Summit Midstream Partners, LP
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Welcome to the First Quarter 2016 Summit Midstream Partners, LP Earnings Conference Call. My name is Sherrie, and I'll be the operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded. I'd now like to turn the call over to Marc Stratton. Marc, you may begin.

[Marc Stratton:]

Great. Thanks, operator, and good morning everyone. Thank you for joining us today to discuss our financial and operating results for the first quarter 2016. 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 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 that such expectations will prove to be correct. Please see our 2015 Annual Report on Form 10-K which was filed with the SEC on February 29, 2016, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call we will use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjusted distributable cash flow. These are non-GAAP financial measures and we've provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. With that, I'll turn the call over to Steve Newby.

[Steve Newby:]

Thanks, Marc. Good morning everyone, and thanks for joining us on the call today. I’ll begin with a few comments on the quarter and then I will turn it over to Marc for more detail on our quarterly financial results. I’ll then wrap things up by discussing our outlook for the balance of the year. Yesterday we announced our first quarter of 2016 operating and financial results for SMLP. Our first quarter results along with all prior period results included in our earnings release and discussed on the call today includes as-if pooled results from the 2016 dropdown assets. What this means is that the actual operating and financial results for the dropdown assets are already included in all periods making the comparison between all period apples-to-apples. Overall was a strong quarter particularly given the continuation of a challenging commodity price backdrop. Adjusted EBITDA totaled $70 million for the first quarter of 2016, which was up 14% over the first quarter of 2015 and up 2% over the fourth quarter of 2015. Our first quarter results of adjusted EBITDA included $1.2 million of transaction expenses related to the 2016 dropdown transaction. When you add that onetime expense back, adjusted EBITDA was up 16% over the first quarter of 2015 and up 4% over the fourth quarter. Adjusted distributable cash flow totaled $52.7 million for the quarter which was up 23% over the first quarter of 2015 and up 4% over the fourth quarter of 2015. In fact our first quarter adjusted EBITDA and adjusted distributable cash flow results, represent new record highs for the Summit family on a consolidated basis. We announced our first quarter distribution of $0.575 a unit on April 21, and we covered the distribution at 1.28 times in the first quarter. The distribution will be paid on May 13. During the first quarter we dropped down all of the remaining operating assets from Summit investments to SMLP including both of our Utica Shale base gathering systems. The 40% interest we own in Ohio Gathering system and the wholly owned and operated Summit Utica gathering system. This transformational acquisition also included our interest in additional Williston based crude oil, natural gas and produce water gathering assets, as well as our gathering and processing system located in DJ, Niobrara. To remind everyone, our acquisition consideration included the deferred payment component which will be based on a 6.5 times multiple of the average EBITDA in 2018 and 2019 from the acquired assets. We paid $360 million of purchase price at the initial closing in March and the balance will be paid in 2020 based on actual performance in the assets adjusted for cumulative CapEx and cumulative EBITDA during the deferral period. We remain excited about the future growth potential that this acquisition provides us in a prospect of broadening our geographic reach into the high growth Utica. Operationally, our first quarter was highlighted by quarterly sequential volume throughput increases across 4 of our 5 operating segments. Leading strong performance was our newly acquired Utica operations. Summit Utica our wholly owned system in Belmont County, Ohio had a 76% increase in volume throughput over the fourth quarter of 2015 as we completed pipeline connections to additional path sites. Relative to the first quarter of 2015, volumes on Summit Utica increased by nearly 11 fold. We continue to build out this system and connect new sources of production during the first quarter and we anticipate additional well connections and continued growth throughout the balance of 2016. Drilling activity remained consistent during the first quarter of 2015 with our anchor customer running 1 to 2 rigs in AMI. At Ohio Gathering we saw 6% sequentially quarterly volume growth with first quarter volumes averaging 888 million cubic feet. This growth was driven by completion activity by our anchor customer in the dry gas window of the Utica during the fourth quarter of 2015, and the first quarter of 2016 and a reversal of curtailment activities from some of our customers in the fourth quarter of 2015. Relative to the first quarter of 2015, Ohio Gathering volumes increased by more than 79% in the first quarter of 2016. Looking ahead, our expectations for the Utica have not changed. We expect to see continued sequential quarterly volume growth in the Summit Utica system throughout 2016 although it could be a little lumpy given construction of well connect and timing of completion activity. On Ohio Gathering, we'd expect sequential quarterly volumes to flatten out of a bit, but significant year-of-year volume increases with increasing dry gas volumes offset by flat declining wet gas volumes, given current in-deal pricings impact on wet gas economics and dry gas drilling. One item that we're watching closely as the year progresses is the rebound occurring in NGL prices. I think it's too early in the cycle to see drilling come back to the wet window in obscure way but relevantly we're too far away on NGL prices as per additional activity in that area. The benefit of our acreage position in the Utica is that we have natural diversification across the dry gas, wet gas and condensate window. Switching to our Bakken business, we saw sequential quarterly volumes increase in both our liquids and natural gas operations in the first quarter. Our liquids volumes averaged 95,000 barrels a