Smith & Wesson Brands Q1 2023 Earnings Call Transcript

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May 5, 2023

There are 5 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the First Quarter 2023 Summit Midstream Partners LP Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Randall Burton, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, operator, and good morning, everyone. If you don't already have a copy of our earnings release, please visit our website at www.summitmidstream.com, You'll find it on the homepage, Events and Presentations section or Quarterly Results section. With me today to discuss our Q1 of 2023 financial and operating results Heath Denicke, our President, Chief Executive Officer and Chairman Bill Moll, our Chief Financial Officer along with other members of our senior management team. 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.

Speaker 1

It 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 2022 Annual Report on Form 10 ks, which was filed with the SEC on March 1, 2023, 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 terms EBITDA, adjusted EBITDA, distributable cash flow and free 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.

Speaker 1

And with that, I'll turn the call over to Heath.

Speaker 2

Great. Hey, thanks. Thanks, Randall. Good morning, everyone. So Summit this morning reported 1st Quarter adjusted EBITDA of $60,400,000 which was in line with our internal expectations.

Speaker 2

As expected, we had a very active quarter operationally with over 60 new wells added to our systems, over half of which were in the Rockies region. Despite experiencing some timing slippage And longer than anticipated frac protect shut ins during the quarter, these new well additions resulted in 17% liquids volume growth quarter over quarter and 14% gas volumes growth in the DJ Basin relative to December of 2022. Shifting to the full year picture, customer activity levels remain healthy across most of our operating segments. There are currently 9 rigs running behind our systems Over 225 drilled but uncompleted wells that we expect will continue to drive significant volume and EBITDA growth throughout the remainder of the year. Based on recent discussions with our customers in the Barnett and Piazza, we do expect that continued downward pressure on near term gas prices will likely result in some delays and pullbacks of plant activity in 2023 versus beginning of the year expectations.

Speaker 2

However, we believe those changes are largely accounted for in the lower end of our original segment guidance range in those particular regions. In the Williston, DJ and Utica Shale Basins, we continue to see resiliency in our original customer plans for the year, which we believe keeps us on track overall to achieve strong sequential quarterly growth in 2023 and deliver on our adjusted EBITDA guidance range of 2.90 $320,000,000 for the year. Our focus this year is on operational execution given the significant number of wells that we're connecting behind our system this year. Over the last 5 months, we have successfully integrated and continue to optimize our recently acquired DJ Basin assets. Our capital program in the Williston and DJ Basins continues to progress on time and on budget.

Speaker 2

And additionally, in the Delaware Basin, we Achieved an important milestone on AA during the quarter by receiving FERC authorization to construct a new lateral to the Red Hills processing facility in Eddy County, Mexico. At over 1.25 Bcf per day of processing capacity, the Red Hills plant is the largest processing complex in the state of New Mexico. We will be ramping up marketing activities this summer to solicit interest from new and existing customers to hopefully provide firm transportation services from the Red Hills complex and other plants in the area across the whole Double E pipeline system to downstream delivery points in the Waha, Texas area. So in summary, we're off to a good start with our Q1 financial and operating results. We're excited about the cadence and level of customer activity we continue to see And we remain on track to achieve the significant year over year growth that we guided towards at the beginning of the year.

Speaker 2

With that, let me hand the call over to Bill to provide additional detail on our segment financial results.

Speaker 3

Thanks Heath and good morning everyone. In the Northeast, which is inclusive of our SMU system, proportionate share of our Ohio Gathering joint venture and our Marcellus system, The segment averaged 1.3 Bcf per day during the quarter, inclusive of 598,000,000 cubic feet a day of 8 8s OGC volumes And segment adjusted EBITDA totaled $17,900,000 a decrease of $1,200,000 from the Q4 of 2022, primarily due to a decline in volumes from frac protect activities Heath mentioned earlier on the call. We estimate those frac protect activities negatively impacted volumes by approximately 50,000,000 cubic feet a day at OGC and 20,000,000 cubic feet a day at SMU and gross margin net to SMLP by approximately 1,000,000 during the quarter. We expect these impacts to moderate in the Q2 of 2023 as these new and existing wells are brought back online. 5 new wells were brought online behind our wholly owned SMU system and 12 new wells were connected behind our OGC joint venture during the quarter.

Speaker 3

There are currently 4 rigs running behind the systems, including 3 rigs behind our wholly owned SMU system with more than 55 docks behind the systems. Our customers are well hedged and while Summit is expecting significant growth behind its systems, we estimate our customers' overall basin activity to remained relatively flat to 2022 production levels. The Rockies segment, which is inclusive of our DJ and Williston Basin systems, generated adjusted EBITDA of $23,200,000 an increase of $9,400,000 from the Q4 of 2022 due primarily to the DJ Basin acquisitions made in December. Liquids volume throughput averaged 74,000 barrels per day during the quarter, A 17% increase relative to the Q4 of 2022 and natural gas volume throughput averaged 108,000,000 cubic feet a day, representing approximately 14% growth relative to volume throughput in December of 2022. There were 36 new wells connected during the quarter.

Speaker 3

There are 3 rigs running and more than 150 docks behind the systems. The Permian segment, which includes our 70% interest in the Double E pipeline, reported adjusted EBITDA of $5,100,000 An increase of $900,000 relative to the Q4 of 2022, primarily due to contractual step ups and take or pay contracts at our Double E joint venture. The PEON segment recorded adjusted EBITDA of $14,100,000 a decrease of $700,000 relative to the 4th quarter. Volumes averaged 287,000,000 cubic feet a day, a decrease of 2.7% relative to the 4th quarter, primarily due to natural production declines, partially offset by volume from 8 wells that were turned in line in March. There are 9 more wells on that same pad site that have been drilled, completed and expected to be turned in line this month.

