 70% of these wells being commissioned in the second half of the year. We expect that by the fourth quarter of 2019, we will set a new liquids volume record despite the sale of Tioga. Of the 65 new wells, nearly half are from our customers that we provide dual services, including crude and produced water gathering. So we’re very encouraged by the outlook for this segment going forward. Our DJ segment averaged 21 million cubic feet a day in the first quarter of 2019, which was the second consecutive quarter we operated at full capacity. As Leonard previously mentioned we're in the process of completing and commissioning our new 60 million a day processing plant right now, and we expect to see an immediate increase in volumes and segment adjusted EBITDA upon full start up of the plant this quarter, with a full quarter of benefit beginning in the third quarter. Our customers remain active behind our dedicated acreage in the DJ, commissioning 34 new wells in the first quarter and 85 new wells over the last three quarters. Our customers currently have one rig working and over 25 ducts in inventory, and operated as many as six rigs on our dedicated acreage during the first quarter. In addition, we estimate there is five to 10 million cubic feet a day of natural gas behind our system that is capacity constrained and will boost volume throughput when our new 60 million a day plant is operational later this quarter. We expect this activity coupled with new capacity associated with our plan expansion will lead to growing high margin volumes over the balance of the year. Moving to the Permian, first quarter 2019 volume throughput averaged 15 million cubic feet a day. Recall our Lane processing plant began operations in December 2018 and the commissioning process for that plant extended throughout the first quarter of 2019. We are very excited about our Permian business and about our customers' near term and long-term plans to develop this acreage. Our customers are currently operating five rigs on our dedicated acreage. We expect that this level of activity will drive significant volume growth on our system, particularly in the second half of the year. Now, turning back to the partnership. SMLP reported a net loss of $36.9 million in the first quarter of '19, which included $45 million of non-cash long lived asset impairments, primarily related to our decision to idle our existing 20 million a day DJ processing plant once our new 60 million a day processing plant is commissioned, as well as our decision to decommission and underutilized Barnett compressor station. Adjusted EBITDA totaled $59 million in the first quarter of 2019 compared to $70.3 million for the prior year period. The decrease was primarily attributable to the startup costs related to the commissioning of our Lane plant in the Permian, which we expect will normalize going forward, together with lower volumes from our Utica Shale, OGC, Marcellus and Piceance segments. Distributable cash flow for the quarter totaled $48.2 million, and includes $3.3 million of maintenance CapEx, which resulted in distribution coverage of 1.69 times in the first quarter. Capital expenditures for the first quarter of 2019 totaled $60.8 million. Nearly half of our capital spend was related to the continued development of our $60 million a day processing plant in the DJ, and associated field compression investments that would support that new plant capacity, along with approximately $16 million related to our Double E project. We expect quarterly CapEx to decline throughout the balance of the year as these assets are commissioned. To that end, we’re closely reviewing all of our projected expenditures and we’re working in coordination with our customers to match our spend with their initial production expectations. We have $434 million outstanding under our $1.25 billion revolving credit facility at March 31, 2019 and $816 million of available borrowing capacity. In the April 2019, we made our $100 million prepayment on the DPPO, reducing that obligation by 25%. Total leverage at quarter end was 4.28 times compared to a maximum limit of 5.5 times. With respect to our financial guidance, we are affirming our 2019 adjusted EBITDA range of $295 million to $315 million in 2019. We continue to expect total CapEx of $150 million to $175 million, but we expect CapEx to trend towards the lower end of that range as we look to scale our capital spend. And we expect that full year 2019 distribution coverage will average between 1.75 times and 1.95 times. Now, I’ll turn the call back over to Leonard.

[Leonard Mallett:]

Thanks Marc. As discussed previously, the Tioga midstream sale was an attractive transaction for SMLP in the first quarter. And non-core asset divestitures will continue to be a top priority for SMLP in 2019 as we look to reallocate capital from legacy areas to core focus areas, and strengthen our balance sheet. To that end, we have engaged an investment bank to help us evaluate certain non-core asset sales. On this topic, I’d like to reiterate a key point, which is that any potential transaction will be grounded in Summit's core objective for this strategy, which includes streamlining our portfolio, refocusing capital deployment in our core focus areas and strengthening our balance sheet. We intend to be disciplined and will only entertain transactions that meet these criteria and provide an attractive value proposition. Separately, as it relates to our DPPO payment, I will reiterate that we continue to have option to settle the DPPO payment by issuing equity to our sponsor. This is a very important lever and will be used to the extent needed to manage our leverage when we make the DPPO payment. One of the key growth areas for our business is of course the Double E pipeline project. We are very encouraged with the progress we are making with perspective shippers, including our anchor shipper XTO and the progress being made with our expected equity partner who’s currently involved in most aspects of the project development. Talent from both organizations are working hard to make this best possible project for all stakeholders. As far as our FERC application process goes, we have begun to submit our resource reports to the FERC, which are a key component of the 7C application process. Additionally, we have refined the scope of the project to account for a pipeline that will initially accommodate 1.35 bcf per day of residue gas transportation capacity from the Northern Delaware to Waha, Texas. To conclude, I’d like to summarize the key takeaways from today’s call. First quarter results are generally in line with our expectations, and we are reaffirming our 2019 financial guidance. We remain confident in our near term and our long-term outlook for the business. We were excited about what we’re seeing in the field with 16 rigs working and over 100 ducts in inventory. We expect significant cash flow growth from our access in 2019 based on the key themes I highlighted at the beginning of the call; those include, the commissioning of our 60 million a day DJ processing plant and the associated near-term ramp in volumes; the continued ramp in volumes, operating efficiencies and improved margins behind the Permian gathering and processing system; the high margin volume growth on our SMU system and significant completion activity we expect to see in the Williston throughout the remainder of 2019. We are thankful for your support, and we appreciate the opportunity to create value for our unit holders going forward. And with that, I’ll turn it over to the operator to open the line for questions.

