Summit Midstream Q1 2024 Earnings Call Transcript

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May 3, 2024

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the First Quarter Summit Midstream Partners LP Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's 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 first speaker today, Reynold Byrne, 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, where you'll find it on the homepage, Events and Presentations section or Quarterly Results section. With me today to discuss our Q1 of 2024 financial and operating results is Heath Denneke, our President, Chief Executive Officer and Chairman Bill Mault, 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

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 2023 Annual Report on Form 10 ks, which was filed with the SEC on March 15, 2024, 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 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

Thanks, Randall, and good morning, everyone. Thank you for joining us today to discuss our Q1 2024 results. We had a very busy Q1 really on all fronts. Starting on the strategic perspective, we successfully wrapped up our strategic alternatives review, announced the divestiture of our Utica position. And as we announced this morning, we've also closed on the sale of our Mountaineer Gathering System in West Virginia.

Speaker 2

In the aggregate, we sold our Northeast segment for approximately 700,000,000 dollars and we're now shifting our focus on several organic and bolt on acquisition opportunities in and around our Rockies and Permian segments. With our pro form a leverage of around 3.9 times, a completely undrawn $400,000,000 revolver and a little over $350,000,000 of pro form a unrestricted cash, we are very well positioned to pursue those opportunities while we further delever the balance sheet and continue to progress our to make progress towards achieving our long term leverage target of sub 3.5 times. Commercial discussions on Double E continue to remain extremely productive. Earlier this week, we concluded a successful open season that resulted in the award of $75,000,000 a day of incremental 10 year take or pay commitments with a subsidiary of Matador Resources. This commitment was really there to support their $200,000,000 a day expansion of the Marlin processing plant in New Mexico.

Speaker 2

The Marlin plant complex is already connected to the Double E pipeline and their plant expansion is scheduled to come online in the first half of twenty twenty five. In addition to the new volume commitment, the amended and restated Matador firm service agreement provided for an approximate 2.5 year extension of their existing agreements and now are extended to a 10 year term effective May 1, 2024. Additionally, as part of the open season, we received 150 $1,000,000 a day of non binding 10 year take or pay bids from other third parties that are looking for new plant connections in 2025. We've also had dialogue with multiple parties that have recently announced plant expansions in along the Double E corridor. Furthermore, we signed a new max rate interruptible agreement in New Mexico for up to $150,000,000 a day of incremental volumes.

Speaker 2

So look both of these contracts both the Matador contract and this IT contract were processing plants are already connected to our systems. So therefore they're really extremely value accretive to Double E as there's really not much or any capital associated with these connections. We're very excited to see the increasing level of demand for residue gas takeaway capacity out of the Delaware Basin materialize and we continue to believe that Double E is uniquely positioned to meet both the near term and long term needs of the market. Operationally, we had a great start to the year despite some severe weather primarily in the DJ Basin. We turned in line 71 wells during the Q1, which pro form a for the Utica Marcellus transaction represents nearly half of the wells that we're expecting to be turned in line for the full year 2024.

Speaker 2

This level of activity exceeded our expectations for the quarter and should put us in a good position to continue to execute operationally and achieve our revised pro form a adjusted EBITDA guidance range of $170,000,000 to 200,000,000 dollars So in summary, we're off to a great start for the year, both strategically, operationally and financially, and we look forward to maintaining that momentum through the rest of the year. So with that, I'll hand the call over to Bill to provide some additional details on our financial results.

Speaker 3

Thanks Heath, and good morning, everyone. Summit reported 1st quarter net income of $132,900,000 adjusted EBITDA of $70,100,000 and capital expenditures of $16,400,000 with the majority of the CapEx spent in the Rockies associated with PAC Connections. With respect to SMLP's balance sheet, we had net debt of approximately $700,000,000 with an undrawn $400,000,000 ABL credit facility. Our available borrowing capacity at the end of the Q1 totaled $384,000,000 which includes $4,300,000 of letters of credit and $12,000,000 of commitment reserve for the upcoming 2025 unsecured notes maturity. Now turning to the segments.