Speaker 3

As Seif mentioned earlier, We are seeing some modest delay in development by our customers, but still expect to achieve our segment adjusted EBITDA guidance in the P and L. The Barnett segment reported adjusted EBITDA of $7,000,000 a decrease of $200,000 relative to the 4th quarter, Primarily due to natural production declines and frac protect activities impacting quarterly volumes by an estimated 6,000,000 cubic feet a day And segment adjusted EBITDA by an estimated $300,000 There is still one rig running behind the system and one of our customers has decided to hold wells in DUC inventory until natural gas prices improve. We now expect 15 wells to turn in line this year, which we expect to result in segment adjusted EBITDA to trend toward or slightly below the low end of our segment adjusted EBITDA guidance range of $35,000,000 to 40,000,000 Quickly on the partnership, SMLP recorded a 1st quarter net loss of $14,200,000 And adjusted EBITDA of $60,400,000 Capital expenditures totaled approximately $16,000,000 for the quarter, in line with expectations and included $4,000,000 of maintenance CapEx. The majority of growth CapEx during the quarter was in the Rockies and associated with pad connections and DJ Basin Integration Projects.

Speaker 3

With respect to SMLP's balance sheet, we have net debt of approximately $1,340,000,000 A decrease of approximately $25,000,000 relative to year end 2022 and total liquidity at the end of the Q1 totaled approximately 100,000,000 which included $4,000,000 of letters of credit. And with that, I'll turn the call back over to Heath for closing remarks.

Speaker 2

All right. Thanks, Bill. As I said earlier, we are pleased with the Q1 performance. And while there have been a few gives and takes across the portfolio, we continue to expect Our 2023 adjusted EBITDA guidance range of $290,000,000 to $320,000,000 for the year. We look forward to continuing to provide operational updates throughout the year.

Speaker 2

And before I open up the call for questions, I wanted to remind everyone of the upcoming annual meeting of limited partners, which will be held virtually on May 10, 2023 at 2 pm Central Time. All unitholders should have received proxy materials associated with the meeting. There are a number of items on the agenda that are important to the partnership and we encourage all unitholders to vote. Thank you for your time and continued support.

Operator

Please standby while we compile the Q and A roster. We have a question from Greg Brody from Bank of Your line is

Speaker 4

open. Good morning, guys. Could you it looks like you have Just based on the quarter and your maintenance you're maintaining the guidance that you need to ramp EBITDA throughout the year to hit those numbers. Does it seem like you're trending towards the lower end of guidance and can you help us think through sort of what are some of the risks to your You're maintaining guidance today.

Speaker 2

Yes. I'll kind of start us off on that. This is Heath and Bill can add some commentary as well. I mean, as we said, we Yes, this quarter is really in line with our expectations and the cadence of activity that we expected throughout the year. If you recall, we had Within our guidance range, I think the midpoint of well connects was north of 300 close to maybe 330 or so.

Speaker 2

And 60 of those got completed in the Q1, which was Again, kind of as we expected. So definitely, when we kind of have looked at the year, it's definitely kind of Late first half to early second half of the year is when the majority of those new wells and then the volumes off those wells will kind of come into play. So I think at this point, while we definitely in the Peyants and the Barnett, we kind of suggested that based on the recent discussions with Customers and some of them some pullback there that we probably expect to kind of come close to the lower end in those particular segments. However, all the timing of all the Utica and the Rockies segments, The timing of those and cadence of well connects and level of well connects are still in line with the producer original plans. So and we've risked those quite a bit in the mid.

Speaker 2

So we kind of think that as long as everything kind of stays on track as it looks right now, we still think kind of coming within The guidance range and at this point, I'd probably say we're just as likely to end up at the midpoint than we would be the low point.

Speaker 3

Yes. And Greg, I'd just add a couple more points, right? We highlighted in the Northeast, right, we had about $70,000,000 a day Down for Frac Protect. While certainly that impacted quarterly results by about $1,300,000 when you include the Barnett Frac protect, but those are great signals, right? That means that they're completing wells that are about to come online.

Speaker 3

So just I think that further gives you a couple more data points on just the cadence and we wouldn't expect those To be shut in for frac protect more than 3 or 4 months as they're completing wells on existing pad sites. So I think that's a good leading indicator. And then, I think again as we see kind of Construction timeline, we had while CapEx was in line with our expectations, a decent CapEx this quarter. I think that's all indicating that we're getting pad connects connected and should tee up for a nice summer.

Speaker 4

I appreciate the color there. And just last one for you. So you've talked in the past about strategic Opportunities potentially deleveraging the balance sheet and just improving the asset base. What's your sense of the opportunities that today? Is it something that We're likely to see this year or has that changed?

Speaker 2

Yes. I mean, I think our focus right now is really just on kind of Yes, just organic execution around our base business. I mean, we're seeing a lot of new well connects and a lot of new activity. We continue to look at opportunities, but we as you well know, I mean, we completed the big DJ acquisitions and we're seeing A lot of good stuff kind of happening in the DJ overall, but this is a year that we're kind of focused on getting all The WellConnects and getting everything we can to move to market and rebuilding up liquidity under our credit facility That we utilized to help finance that DJ transaction. So I think certainly lots of opportunity and we always Look into things, but I don't think there's anything right now that I would say is imminent or Yes, something that we're frankly not we're just not really all that focused on right now.

Speaker 4

Got it. Thank you for your time guys. You bet.

Operator

Thank you. And that's all the questions we have. This concludes today's conference call. Thank you for

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Earnings Conference Call
Smith & Wesson Brands Q1 2023
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