Summit Midstream Partners, LP
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Welcome to the Q4 2017 Summit Midstream Partners, LP Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll 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 fourth quarter of 2017. 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 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 Please see our 2016 Annual Report on Form 10-K, as updated and superseded by our Current Report on Form 8-K filed with the SEC on November 6, 2017, as well as our other SEC filings for a listing of factors that could cause actual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. Thanks for joining us on the call this morning. As usual, I'll begin with a few comments on the quarter and then I'll turn it over to Matt for more detail on our quarterly financial results. I'll then wrap it up by discussing our 2018 financial guidance which we released last night. Yesterday we announced our fourth quarter and full year 2017 operational and financial results which were in line with our guidance with fourth quarter adjusted EBITDA of $72.9 million and full-year adjusted EBITDA of $290.4 million. On January 25, we announced our fourth quarter 2017 distribution of $0.575 per unit which implies our fourth quarter distribution coverage ratio 1.09, and distribution coverage for the full year of 1.14 times. During our third quarter earnings call, I addressed the topic of Summit's commitment to maintaining a strong balance sheet and a conservative financial profile. We executed on this commitment in the fourth quarter of 2017 with our issuance of $300 million of perpetual preferred equity, which allowed us to repay outstanding debt and significantly reduce leverage. At year end, SMLP had nearly $1 billion of committed liquidity under our revolver and our leverage ratio of 3.6 times. While this preferred offering will impact DCF by approximately $29 million per year and cause our distribution coverage ratio to average approximately one times for 2018 while comfortable with our leverage metrics relative to our commercial project backlog and associate CapEx. We also announced yesterday our 2018 financial guidance with adjusted EBITDA expected range from $285 million to $300 million. On the segment basis, this guidance represents roughly 10% growth year-over-year in our Williston segment and approximate 5% year-over-year decline in our Barnett segment, and then roughly flat year-over-year EBITDA expectations for Piceance/DJ segment or Utica segment in our Marcellus business unit. It is important to note that our weekly announced expansion projects in the Northern Delaware Basin and DJ Basin will be a big focus of ours in 2018 and will represent a majority of our capital programs but will provide little EBITDA contribution in 2018, getting the expected timing of project commissioning and associated volume ramp. So our guidance range includes very little contribution from two big projects that are coming on in 2018. Our Utica assets which are included in our 2016 drop down transaction in our deferred purchase price obligation, our guidance reflects a more measured pace of drilling and well completion relative to our prior communication from our customers. Further, the timing of system-wide compression on our semi Utica system is now expected to begin in 2019 versus 2018 previously. These two updates are the largest drivers of the roughly $200 million decrease quarter-over-quarter in the undiscounted amount of the deferred purchase price obligation or DPPO. This reduction really underscores how the DPPO is working exactly as it was intended to work. The variability and the price that we ultimately pay shields SMLP from the volume of capital risk associated with our 2016 drop down assets. With that, I also want to make several points abundantly clear as it relates to our Utica business. First, the changes I just mentioned impact the rate of growth for our Utica assets. We expect that these assets will continue to grow just over a longer period of time that will soon be on the DPPO measurement period. Some of this more measured growth is correlated to our producers focusing on drilling within their internally generated cash bond. Second, the DPPO calculation only contemplates EBITDA contribution through 2019. The change in producer activity I just discussed on balance is not used as a net decrease in growth but instead a shift in growth into 2019 and beyond. This represents a positive for the MLP and that the growth in inventory are still there, that will come in a lower incremental cost to the partnerships given the way DPPO formula works. Next, we remain encouraged by the underlying reservoir. For example, one of our customers turned in line two dry gas wells behind our SMU system late in the fourth quarter of '17, These two wells IP at 30 million cubic feet a day each and are still flowing at those levels today. So this is not a reservoir prospectively issue. Finally, we are beginning to see more drilling activity and some attractive well results in the wet gas and condensate window of the play. We think that this is a precursor for more positive things to come particularly given some of the recent acreage transactions in the recent strength we've seen in crude oil prices. We have a tremendous amount of existing infrastructure and gathering capacity in this part of Utica and volume growth in this area will be highly incremental to SMLP. Turning to our operational results, total operating natural gas volumes averaged 1.76 Bcf a day in fourth quarter, a 17% increase over the prior year period led by higher volume growth throughput in Utica and the Marcellus. In the Utica, our wholly owned and operated Summit Midstream Utica system gathered 369 million cubic feet a day in the fourth quarter down 8.4% from the third quarter of 2017. The quarter-to-quarter