day in the first quarter of 2016 representing an increase of 78% over the first quarter of 2015 and 10% over the fourth quarter of 2015. Natural gas volumes in Bakken averaged 25 million cubic feet in the first quarter of 2016 which was up 19% relative to the first quarter of 2015 and flat relative to the fourth quarter of 2015. Liquids volume growth benefited from strong fourth quarter in early first quarter of 2016 activity on the crude oil completion side, as well as displacing additional truck gallon. In addition, during the first quarter we bought on our previously announced Stampede Lateral transmission project, which added an additional interconnect to our crude oil system. As a reminder, the Stampede project was built pursuant to a long term NBC contract. Subsequent to the first quarter 2016 we also added a little money interconnect which further diversifies our connectivity by adding a pipeline takeaway option in Enbridge's North Dakota Pipeline System. Both projects provide our customers with the ability to access alternative in markets and maximize their netbacks. These projects allow us to earn incremental fee based revenue on the barrels we already gather depending on the delivery point. Given the current weakness in the crude oil markets, we are seeing completion delays and significant reductions in drilling activity. These reductions were anticipated and were built into our fiscal year 2016 financial guidance. Obviously over the last month or so we've seen crude prices bounce off to lows of early 2016. However, we remain cautious on the balance of 2016 particularly the latter half of 2016, as it relates to crude volumes. DFW we gathered an average of 341million cubic feet a day in the first quarter of 2016 which was down 15% from the first quarter of 2015 but up 5% from the fourth quarter of 2015. The increase relative to the fourth quarter is attributable to volume tailwinds from the completion of a 10-well pad that occurred in early December. Looking forward we have another 11-well pad site that began initial flow back earlier this week. During the first quarter of 2016, we also had a rig working in our area so we anticipate seeing the benefit of those completions during the second half of this year. Volume throughput on our Mountaineer Midstream system, which is our high pressure system that delivers gas to the Sherwood Processing Complex average 453 million cubic feet a day in the first quarter which was down 17% in the first quarter of 2015, but up 24% from the fourth quarter 2015. Volume increases compared to the prior quarter with the result of 8 new well completions during the quarter along with the commissioning of a new third party regional takeaway pipeline, which increased netbacks for our customers and prompted them to bring production back on line. Negatively affecting this quarter was a right away foot that we repaired at a cost of $1.2 million. Looking forward, our customer still maintains a sizable backlog of approximately 27 drill but uncompleted wells behind the system. We expect a handful of the docs be completed in the next several months while the majority of these completions will be pushed to 2017. We also had an average of one to two rigs working in the first quarter in areas behind a Mountaineer system that will add to the documentary backlog by the end of 2016. Our Piceance and DJ operations which consists of our Western Colorado gathering and processing systems, and now includes our Niobrara Associated gas gathering and processing system was the one segment where we saw sequential quarterly volume and adjusted EBITDA declines. First quarter of 2016 volumes average 572 million cubic feet a day down 8% from the first quarter of 2015 and down 5% in the fourth quarter of 2015. Segment adjusted EBITDA for the first quarter total $24.8 million which was down 13.5% in the first quarter of 2015 and down 9% sequentially. The negative variance in this area was primarily related to the lack of drilling from our anchor customer in the region together with a sharp price declining crude oil and NGL prices which impacted our condensate sales and processing margin. Lower volumes from our customers that are not covered by MVCs or who are producing an excess of MVCs and the write-off of approximately $1 million of previously recognized MVCs from a private customer that represent less than 1% of our total Piceance volumes. We determined during the quarter that this producer was unlikely to pay its MVCs, so we decided to reserve for the MVCs shortfall recognizing 2015 and the portion of the expected 2016 MVC shortfall that we had recognized today. We are still following discussion with GAAP because it is predominantly non-operative production and are getting paid for that transportation. This was just related to the shortfall amount. There are multiple bright spots that give us reason to be optimistic about near term activity in the Piceance and DJ basins. Just a few weeks ago, Terra Energy closed on their acquisition of Piceance acreage on WPX which we believe will be a positive for us long term. WPX was our second largest customer on the Grand River system by volume and we expect to see a consistent level of drilling and completion activity from Terra in the immediate term. In general, upstream acreage M&A is positive for the midstream provider as new capital is typically being deployed at levels that account for current market conditions, effectively allowing the buyer to re-price the acreage and reset the bar on drilling economics. In our experience, we have typically seen higher levels of drilling activity, post purchase and we plan to work with Terra closely over the next several months to determine their game plan for the area. Currently, there are two rigs working in our Western Colorado acreage, one of those being Terra rig. In addition, we have identified more than 80 wells upstream of our system that have either already been drilled or in the process of being drilled. Finally, we have not yet had any of the 70 new wells that were committed to be drilled by one of our customers by the end of 2017, pursuant to negotiated transaction in the fourth quarter of last year which called for 70 new wells by the end of 2017 and returned for a sooner drilling rate. Collectively, this activity will be a close catalyst for our Piceance DJ basin segment volume in adjusted EBITDA over the coming quarters. Now I will turn it over to Matt to review the quarter in more detail.

