Summit Midstream Partners, LP
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good morning and welcome to the Second Quarter 2018 Summit Midstream Partners, LP Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time all participants are on 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'll now turn it over to Marc Stratton. You may begin sir.

[Marc Stratton:]

Thanks, operator and good morning, everyone. Thank you for joining us today to discuss our financial and operating results for the second quarter of 2018. If you don't already have a copy of our earnings release, please visit our website at www.summitmidstream.com, where you'll find it on the Homepage or in the News section. With me today to discuss our quarterly earnings is Steve Newby, our President and Chief Executive Officer; Matt Harrison, our Chief Financial Officer; Leonard Mallett, our Chief Operations Officer; and Brad Graves our Chief Commercial Officer. 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 of 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, 2018, 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 Steve Newby.

[Steve Newby:]

Thanks, Mark. Good morning everyone and thanks for joining us on the call this morning. As usual I'll begin with the few comments on the quarter and then I'm going to turn it over to our CFO, Matt Harrison for more detail on our quarterly financial results. Yesterday we announced our second quarter 2018 operational and financial results, which exceeded internal expectations. Adjusted EBITDA in the second quarter was $73.5 million, a 4.5% increase from the previous quarter and 1.3% increase over the second quarter of last year. Distributable cash flow of $47.2 million resulted in a distribution coverage of 1.04 based on our quarterly cash distribution of $0.575 per unit that we announced last week. We are reaffirming our 2018 adjusted EBITDA financial guidance of $285 million to $300 million and we are anticipating distribution coverage to exceed one time for n the calendar year of 2018. Our forecast for the second half of 2018 is supported by robust volume growth expectations for our Williston, Utica and DJ assets, particularly as we approach the fourth quarter of 2018. In the fourth quarter we also expect improving financial performance from the commissioning of our lane [ph] gathering and processing system which serves the Northern Delaware basin. Lane will commence operations in the fourth quarter with meaningful cash flow generation beginning in 2019, supported by a steady ramp in volumes. Commissioning of our lane gathering and processing system is important step is executing our strategy of establishing Summit as a significant midstream provider in the Northern Delaware Basin. That project initially contemplates development of a 60 million cubic foot a day associated gas gathering and processing system for XTO Energy and has mechanisms in place for future significant incremental capacity additions. To remind you the Lane plant will serve as the origination point for our proposed EE pipeline, which we believe will be sized to support the transportation of more than 1 Bcf a day residue gas from the Northern Delaware to the Waha Hub. We are in the process of expanding our service offering to include crude oil and produced water gathering in the Delaware. The crude gathering system, which we expect to be operational in the first quarter of 2019 will begin with 15,000 barrels a day of capacity, but we expect our capacity will increase overtime and so we build out our footprint and expand our gathering reach. During the third quarter we were also awarded new opportunity to provide produced water gathering and disposal services. As currently contemplated, the initial project will have 30,000 a day gathering and disposal capacity, but we expect that this capacity will grow overtime as well. These new opportunities together with our entry into the long haul residue gas transportation business through the EE pipeline support our strategy of offering our customers multiple services along the midstream value chain, while generating attractive returns for our unitholders by maximizing our footprint in the basin. With respect to EE, last week, we made an exciting announcement which represents an interim step if you will on our way towards FID in the project. XEO committed to becoming a foundation shipper on the EE pipeline under a 10 year take or pay agreement for up to 500 decatherms per day. Additional SMLP and Exxon have executed an option agreement giving Exxon the right to acquire up to 50% interest in EE. Exxon's desire to partner with us on EE is a very positive development for Summit and we believe it is a testament to the reputation our team has built in the industry and validation of our service model and expansion strategy in the Delaware. In addition, we've had productive discussions with other large potential shippers regarding additional volume commence on EE. We're encouraged by the producer community’s interest in the project. And we expect to be in a position to make a final investment decision following the conclusion of a binding open season, which will launch on Monday for an additional 500 decatherms per day of firm capacity. EE, which will aggregate residue natural gas for multiple receipt points in the area including our own processing plant and deliver to existing and to be build takeaway pipelines at the Waha Hub, represents a critical solution to relieving capacity constraints for residue gas takeaway from this part of the Delaware. We look forward to providing a positive update regarding the full scope for the double EE projects along with cost estimates, development timeline and financing details on the conclusion of this binding open season. Turning to our quarterly asset performance. Last quarter we discussed our improved outlook for our Bakken assets and our second quarter results