decline can primarily be attributed to our customers temporarily shutting and producing wells for maintenance and simultaneous completion activities related to new wells being completed on pad sites with the existing producing wells. These activities occurred primarily behind acreage that is serviced by our TPL7 connector. We anticipate temporary production curtailments from producers will continue in 2018 as producers shut in existing producing pad sites to drilling complete new wells on those pad sites. The benefit of this infill drilling will more than offset the temporary curtailments in the long term as we're able to increase our utilization on existing infrastructure. Lower volumes from production curtailments were partially offset by two new wells behind the SMU system which I mentioned previously that came on at very attractive IP rates contributed a minimal amount to our quarterly results in the timing of those completions. We currently have one rig operating in our SMU system and beginning in the second quarter of 2018, we expect that our customers will operate two additional rigs behind the system. We expect to see the production impact from this drilling program beginning in the first quarter of 2019. SMU volumes have benefited overall from our TPL7 connector pipeline which was commissioned in April 2017. We expect that beginning late in the first quarter of '18 we’ll begin to see the benefit from over 20 new wells turned in line behind the TPL7 connector project. For our 40% of Ohio gathering interest volume throughput in the fourth quarter of '17 was 825 million feet a day up 8% from third quarter '17 volumes. Volumes increased in the fourth quarter relative to the prior quarter due to the completion of 28 wells behind this system in the second half of '17 including completion of seven new wells in the fourth quarter of '17. There are currently four rigs running behind the OGC system and we expect to see the benefit of new well completions beginning in the second quarter of '18. We are forecasting the completion of over 40 new wells in 2018 on OGC. Due to some compression overall work and right-of-way repair expense, we do expect increase operating expenses year-over-year in this segment but we forecast these expenses to normalize again in 2019. Our liquids gathering business in the Williston average 74,000 barrels a day in the fourth quarter relatively flat to the third quarter. 20 new wells were completed late in the fourth quarter but liquids volumes were negatively impacted by third-party operational issues and our temporary production curtailments from customers' completion activities on pad sites connected to our system with producing wells. Majority of these curtailments will result in January and we are optimistic about liquids volumes growth heading into 2018. We expect volume growth to resume in the first quarter and continue throughout the remainder of '18 supported by existing backlog of approximately 40 docs and in addition there are two rigs currently working on the Summit's acreage in the Bakken. Piceance/DJ Basins segment average 575 million cubic feet a day in the fourth quarter which included higher volumes and cash flow contribution from Ohio margin DJ Basin asset. We had 17 new wells turned in line in the fourth quarter of '17 partially offsetting natural production declines. Our customers currently have four rigs working across our Piceance/DJ Basins segment and we anticipate six wells in the first quarter of '18. We currently have over 70 docs behind our system that we expect will be turned inline over the course of '18. As well completions occur, we expect to see volume increases to offset natural production declines in the Basin. Our customers continue to implement upgraded technologies and efficiencies in the Piceance and with our substantial gathering footprint in the basin, we believe we are at advantage to see benefit from these improvements with producers. Supported by the positivity outlook on producer activity, in November we announced a new 60 million cubic feet a day cryogenic processing plant expansion in the DJ Basin. This project is on budget and on schedule and is expected to be operational in the fourth quarter of '18. We are excited about the drilling results in this northern extension of the DJ and would anticipate that our added processing capacity will be quickly utilized once it comes on. In the Barnett, volume throughput increased slightly from the third quarter due to the commissioning of seven new wells late in the quarter. We expect our customers will commission six new wells during the first quarter of '18, and will operate drilling rigs in the second and third quarters of '18 with additional well completions in the fourth quarter of this year. This drilling activity will help mitigate natural production declines in 2018. We continue to see encouraging results from our Marcellus gathering assets. Volume throughput in the Marcellus averaged 540 million cubic feet a day in the fourth quarter, a slight decline from the previous quarter of approximately 44% higher than volumes in the fourth quarter of 2016. Fourth quarter volumes were positively impacted by the completion of 12 well including the earlier than anticipated completion of our five well pad site in late December. Well completions in the Marcellus have been driven in part by the continued expansion and the Sherwood Processing Complex which in 2017 increased its capacity by 600 million cubic feet per day. Further processing capacity increases our expectation in 2018 and we believe that our Mountaineer Midstream system is well-positioned to participate in volume growth over the coming years as processing capacity expands. We expect nine docs completions in the first half of 2018 in the Mountaineer system. So with that, I’ll turn it over to Matt to review our financial results in more detail.