[Matt Harrison:]

Thanks Steve. Like to reiterate that all current and historical periods include as-if pooled results for 2016 dropdown assets. Therefore, all of those periods we discussed this morning include the actual financial and operational results from the 2016 dropdown assets. Adjusted EBITDA for the first quarter of 2016 was $70 million compared to $61.6 million for the first quarter of 2015. The $8.4 million increase in adjusted EBITDA was primarily due to increase in natural gas volume throughput, our Summit Utica and Ohio Gathering systems and increased liquids volume throughput on our Williston Basin gathering systems. These volume throughput increases were partially offset by a volume decline on our DFW Midstream, Grand River, and Mountaineer Midstream systems in the first quarter of 2016 compared to 2015. Adjusted EBITDA in the first quarter of 2016 was impacted by approximately $1.2 million of transaction cost associated with a 2016 drop down. $1 million related to reserve for gathering receivables from a small private Grand River customer and approximately $1.2 million related to repairs to rights-of-way on our Mountaineer Midstream system. These expenses did not impact the comparable period in 2015. Adjusted EBITDA in the first quarter of 2016 included $15.2 million related to MVC mechanism from our natural gas gathering and crude oil transportation agreements. Additional tabular detail regarding MVC is included in the first quarter earnings release. SMLP reported a net loss of $3.7 million for the three months ended March 31 2016, compared to a net loss of $2.5 million in the first quarter of 2015. This includes approximately $7.5 million of differed purchase price obligation expense. In conjunction with the 2016 dropdown acquisition, we recognized that liability on our balance sheet for the differed purchase price obligation to reflect the estimate of the remaining consideration to be paid in 2020 for the acquisition of a 2016 dropdown assets. We discount the remaining consideration on the balance sheet and recognized 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 differed purchase price obligation. Adjusted distributable cash flow totaled $52.7 million in the first quarter of 2016. This implied distribution coverage ratio by 1.28 times relative to the first quarter 2016 distribution of $0.575 per limited partner unit to be paid on May 13. CapEx for the first quarter of 2016 totaled approximately $61.3 million of which approximately $3.2 million was classified as maintenance CapEx. This CapEx does not include our proportionate share of capital calls of approximately $15.6 million related to the Ohio Gathering assets in the first quarter of 2016. We had $720 million of debt outstanding under our $1.25 billion revolving credit facility at March 31, 2016, and $529 million of available borrowing capacity. Total leverage as of March 31, 2016 was 4.47 times. SMLP reaffirms natural guidance for 2016 with adjusted EBITDA expected to range from $260 million to $290 million. Given the challenging commodity price backdrop, SMLP will take a measured approach regarding distribution per unit growth in 2016. In the near term, SMLP intent to focus on building distribution coverage and strengthening its balance sheet. We expect SMLP’s distribution coverage ratio from 2016 to range between 1.1 and 1.2 times. And with that, I’ll turn the call back over to Steve.

