Summit Midstream Partners, LP
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Welcome to the Third Quarter 2017 Summit Midstream Partners, LP Earnings Conference Call. My name is Hilda, and I'll be your operator for today. 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. I will now turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

[Marc Stratton:]

Thanks operator and good morning everyone. Thank you for joining us today to discuss our financial and operating results for the third quarter of 2017. If you don't already have a copy of our earnings release, please visit our Web site 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 and Matt Harrison, our Chief Financial 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 2016 Annual Report on 10-K, which was filed with the SEC on February 27, 2017, 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 a few comments on our operations and our quarter and then I'll turn it over to our CFO, Matt Harrison for more detail on our quarterly financial results. I'll end the call with wrapping it up by discussing our outlook for the balance of the year. Yesterday, we announced our third quarter 2017 financial results, which included $73.5 million of adjusted EBITDA and $52.9 million of distributable cash flow, and a strong quarterly distribution coverage ratio of 1.17 times based on a quarterly distribution of $0.575. Our third quarter results and our expectations for the fourth quarter continue to be in line with our 2017 financial guidance. We continue to expect to generate adjusted EBITDA of $285 million to $300 million for 2017 and distribution coverage of 1.1 to 1.2 times. Our balance sheet also remained strong with third-quarter leverage coming in at 4.16 times. Turning to performance of our operating segments. We had an active quarter, which included a number of highlights. Total operated natural gas volumes averaged 1.83 bcf a day in the quarter, a new record for the Partnership, and a 2.6% sequential increase over the prior quarter. Gathered volumes for SMLPs Ohio gathering JV Utica averaged 763 million cubic feet a day in the third quarter, up 8% over the second quarter '17. This was primarily due to the completion of more than 20 wells across OGC system in July and August. Natural gas throughput on our operated asset was led by the Marcellus segment, which average 554 million cubic feet a day in the quarter, our highest quarterly volume ever and a 15% sequential increase over the second quarter '17. Third-quarter volumes were underpinned by 11 well completions that occurred late in the second quarter of '17, driven in part by the continued expansion of processing capacity at Sherwood processing complex in July, which brought total processing capacity there to 1.6 bcf a day. We expect an additional seven well completions for behind our Mountaineer asset in the fourth quarter of '17, and expect drilling activity to resume in the fourth quarter of this year behind the asset, resulting in more than a dozen wells behind the system in the first half of '18. We remain encouraged for our Marcellus gathering assets with a strong outlook for this segment, given MPLX's plan to further expand processing capacity at Sherwood by the end of 2018. In the Utica, our wholly owned and operated Summit Midstream Utica system gathered 403 million cubic feet a day in third quarter, down 2.4% sequentially from the second quarter of this year. Recall, second-quarter volumes on SMU were strong given the completion of 11 wells in the first half of the year, along with our commissioning of the TPL7 connector pipeline in April of this year. Much of the third quarter was impacted by rolling temporary production outages related to nearby drilling and completion activities and producer well maintenance across our footprint. We expect this work to be completed during the fourth quarter along with additional well completions, which provides us visibility for continued volume growth in the fourth quarter and in '18. We remain optimistic about volume growth in our dry gas Utica area over the medium-term given the improved drilling economics in the area coupled with the commissioning of long-haul takeaway pipeline, which should help producer net backs. With respect to the liquid dynamics in the Utica, we’re extremely encouraged by the rallying natural gas liquids prices and are already seeing an uptick in drilling activity across the areas of our system that service the liquids rich window. As a reminder, our Ohio gathering system spans more than 800,000 acres in the southern core of the Utica with exposure to all three phases of the play. So it provides us with great diversity across the dry, wet and condensate windows of the play. Volume throughput in our Piceance/DJ segment averaged 594 million cubic feet a day in the third quarter, which was roughly flat compared to the prior quarter. Expanding on some of my comments from our second-quarter call. We are seeing an uptick in drilling and completion activity across our DJ Basin asset as operators experienced assess in drilling the Codell Niobrara formations in the northern extension part of the play. September volumes for this sub-system were up nearly threefold from year ago levels and are approaching our current 20 million a day of processing capacity. These are higher margin volumes and contributed to our sequential segment adjusted EBITDA growth in the overall Piceance/DJ segment. Given our strong outlook in this area, we are excited to announce that we're expanding our DJ Basin operations and we’ll be constructing a new 60 million cubic feet a day cryogenic processing plant. The expansion is supported by increasing volumes from our customers and their future drilling plans. We will finance the approximately $60 million first phase of the project with internally generated cash flow and borrowings under our $1.25 billion revolver. Our Western Colorado operations remained steady and our customers continue to run two drilling rigs behind our systems. As I mentioned on the second-quarter call, this area is where we saw some completion timing slip from late second-quarter and third-quarter into the fourth quarter. These completions are currently taking place and we should see subsequent volume increases in fourth quarter and into '18. Currently, we have 80 drilled and uncompleted wells behind the system scheduled to be completed in the next several quarters. A key event occurred in the Piceance in late July when Caras, an existing Piceance customer completed its acquisition of Encana's Piceance acreage. As a result of the transaction, all four of our largest customers are now private equity backed and singly focused on the Piceance basin. A dynamic that we think is a big positive for Summit in all midstream operators in the basin. Importantly, as part of the Encana sale, we amended our gathering agreement to change the MVCs from an annual test for payment to a monthly payment. Overall, we’re very encouraged by the A&D and drilling activity in the Piceance. We’re seeing the technologies and efficiencies perfected in other traditional shell basins being brought to the Piceance by dedicated singly focused companies. We have a large gathering footprint in the basins, so we expect to benefit from this renewed activity over the near, medium and long-term. Our liquids business in the Williston Basin had a strong quarter with volumes of 74,000 barrels per day in third quarter compared to 69,000 barrels per day in the second quarter. Volumes were bolstered by 17 new well completions in the period, many of which occurred late in the quarter and they will have a greater impact on fourth-quarter results. In addition, our customers have plans to connect an additional 16 wells in the fourth quarter of '17, which we expect will drive volumes higher from third-quarter levels. Many of you may have seen the success that our anchor customer Whiting reported in its third-quarter results with its recent [Avid] and Nelson pads, both of which are flowing on our gathering systems. These wells are tracking toward Whiting’s 1.5 million barrel a day type curve, and SMLP will benefit from increased production as a result. We also added a new customer on our liquids gathering system in the third quarter, and we received first volumes from them in late October and they have plans to continue to drill in the area. We currently have three rigs drilling upstream of our Bakken gathering systems, which along with an inventory of over 50 docs and crude oil firming at $50 to $55 a barrel, is expect to contribute to a stronger fourth quarter and provide tailwinds as we head into '18. I'll now turn it over to Matt to review our financial results in more detail.