[Matt Harrison:]

Great. Thanks Dave. SMLP reported net loss of $18.3 million for the fourth quarter of 2017 compared to net income of $14 million in the fourth quarter of 2016. Net loss in the fourth quarter of 2017 included the long-lived asset impairment of $187.1 million related to the Basin Midstream system in the Williston Basin segment and $145.6 million of non-cash income related to the decrease in the present value of the estimated deferred purchase price obligation at December 31, 2017 compared to September 30, 2017. In conjunction with the 2016 drop down acquisition, we recognized a liability in our balance sheet for the deferred purchase price obligation to reflect the estimate of the remaining consideration to be paid in 2020 for the acquisition of the 2016 drop down assets. We discount the remaining consideration on the balance sheet and recognize the change in present value on the income statement. The change in 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 fourth quarter of 2017 totaled $72.9 million compared to $72.7 million for the fourth quarter of 2016. Relative to the fourth quarter of 2016, natural gas volume throughput declined on our Ohio gathering beyond Piceance/DJ and Barnett shale segments and liquids volume throughput decreased on our Williston Basin segment. These decreases were offset by increased natural gas volume throughput on our Utica Shale and Marcellus Shale segments. While aggregate volume throughput increased relative to the fourth quarter of 2016, adjusted EBITDA was relatively flat primarily due to the rate mix associated with the volume increases on our Marcellus segment and our TPL7 connector project at SMU. Adjusted EBITDA for the fourth quarter of 2017 included approximately $15.1 million related to MVC mechanisms from our natural gas gathering and crude oil transportation agreements. Additional tabular detail regarding MVCs is included in the fourth quarter earnings release. Distributable cash flow totaled $49.2 million for the fourth quarter of 2017. This implies a distribution coverage ratio of 1.09 times relative to the fourth quarter of 2017 distribution of $0.575 per limited partner unit paid on February 14. CapEx for the fourth quarter of 2017 totaled $41.9 million of which approximately $4 million was classified as maintenance CapEx and $3.9 million was related to capital contributions at Ohio gathering. We had $261 million of debt outstanding under our $1.25 billion revolving credit facility at December 31, 2017 and $989 million of available borrowing capacity. Total leverage as of December 31, 2017 was 3.62 times. SMLP also provides 2018 financial guidance. We expect 2018 adjusted EBITDA to range from $285 million to $300 million. We expect CapEx to range between $175 million and $225 million which includes $15 million to $20 million of maintenance CapEx. Distribution coverage for the full year is expected to average between 0.95 times to 1.05 times. And with that, I'll turn the call back over to Steve.

