Summit Midstream Partners, LP
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Welcome to the third quarter 2014 Summit Midstream Partners, LP Earnings Conference Call. My name is Christine and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Marc Stratton. You may begin.

[Marc Stratton:]

Alright, thanks, Christine and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the third quarter of 2014. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.summitmidstream.com where you will find it on the homepage or in the News section. With me today to discuss our quarterly earnings are Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer. Before we start, I would 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 Please see our 2013 Annual Report on Form 10-K as updated and superseded by our current report on Form 8-K filed with SEC on July 3, 2014 as well as our other SEC filings for a listing of factors that could cause actual results to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, 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. And with that, I will turn the call over to Steve Newby.

[Steve Newby:]

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call this morning. I will begin by discussing our third quarter highlights and our forward outlook for each area and then I will turn it over to Matt for more details on our financial results. I will then end the call with some additional comments on the remainder of '14 and our 2015 outlook and guidance. Yesterday, we announced our financial and operating results for the third quarter of 2014. For the quarter we reported adjusted EBITDA of $50.3 million, which was up 13.5% over the third quarter of 2013 and up approximately 5% over the second quarter of '14. Adjusted distributable cash flow totaled $35 million, which was up 5.8% over last year and flat through the second quarter of '14. On October 23rd, we announced our third quarter distribution of $0.54 a unit, which was up 17.4% over the third quarter of '13 and 3.8% increase over the last quarter. Our average coverage ratio for the year has been 1.1 times. We reported a record 1.5 Bcf of volume throughput in the third quarter, up 25% over the last year and up 4.4% over the second quarter. This volume growth was a result of our diversified service area and customer base and was the major driver in our continued growth in adjusted EBITDA. Distributable cash flow for the quarter was flat largely due to the investments we made in our balance sheet in mid-July when we issued $300 million of senior notes and higher than anticipated maintenance CapEx during the quarter. During the third quarter, we incurred higher than expected maintenance capital expenditures on our DFW system in order to address a vibration issue at our Bulldog compressor station. The issue resulted in approximately $1.2 million of higher maintenance CapEx during the quarter, but the situation has been fully remediated and we don’t anticipate a recurrence of those costs going forward. Before I discuss each of our assets at SMLP, let me first discuss the activity level at Summit Investments, our general partner development company. Activity levels remain high as we continue to execute on $2 billion of investment over the next several years, including approximately $800 million in 2015. Given current dialog with producers in our key growth areas, the Bakken and Utica, we feel confident that that $2 billion of investment will continue to grow over the near-term as those shale plays remain resource-rich, but infrastructure constrained. This activity continues to increase the growth visibility of the MLP which will have access to a portion of this development backlog once the assets are de-risked over the next several years. I’ll discuss these future drop downs and their potential impact later in the call. Now to the MLP and specifically on the volume throughput front. As I mentioned earlier, total average throughput for the third quarter was 1.5 Bcf a day, which was up 24.6% over year-ago levels and 4.4% over the second quarter. The largest driver of our volume increase was our Marcellus asset, Mountaineer Midstream, which was up 14% over the second quarter and averaged 416 million cubic feet a day in the third quarter. In addition, Mountaineer volumes increased despite no contribution from our Zinnia Loop project which was commissioned at the very end of the third quarter. The commissioning of the project increased our throughput capacity on Mountaineer to over 1 Bcf a day. We expect to see continued growth on the Mountaineer system through the end of '14 and into '15 as our anchor customer, Antero, continues to be very active in the area. At Bison, we were very encouraged by our third quarter performance as volumes increased 40% over the second quarter, averaging 21 million cubic feet a day for the quarter. In addition, we have now experienced