DT Midstream Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 1, 2023

There are 10 speakers on the call.

Operator

Welcome to the DT Midstream Second Quarter 2023 Earnings Call. I will now turn it over to our speaker today, Todd Lorman, Director of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome, everyone. Before we get started, I would like to remind you to read the Safe Harbor statement on Page 2 of the presentation, including the reference to forward looking statements. Our presentation also includes references to non GAAP financial measures. Please refer to the reconciliations to GAAP contained in the appendix. Joining me this morning are David Slater, President and CEO and Jeff Jewell, Executive Vice President and CFO.

Speaker 1

I'll now turn it over to David to start the call.

Speaker 2

Thanks, Todd, and good morning, everyone, and thank you for joining. During today's call, I'll touch on our financial results and provide an update on our growth projects, including our CCS project in Louisiana. I'll then close with some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance. So with that, we had another strong quarter and the business continues to perform in line with our full year plan, giving us confidence And our full year adjusted EBITDA guidance for 2023 and early outlook for 2024. As a reminder, we expect growth to be weighted towards the second half of the year as we bring new projects online.

Speaker 2

I am very excited to announce that we made a final investment decision on a new greenfield gathering opportunity in the Ohio Utica. This opportunity originated from an acreage dedication we held with a small private producer. That acreage Since been acquired by a large cap investment grade producer, who is committed to developing this area. This opportunity has always been in our plan for 2024. And now with the development schedule finalized And a restructured commercial agreement in place, we are shifting approximately $100,000,000 of committed capital forward a few months from early 2024 into the second half of twenty twenty three.

Speaker 2

The initial backbone build out of this natural gas gathering system We'll provide over 200,000,000 cubic feet a day of capacity and go into service in the first half of twenty twenty four. The gathering system will transport associated gas from new wells being drilled in the rich window of the Utica. These wells are highly economic under current market prices, and our investment is underpinned by a long term contract With minimum volume commitments that fully protect project returns. As is typical with any new resource development, There will be a production ramp up expected to occur over an 18 to 24 month time period as the acreage is delineated. As such, we don't expect a meaningful EBITDA contribution until 2025.

Speaker 2

Longer term, we expect A larger scale build out across a customer sizable acreage position as well as future integration with our downstream assets such as NEXUS. So in summary, this opportunity checks all the boxes for DTM, accretive for organic growth, highly economic resource, Long term contract with MVCs, strong producer that diversifies our customer mix and significant follow on opportunities for our existing assets. In our emerging energy transition platform, we continue to progress our CCS opportunity in Louisiana. Our initial three d seismic survey data indicates the geology we are targeting is favorable for permanent CO2 sequestration. During the quarter, we filed our Class 5 Characterization Well Permit application, which we expect to drill in Q4 of this year.

Speaker 2

We plan to spend approximately $15,000,000 this year for these activities. Assuming the characterization well results are favorable, We would then plan to FID the project in the first half of twenty twenty four. Overall, we continue to make great progress advancing organic opportunities across our portfolio in both our conventional business lines and our emerging energy transition business platform. Turning now to our projects currently under construction. I am happy to report that all projects remain on budget and on schedule.

Speaker 2

We have made excellent progress on our LEAP Phase 1 expansion, and I'd like to acknowledge and thank our dedicated team in Louisiana for doing Exceptional work on this project. Pipeline expansion is currently running ahead of schedule and we expect an early Q4 2023 And serve a state with the potential to pull that forward into late Q3 if we maintain our current pace. Finally, I want to take a moment to address the natural gas market fundamentals and producer activity across our assets. We are observing moderating production levels and some short term deferral of activity in both basins as producers continue to operate in a disciplined manner Given the near term weak prices, this is all fully reflected in our guidance. On a positive note, Over the past few weeks, we have seen rig reductions stabilize.

Speaker 2

With extreme hot weather occurring across large portions of the country, This is driving strong power demand for natural gas. LNG fee gas deliveries have returned to high levels following summer maintenance And all of this is beginning to reduce the current storage surplus that has created the near term price weakness, resulting in some price improvements. Floor gas prices look favorable in 2024 2025 in the $3.50 to $4 range as the market anticipates The next wave of LNG demand. Our assets are well positioned to participate in this growth. I'll now pass it over to Jeff to walk you through our quarterly financials and outlook.