[Operator:]

Thank you, sir. We will now begin our question-and-answer session [Operator Instructions]. And we have our first question from Tristan Richardson with SunTrust.

[Tristan Richardson:]

I appreciate all the detail you gave on the activity that bridges you from the 1Q earnings to the annual guide. Just real quickly on the Double E project just in terms of your permitting and re-scoping to a slightly smaller size, just thinking about the timeline. And I know it’s been a while since you talked about 2Q, 2021. But should we think that it’s fair to say that timeline has shifted just based on refining the scope and up the project?

[Leonard Mallett:]

So let’s just talk through Double E and what’s going on there. So, the project it we continues to develop. And I’m confident that the end result will be an even better project than originally conceived. And so as mentioned, some of it afforded the opportunity to bring on to engage an equity partner. And that arrangement provides us with both volume and cash to support the project for partial ownership. And so given this equity partner, we've altered that timeframe as we working with this equity partner in bringing them along, engaging them in the project to make sure they’re comfortable with and allow to perform their due diligence on the project, get involved in the project details, profiling details and et cetera, and also, working very closely with them hammering out JV agreements. And so that both entities, both Summit and the equity partner can go to their perspective management to get approval to move forward with the project. With regard to timing, we anticipate our FERC filing this summer, or later this summer, and so that’s a three month move. And so right now, we’re still second quarter of 2021, maybe late second quarter but second quarter of 2021.

[Tristan Richardson:]

And then just last one from me just progress on executive search and just any update there?

[Leonard Mallett:]

So the board has engaged in very comprehensive search. They’re actually -- board members are actually interviewing perspective of candidates. Hopefully, we’ll have something to announce maybe in two or three months. It depends on who the successful candidate is, because sometimes we think we may have to unwind current deployment and that kind of thing. But in meantime, I am being supported very well by our board, I'm in contact with those guys just about every day and certainly, supported by my fellow officers. And so in the interim we are about our business and moving forward.

[Operator:]

We have our next question from Mirek Zak with Citigroup.

[Mirek Zak:]

Can you just speak to your DPPO funding options in case you’re unable to sell additional assets at this point, and also the dynamics around issuing potentially additional equity to fund that payment? And how that balances with the sponsors' investment time horizon and Summit?

[Leonard Mallett:]

The DPPO payment is not something that keeps me up at night. We -- downstream of our strategic actions introduced last quarter, we have capacity and options to sell the debt. And I’ll let Marc share the details.

[Marc Stratton:]

So obviously, we plan to finance the DPPO with a combination of debt and equity. And we expect to use our revolver to fund the debt portion. And clearly, we expect our leverage capacity to increase as EBITDA growth ramps throughout 2019 and CapEx flows. I’ll reiterate that the 4.3 times leverage ratio that we reported for the first quarter is totally skewed a bit higher at this point. We mentioned on the call we have over $200 million of debt on the balance sheet related to our Permian and DJ processing plants, which are really yet to throw off any meaningful cash flow. So as those assets ramp, we expect to see some meaningful deleveraging. We’ve announced and we are currently looking at non-core asset sales as a way to bring equity into the business in 2019. And then we also have the ability, as you know, to backfill our equity needs as part of the DPPO consideration with equity to the sponsors. So we’ll look to balance the consideration mix between debt and equity as we move forward. And then finally, we always have the ability to extend that DPPO payment throughout 2020 to take further advantage of expected EBITDA growth. So, a number of levers that at our disposal in order to finance the DPPO and we expect to keep all of it top in mind when we go to make the DPPO payment.

[Mirek Zak:]

And just a follow up. Can you speak to the rate of MVC expirations on your Piceance contract and how do you see the pace of production declines there relative to those MVCs over the next few years?

[Marc Stratton:]

So we do see some slight MVC contracts rolling off this year in 2019, and what I mean slight -- I mean $1 million or $2 million relative to 2018. As it relates to the go forward, obviously, we’re highly contracted from an MVC standpoint in the Piceance space. And we really don’t see a significant roll-off of MVC contracts until really the fourth quarter of 2021, so highly contracted from an MVC standpoint through that point in time.