supports this outlook. Liquid volumes in the Williston increased nearly 30% from the second quarter of 2017 and 5% from the first quarter of 2018 driven by our customers completing 20 new wells during the quarter. Customers are reporting better than expected well results on recently drilled wells and drilling activity continues according to our expectations with two rigs currently working on our Polar and Divide system. Our expectations that our customers will continue to drill and complete new wells behind our liquids gathering system in Williams and Divide Counties throughout the remainder of 2018, resulting in dozens of new wells and increasing liquids volumes throughout the remainder of 2018 and well into 2019. Given the higher expected volumes we’re reviewing operational enhancements to our liquids gathering system that will relieve future expected bottlenecks associated with growing volumes in the area. We are pursuing a debottlenecking project in our Polar and Divide system that will add approximately 33,000 barrels a day of additional capacity for less than $5 million of capital investment. This project should be completed in the fourth quarter of this year. In the Utica, we currently have one customer operating a drilling rig on the SMU system and we’re expecting two additional rigs later in the year. With higher anticipated activity leading to higher expected volume throughput, we are evaluating several debottlenecking projects that will increase our total gathering capacity on SMU to approximately 800 million cubic feet a day. These debottlenecking projects are expected to require less than $2 million of additional CapEx. SMU volumes in the second quarter increased almost 17% from the previous quarter, primarily related to nine new wells commissioned behind the TPL7 connector. We expect dozens of new well to be drilled and turned in line on SMU over the next 18 months, the vast majority of which will represent wells on the higher margin pad sites that are already connected to the SMU system. Staying in the Utica OGC volumes decreased approximately 6% from the previous quarter, but we anticipate volume growth to resume in the third and fourth quarter of this year. 20 new wells were connected late in the second quarter of 2018 and we’re forecasting 30 new wells to be completed in the second half of the 2018, which we believe will translate into higher volumes and improved financial performance. Interestingly many of these wells are in the condensate window given the improvement in crude oil prices. However we expect certain of our customers to IP several dry and wet gas wells in the second half of this year, which tend to have much larger natural gas volumes compared to the condensate window. With the rebound in liquids prices we’re seeing the benefits of being diversified across all three windows in the Utica. On our DJ Basin system we are anticipating volume growth will continue through the end of the year. We expect to commission our new 60 million a day cryogenic gas processing plant at the end of 2018. This new processing plant will provide incremental processing capacity for existing customers and other third party producers, supporting the tremendous volume growth we’re seeing at this part of the basin. Our customers currently have four drilling rigs working upstream of our system in the DJ and we expect significant drilling and completion activity in and around the system for the foreseeable future. This is an associated natural gas system with a crude oil play and as such it is much higher margins than our other systems in the Piceance that are also included in this segment. Moreover we’re highly encouraged by the publicly stated plans and current activity shown by High Point Resources, one of our largest and most active customers on the DJ gathering and processing system. We look forward to providing High Point with all the necessary gathering and processing required to achieve their state of growth objectives. Our net volumes were slightly flat from the first quarter of 2018, we expect volumes will be down slightly in the third quarter, primarily related to our annual scheduled maintenance before volume growth resumes in the fourth quarter of 2018. Our anchored customer in the Barnett is currently operating a drilling rig its first drilling activity since it assume control of the acreage at the end of 2016. In addition another customer recently finished drilling five new well on the system, which is currently completing and we expect to be turned in line late in the third quarter. We’re also seeing an increase in the pace of permitting in the area, a trend that we believe will bode well for rig activity and volume throughput in 2019. Our outlook for the Williston, Utica and DJ assets is providing a very positive view to growth in the 2019. This incremental growth will further strengthen our leverage and distribution coverage ratios as we progress into and throughout 2019. Our balance sheet remains strong, with significant liquidity and ample leverage, which as of 6/30, stood at 3.75 times. We do not need to access the equity capital markets in the near-term, as we have already financed the majority of the DPPO, which is directly tied to the increasing EBITDA outlook for the dropdown assets. Our largest capital need in the foreseeable future is related to the development of our Delaware assets. We have received significant interest from various parties to facilitate our financing of the Delaware built out, and the structures of these financing opportunities have been creative, while allowing SMLP to retain control. As it relates to timing however, as I mentioned before, we expect minimum capital requirements, while we work to obtain the required FERC permits, with more meaningful expenditures not beginning until 2020, related to EE. Now I’ll turn it over to Matt, to review our financial results in more detail.