[Matt Harrison:]

Thanks, Steve. SMLP reported net income of $93.6 million for three months ended September 30, 2017 compared to net income of $2 million in the third quarter 2016. The third quarter of 2017 included $19.1 million of net income associated with an amendment to Piceance Basin gathering agreement that accelerated the frequency of MBC shortfall payments from annual to monthly. And $70.5 million decrease in the present value of the deferred purchase price obligation. In conjunction with the 2016 dropdown acquisition, we recognized the liability on our balance sheet for the deferred purchase price obligation to reflect estimate of the remaining consideration to be paid in 2020 for the acquisition of the 2016 dropdown assets. We discount the remaining consideration on the balance sheet and recognize the changing present value on the income statement. The changing present value comprises both a time value of money concept as well as any adjustments to the expected value of the deferred purchase price obligation. Adjusted EBITDA for the third quarter of 2017 totaled $73.5 million compared to $76.5 million for the third quarter of 2016. Relative to the third-quarter of 2017, natural gas volume throughput declined on our Ohio gathering Barnett Shale and Williston Basin segments, and liquids volumes declined on our Williston Basin segment in the third quarter of 2017 compared to the third quarter of 2016. The decrease was offset by increased natural gas fine throughput on our Utica Shale and Marcellus Shale segments. Adjusted EBITDA in the third quarter of 2017 included approximately $14.8 million related to MVC mechanisms for our natural gas gathering and crude oil transportation contracts, additional tabular detail regarding MVCs is included in the third quarter earnings release. DCF totaled $52.9 million in the third quarter of 2017. This implies a distribution coverage ratio of 1.17 times relative to the third quarter 2017 distribution of $0.0575 per limited partner unit to be paid on November 14. CapEx for the third quarter of 2017 totaled approximately $40.3 million of which approximately $3.5 million was classified as maintenance CapEx. Also, the partnership made $5.9 million of capital contributions related to its Ohio gathering in the third quarter of 2017. We had $506 million of debt outstanding on our $1.25 billion revolving credit facility at September 30, 2017 and $744 million of available borrowing capacity. Total leverage as of September 30, 2017 was 4.16 times. With that, I'll turn the call back over to Steve.