[Operator:]

Thank you [Operator Instructions]. Our next question comes from Elvira Scotto with RBC Capital Markets.

[Elvira Scotto:]

With the new scope for Double E, do you have a new cost estimate?

[Leonard Mallett:]

So we said we refine the scope. And what that means is that customers are coming in at various locations, so we hone that down. So the physical size of the pipe has not changed, and it’s still a 1.35 bcf pipe with the option to add compression and add another half bcf to get it to 1.85. So I’m sorry if we caused some confusion there but we did not make it a smaller pipe or anything like that. So it’s more of a refinement based on entry or origin levels.

[Elvira Scotto:]

And then the other question, I think you said you plan to scale CapEx. Can you provide a little more color on what you mean by that?

[Leonard Mallett:]

As we continue to map out the projects that are need for the year in conjunction with talking with our customers and what their needs are and then we can move CapEx out of this year and into next year. An example, Marc, is the Hereford plant…

[Marc Stratton:]

So as we announced, we expect CapEx in 2019 to come in towards the lower end of our $150 million to $175 million range. As Leonard mentioned, primarily driven by a slower pace of spend over the balance of 2019, primarily related to our second 60 million a day plant in DJ, which we announced last quarter. We are continuing to procure long live items and pushing forward with permitting and engineering in an effort to preserve our ability to move quickly and meet customer demands beyond 2019. But we are working very closely and watching every dollar spent in 2019 to make sure that we scale that spend in a way that matches the development pace of customers' production schedules. So that’s what we meant when we talked about scaling our CapEx in 2019.

[Elvira Scotto:]

And then just I know you've said this earlier, but I missed it. Can you just run through those asset impairment charges?

[Leonard Mallett:]

So we have $45 million of non-cash long lived asset impairments in the quarter, really related to two things. So, the first is we had a decision to decommission a Barnett compressor station that we don’t expect to use again in the future as a result of low current and low expected future volumes along with high fixed costs. So we are going to decommission that plant and remove the insignificant amount of high fixed costs associated with that plant, and that was about $10 million of the $45 million impairment. Secondly, with the pending commissioning of our 60 million at DJ plant, we made the decision to decommission our existing 20 million a day DJ plant, because we don't anticipate using it again in the future. Obviously, we’re bringing on and tripling our processing capacity in the DJ here this quarter and then any future processing capacity expansions will be accomplished through the development of our second 60 million a day plant in DJ.

[Elvira Scotto:]

And was that just a function of -- just because it’s small plant and the costs are probably higher on a per mcf basis?

[Leonard Mallett:]

The new plant that we have coming on is a much more efficient plant. This impairment was triggered based on our decision to bring on the second 60 million a day plant in the future, because of that efficiency. And we expect to scale that plant up as needed overtime. But this is really more accounting related when we don’t expect to use existing assets that we have -- that we’re carrying on our books, we really need to impair it at that point in time.

[Elvira Scotto:]

And just given the activity in the DJ basin. How long do you think it will take for you to ramp the new plants that you just commissioned to full capacity?

[Marc Stratton:]

We had a significant amount of activity, customer activity behind that system in the fourth quarter of '18 and the first quarter of 2019. For many months during that six months period, our customers were running really five to six rigs. They’re currently running one, but they’ve got a significant amount duct inventory that they'll work to complete throughout the balance sheet of the year and drive growth. So we expect to commission that new 60 million a day plant this quarter. And once we do, we expect utilization rates on that plant to be nearly 50%, so think about that in a 30 million a day range. And we expect that utilize to increase throughout 2019 as new wells are brought online. We expected -- or we said this last quarter that we expect that plan to reach near full capacity by the end of this year, and we still expect that to occur.

[Operator:]

Thank you [Operator Instructions]. And I see we have a follow up question from Mirek Zak with Citigroup.

[Mirek Zak:]

Just one more quick follow up. Are you seeing any insurance currently from -- regarding your potential asset sales from third parties? And if so, is that more coming from the strategics or potential financial players as well?

[Leonard Mallett:]

I don’t know that we can share that level of detail at this point. But as mentioned, we have engaged in investment bank really in the early phases of the process right now. So I think we have to -- maybe we'll have more news for you next quarter. Our timing would be that we work through the summer or early fall and mapping out these asset sales and hopefully have one or more to announce by the end of the year.

[Operator:]

Thank you. That is all the time that we have for questions today. I will now turn the call over to Leonard Mallett for closing remarks.

[Leonard Mallett:]

Thank you. So we are very pleased with the outlook for the remainder of 2019. 16 active rigs, over 100 ducts, is a very coveted position for us to be in. It’s been several years since we’ve seen this level of activity in the field on our system. So again, we’re very encouraged. We’ve outlined marked progress on our near term and long-term objectives. We affirmed our guidance for 2019. We are very proud of the story that’s developing for Summit, and we look forward to next quarters report.

[Operator:]

And thank you speakers. Thank you, ladies and gentlemen. This concludes today’s conference. We thank you for participating. You may now disconnect.