six consecutive months of volume growth at Bison from 12 million cubic feet a day in March to 22 million cubic feet a day in September. Increases in volume throughput at Bison came from our two most active customers on the system, Oasis and Statoil. We have continued to invest heavily in Bison both with new compression assets and with maintenance capital to increase the efficiency of our existing assets and those efforts are beginning to pay off. During the fourth quarter and into the first quarter of '15 we will bring on two additional compressor stations which will help further reduce fuel pressures and provide us with additional capacity to move more volumes and capture flush IPs when the wells turn over to sales. Producer activity remained constant during the third quarter and producers are currently completing wells that we expect will be brought online over the next several months. Looking into 2015, we’re confident in further growth on Bison, but we’re also monitoring the crude oil price situation carefully and its effect on producer drilling activity. At DFW, total volumes for the third quarter averaged 361 million cubic feet a day, which was up 3% from the second quarter and marked the second consecutive quarter of volume growth. The increase did not include any contribution from the Texas Energy Midstream acquisition that we announced on our second quarter earnings call. That acquisition closed on September 30th due to a delay in obtaining certain approvals which we have now obtained. Currently, the Texas Energy Midstream system is moving approximately 15 million cubic feet a day. For the balance of 2014 and into 2015, we expect volume to increase from third quarter levels across the DFW system as we bring on several pad sites that are currently down for drilling and completion activities, and as Vantage, our most active customer on the system, increases its activity under the expansion project we announced last quarter. Our DWF System in the Barnett is positioned at what we call 'core of the core' and the acreage remains one of the most economical dry gas areas in the country. Recently, producers on our system have announced rates of return in excess of 60% plus at current pricing and bases in this area is not nearly the problem that we see in the Northeast. So the DFW System continues to provide significant free cash flow for SMLP while also giving us upside increase in natural gas prices and production. For Grand River, which now includes our legacy Red Rock assets that we acquired in the first quarter of 2014, volume average 667 million cubic feet a day in the third quarter which was virtually flat over second quarter of 2014 volumes. The third quarter results reflected a consistent theme to the second quarter Grand River with declines from Encana’s reduced drilling activity being offset by growth from several other Red Rock customers including WPX and Ursa. We expect that this theme will continue in the fourth quarter and into '15. Our current expectation is that Encana will again minimize drilling under their JV agreement with Nucor in our area for '15 before picking it back up in '16. Although they are focusing their efforts on maximizing production from existing wells, we do expect continued volume declines related to their inactivity. We expect other customers in the area, namely WPX, Black Hills and Ursa, to continue to be active in the Piceance Valley which will help offset declines from Encana in 2015. Further, we remain highly contracted in this area. Our Grand River MVCs will increase in the aggregate from 2014 to 2015 and average over 750 million cubic feet a day over the next four years versus our third quarter reported volume of 667 million cubic feet. For Encana specifically, our contracted MVCs run through 2026, so our cash flows are well protected against further volume declines. The other trend we’re seeing in this area is acreage trading hands. During the third quarter of 2014 we had several transactions related to acreage sales including three of our customers. As we have said in the past, we believe acreage transactions on balance are positive to midstream providers as acquirers are able to reprice the acreage and are usually buying to further develop the area. So before I turn it over to Matt to summarize the quarter, volume growth continues to be consistent, which is leading to solid adjusted EBITDA growth. DCF for the quarter was impacted by higher maintenance CapEx at DFW and Bison along with higher interest costs related to investment in our balance sheet with our high yield notes deal. For 2015, our diversified highly contracted asset base should deliver solid baseline growth, while the continued robust development activity at some investments will afford us visible, accretive growth opportunities while further scaling and diversifying our business mix. So with that, I will turn it over to Matt.