[Matt Harrison:]

Thanks, Steve. SMLP reported a net loss of $49.9 million for the second quarter of 2018 compared to net income of $11.2 million in the second quarter of 2017. The second quarter of 2018 included a $69.3 million of non-cash deferred purchase price obligation expense, or DPPO expense. In conjunction with the 2016 dropdown transaction, we recognize the liability on our balance sheet for the DPPO to reflect the estimate of the remaining consideration to be paid in 2020 for acquisition of the 2016 dropdown assets. We discount the estimated remaining consideration on the balance sheet, and recognize the change in present value on the income statement. The change in present value comprised of both a time value of money concept, as well as any adjustments to the expected value of the DPPO. Net income in the prior period, included a $5.1 million decrease of the deferred purchase price obligation. Adjusted EBITDA for the second quarter of 2018 totaled $73.5 million compared to $72.6 million for the prior year period. The $900,000 increase in adjusted EBITDA was primarily due to liquids volume increases on our Polar and Divide systems and natural gas volume increases on our Mountaineer system. Partially offset by natural gas volume decrease on our DFW system and increased operating expenses on the Ohio gathering system. Adjusted EBITDA for the second quarter of 2017 include a $2.8 million of gathering revenue, related to previously build the unearned revenue in crude oil and produced water volumes that a customer trucked around our gathering system in the second half of 2016. Adjusted EBITDA in the second quarter of 2018 included approximately $14.8 million related to MVC mechanisms for our natural gas gathering and crude oil transportation contracts. Adjustments related to MVC shortfall payment on our DFW system decreased by approximately $1.5 million compared to the prior year period. Additional tabular detail regarding MVCs is included in the second quarter earnings release. Total operated natural gas volumes averaged 1.8 billion cubic feet per day in the second quarter, which was flat relative to the prior year period. Increased volume throughput on our Marcellus segment was offset by volume declines on our Piceance/DJ segment. In the Utica our wholly owned and operated Summit Midstream Utica system gathered 415 million cubic feet per day in the second quarter. Relatively flat to 413 million a day in the prior year period. Natural production declined on our SME system were offset by increased volumes from the TPL-7 connector, which was started in the second quarter of 2017. Volumes on the TPL-7 connector average 124 million a day in the second quarter of 2018, compared to 34 million a day in the prior year period. SMU volumes are up 17% relative to the first quarter of 2018. The quarter-over-quarter increase was primarily a result of nine new wells behind the TPL-7 connector during the quarter. We expect our customers to complete dozens of new wells, beginning in the fourth quarter of 2018 and continuing through 2019. Our Ohio gathering volume throughput in the second quarter of 2018 was 727 million cubic feet a day, a 3% increase compared to the prior year period and down 6% from the first quarter of 2018. Volumes decreased relative to the prior quarter, due to natural declines from wells brought on line in the second half of 2017. 20 new wells were brought online late in the second quarter of 2018. We expect these wells together with dozens of new wells in the second half of 2018 to generate volume growth in the third quarter and fourth quarter of 2018. Our liquids gathering business in the Williston Basin averaged 89,000 barrels per day in the second quarter, up 29% from the second quarter of 2017 and up 5% from the first quarter of 2018. 46 wells were brought online in 2017, 10 new wells were brought online in the first quarter of 2018, 20 new wells were brought online in the second quarter of 2018, and addition of a portion of previously curtailed liquids volumes positively impacted second quarter volume results. Liquids volumes also benefited from a new customer in 2018. Currently, our customers have two rigs working in our Williston Basin service areas. Our Piceance/DJ Basins segment averaged 576 million cubic feet per day in the second quarter 2018, down approximately 3% compared to second quarter 2017 and relatively flat to the previous quarter. Natural production declines have been partially offset by the completion of 50 new wells in the system in the first quarter 2018 and 37 new wells in the second quarter of 2018. In November 2017, we announced plans to develop a new 60 million cubic feet per day processing plant expansion in the DJ Basin. The new plant is expected to come online at year end. We expect volumes on our DJ Basin system will continue to experience volume growth throughout the balance of 2018 and continue through 2019. In the Barnett volume throughput averaged 264 million cubic feet per day in the second quarter of 2018, down approximately 3% compared of the second quarter of 2017, and flat from the first quarter of 2018. Volume throughput for the second quarter of 2018 was positively impacted by the commission of 6 new wells during the first quarter of 2018. A customer is currently operating one rig in our Barnett system and we expect another customer to complete 5 new wells late in the third quarter. Volume throughput in our Marcellus segment averaged 524 million cubic feet per day in the second quarter, relatively flat in the previous quarter and approximately 9% higher than volumes in the second quarter of 2017. Volumes compared to the prior period were positively impacted by 27 new wells in 2017 and 9 wells that came on late in the first quarter of 2018. No new wells are expected for the balance of 2018. Turning back to the partnership, distributable cash flow totaled $47.2 million in the second quarter, which imply the distribution coverage ratio of 1.04 relative to the second quarter distribution of $0.575 per common unit to be paid on August 14th. CapEx for the second quarter totaled $49.6 million, of which $3.3 million was classified as maintenance CapEx. We have $356 million outstanding under our $1.25 billion revolving credit facility at June 30, 2018, and $894 million of available borrowing capacity. Total leverage as of June 30, 2018 was 3.75 times. SMLP also reaffirmed its 2018 financial guidance. We expect 2018 adjusted EBITDA to range from $285 million to $300 million. Total CapEx is expected to range between $175 million and $225 million, including $15 million to $20 million of maintenance CapEx. We expect distribution coverage for the full year to exceed one-time. Now I'll turn the call back over Steve.