[Steve Newby:]

Thanks, Matt. As we noted on our second quarter call in July, we executed an agreement to build a new $60 million a day gathering and processing system for XTO Energy in the Delaware Basin. I'm pleased to report that we're on budget and on schedule, and we continue to expect to have the gathering and processing system up and running before the end of the second quarter this year. Commercial activity in the Northern Delaware remains robust and we recently added our first third party customer outside of XTO. We expect to be able to share additional information about our continuing commercial development efforts in and around this new asset as we move into 2018. During the third quarter, we also reached an agreement to acquire nearly 50 miles of strategic runway that is fully permitted and runs through the heart of some of the most prolific acreage in the Northern Delaware. This is BOM managed to land, so we expect this acquisition to give us a timing advantage as we continue to build out our gathering and processing complex. In addition to the DJ and Permian expansions, which I touched on earlier, we have a number of additional projects that we're evaluating around our existing footprint and we're seeing relative value and organic development as compared to the Privitera asset M&A market. We're increasingly optimistic about our prospects for securing additional development opportunities that extend or complement our existing assets. One other item I'd like to discuss this quarter is lower mark on our deferred purchase price obligation or DPPO. While we remain bullish about the outlook for volume growth for our Utica assets over the next several years, our current outlook for '18 is flatter compared to previous expectations, primarily due to volume growth and associated CapEx projects being delayed to the second half of 2018. This is the primary reason why the undiscounted value of our DPPO decreased in the third quarter and now stands at an estimated $656 million. To SMLP, this reduction is really neutral. The DPPO is working exactly as it was intended. The GP, there's the development risk during the measurement period. And if volume growth is delayed then the MLP will ultimately pay a lower price for the asset. Finally, I'd like to address the topic that seems to be on everyone's mind in MLP sector, which is capital allocation. We are hearing loud and clear the desire from our investors to shift capital focus toward balance sheet strength and distribution coverage. We believe we compete very favorably in that environment, given our history. Since 2014, 32 of the 50 Alerian Index constituents have effectively cut their distribution, either through an outright cut or a merger that resulted in a cut. Summit has not. And in fact, since 2014, we've grown our EBITDA by 12% per year. During that time, our distribution coverage has increased and our leverage metrics have remained constant. I believe we have managed the uncertainty over the last several years well and I'm encouraged that our outlook today for accretive organic growth is better than it has been over those past three years. We have historically focused on return on capital deployed over growth and we will continue to be even more focused on this metric, going forward. Our long term leverage target of 4 times and coverage target of 1.2 times remains intact and achievable and represents levels that we believe are appropriate for our business risk profile and stable cash flow stream. We will endeavor to take a firmer stance on utilizing excess coverage for internal capital needs versus growing the distribution a posture which we think is prudent, given the evolving MLP landscape. And with that, I'll turn it back over to the operator and open it up for questions.

[Operator:]

[Operator Instructions] We have a question from Tristan Richardson from SunTrust. Please go ahead.