Speaker 3

Thanks, David, and good morning, everyone. In the Q2, we delivered overall adjusted EBITDA of $224,000,000 which is in line with our full year plan. Our pipeline segment results were $2,000,000 below the Q1, reflecting the impact of lower winter related revenues from our pipeline joint ventures. Gathering segment results were in line with the Q1 and consistent with our plan for the year. Operationally, total gathering volumes across both the Haynesville and Northeast averaged approximately 2,900,000,000 cubic feet a day In the Northeast, 2nd quarter volumes were up compared to the Q1 due to higher volumes on Appalachia Gathering.

Speaker 3

In the Haynesville, 2nd quarter volumes were down compared to the Q1 due to a planned treating outage in April and a weather related outage in May. Haynesville's volumes have normalized subsequent to these outages, with July volumes averaging approximately 1.6 Bcf per day. As David previously mentioned, we are accelerating a portion of our 2024 committed capital Into 2023 for our new Ohio Utica opportunity and initial investment in our CCS project. As a result, we are increasing our 2023 growth CapEx guidance to $700,000,000 to $750,000,000 And lowering our 2024 committed growth CapEx by $100,000,000 Our committed capital over 2023, 2024 Approximately $800,000,000 remains unchanged. As the increased 2023 growth CapEx guidance solely reflects An acceleration of timing driven by our customers' development plan.

Speaker 3

This accelerated CapEx timing Fits within our longer term investment plan, and we are maintaining our 5 year $1,700,000,000 to $2,200,000,000 growth CapEx Following the completion of the heavier CapEx spend in 2023, we expect to fund our growth investments Within cash flow after dividends. The strength of our balance sheet and our policy of a 4 times long term leverage ratio ceiling Is a continual focus for us. Our leverage ratio ceiling now includes our proportionate share of debt at our equity method investees. We expect to end 2023 at approximately 4.2 times, temporarily exceeding our long term ceiling, As we complete our heavier organic capital investment program this year, our on balance sheet leverage is expected to end the year around 3.8 times. Also in the quarter, funds from the NexSys financing were distributed and received and were used to pay down our revolving credit facility, Further bolstering our liquidity, which remains very strong at approximately $900,000,000 Today, we also announced the declaration of our dividend, Which is unchanged at $0.69 per share, and we remain committed to growing the dividend in line with cash flows.

Speaker 3

I'll now pass it back over to David for closing remarks.

Speaker 2

Thanks, Jeff. So in summary, we're feeling good about our full year guidance For 2023, an early outlook range for 2024. Our key growth investments are on track and we continue to advance new organic opportunities. We are excited about our new growth platform in the Utica as it further diversifies our customer base and integrates into our regional assets. Our energy transition platform is also nicely developing, anchored by our CCS project in Louisiana And our hydrogen development partnership with Mitsubishi.

Speaker 2

We will grow this business in a disciplined and thoughtful manner, leveraging our core competencies and Existing Business Platforms. We can now open up the line for questions.

Operator

Thank We'll take our first question from Jeremy Tonet at JPMorgan.

Speaker 4

Hey, guys. This is Ratin Reddy on for Jeremy. For my first one, I just want to talk on the CCS project. Wondering if you could walk us through economics there, as well as any details around capital cost to develop the system. Thank you.

Speaker 2

Sure. This is David. We laid out our development schedule on our CCS project in our deck. So I maybe point you there. As we've said, I think historically on this project, this project Has 2 strategic drivers for us.

Speaker 2

1, it significantly reduces our direct CO2 emissions for the company, so it's a significant contributor to our march towards net 0. However, with the existing tax credits, it's also a very economic project for investors. In terms of providing more detailed disclosures around the capital, we plan to do that when we FID the project and we'll provide More refinement on schedule and more refinement on capital. But based on where we're at in the development cycle, I think the disclosures that we laid out in the deck Is it the current disclosures we're providing, so.