Speaker 3

In the Rockies segment, which is inclusive of our DJ and Williston Basin systems, we generated adjusted EBITDA of $22,900,000 an increase of $500,000 from the 4th quarter, largely due to increased project margin from our percentage of proceeds contracts from higher commodity prices, which was partially offset by lower liquids and natural gas volumes. Liquid volumes averaged 74,000 barrels a day, a decrease of 7,000 barrels a day relative to the 4th quarter due primarily to natural production declines. Natural gas volumes averaged $124,000,000 a day, a decrease of $2,000,000 a day relative to the 4th quarter, primarily due to extreme weather and operational downtime we experienced in the DJ Basin that negatively impacted volumes by approximately 9,000,000 cubic feet per day during the quarter. We connected 39 wells in the DJ and 18 wells in the Williston during the quarter, which we expect will drive liquids and natural gas volume growth in the Q2. The Rockies segment currently has 2 rigs running behind the systems and more than 50 docks.

Speaker 3

The Permian Basin segment, which includes our 70% interest in the Double E pipeline reported adjusted EBITDA of $7,300,000 a decrease of $700,000 relative to the 4th quarter due primarily to $1,000,000 of other revenue recognized in the 4th quarter. Volume throughput on Double E averaged 467,000,000 cubic feet per day, representing an increase of 21% relative to the 4th quarter. As Heath already mentioned, with the significant momentum in contracting the remaining capacity, we remain extremely excited about the long term prospects for Double E. The PION segment reported adjusted EBITDA of $15,200,000 down $900,000 relative to the 4th quarter, due primarily to natural production declines and no new well connections to the system during the quarter. Volume throughput averaged 312,000,000 cubic feet a day during the quarter, a 5,000,000 cubic feet a day decline relative to the 4th quarter.

Speaker 3

The Barnett segment reported adjusted EBITDA of 5,900,000 dollars a decrease of $700,000 relative to 4th quarter, primarily due to lower volume throughput, partially offset by 4 new wells connected to the system. There's currently 1 rig running and 24 docks behind the system and a customer continues to keep approximately 30,000,000 a day of production shut in due to low natural gas prices. We estimate that the 30,000,000 cubic feet a day of shut ins negatively impacted adjusted EBITDA by $2,000,000 during the quarter. Briefly on the Northeast, the segment averaged 1.56 Bcf per day during the quarter, inclusive of 849,000,000 cubic feet a day of 8 inches OGC volumes and segment adjusted EBITDA totaled 29,000,000 an increase of $600,000 relative to the 4th quarter. During the quarter, we connected 3 wells beyond the SMU system and 7 wells behind ODC.

Speaker 3

And as we announced today, as of May 1, with the sale of the Mountaineer system to Antero Midstream, we have successfully exited the Northeast segment with $700,000,000 in aggregate asset sale proceeds. And with that, I'll turn the call back over to Heath for closing remarks.

Speaker 2

Yes. Thanks, Bill. So, as I said earlier, very pleased with the Q1 performance, activity levels behind our system and certainly the progress, great progress that we made on the balance sheet. We believe we're in an opportunity rich environment and we look forward to continue to build on our progress and momentum throughout the year. Before opening 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 9, 2024 at 2 pm Central Time.

Speaker 2

All unitholders should have received proxy materials associated with the meeting. Certainly, there are a number of important items on the agenda. They're important to the partnership, and we certainly encourage everyone to vote. Additionally, we are making good progress in preparing for the previously announced C Corp conversion, including a subsequent proxy and special meeting where we will intend to seek approval from Summit's unitholders to convert the partnership to a C Corp. While the exact timing is depends on a number of factors, we are on track to file the Corp proxy statement and provide unitholders with the additional information about the rationale and the benefits of the conversion as early as the second quarter and currently expect to hold a special meeting sometime during the Q3 of the year.

Speaker 2

We continue to strongly believe that converting to a C Corp positions the company to maximize value for our unitholders and will certainly provide significant long term tax savings for current and future shareholders going forward. With that, I would like to thank you for your time and continued support. And operator, please open the call for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Gregg Brody of Bank of America. Your line is now open.