[Tristan Richardson:]

Just a little bit on the spend cadence in the Delaware with the right away acquisition, presumably there was some spend in 3Q. But just curious, do you see the bulk of that in the first half of next year? Or will we see 3Q and 4Q of this year have pretty regular spend in the Delaware?

[Steve Newby:]

Yes. So I would say first on the right away acquisition. Although, it was important to us because of permitting timing from a capital standpoint, it's not material. So that's really not what's driving it. But in the third quarter, we spent 30 of our, what $40 million of CapEx total, I think $35 million of it was related to the Permian in the third quarter. And it'll be a heavy quarter, probably not that heavy in the fourth. But again, fairly heavy in the fourth on Permian spend as well. Some of that Tristan is frontloaded, because we bought the plan we bought compression. Obviously, we’re buying pipe too so some of the big ticket items are here into '17. And then I would expect the spin in '18 to actually be throughout '18. So even though it goes in the service in June, some of our spend, obviously, will tail into third and I would expect even fourth quarter of '18. But we’ll probably have half of the initial $110 million with specs probably by the end of the '17.

[Tristan Richardson:]

And then just curious on the DPPO adjustment talking about '18 being slightly flatter. Is that purely a function of customer drilling and completion schedules or basin takeaway timing? How should we think about the reason for the shift?

[Steve Newby:]

Well, I think those two are probably somewhat related. But I would think of -- a couple things are going on. Obviously, in our customer space, those guys are under a lot of pressure like the midstream space too on just capital allocation spend and a lot of our guys are looking at spending within cash flows. So that's going to have an impact. And basis was still poor in the fourth quarter -- in the shorter months, this past quarter. So we do expect that to get helped with leach coming on here. Hopefully, by the end of the year and then Rover coming on in the first quarter. So I do think that'll help. But we’re just seeing growth get more pushed to the right and that affects the DPPO. I would say nothing about the basin in the reservoir and the rock causes us any concern, if anything, it's gotten better over the last couple of years but it's more customer just activity being stretched.

[Tristan Richardson:]

And then just last one from me is, I guess, conceptually as we think about the new project in Weld County and the spending plan for the Delaware. Directionally, should we think with the offset of lower spend in '18 that you might see stable CapEx next year?

[Steve Newby:]

I think, overall, our CapEx will be higher in '18 than '17, still manageable within our framework of what we're trying to accomplish with prefunding the DPPO and things like that. I don't think it's going to stretch us from leverage metric, but it will be higher mainly because we have those, as you mentioned, we have those two projects coming on. We expect the Permian to come on in the second quarter, by the end of the second quarter and then our Delaware expansion some time later third early fourth quarter. So we also just won't get, as those ramp, we won't get a huge contribution -- we'll get some contribution in '18, but it'll be more so '19 from those two projects.

[Operator:]

Our next question comes from Ethan Bellamy from Baird. Please go ahead.

[Ethan Bellamy:]

Could you let me know how big do you think the opportunity is ultimately with XTO in the Delaware? And then Steve maybe could you source rank your opportunity set, say over the next two to three years in terms of follow-on investment and expansion?

[Steve Newby:]

I think, those two are probably tied together because I think the opportunity with XTO in the Delaware is large. I mean, I think it's large -- it's going to be large for couple of different midstream providers there. Just to remind everybody, they've 275,000 acres in really -- they dominate the Northern Delaware from an acreage position. It's contiguous acreage as well too so that always helps. It's in three different blocks of acreage, and we just acquired right of way that basically cuts right through it, and saves us about a year of timing from a permiting standpoint. So the opportunity -- we're very focused on making sure we service XTO properly, timely, safely because they have an enormous -- we have an enormous opportunity set to hopefully add on to our offerings in size with them. There're a lot of other parties up in that area, and both from a producer side, and we're obviously not the only gaming town from midstream side either. So we expect additional parties and opportunities folks to come to the plant. So it's a large opportunity set over there over the next couple of years. I think you're going to see it as another leg of organic growth for us. We also have -- so I'll also let you know and Matt just reminded me on XTO. They also announced last Friday on their call that they're going from 20 rig in the Permian to 30. So by the end of '18, so they're obviously ramping up as well too. Force ranking on opportunity set. We just announced a project in the DJ, so that’s probably got to be up there. We are still spending expansion capital in the Utica. I think, a lot of folks have heard me talk about -- we still haven't added compression on our 100% owned system, that’s a very creative project for us and that’s going to come, these wells are just so big and strong that it's been pushed out, that’s also part of the DPPO calculation, coming down too by the way as that getting pushed -- compression getting pushed to right. So that's another area. We think we will continue to spin organic capital. And then I would tell you we’re also seeing opportunities in Western Colorado. We now have now singly focused well-capitalized private equity backed companies that are very active out there. And so that's going to lend itself to some -- we hope to and we think to some growth opportunities out there as well as too.