[Steve Newby:]

Thanks Matt. As Matt mentioned, we are reaffirming our 2016 guidance of $260 million to $290 million of adjusted EBITDA with average distribution coverage for the year of 1.1 to 1.2. Growth CapEx for 2016 remains within our guidance range of $135 million to $180 million and we have significant borrowing capacity under our revolver. To remind everyone, in connection with the dropdown in the first quarter, we upsized our revolver from $700 million to 1.25 billion. Together with excess distribution coverage, we have adequate liquidity to fund all current expected obligations in the next several years. More importantly, I think our financial results this quarter displayed a diversity and strength of our business model in a positive impact of the dropdown transaction completed in the first quarter. We take comfort in the fact that we’ve planned rigorously for the current downturn with our high level of MVC commitment in our recent attractively structured dropdown transaction. With a strong contracted cash flow underpinning, significant distribution coverage and manageable leverage, we are poised to take advantage of potential opportunities presented to us. On [DUV] [ph] growth, we will continue to take a measured approach, a quarter-by-quarter approach regarding the pace of distribution growth per unit in 2016, which will be dependent on not only our current financial results but also the outlook for commodity prices and the impact that that will have on our customers drilling and completion activities. Our focus, as Matt said, continues to be on building distribution coverage and strengthening our balance sheet. So with that, I’ll turn it over to the operator to open it up for questions

[Operator:]

[Operator Instructions] Our first question is from Kristina Kazarian from Deutsche Bank.

[Kristina Kazarian:]

Morning guys. So looks like the Utica is going really well, 19% volume on a quarter-over-quarter basis, so congrats there. Something I struggle with though is the fact that we don’t get a lot of color on XTO, integrate per counterparty to have but I was hoping you might be able to talk a little bit more about how you see their build out, specifically there for the next couple of years.

[Steve Newby:]

Hi Kristina, it’s Steve. So the best proxy for XTO is really Summit Utica. So when we discuss Summit Utica specifically versus the 40% interest in OGC, really XTO is the dominant player there and the one effectively drilling there today and who are building out for. So that's the view into what their activity is in the area, is through Summit Utica.

[Kristina Kazarian:]

Perfect. And somewhat offset. You've got two systems in the Utica. One fully owned and the other the JV with MPLX and EMG? I know the latter is significantly larger now but any color on relative growth between the two, I kind of touched on it earlier, and how your CapEx spend will trend there.

[Steve Newby:]

Yes. I’ll take the first part, and I’ll touch a little on CapEx and Matt you may jump in top. But on relative growth, I think we tried to touch on this in our comments as well too. For Summit Uitca we expect to see pretty significant growth throughout the year as we're still completing that system. XTO is still actively drilling that area, that's all dry gas in sort of Belmont County in Southeast part of the Utica Play. OGC large position - we own the largest percent at 40% and then MPLX operates and they split their ownership with EMG as well too. In that area we expect to see somewhat - I would say flattening volumes throughout the rest of the year. Gulfport, the anchor customer there I think is shifted to the dry gas window outside of OGC for now, and until I think we could see some wet gas drilling if NGL prices increase, but for now we're assuming volumes at OGC, I'd call them flat basically for the rest of the year. On CapEx spend I think one thing of note in our CapEx comments, - our CapEx guidance is basically $150 million to $200 million when you include growth and maintenance CapEx for the year. We spent about $75 million in the first quarter of that. So first quarter for us was a very heavy quarter. So I think you can - we're not changing our CapEx guidance, so I think you can probably extrapolate the CapEx will on a sequential basis be coming down over the balance of the year. About 80% or 85% percent of that Kristina of that CapEx in the first quarter within Utica.

[Matt Harrison:]

Yes, of the drop about 70% is in the Utica and about 25% would have been in the Williston Basin, so of the two kind of growth area is about 91% of our $75 million to $76 million of CapEx in the first quarter. And another thing that may help out relative to OGC versus Summit Utica, if you look in our calculation of the DCF in our earnings release, you can see the contribution from - let's call equity method investees of 12.4% for the quarter. So that would be OGC.

[Kristina Kazarian:]

Perfect, thanks. And one last non fundamental question. I think the sponsor level buyback should be essentially of that $100 million number now, but I thought, I saw another large purchase this week. Just maybe any color around that, because it seems like those numbers have been very strong on them continuing to buyback units?

[Matt Harrison:]

Yes, they have a 10b5 program going that’s kind of outside of management per view but I can say that they have purchased about $85 million of their $100 million program that we announced.

[Kristina Kazarian:]

Perfect, that’s it for me. Thanks guys, appreciate the time.

[Operator:]

Thank you. And our next question is from Gabe Moreen of Bank of America.