[Steve Newby:]

Thanks, Matt. With the growth trajectory of our current assets and our commercial opportunity set, we remain confident in our 2018 guidance and are very excited about the prospects of 2019. We're establishing a strong footprint in the Northern Delaware, we're executing on our strategy of providing a top-tier diversified service offering. Summit’s reputation with customers and our track record of skill sets are affording us the opportunity to become a multi service midstream provider in the Northern Delaware. With the release of these results for the first half of 2018 I’m very proud of the operational successes our team has accomplished and I'm excited about both the development opportunities that are underway and the new opportunities that our commercial team is pursuing. Earlier this year, I stated that 2018 is going to be a big execution year for us and I believe that we are executing on task and achieving our goals. At that time, we were forecasting that significant volume and adjusted EBITDA growth would resume in 2019. Our outlook for 2019 is robust and improving relative to my expectations even three months ago. So with that, I'll turn it over the operator and open it up for questions.

[Operator:]

Thank you. And will now begin the question-and-answer session. [Operator Instructions]. And from SunTrust we have Tristan Richardson. Please go ahead

[Tristan Richardson:]

Hey, good morning guys.

[Steve Newby:]

Good morning, Tristan.

[Tristan Richardson:]

Just curious Steve you guys talked about the Utica and sort of expecting new wells to come on kind of exiting the year -- in the fourth quarter and exiting the year. Just kind of curious is that just broadly across your key customers there or is it one or two key customers? And to that question, just your general thoughts on activity levels after we've seen a few kind of high-profile Utica asset packages changing hands, just any commentary there?

