Summit Midstream Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Summit Midstream Partners Third Quarter 2023 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 session. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to your host, Randall Burton. 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 Q3 of 2023 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 these 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 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

All right. Thanks, Randall, and good morning, everyone. So today, I'll start by discussing our Q3 financial and operating results, And then I'll briefly touch on the strategic alternatives review that we launched in October. So as we previously mentioned, we did have a slower than Good start in the first half of the year. That was primarily driven by a timing shift in well connects that were originally slated to come online during the Q2.

Speaker 2

I would now regain that momentum in the Q3 with about 74 new wells turned in line behind our systems, which of course Today, our Q3 adjusted EBITDA equaled about $72,800,000 which was above the midpoint of our original guidance range and certainly demonstrates that we're back on track to achieve $300,000,000 of LTM EBITDA, adjusted EBITDA during the first half of next year. Drilling down a bit more on our segment results in the Northeast, we connected 22 new wells during the quarter, 14 behind our wholly owned SMU system and 8 behind our OGC joint venture. This also resulted in quarter over Quarter segment adjusted EBITDA growth of over 35%. Since the end of the Q3, we have connected an additional 11 wells, which we expect will continue to drive volume and EBITDA growth behind our SMU system throughout the Q4 and into next year. Despite the timing delays that we had in the first half of the year in the segment, our activity levels are now have fully caught up with 76 wells connected year to date.

Speaker 2

And we're also pleased to announce, as we did this morning, that we had we kicked off a multi phase project, centralized compression project I will provide low pressure service on parts of our SMU system. The first phase of the project will be in service during the Q1 of 2024 and will result in an incremental compression fee on about $20,000,000 a day of existing production. And we anticipate installing additional phases of the compression project over the next couple of years, which again will add additional revenues behind that SMU system and we believe will have a positive impact on overall production levels. The combined project will take advantage of latent compression units from our Mountaineer system in West Virginia, which significantly mitigates our out of pocket capital cost on the project. Moving to the Rockies segment, we connected 37 wells behind the system during the quarter, including 6 in the DJ and 31 in the Williston, which drove about 20% volume growth on the liquid system and nearly 50% adjusted EBITDA growth.

Speaker 2

Full year to date well connects in the Rockies to 114 wells. And by the way, we're still expecting an additional 50 wells or so to be connected during the Q4. We continue to focus on integration of the DJ Basin acquisitions that we made last year and expect to have the majority of the capital projects complete by the end of the year. These projects will meaningfully enhance our operating margins in 2024 and beyond as we integrate the systems. A few other key highlights in the Rockies.

Speaker 2

We recently We did a 15 year contract extension with a key customer in the Williston Basin, which includes over 30,000 largely undeveloped acreage behind our existing system in Southern Williams County. We expect this customer to begin a 1 rig development program in mid-twenty 24. And additionally, we had 2 of our major customers in the Williston segment merged during the Q3. And while this Combination might create some or dampen some near term development activity relative to status quo. We're really very excited about the pro form A combination.

Speaker 2

The contiguous acreage position here will certainly create and enable our anchor customer here to develop more 3 mile laterals Versus 2 mile laterals that they've been able to do historically. So overall, we think it's going to be a very positive development for the segment. Quickly in the Barnett, our anchor customer connected 6 wells during the quarter, which are performing very well. It's A bit early to talk too much about 2024, but we will tell you that that customer has also communicated plans to complete 15 to 20 wells In the first half of twenty twenty four, which would lead to some really nice volume growth behind the Barnett system next year. Additionally, as we previously announced, one of our customers had elected to shut in production about $20,000,000 a day of production, Really just anticipating much higher gas prices in the future than what we've experienced thus far in the year.

Speaker 2

We're hopeful that production will also come back online soon as we see prices continue to strengthen. So, look, with the 2 24 wells that we've connected through the Q3 and at least 75 new wells that are expected to turn online by year end. We continue to expect 4th quarter adjusted EBITDA to range from $75,000,000 to $85,000,000 Looking further ahead, we're very pleased with the cadence Customer activity, as we said, we have about 2 20 wells that are slated to turn in line between now and the first half of next year. And we believe this level of activity demonstrates that the momentum in the business will continue next year and really gets keeps us On track to achieve again the $300,000,000 of LTM adjusted EBITDA sometime during the first half of next year. So before handing the call over to Bill, I also wanted to touch on the strategic alternatives review we announced in early October.