[Matt Harrison:]

Great. Thanks, Steve. I will cover the results of Summit Midstream Partners LP, or SMLP. SMLP acquired Bison Midstream and Red Rock Gathering from a subsidiary of Summit Investments on June 4, 2013 and March 18, 2014. The transactions were considered acquisitions from an entity under common control. Therefore, the Bison and the Red Rock drop down acquisitions have been accounted for on an as-if-pooled basis for all periods in which common control existed. Therefore, Bison Midstream financial results are combined with SMLP beginning on February 16, 2013 and Red Rock Gathering beginning on October 23, 2012. Adjusted EBITDA for the three months ended September 30, 2014 was 50.3 million compared to 44.3 million for the three months ended September 30, 2013, an increase of approximately 14%. The $6 million increase in adjusted EBITDA was primarily due to the proportionate contribution of higher margin throughput volumes from certain of our customers on the Grand River system, including the volumes associated with the startup in March 2014 of our DeBeque plant and the increase in volume throughput on the Mountaineer Midstream System, which was acquired on June 21, 2013. These increases in adjusted EBITDA were offset by a decrease in DFW Midstream as a result of lower throughput in the third quarter of 2014 compared to 2013. Also, certain of SMLP's gas gathering agreements on this Grand River system contain annual minimum volume commitments, or MVCs, and gathering rates that increased at the start of 2014. Adjusted EBITDA in the third quarter of 2014 included approximately $12.1 million related MVC mechanisms from our gas gathering contracts. This amount included 900,000 of shortfall payments that were recognized as revenue, 7.2 million quarterly adjustments related to future projected annual MVC shortfall payments and 4 million associated with the increase in deferred revenue related to MVC shortfall payments. 4 million MVC shortfall payments was recognized as deferred revenue on our balance sheet. Additional detail regarding MVCs is included in our third quarter earnings release. Adjusted distributable cash flow totaled 35 million in the third quarter of 2014. This implies a distribution coverage ratio of 1.05 times to third quarter distribution of $0.54 for LP unit to be paid on November 14, 2014. CapEx for the third quarter of 2014 was approximately 40.8 million, of which approximately 4.2 million was classified as maintenance CapEx. We had 175 million of debt outstanding under our revolving credit facility at September 30, 2014. The borrowing capacity under our $700 million revolver was approximately 525 million at September 30, 2014. Total leverage at September 30, 2014 was 4.2 times. SMLP tightened its 2014 adjusted EBITDA guidance to 195 million to 200 million and distribution per unit growth to 15% to 17.5%. With that, I will turn the call back over to Steve.

[Steve Newby:]

Thanks, Matt. First to reiterate what Matt said, we are narrowing our full year 2014 adjusted EBITDA guidance to a range of 195 million to 200 million and distribution per unit growth to 15% to 17.5% over our fourth quarter '13 distribution of $0.48 a unit. We are also issuing 2015 guidance of $215 million to $230 million of adjusted EBITDA. Driving SMLP's expected growth in 2015 are several factors. First, increases on our DFW system related to the expansion of the system for Vantage, the increased utilization of our Zinnia Loop project at Mountaineer and continued growth in Antero production, the continued increase we expect on our Bison system associated with Oasis and Statoil, and finally increases on our Grand River system related to the step-ups in our MVCs and production growth from WPX, Black Hills and Ursa. As usual, our 2015 guidance does not include the impact of any asset drop downs from Summit Investments to SMLP. If, or should I say, when these drop downs occur, we will revise our guidance accordingly. As I mentioned earlier, our general partner Summit Investments has a $2 billion contracted backlog of organic capital expenditures that we expect to grow. This backlog provides us with multi-year growth visibility at SMLP. So with our current outlook on development at our general partner, we are revising upwards our projections for drop downs over the next three years. Previously we had guided the market to $300 million to $500 million of drop downs per year over the next several years. We now believe we will have $400 million to $800 million of drop downs per year over the next three years as our Bakken and Utica developments begin to reach development maturity and cash flow stability. We believe this level of drop down activity will lead to mid-teens annual LP distribution growth over the next three years. It is also important to note that as these drop downs occur, they will have organic growth CapEx associated with them. So we anticipate that some amount of the $2 billion of development CapEx at the general partner today will actually be executed by the MLP. Obviously, with that comes the accretion from the organic CapEx as well. In addition, we would expect that as SMLP becomes larger and more diverse, we will be able to execute more organic growth activity at the MLP level. Our operating areas are some of the highest growth areas in the country for midstream infrastructure development, so we feel like we're well positioned for organic growth and bolt-on acquisition opportunities and I think our team has shown the ability to win our fair share of new business and compete effectively in those areas. The success of winning and in executing on growth opportunities in and around our current operating footprints, we believe, will further enhance our high level of distribution per unit growth over the next several years. So with that, I'll open it up for questions. Christine?

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Gabe Moreen from Bank of America. Please go ahead.