[Steve Newby:]

Yes, so we have three big customers in the Utica. Really it's Ascent, Gulfport and XTO are the three large ones, we have others, but those are the three large ones. I would say activity levels are fairly high and expected to be consistent with Ascent and XTO. And so Ascent is drilling really across all three windows in the Utica. From condensate to some wet gas and to even some dry gas. And that captures volumes from our OGC interest to our SMU interest as well. And then our outlook also is being further supported by what I think we would classify as an increased level of activity by XTO and it expect it to be a very steady level of activity by XTO on our SMU system. And that's very incremental to us. Because we have all the pads connected from XTO. And so they are infield drilling. So they have a rig working now and were expected that rig in our SMU system to be pretty consistent throughout the rest of 2018 and actually throughout 2019 as well. So, on your second part of your question on just activity. Nothing lost on us, it's Ascent sort of doubling maybe even tripling down on their Utica position. I think what our expectation is that’s probably positive for us more so in our OGC area. And it's a little early, but we do think it's going to be a positive catalyst in that area for future activity as well.

[Tristan Richardson:]

Steve, that's helpful. And then just kind of curious sort of the gating events on the debottleneck project sort of what kick those off? Is it really sort of activity levels you see coming, just given that maybe where volumes are today it seems like you have ample capacity? Or is it kind of just to view that hey, it only takes a few pads coming online before things get tight in the Utica in terms of your current capacity?

[Steve Newby:]

Yes. So we have a pretty robust efforts internally to model capacity between our commercial teams and our engineering teams and our outlook and obviously a lot of that involves discussions with our customers in their activity levels. And both of the bottlenecking projects we talked about today. We talked about the Utica-1 for probably a little while, but both of them today are based upon our view of -- and our knowledge, of activity levels going forward in those areas. And quite frankly we had to increase capacity to not shut in production. So we are planning ahead and we expect to use the capacity we're creating in 2019 from both of those projects.

[Tristan Richardson:]

Great, that's helpful. And then last one for me, Steven or Matt, could you kind of remind us sort of on the cadence of spend for; A, express just when you start to see kind of critical mass spending commence. Assuming FID and sort of where you are and where you want to be just kind of when you expect to kind of bulk of spending to occur.

[Steve Newby:]

Yeah I'll take it Matt, you can jump in. We don't really expect any material spending at the earliest would be sort of third quarter of next year. And that's largely due really when we buy make the decision to purchase some big materials mainly pipe related to the project. And we would tell you we probably have timing, some pricing flexibility on that as well too. So we anticipate today filing -- we would file our 7C applications sometime in the first quarter, probably late first quarter. We anticipate that to being sort of an 18 month process. And then as you get closer to your awarding your 7C that’s when you start to looking at purchase some materials so you can get hit the ground running on construction. So the bulk of activity and the bulk of spend really comes in 2020 and into 2021 Tristan. And I think we’ve laid that out in some of our investor materials as far as percentages and we don’t think that’s really -- that’s changed. From now until the end of the 2019 we’re really talking about million dollars to just for permitting and regulatory activities.

[Tristan Richardson:]

Okay, thank you guys. Sorry Matt go ahead.

[Matt Harrison:]

No, nothing to add, appreciate, Tris.

[Tristan Richardson:]

Thanks, guys.

[Operator:]

From Capital One Securities we have Kyle May. Please go ahead.

[Kyle May:]

Hey, good morning guys. Just on the DPPO payment you’ve bumped it up a couple of times and I was curious if this really has any implications on your outlook for 2018 or is it all just going to 2019?

[Matt Harrison:]

Yes, the DPPO as obviously just a calculation right, but so the increases imply the increases in EBITDA expectations. So -- but those are really it’s our outlook for 2019 that is kind of continuing to increase. And it’s relative to what we have going on at SMU mostly, but as well as in the Bakken. And then recall that we moved that compressor project at SMU outside of the deferral period so that CapEx gets kicked outside of 2019.

[Kyle May:]

Got it, okay that definitely helps. And on the EE project can you give us any more color on the timing around Exxon’s equity option there?