[Steve Newby:]

Thanks Matt. 2018 is a big execution year for us given the build-out of our Permian footprint and the increase in our DJ processing facility. Also I'm encouraged more today than any time in the past three years with our commercial backlog and growth opportunities set around our assets. We are forecasting significant volume and adjusted EBITDA growth resuming in 2019 driven by our Delaware and DJ expansion projects together with the significant growth behind our Utica assets relative to 2017. In our earnings release last night, we announced 2018 capital guidance of $175 million to $225 million which is primarily related to the expansion of our Delaware and DJ systems along with CapEx for [indiscernible] in the Utica to comminate anticipated volume growth most of which we will see in 2019. Further, given the level of commercial discussions in these areas, I am hopeful that we will be able to supplement this project backlog over the course of the year. Most notable is our proposed EE pipeline from which we announced an open season a few weeks ago. The EE will deliver residue natural gas from the Northern Delaware basin at our lane processing plant to the [indiscernible] hub. We are currently in the middle of the nonbinding open season and getting great feedback from a number of potential shippers. Our open season will conclude in early March and look forward to sharing more on the status of this project over the next few months. We anticipate we will be able to fully fund our 2018 capital expenditures including the development of the plant expansions in the DJ and the gathering and processing expansion in the Delaware from our $1.25 billion revolving credit facility. With a $300 million preferred equity issuance last November combined with the reduction in the undiscounted value of the DPPO, we do not need to access the debt or equity capital markets in 2018. So with that, I’ll turn it over to the operator, and open it up for questions.

[Operator:]

[Operator Instructions] Our first question from the line comes from Kristina Kazarian from Credit Suisse. Please go ahead.

[Kristina Kazarian:]

Can you guys talk more about the potentially EBITDA upside that comes from the North Delaware and DJ projects. I know you mentioned it’s not included in guidance but just remind me how you're thinking about this and also when these assets come online?

[Steve Newby:]

I’ll take the sort of inverse last one first. So the - Delaware is going to come on mechanically it will be complete in second quarter - late second quarter. We’re being fairly conservative on contribution for 2018 because of the anticipated ramp of it. I think that's probably one of the differences between our guidance and some of the street estimates is contribution from the two plants. The DJ will come on late in the fourth quarter so of 2018 and it's underpinned by minimum volumes, and we also expect it to ramp up fairly quickly once it comes on. Contribution wise, I think looking forward what we announced - when we announced the DJ or the Delaware was the initial build outs roughly $110 million initially and that should be - you should assume that to be a 8 to 10 times sort of run rate basis. And then as we add on to the facility add on customers we would expect those to be fairly incremental to that multiple.

[Kristina Kazarian:]

And may be on the Utica side, can you guys talk a little bit about what really changed there dramatically on your Utica outlook versus last quarter and kind of help us understand the activity lag specifically what we’re hearing from producers, how much more this kind of fall to the rate?

[Steve Newby:]

Yes, so its couple of different things. First the compression situation as we pushed compression back now not coming on in 2018, but coming on in 2019 and this is on our wholly owned system SMU. And that's really due to the strength of the wells on SMU they are outperforming. Our expectations and the producers expectations so just don’t need compression yet, and again some of these wells have been on now for over two years. And so that's a little unheard of, but that just shows you the strength of the reservoir. But it is - that is an incremental project to us and we pushed it back now in a fairly confident and coming on in 2019 so that’s one. The other is really a more measured pace by some customers particularly our public companies in their pace of drilling - in drilling within cash flow. And that is causing a more measured pace I would say and that's a - we don’t think it's an issue of the Utica not growing. In fact I would tell you the Utica still - we still see pretty significant growth and saw pretty significant growth over the course of 2017 actually. So I would say that the second piece. And then the third piece we had one of our other large customers it was a timing related issue they pushed wells that we anticipated coming on middle of 2018 are now going to come on at the end of 2018 and really the first part of 2019. It’s several pad sites in the dry gas window it’s on SMU and it’s going to be fairly significant and we’re actually building out to those pads as we speak it’s just is a timing issue. So those are the three I would say our biggest issue Matt did I miss any.

[Matt Harrison:]

No that is 85% of the decrease.