Speaker 4

Good morning, guys, and congrats on all the transactions. Thanks, Greg. Just respect to strategic review, you concluded it, it's you've sold the Northeast and it sounds like you're focused on M and A in the Permian in the Rockies. Can you talk about what the opportunity is there? Is the conclusion of the strategic review mean that the company is done pruning assets now and it's all about adding assets?

Speaker 4

We need to hope a little bit about that.

Speaker 2

Yes. Good questions. Yes. I think the long and short of it is, we think we are kind of done in terms of pruning assets. I mean, obviously, that's at the right value, I think, would continue to consider it, but that's not kind of been the base plan.

Speaker 2

I would think as you see on the balance sheet, we've got kind of 3.9 times levered now. We think we've got ample amount of liquidity with an undrawn revolver and close to what $350,000,000 plus of cash on the balance sheet. So that's more than enough liquidity to really support an M and A strategy around our Rockies and Permian segments. Look, I think we're target goal number 1 is to kind of maintain leverage and try to achieve our long term target of 3.5%. But we do see quite a bit of opportunity set in and around both the Rockies and the Permian segment to do potentially take advantage of what we think is a good market for buyers right now.

Speaker 3

Yes. And Greg, I'll just add to as you think about Double E, we mentioned we got the $150,000,000 a day of kind of non binding proposals for additional planned connections. I think there's a really good organic growth strategy out at Double E as well. I think we could finance a lot of that with asset level debt, but there may be some investment opportunities there. And then as you think about we keep a pretty exhaustive list of kind of high priority targets from a bolt on acquisition perspective.

Speaker 3

And I'd tell you they're all primarily highly synergistic to our existing footprint. And we see a number

Speaker 4

Could you give us a sense of how big that opportunity set is?

Speaker 3

Yes. Greg, if we could get them all done, I feel like we could double the size of Summit. Obviously, that's a pretty ambitious strategy. But I would think about them ranging from as low as $15,000,000 of EBITDA to as high as $50,000,000 to $60,000,000

Speaker 4

And is there and that's there's how many type of opportunities are there out there?

Speaker 3

I'd say there's, call it, 10 or so that we keep a close eye on, Greg.

Speaker 4

And then just the asset sale, the last one that you announced yesterday, it looks like you saw that for about 3.5 times is based on what I look when I see Antero's guidance out there. Is there some other value creation there that we're not thinking about?

Speaker 3

Yes. So Greg, on that one, if you do the math and our revised guidance, that put you right at 17.5 at the midpoint reduction in EBITDA. You got to remember though, Greg, there's about almost $7,000,000 of shortfall payments that expire in 2025 and 2026 behind that system. So if you think about it more as like $10,000,000 to $11,000,000 of EBITDA flowing EBITDA, I think that will help bridge kind of the perception on the value gap.

Speaker 4

Got it. And then as I think about use of cash, you've obviously pointed out M and A. How do you think about financing the capital structure? And if you remind us, are there any mandatory payments associated with the debt sales that we should be thinking about flowing to bondholders?

Speaker 3

Yes. So the second lien, Greg, does have a 3 65 day reinvestment period provision. It does have some extensions in certain circumstances. So that would kind of be your back end, Greg, on when you would be required to make an asset sale offer. Obviously, we paid down the revolver, a big chunk of the revolver.

Speaker 3

And you may have noticed in the release and some of Heath's commentary, we've got a tremendous amount of liquidity. I think this is a balancing act, Greg. So I think some additional debt pay down, I wouldn't be shocked if you saw us come out and maybe try to do some additional debt pay down and balance kind of the liquidity profile with continued debt repayment.

Speaker 4

And what about just how you think about how that should be financing capital structure?

Speaker 3

Yes. Look, it's a great question. We've always kind of said Q1 'twenty five is kind of the back end date. Obviously, the market is seems to be very open right now and we're seeing a lot of constructive prints. The Harvest deal that got done was an interesting comp for us.