[Derek Walker:]

This is Derek Walker on behalf of Gabe. Just a couple of questions around guidance. You obviously increased the drop down potential to 400 million to 800 million. I guess, do you have a sense on sort of the pace of that? Would you do it in two tranches in the year, say, call it, towards the lower end of that spectrum, 200 million in 1Q, another 200 million in 3Q? And I guess, what's sort of driving that variation which seems to be relatively sizable?

[Steve Newby:]

Derek, it's Steve. So on sort of scaling, I would probably guide you to sort of two transactions a year most likely. Most likely it wouldn't be one large one. And then the variance is really driven around how fast ramp ups occur, particularly in the Utica and the size of the asset when it comes down. So that's really what's driving the variation.

[Derek Walker:]

And then, Steve, in your formal remarks you mentioned you continue to watch producer behavior with regards to where crude oil prices are. I guess, have you had any recent conversations around that and any particular changes you have anticipated?

[Steve Newby:]

We're dealing in a situation where the crude price drop has been fairly recent, the last couple of months, and it's also coming right in the middle of producers setting their budgets too for '15. So I think everybody, including our customers, are trying to figure out exactly what things are going to look like and how they're going to react. I think we fully expect and in our guidance I would say is the expectation that we're sub $80, $85 crude oil we're going to see a slowdown in activity in those areas that we're exposed on the crude side and we've reflected that really in our guidance. So, I mean that's really the extent right now. As I said, folks are in the middle of setting their '15 budget, so I think everybody's trying to figure out and I really don't think folks will until probably first part of '15.

[Derek Walker:]

And just the last one for me on the DSW System. I know previously you mentioned you continue to watch what Chesapeake' is doing in that area. Just given what the merger with ACMP and WPZ, have you heard any discussions or conversations just around Chesapeake's strategies with their acreage in that area and how it might impact DSW?

[Steve Newby:]

Nothing other than probably what you've heard publicly what they've said. I think they're going to put out that they are going to run two rigs I think in the Barnett next year. And we will have in our area, or have had historically, sort of sporadic drilling from them, opening a rig in and put down a few wells, but nothing consistent. So other than that, we haven't seen anything. I will tell you, for us and for '15 guidance, we've assumed they're basically inactive for '15 in our area.

[Operator:]

Thank you. (Operator Instructions) We have no -- A question has just turned up from Helen Ryoo from Barclays. Please go ahead.

[Helen Ryoo:]

I just have a very quick clarification question related to your 2015 guidance. Does that include -- you mentioned that this doesn't include drop downs, but I guess that the guidance does include that 400 million to 800 million of drop down taking place. So if anything happens above that range, that's not included? Was that the comment?

[Steve Newby:]

So the EBITDA guidance does not include any drop downs, including, it doesn’t include anything in the 400 million to 800 million. So anything that occurs, any kind of drop downs that occur, we’re going to include that or increase that EBITDA guidance. Does that answer your question?

[Helen Ryoo:]

Yes. So you are guiding towards a 400 million to 800 million drop down next year and then sort of every year for the next three years. So eventually when this drop down takes place, you’re going to have to increase the currently established 215 million to 230 million guidance at that time?

[Steve Newby:]

That’s exactly right, yes.

[Operator:]

Thank you. Our next question comes from Elvira Scotto from RBC Capital Markets. Please go ahead.

[Elvira Scotto:]

Just a couple of quick clarification questions again. So the guidance, the EBITDA guidance does not include drop downs nor does the distribution growth guidance. Is that correct?

[Steve Newby:]

So the EBITDA guidance does not include any drop downs. With the drop downs over the next three years, 400 million to 800 million, we expect to be a mid-teens grower over the next three years. So that includes the effect of the drop downs. So does that make sense?

[Elvira Scotto:]

It does make sense. So without the drop downs, you wouldn’t be mid-teens. But with the drop downs….

[Steve Newby:]

That’s right, yeah. Assume without the drop downs, the base business is probably half of that. So we’re in the 6% to 8% range of growth.

[Elvira Scotto:]

And then just the other question, so just to clarify again, the guidance that you put out assumes some level of sort of lower activity because you are baking in something below an $80 crude price. Just maybe elaborate a little bit on that.