[Steve Newby:]

Yes, this is Steve. We would expect them to make a decision before the end of the second quarter of next year. So I think look Exxon we should all take it -- we take it and I think the market should take it as very positive that they’ve expressed I would tell you a very high level of interest in being a partner with us on the project both from -- obviously a very large commitment to the project from a volume standpoint, but also from an equity standpoint as well too. So that the option they have a little bit less than a year I guess to exercise it in, I would tell you we’re working on things with them already.

[Kyle May:]

Okay, great. That’s helpful. And maybe just one more, now that you’re starting to get a lot more traction in the Delaware and adding multiple different streams any thoughts around maybe making changes to the legacy portfolio of assets?

[Steve Newby:]

Yes, look I think we always look at opportunities around our assets and if they work more to somebody else than us and I think that’s a consistent evaluation we do internally. And we’ll continue to do and I’d leave it there I don’t think there is certain areas we believe are core to us and we have great prospects and we can offer multiple services and be important. And there’s other assets that -- yes, we would absolutely entertain if somebody believes they’re worth more to them than us. So I think that’s a continuous look. I don’t think we’re in a position, I think credit to our finance team, we’re not in a position where we have to do anything, but it’s -- we always look at optimizing the portfolio.

[Kyle May:]

Okay, great. That’s all for me, thanks guys.

[Steve Newby:]

Thanks.

[Operator:]

[Operator Instructions] And from Baird we have Mike Gaiden. Please go ahead.

[Michael Gaiden:]

Good morning gentlemen thanks for all the detail. Also related to EE, could you please share your thinking about the high level trade-off between long-term cash flow from ownership of the project versus the CapEx burden of funding it on your own to the extent that you can? Thanks.

[Steve Newby:]

Yes, it’s a great question. I think base cases, we’d like to own as much as we can own. That’s a great project we think it’s going to be a great project, we’re excited about the open season. We think those will be surprised at the strength of the economics of the project. But, we have to make sure we have the capacity to build it, fund it and we understand the status of the capital market today, quite frankly we’re not gaining a lot of benefit from our Permian position from the equity community today unfortunately, given what we have done there really just in the past year. So, it is a trade-off and I think we’re balancing the facts we want to own as much as we can with the fact that we got to make sure we enable the project and get it done. Obviously having Exxon is a or potentially in as a partner helps that burden quite a bit. And then I think I have stress Mike to you and others is just that the stretch of the spin here really fits well with us. We don’t have a lot of capital needs on the board for 2019 and 2020. We don’t have a lot of things we’re committed to yet for 2019 and 2020 outside of EE. So, the pace of that spin fits well. The DPPO we select, we financed most of that already. So, we feel real good about where we are particularly as we are looking at bringing a big partner in. Hopefully that helps you.

[Michael Gaiden:]

Yes, thank you very much for that perspective. And relatedly, can I ask for your current thinking on distribution policy in light the encouraging prospects for DCF coverage growth into the fourth quarter and beyond versus this large and potentially very accretive cash flow spend on EE?

[Steve Newby:]

Yes, I think we’re going to take our growth, which we hinted into obviously into 2019 we think it’s going to be pretty significant. We’re going to taking the coverage, yes.

[Matt Harrison:]

I mean, I think that’s the net there.

[Steve Newby:]

That that philosophy hasn’t changed for the last several quarters.

[Matt Harrison:]

And then I think from there we feel really good about where our balance sheet is for both the deferred payment and the timing of some of the Permian projects that we’re talking about.

[Steve Newby:]

I will say just to add further color. The crude oil and water deals although very important to us from a service standpoint and there we think very incremental deals. They are not large capital deals. Under -- both of those are under $40 million each. So, very manageable not large spends. Really utilizing our system and our footprint, our right away footprint and other things maximizing those. So those aren’t going to stretches and we feel like we’re well positioned as we are growing coverage, growing cash flow into 2019, and it’s going to be pretty significant.

[Michael Gaiden:]

Great, thanks for all that. That’s it for me.

[Steve Newby:]

Thanks, Mike.

[Operator:]

And we have no further questions at this time, we’ll now turn it back to Steve Newby for closing remarks.

[Steve Newby:]

We appreciated by joining us, obviously as it dick through the results and have further questions, please reach out to us and have a good weekend. Thank you.

[Operator:]

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