[Steve Newby:]

So that you know and that is reflected in how the deferred purchase price has moved down. So you can draw your own conclusions about the MLP but we view it as a positive structure to the MLP and the growth is still going to be there in the Utica it just being what I would call elongated.

[Kristina Kazarian:]

And if I think of the puts and takes [Marcellus] on the two comments that you kind of just gave me. How do I think about that and I know you haven’t given me any guidance around 2019 yet but can you maybe help frame it up in the context of 2016, 2017, 2018 EBITDA all kind of being roughly flat at this point how you’re thinking about what the setup could be for 2019?

[Steve Newby:]

I’ll let Matt take it first, and then I may jump in…

[Matt Harrison:]

You can kind of back so - our DPPO is now 454 million on discounted basis right and you assume kind of CapEx and business just EBITDA are the same that would be imply that these dropdown assets would be delivering average what - between a 120 million and 125 million of EBITDA for the two years on average. And so that is 20 million to 25 million above where we are today right. So I think that should help from a dropdown asset standpoint to bridge gap a little bit between our expectations for kind of 2019 and beyond.

[Steve Newby:]

And I’ll add to that just to correlate with the CapEx a little bit Kristina because I think there’s some discussion around that as well to with us. I think it’s important to keep in mind that for 2017 we did about $150 million of CapEx. So we’re in the neighborhood of probably 60 million to 70 million of that actually was related to the DJ and to the Delaware so, those are growth projects. They are going to come on I would say we’re being a fairly conservative about the contribution in 2018 with them. But I think that’s an important point of sort of where our CapEx is being spent relative to growth coming on.

[Operator:]

[Operator Instructions] We have a question on line from Mirek Zak from Citigroup. Please go ahead.

[Mirek Zak:]

I was just wondering if you can give your expectations around sort of the timing and the rate of development that you're kind of expecting in the Delaware business at this point and kind of if you can give any clarity around as to how large of contributor you expect that to be in the next maybe couple of years?

[Steve Newby:]

Yes, I'll try to give you a little bit color, we expect - let’s just take 2018 I think we said it I’ll reiterate it, we don't expect much contribution in 2018. I think we're - look I think we’re taken a fairly conservative approach to give ourselves and our large anchor customer XTO a chance to ramp the plant. They're obviously running rigs there but it takes a little bit of time from a permitting standpoint for them and for us on pipeline buildout. So 2018 I would say limited - but I think you will see as I mentioned the initial buildout 8 to 10 times on a $110 million are so buildouts so you can do that math as it ramps up. And then look, we’re having significant discussions I mean EE now itself is a fairly large project hundreds of millions of dollars for to regulate a line it’s been over course of the next three years. So it's not a quick project from a CapEx spend or contribution, but it's a significant project I think we're getting very good interest there. It's going to really enable New Mexico processing capacity because frankly if you look at the math there and the math there we're going to run out of residue capacity over the next couple years if something doesn’t get done. So that's an important project. I think if - we got to bring it together. I think if you see Bcf a day or somewhere around their pipeline originating and laying processing plant going to Waha, you can probably correlate that to the prospect of us expanding our laying processing plant. So I think that's going to be a very attractive origination point which means a very attractive processing point for producers of gas. So, we expect to be doing a lot of work in the Delaware over the next couple of years both on the gas side I think we’ll broaden our services to crude as well too. If you ask me what we have in the backlog in the Delaware its - we’re looking at projects north of $0.5 billion in total over the next several years. So, we’re pretty excited about the area but we're not going to get ahead of ourselves and it’s going to take a little bit of time to develop when you do it organically that's what occurs. But we think long term that's what's attractive to our unitholders.

[Operator:]

Our next question on line comes from Chris Tillett from Barclays. Please go ahead.

[Chris Tillett:]

I was just wondering, you mentioned in the press release that in your Piceance/DJ segment some of the activity this quarter was affected by an anchor customer sort of spinning activity there. I was just wondering if you could give us an update on the outlook for win or if you expect that to presume?