Speaker 3

But Greg, as you know, we need to kind of sort out an extension of our bank deal. So I view it more along the lines of that takes a little bit more time get everything ironed out, but it's safe to say that we're working on that real time. And when we're in a position to get that extension done, evaluate the market at the time, I think we're kind of in the window here between now and the end of year of trying to get something done on the refi.

Speaker 4

And as you think about the revolver extension, are you anticipating any just obviously, say assuming you don't find anything else, assuming the revolver stays the same size?

Speaker 3

I think we're we'll certainly try to upsize it a bit here, Greg. I think I don't think you're going to see anything crazy, maybe $50,000,000 $100,000,000 here or there. I do think and as we've discussed, there really is a sizable opportunity here to continue to kind of regain scale within our footprint. And it's a balancing act between prepayable debt, bullet bond as well as having liquidity to continue to kind of expand the business and take advantage of this opportunity set we see in front of us. So those are the things we're balancing.

Speaker 3

That's what we're chatting with our banks about and potential new banks to join the bank group. And we'll be kind of all part of the decision making as it relates to the size of any sort of bond deal and the like, as we go out to the market here later this year.

Speaker 4

And then just turning to operations, obviously, some contract wins in the Permian. How should we think about the incremental EBITDA associated with those?

Speaker 2

Yes. The ones that we announced, both the interruptible agreement could start contributing this year. The Matador contract would kind of step up next year. I think it's just call it kind of somewhere late in the Q2 mid to late second quarter is when the incremental take or pay capacity will kind of step up. And then again, as we kind of highlighted, we do see quite a few announced publicly announced expansions that are up and down the corridor.

Speaker 2

Many of those are kind of late 2025, early 2026 in service dates. So kind of we think we'll see the sizable step up in 2025 and a lot of opportunity that we think could materially drive our 20 26 and beyond EBITDA.

Speaker 3

Yes. And Greg, as you think about between EOG contract, that ramps up to $40,000,000 a day. You got the new Matador at $75,000,000 a day. And then if you kind of exclude all the other opportunities that we're working right now, that will get you another $6,000,000 $7,000,000 of revenue growth once they're fully ramped. And then I would just point you to our investor presentation.

Speaker 3

We kind of show you where we think Summit kind of EBITDA net to Summit will be if you kind of fill up the free flow capacity of the pipe. So that will get you somewhere in the mid-40s from an EBITDA relative to $30,000,000 today.

Speaker 4

And sort of it's a neutral transaction. Based on where things are you're out today, when can you think we can possibly see that happen?

Speaker 3

Yes. How we model it out, Greg, I'd tell you it's probably 26 type timeframe, right? A lot of these contracts are ramping over the next 18 to 24 months. So it's you kind of need some of that in the rearview mirror. Would we be willing to maybe see some marginal uplift in leverage if it was truly just contractual ramp issue and you knew that LTM EBITDA was going to kind of roll in.

Speaker 3

So I'd think about it 26% -ish timeframe. That may be another opportunity, Greg, to kind of go pop off a capital markets deal as well. But I think that's probably about right as it relates to the contract ramp and the LTM EBITDA profile of Double E, how we see it today.

Speaker 4

Got it. And just one clarification here. I believe your coupon on the 26 has stepped up another 50 basis points as a rate for 1?

Speaker 3

They did. Is that correct? It's unfortunate these asset sale proceeds can't circumvent that, Greg. But I think the 2nd lien holders got a nice win here with a major delevering and a step up in coupon.

Speaker 4

Yes. And there's no way that's a permanent step up until you refinance the balance?

Speaker 3

Next year, if we catch up on ECF next year, theoretically, it could go down, Greg. But as I had mentioned, I would suspect that we kind of clean all this up with a refi before we get to that point anyway.

Speaker 4

Excellent timing guys. I appreciate it.

Speaker 3

Yes. Thanks for the questions, Greg.

Speaker 2

Thanks.

Operator

Thank you. This concludes the question and answer session. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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Earnings Conference Call
Summit Midstream Q1 2024
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