Speaker 4

Okay, Great. And then for my second one, I wanted to hit on leverage, which you guys talked a bit about 2023 Earlier in the call, could you walk us through, I guess, thoughts on staying at or below the 4 times leverage with CCS And or any LEAP expansion CapEx in 2024?

Speaker 5

Yes. Yes, this is Jeff Jewell. Yes, that's what our Plan is, again, we've been pretty clear. Our ceiling is at 4 times long term as a part of the play. And as get into 2024, what we're seeing currently in our committed capital and other items that will be inside of our cash flow For 2024, so again, we feel good that we'll be at or below the 4 times in 2024.

Speaker 5

And then as a reminder, remember that's at the proportional level, is where we are. And at a on balance sheet, like for this year, we'll be at like 3 0.8 at the end of this year. So again, we're very comfortable where we are from a leverage standpoint.

Speaker 4

Great. I'll leave it there. Thanks.

Speaker 5

Yes. Thanks.

Operator

We'll move next to Michael Blum at Wells Fargo.

Speaker 6

Thanks. Good morning, everyone. Good morning, Michael. I wanted to first just wanted to ask about the Ohio Utica Investment. Just to confirm that the MVCs that you'll be receiving, that will not Cover you to get to the 5 times investment multiple you cited.

Speaker 6

I'm assuming you're going to need a certain amount of volume To get to that and when do you

Speaker 2

think you'd hit that? Actually, Michael, that MVC will protect Our threshold returns for the segment that will deliver that 5 times EBITDA multiple. So it's a very it's a protected investment in this market environment.

Speaker 6

Got it. But just to clarify, you're saying though that the impact to cash flows will really show up in 2025 And not really in 2024.

Speaker 2

That's correct. We'll construct here late in 2023 And then their development, the producers development schedule start bringing volumes on at 24 and then they've got a 18 to 24 month grant period As I start to develop the resource and we'll ramp into that volume. But there's MVCs that ramp along with the producer activity that get us to that higher run rate. And yes, 2025 is when you should see kind of a full year higher level run rate impact on our EBITDA.

Speaker 6

Okay, perfect. And then, just wanted to ask about the CCS project. The $800,000,000 of CapEx Committed for 20242023 2024. Does that include is that inclusive of the CCS project? Or if you FID the project in early 2024 That would be additive.

Speaker 2

Yes. I think the only thing that we're including right now is the 15 that we detailed. So that's what I'll call pre development capital to de risk the project. And again, Like I said earlier, when we FID the project, we'll provide a lot more granular disclosure on total CapEx budget And a refinement on timing.

Speaker 6

Got it. Thank you very much. You're welcome.

Operator

We'll take our next question from Spiro Dounis at Citi.

Speaker 7

Thanks, operator. Good morning, guys. First question is on CapEx. The sequential decline on CapEx into 2024 from 2023 looks a bit more sizable now. So just curious how you're thinking about plans to backfill With other projects from here, it sounds like funding within cash flow is a hard stop for you.

Speaker 7

So maybe that's sort of the most you'd fill in a year. Anthony, you do generate excess cash flow beyond the dividend. SafeMoon right now that's entirely getting allocated towards leverage or could we see some other uses?

Speaker 2

Good morning, Spiro. Yes, let me start and then I'll pass it over to Jeff. But I think you're understanding it correctly. The Ohio project was in the 24 committed capital. And really, it was just As we refined with our customer and there was a modest timing shift, it benefited us well By moving us out of winter construction, which derisked the execution side of this project, but what it had the effect of doing as We moved forward a few months and it moved into the 2023 window.

Speaker 2

So that shift is really just a timing shift of committed capital. So you're right. It takes a big chunk of committed capital out of 2024. And The 'twenty three free cash flow run rate, you guys know what that is. So yes, there's a bunch of uncommitted capital free cash flow sitting in And Jeff, maybe I'll pass it over to Jeff here to provide commentary on our high level thoughts today on that On committed free cash flow.