[Matt Harrison:]

So recall that the carriers bought in and Carrizo acreage. And so that's kind of who are - who has been and will be our anchor customer. So we have, what 70 to 75 docks at the end of the year in the Piceance. We're expecting 110 to 120 wells to come on in '18 with little-to- none of that activity from our anchor customer. So we would kind of consider that some upside for growth in the future in the Piceance. Right now from what we can see with carriers, they are more focused north of the river, but we expect them at some point to come down in our acreage.

[Chris Tillett:]

And then on your Double Eagle projects, have you guys given a CapEx estimate for that pipeline and then how should we think about your plans to fund that as you move forward?

[Steve Newby:]

It's EE instead Eagle, although I like Double Eagle, we may change the name actually, didn’t think of that one. So we haven't given CapEx yet. The reason Chris, it's pretty simple we're in a open season. Scope for the project could change and so we can bring it together and see ways to see what it looks like, see who wants us to connect, where they want us to connect those type of things. So the scope could change and so I'm hesitant to do that. It's a large project, it can be several hundreds of millions of dollars. But the spend Chris is over multiple years right, the FERC regulator project so it's a multiyear spend. In fact won't be much in '18, '18 will be permeating year for the most part. We expect to spend to pick up some in '19 into '20 and those will be the back half of '19 into '20 will be the heavy years for it. So we anticipate given our current longer term projections, we would be able to stay with our leverage metrics and be able to fund that project internally. So we don't expect a big need, just given what we call the F-curve, the length of the spend there and how it lays out.

[Operator:]

Our next question online comes from Michael Gaiden from R. W. Baird. Please go ahead.

[Michael Gaiden:]

Can I ask - as it relates to 2018, can you talk about any expectations for how volumes in EBIDTA should progress throughout the year? Do you expect it to be flattish, should we anticipate any seasonality or any potential build into year end?

[Matt Harrison:]

It's similar I think to what we what we experienced in '17 or expected to experience in '17, in that relatively flat for the first half and then increasing as we turn the calendar into 2019.

[Michael Gaiden:]

And lastly, can I please ask about any additional or color background you could offer on the impairment on that Bison system recorded in the fourth quarter? Thanks.

[Steve Newby:]

Yes sure. So in the fourth quarter we recognized $187.1 million impairment on our Bison system in the Williston segment. This impairment - it was a result of a strategic review considered to Bison which caused us to accelerate the assumptions on timing of realizing cash flows for Bison. And by doing that it caused us to bring in fixed assets by about 102 million and our contract intangibles by about 85 million. That's what that $187 million impairment was related to.

[Michael Gaiden:]

And was there a change in the commercial backdrop there or any other thing that caused a strategic review in these charges?

[Steve Newby:]

No change in the commercial backdrop, it's just timing of kind of the cash flows. But again, it's nothing that is impacting our outlook or our outlook for Bison, just more of how we expect to handle it in the future. So there's no real impact to '18, '19 our expectations relative to Bison.

[Operator:]

[Operator Instructions] And at this time I see we have no questions in queue. I like to turn the call over to Steve for closing remarks.

[Steve Newby:]

Well, thanks everyone for joining us. Before we jump off, I just wanted to try to help a little - folks out a little bit on the bridge from our '18 guidance to some of the street estimates. Since I know, it seems to be somewhat surprising. So most street - if you take the consensus street estimate it was around 330 million. So if you think about the plant contribution, I think most folks had that it $8 million to $10 million for '18. We’re taking a conservative approach that's zero effectively. We had OpEx of about $8 million going to hit us. We have a large year of compression overhauls, that just the timing effect that won't be recurring. And then in the final piece as Utica, and the Utica is about $20 million of that and that is obviously reflective in the DPPO coming down as well too. So, if you're doing that, if you're doing the bridge from street consensus to where we are, I think those three things will get you there and help you out. So in the call with that and obviously if questions - you have follow up questions feel free to call us today and we'll get back to you. Appreciate it. Have a good weekend.

[Operator:]

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