[Steve Newby:]

I think, first of all, the area where we’re exposed at the MLP level to crude oil is our Bison system. So our other areas are not really exposed on the crude side. And in that area, our '15 guidance really has a very reduced level of drilling activity from our customer base based on what we know today. And so we don’t think we’re that exposed to '15 guidance from the reduction in crude oil, so we've really built it in already.

[Elvira Scotto:]

So that’s just -- is that based on conversations with your customers or just some analysis that you have done on kind of breakeven costs?

[Steve Newby:]

Based on conversations with our customers.

[Operator:]

Thank you. Our next question comes from Jerren Holder from Goldman Sachs. Please go ahead.

[Jerren Holder:]

Just wanted to touch on maybe the impact of lower commodity prices on maybe the drop down backlog and what’s being built at the Bakken and Utica and Niobrara, if you guys could touch on that. And essentially what’s like fully or more advanced in terms of being developed that can be dropped down in 2015 even if you were to see sustained lower prices there?

[Steve Newby:]

I think as far as impact goes, it varies depending on what the -- depending on what assets we're talking about in the backlog. If you’re specifically drilling into crude oil side, that would be our Bakken system, what we call our Meadowlark assets, which includes our Polar and Divide systems. When and if those get offered down to the MLP, they are going to be offered down in the context of the current commodity price environment. So I think that’s a given. And will there be -- as we see in our Bison system, we expect there to be some sort of effect on activity given the current commodity prices there. So our Utica systems are much more gas driven than our Bakken stuff obviously and different drivers going on there. So does that answer your question?

[Jerren Holder:]

Yes, it definitely does. And I guess you obviously brought the point about Bison, the only system being exposed to crude oil prices. So what about NGL prices, which in a way does trade a little bit by crude here? How does that affect like the Barnett and Piceance from that sense?

[Steve Newby:]

So our Barnett system is dry gas, so that doesn’t have much effect. Our Piceance or Western Colorado system, there is some effect out there, it’s more gassy than it is NGL exposed, however, but there is some effect on NGL prices. But they have been in rejection in Western Colorado on that thing for quite some time. And then in the Utica, it’s been -- we have a condensate window, a wet gas window and a dry gas window. And then in the Marcellus, on our Mountaineer system, there is exposure to NGL prices, however you've probably seen Antero’s information, it’s a very, very economical area even at this pricing level. So our biggest crude oil exposure and only crude oil exposure really at the MLP is Bison. I will say on our general partner development on the crude oil side, we’re still seeing heavy activity in the core area, particularly that southern part of the system near the river is really a very, really the core area, part of the core area of the Bakken. So we are still seeing pretty heavy activity and have seen heavy activity even as you go further North because of that Three Forks bench and divide. We've seen one of our customers there and be pretty aggressive on the acquisition front there and we think that's pretty positive too.

[Matt Harrison:]

And Jerren, just to be super clear on the exposure to NGLs. As Steve talked about the Piceance, we are -- Summit's not directly exposed and we have gathering rates. That's our customer's and their returns that are exposed. It’s the same with the Marcellus. We are a fee based in the Marcellus as well, but Antero was exposed as they get the net backs.

[Jerren Holder:]

And I guess the last one, just given I guess the volatility here. What are you guys seeing in terms of M&A opportunities for the parent to keep building the backlog, I would think that maybe more opportunities will be popping up? What are your thoughts there?

[Steve Newby:]

I think, it remains fairly robust. I don't think we've seen the effect of commodity prices fully reflected yet probably and so is our valuation consideration. So I think that's to be determined. But, I would say we are still probably as, if not more, bullish on the development side, Jerren, on opportunities in or around our footprints and believe that there is a lot of opportunity in our areas and we think we will be successful in some of those opportunities. So I would say for us, it's as much now development in and around our footprint as that is acquisitions. There are going to be things available from a bolt-on standpoint in both the Bakken and the Utica, we would expect.

[Operator:]

Thank you. I will now turn the call back to Mr. Steve Newby for closing comments.

[Steve Newby:]

Okay. Well we thank everybody for tuning in obviously. As usual, if you have follow-up questions, just reach out to us. Thank you.

[Operator:]

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