Speaker 5

Yes. Hey, good morning. Yes, just like David said again, given our highly contracted cash flow and Contracting that we do, I would our cash flow between the years is going to be pretty close to the same. And so like David said, what we've got is on a committed level, as well within that cash flow. And then with our As you can see on that slide, we kind of talk about on Page 8.

Speaker 5

We've got a lot of potential organic backlog that's out there that we're reviewing And I'm kind of evaluating at this time and we'll provide updates either Q3 or the end of the year most likely of additional projects is a part of that. But you're right, we're going to keep that inside the cash flow, inside the leverage that we've talked about.

Speaker 2

I think the key thing is that We expect to be back to 4 or less on a proportional basis, which is a higher threshold than when we spun the company because that 4 was Originally measured on an on balance sheet basis. So, yes, I expect there'll be a combination of incremental organic that emerged before year end, but I also expect there'll be some uncommitted free cash flow that will kind of go towards the balance sheet as well.

Speaker 7

Got it. Helpful color. Thanks guys. The second one quickly just related to natural gas storage. A lot of your peers kind of lean into that more aggressively, economics there have been improving.

Speaker 7

I'm curious if you're thinking about your ability to Span on that front and if that's something that maybe is already considered inside that long term capital plan.

Speaker 2

Yes. Storage has been a bright spot in the portfolio for the last 6 months. We did lean on that pretty good in the second quarter And termed up at some pretty attractive rates, some of the capacity that's just naturally rolling From year to year in the portfolio. So that was step number 1. I'd say you're alluding to step number 2 is looking for expansion opportunities.

Speaker 2

Our Team is assessing that right now. And stay tuned on that. More to come as we Get a better sense is this market going to hold at these higher values and where potential expansion opportunities would exist.

Speaker 8

Great. That's all

Speaker 7

I have today, guys. Thanks for the time.

Speaker 5

Yes.

Operator

We'll go next to Keith Stanley at Wolfe Research.

Speaker 9

Hi. Thank you. First, maybe I could start with the Haynesville. Just any high level commentary on where you see volumes directionally on your system over the next year? Is it up meaningfully?

Speaker 9

Is it flattish? And any color on what producers are saying about how they're approaching activity with the forward curve strengthening and some of the LNG facilities coming on?

Speaker 2

Sure. Why don't I just start on with the first questions. We're looking at Volume growth. We're expecting volume growth towards the back end of the year that should Click in post all the expansion. So we have a series of LEAP expansions coming over the next 12 months.

Speaker 2

We also are in flight on a Series of gathering expansions that and both those support each other. So yes, we fully expect our volumes will ramp As those projects complete and come online, what we're seeing, I'd say, generally in the Haynesville from A number of our producers is rational behavior. With the current low cash prices, We're seeing that pausing of activity or short term deferral of activity, especially when you look at the forward curve, when you Forward to even as early as November, you have significant price ramping and going into the winter. And then as I said in my opening comments, you've got Cal 24 in around $3.50 and Cal 25 is in around $4 Very healthy numbers for Haynesville Producers to drill into. So I think the producers are being very rational.

Speaker 2

They're seeing The way that 4 curve is shaped and they're adjusting their activities and their behaviors to sort of match up with What the market is telling them that the market is telling them that they need to ramp production in 2024, 2025. And we're sort of seeing them all positioning themselves to do that. And in a lot of cases, we're seeing levels of drilling being maintained, But DUC inventory is growing. So I think producers are sort of building some torque into the system, If I could use that word to be able to quickly adjust and react to what the forward curve is telling them in terms of price.

Speaker 9

Great. Thanks for that. Second question, maybe just a basic one on the CCS project. So can you talk to the timeline? I guess you're planning to FID it by the first half of next year and You're expecting the Class 6 well permit approval later in 2024.

Speaker 9

Just talk to confidence in getting full permitting for the project and How you would think about plans if permitting takes a little longer than expected?

Speaker 2

Great question. Permitting is probably the biggest question mark For anybody's CCS project right now. So let me just back up. We're having regular dialogue with both the PA and the Louisiana DNR. As you know, there's an expectation that Louisiana will receive primacy.