[Ethan Bellamy:]

And then one more big picture question. As you’re talking with producers, who are all belt-tightening and trying to leveling cash flow. What's changed in terms of what they're looking for? Are they still looking for primarily up time, are they just trying to get their pencil as sharp as they can on the best rates available? I mean, where's the competitive frontier, if you will, between you and some of the other guys who I know, I mean you actually have the marquee customer, a lot of people love to get in and have that business and what led you to win that?

[Steve Newby:]

It varies with our customer base on what they look for. Some are -- they are not all the same. Typically, a customer -- I’ve commented on this publicly, a customer like XTO is -- they are all price-sensitive. I don’t want to make -- that’s just a gibbon. But some also value the ability to execute, the ability to do it safely, ability to do on time and the ability to be flexible with their changing plans. Those are all factors that go in when you’re a company like Exxon, those are multiple factors versus just use the lowest price. I can tell you we weren’t the lowest price in the Permian for them, but they have a lot of -- I think if you talk to them, they have a lot of confidence in our ability to execute given what we've done for them in the Utica. So it varies. Some producers are much more price-sensitive and focused but both are -- I'll tell you, most are really focused on can you deliver what you say you’re going to deliver. Do you have a track record of doing that and can you do it safely, obviously. So it varies. In the competitive environment in different basins, we’re now in five or six of them that varies as well too. So it's not a -- it’s a little bit of a mix bag, but producers are very -- given their -- their capital type too, they are very focused on price and execution right now.

[Ethan Bellamy:]

And would you say there is a -- it does. Is there any shift in the desire to structure say part versus people versus streaming, or to execute MBCs?

[Steve Newby:]

MBCs, depending on where you are in the dynamics of the area, we will have commitments on our donor DJ asset. So that's good. We have tended -- we will give up upside, sometimes a predictable downside that’s been a strategy of ours. I think we've said that publicly in places. We are not a commodity price takers our customers know that. So our processing this new transaction the DJ is 100 fee based, our transaction in the Permian is -- our deal in the Permian is 100% fee based. So we're just not big commodity price takers, I think that's -- I think most customers work with us on that in as well too. And it's just a matter of how the ultimate service looks like to them. So I don't think there's a push one way or the other. There is obviously some aggressiveness out there in the space on -- I think some folks have, some other peers have led with paying for acreage commitments and things of that nature. So that's a phenomena that we're trying to wrap our head around little bit here over the last -- that we've seen over the last six months come to play.

[Operator:]

Our next question comes from Elvira Scotto from RBC Capital Markets.

[Elvira Scotto:]

A couple of questions, first on the DJ Basin project that you announced. Do you expect the typical midstream return on that project, and what's the timeline that you get to that return?

[Steve Newby:]

I would say, yes. That project is -- think of it is our -- right in our 6 to 8 times where we want to be organically. We expect this one to ramp up pretty quickly given activity levels, going on in the area, rigs have been working in that area pretty consistently, I think we've got rig there now and then we’ve had one or two rigs working pretty consistently through the year. So we'll be pushed or wire on this one to get the plant going in time to meet producer volume. So I expect this one to ramp up pretty quickly. So we'll get to that level, I would expect within the first 12 months or so. The Permian, I think, we've said there we're more just to position, I guess, that we're more eight to 10 times I expect us to get towards 6 to 8 times that will probably take a little bit longer. It'll come up in June and we expect a strong ramp there, probably more '19 related, so six months or so probably behind the ramp of the DJ.