[Gabe Moreen:]

Hi, good morning everyone. Just a quick question from me, I know in previous calls you’ve talked about - or last call you talked about the potential for buying back that did you actually do any of that this quarter. I know obviously the debt prices were recovered pretty nicely, but it seems like there's still reasonably below par is that something you might still be contemplating?

[Matt Harrison:]

So as you know Gabe on our amended facility we included a little piece, a little $100 million basket to buyback bond. We have not executed any bond repurchases. Our bond right now are trading around 80% to 90% - with [$0.90 and $1] [ph] currently and we have not been in the market for those.

[Gabe Moreen:]

Okay. Thanks Matt. And I don't know if you hit on those with Kristina, but just the run rate on maintenance CapEx this year was first quarter a little light, I'm sorry if I missed that and then the answer to her.

[Steve Newby:]

Yes. Gabe, it's Steve. Maintenance CapEx guidance overall is 15 to 20 for the year I think we did 3.5 in the first or close to that first quarter. Usually first quarter for us Gabe is fairly light because it's the winter and even though we didn't have much of a winter, this year we typically do have some seasonality to that number, so we would expect we're somewhere between 15 and 20 still on maintenance.

[Gabe Moreen:]

Got it, thanks Steve.

[Operator:]

Thank you. And then our next question comes from Tristan Richardson of SunTrust.

[Tristan Richardson:]

Hi, good morning guys. Just another quick one on the Utica. Given the growth you're seeing in that segment and then some of the puts and takes in the other segments. And then the easy up the heavy spend in Q1, I mean is it still the expectation that - because you guys have talked in the past about the Utica being somewhere around 20% this year and ramping to 40% the out years. Is that still consistent with your expectations or could you actually see the Uitca be a little bit bigger piece this year?

[Steve Newby:]

Yes, I think - Tristan it’s Steve, I think our expectations today are not any different than they were and what we've announced in the past week. We expect in the next three to five years the Utica to be a pretty large contributor to the overall EBITDA. So I wouldn't go north of that 40% range today.

[Tristan Richardson:]

It's helpful. And then just secondly, you guys kind of talked about the duck inventory in the Bakken last quarter and obvious your comments about Serbian cautious on volume sequentially, but any update on sort of what the inventory looks like in that region for you guys currently?

[Steve Newby:]

Yes. So let me comment first on one of our anchor producers announced here recently on their earnings that they were going to resume completions and completion activity in the Bakken. I would tell you, we haven't really built that activity in for the balance of the year. To say we're maybe being little conservative on that, but that's our stance right now. As far as ducks in the Bakken, we probably still have over 50 or so on - in our area and that's primarily on pads that we've already connected to.

[Tristan Richardson:]

Great, all right, thanks. Thanks guys very much.

[Operator:]

[Operator Instructions] And then our next question is from Helen Ryoo of Barclays.

[Helen Ryoo:]

Good morning. A clarification on the - how you show the MVC, just on like Piceance year-over-year there's like $4 million of EBITDA decline but then you had MVC contribution in your EBITDA to like $6.5 million. So the - without the MVC is the right way to read the data that $10 million decline would have taken place if there wasn’t the MVC protection there?

[Steve Newby:]

Helen I don't totally understand the question - can you say one more time.

[Helen Ryoo:]

Yes. I was just looking at the Piceance/DJ EBTIDA year-over-year. So it went from $28.7 million to $24.8 million, so that's a $4 million decline. And then on the MVC side you show$6.5 million on that segment, so just wanted to understand if I was reading and I could follow-up offline if anything.

[Steve Newby:]

The actual MVC available to us as you know in that line about $6.5 million, that’s mostly in Encana. That MVC is absolutely the commitment flat year-over-year. And what happened is actually their volumes declined a little bit more relative to prior year, so their actual MVC payments are little bit higher but the impact is flat year-over-year.

[Helen Ryoo:]

Okay, got it. All right, that's all I have.

[Matt Harrison:]

And Helen I would add, the other thing we had in the Piceance this quarter is we took a $1 million reserve for small private producer on their MVCs, so that an expense we would not expect to incur on a go forward basis.

[Helen Ryoo:]

Got it, all right. Thank you so much.

[Operator:]

Thank you. And then at this time I'll turn the call back to Steve Newby for closing remarks.

[Steve Newby:]

Well, thanks everybody for joining and happy early Mother's Day to all the mothers on the phone and for those on the phone you need to call your mother this weekend. So have a good weekend and we'll talk to you soon. Thanks.

[Operator:]

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