Speaker 2

There's not clarity on the timing around when that may occur. So we're running this parallel track right now, keeping both agencies fully Informed. In terms of our project, we're laser focused right now on derisking the project. So Seismic shoot was key to validate the character to characterize The geological formation we want to sequester into the Class V well permit and ultimate drilling of that characterization well later this year will be The next significant de risking activity, once we're on the other side of that, then we expect to FID the project Early next year. Our best view on timing to get through The Class 6 well authorization is kind of laid out in our deck on Page 7.

Speaker 2

And again, that's our best view with the information we currently have. Is there opportunity to accelerate that? We're hopeful that there is, especially if primacy shifts to Louisiana. But I think all of that will be to be determined as we work with the regulatory agencies. And we'll be committed to keeping everyone apprised as we get incremental information that could impact our schedule.

Speaker 2

We'll be very transparent about that with everybody.

Speaker 4

Thank you.

Operator

We'll move next to Robert Mosca at Mizuho Securities.

Speaker 8

Hi, good morning, everyone. Good morning, Rob. Good morning. Just wondering if I could get your latest thoughts on a potential Nexus expansion. Do you still consider Permitting reform to be a gating item and just wondering if you view the Utica project as perhaps a way to feed Any future expansion of that

Speaker 2

pipe? Yes. So let's just start with permitting reform. We're very supportive of What's happened to date through the IRA and also the dialogue that's occurring in Washington as we speak Around incremental permitting reform. So, we're optimistic.

Speaker 2

There seems to be a recognition in Washington that More work needs to be done in this area for all energy infrastructure like from an agnostic perspective, it doesn't really matter what infrastructure We need more clarity on permitting and scheduling and sort of the steps to take a project from Concept to completion. So very important work that's being done in Washington, very supportive of that work. In terms of our Utica project, we're very optimistic that we're building that project right back to be able to directly interconnect with NEXUS. And as you know, NEXUS has a direct open pathway to some great markets here in the upper Midwest, Chicago through to Eastern Canada and right across Michigan. So that's certainly something that our customer Is aware of and that there is dialogue occurring around.

Speaker 2

So we see that as a nice strategic value In this upfront investment. In terms of Nexus, I think as we've talked about on previous calls, we're looking very closely at just the hydraulics of that system And optimizing the hydraulics now that it's been in service for 3 or 4 years to maximize the utilization And capacity available on the system. This past winter, the pipes been chock full. I'll say it that way, just Running at very, very high utilization. And so step 1 is to optimize it hydraulically.

Speaker 2

Step 2, Rob is what you're alluding to is doing more of a permanent expansion on the pipe and We're working on that. There's nothing public on that at this point, but we will certainly be sharing that information When we decide to look at that.

Speaker 8

Great. That's helpful. And my second question, I think in your prepared remarks, you said something about the commercial agreement underpinning the Utica project that it was restructured, which allowed you to Just wondering if is that simply modifying the construction schedule or were there any concessions made that maybe made it more appealing for your customers to accelerate production Where you need to build the asset earlier?

Speaker 2

I'd say, what happened there is when the ownership changed, The ownership shifted from a smaller independent producer to a A large cap investment grade producer. And their development schedule Obviously changed after they acquired those assets. So part of restructuring the contract was just We're addressing how we're going to develop this acreage in tandem with our customer and making sure that both companies are aligned In terms of activity, economics and the like, it's a new area And we were in a difficult commodity environment. So a lot of the features of that agreement Kind of reflect the times that we're operating in. And as I said on my opening remarks, there's significant NBC is in this agreement that were important to protect the capital that we're deploying Against this acreage and this resource development.

Speaker 8

That's helpful.

Speaker 7

Have a

Speaker 8

great day everyone.

Speaker 2

Thank you.

Speaker 5

You too. Thanks Rob.

Operator

And there are no further questions at this time. I would like to turn the call back to David Slater for closing remarks.

Speaker 2

Thank you very much for joining us today. We certainly appreciate all the support and your interest in DT Midstream and Hope your day goes well and thank you very much.

Operator

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.

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