[Elvira Scotto:]

For the Permian that's to get to 8 to 10, or is that to get to 6 to 8?

[Steve Newby:]

Yes, it's six to eight.

[Elvira Scotto:]

And then the other question that I had is, can you expand a little bit on your comments of taking a firmer stance on using excess cash to fund capital versus distribution growth? How does that fit in with the 1.2 times coverage target? Is the plan to finance your -- the equity portion in of your growth CapEx with internally generated cash? Or just how should we think about that, going forward?

[Steve Newby:]

So, I think Elvira if you think about right now, a distribution increase just really isn't in the cards currently, as far as our thought process. So if you take our current coverage on a quarterly basis, little over 7 million multiplied by 4 million you get close to $30 million. And then with the growing EBITDA case so that current 30 million of excess cash on an annual basis and then growing as we roll into 2018, we would consider that to be reinvestment of business versus distributing and raising more capital in the capital markets. So that’s what we’ve been focused on. And then that the coverage will then basically just increase basically, right. Now, one of the governors on all this quite is leverage and so as we continue to build up northeast, the Permian and the like. So we have to keep the leverage statistics in my as well. But again we’ve been opportunistically taking out our DPPO commitments. We had some ATM issuances in the second quarter. We actually had no ATM issuances in the most recent quarter. So we’ll continue on that pace.

[Elvira Scotto:]

And in terms of financing the DPPO, are you looking at alternative ways of financing, i.e. potentially doing some preferreds?

[Steve Newby:]

I mean, I'll say that the preferred activity has certainly been noticed by Summit, I think over the last few months. A lot of that has been done by the investment grade guys. And so I think on the retail side, there's opportunity as well. So as we look opportunistically pick our spots that would certainly be one that we would think while we would consider.

[Operator:]

[Operator Instructions] The next question comes from [indiscernible] from Citigroup.

[Unidentified Analyst:]

I really just wanted to ask if you can provide a little bit more color around the push out of the Utica developmental into maybe later 2018 and do you see any concerns over that possibly being pushed out further?

[Steve Newby:]

So part of it is we have Ascent drilling on our SMU acreage and will bring their first volumes on expect to here in the fourth quarter, that’s pretty much set. And then we’re working pretty closely with them on building out to the pads they’re going to be bringing on in '18. So I think we feel pretty good about that outlook. It is gotten pushed to the latter part of '18 as it stands right now. And so that's part of what's around our commentary. And then our other big customer, Gulfport, I mean they’re public so they give good commentary around it. I think they’re focused like a lot of EMPs about drill within cash flow. And so that’s part of what I would say is in the elongating of the development in the Utica. On the positive side, I mentioned in my prepared remarks. We are seeing increased activity in the condensate NGL windows. And I think we anticipate that still occurring in '18 as well too as NGL prices have rallied here bit. And then the other thing, the final piece I would mention is compression getting being pushed out. We still -- just so everyone know we’ve had volumes flowing now SMU for over two years and we’ve yet to put compression on our system. So that means they're basically -- the wells are strong enough to still get into the interstate system and 1,000 plus pounds. So they’re just big-big wells and compressions getting pushed out, that's a little bit of an -- you could take it as a negative to us, because it's accretive project but it's a positive in the sense of how big these wells are in the Utica. Final point I'll make is I want to make sure everyone understands, the DPPO is working exactly like it's supposed to. As that growth got pushed out, the price at which we buy those assets, the MLP, has come down. And so we've made this point since we did the transaction. I think this is a good quarter to see how that works. The risk of this extension or the pushing out of growth is not a risk the MLP is bearing, it's a risk that GP is bearing.

[Operator:]

At this moment, we're showing no further questions. I would like to turn the call back to Mr. Stratton for final remarks.

[Marc Stratton:]

Great. Well, thank you everybody, have a good weekend. And if you have follow-ups, please give us a call and we'll help you out. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.