Speaker 2

We're pleased with the level of interest We've received from multiple parties that involve various transactions ranging from specific asset sales to sell the whole partnership. Gord and I felt it was prudent to engage external advisors to help evaluate these alternatives, obviously with a goal of maximizing The value of our units for our unitholders. These alternatives include, but are not limited to continuation of Continued execution of the business plan that we're under now, sell of certain assets, refinancing parts or the entirety of the capital structure, Sell of the partnership by merger or cash or really any combination of these and other alternatives are definitely in play. There's no deadline or definitive timetable set for completing the strategic alternatives review, but we are committed to provide further updates on the process as appropriate. I'd like to remind everyone while the Board conducts its review, the company remains focused on its operational performance and execution of its existing business plan.

Speaker 2

So with that, let me turn the call over to Bill to give more details on segment results and expectations.

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 1622,000,000 cubic feet per day during the quarter, inclusive of 870 1,000,000 cubic feet a day of 8 eighths OGC volumes. Segment adjusted EBITDA totaled $27,800,000 An increase of $7,600,000 representing 37% growth relative to the Q2. This was primarily due to an increase in volumes. We connected 22 new wells during the quarter, including 14 new wells behind our wholly owned SME system and 8 new wells behind our OTC joint venture.

Speaker 3

Subsequent to quarter end, we've connected an additional 11 wells behind the system And there's currently 2 rigs running with approximately 14 DUCs. The Rockies segment, which is inclusive of our DJ and Williston Basin Systems generated adjusted EBITDA of $25,000,000 an increase of $8,200,000 from the Q2 of 2023, primarily due to increased volumes, higher freshwater sales and an increase in commodity prices positively impacting our POP contracts. In the DJ, natural gas volume throughput averaged 117,000,000 cubic feet per day, representing 18% increase relative to the 2nd quarter, which is primarily a result of 13 wells connected during the Q1 year starting to reach peak production. We expect the 38 wells connected during the Q2 to reach peak production during the 4th quarter, which we would expect to continue to result in volume growth through the end of the year and into 2024. In the Williston, liquids volume throughput averaged 83,000 barrels per day during the quarter, 17% increase relative to the 2nd quarter as a result of 31 new wells coming online during the quarter.

Speaker 3

We continue to expect over 50 new wells to be connected behind the systems in the Q4, mostly in the DJ, which will lead to continued volume growth in the first half of twenty twenty four. There are currently 3 rigs running and more than 115 docks behind the systems. The Permian segment, which includes our 70% interest in the Double E pipeline, reported adjusted EBITDA of $5,800,000 An increase of $500,000 relative to the 2nd quarter. And just as a reminder, the contracts on Double E will ramp again in November, which will bring total contracted volume to 985,000,000 cubic feet per day. Volume throughput on Double E averaged 327,000,000 cubic feet per day, representing an increase of 34% relative to the 2nd quarter.

Speaker 3

We remain confident in the fundamental long term outlook for the Double E pipeline with 102 rigs running in Eddy and Lea Counties, New Mexico, Several recent plant expansions announced in the region and the recent and expected trajectory of our anchor customers' production in the basin. The PION segment reported adjusted EBITDA of $15,300,000 an increase of $900,000 relative to the 2nd quarter. Volumes averaged 313,000,000 cubic feet per day, an increase of 5.4% relative to the 2nd quarter, primarily due to volume from 12 wells that were turned in line during the quarter. Subsequent to quarter end, 8 additional wells have been connected behind the system We expect another 13 to be connected by the end of the year, all of which are currently DOCS. The Barnett segment Reported adjusted EBITDA of $6,100,000 a decrease of $1,200,000 relative to the 2nd quarter, primarily due to $1,800,000 of other revenue Our customer continues to keep approximately $20,000,000 a day of production shut in due to low natural gas prices, And we estimate that those shut ins negatively impacted adjusted EBITDA by approximately 1,300,000 Our anchor customer connected 6 wells in September, which will result in volume growth in the Q4.

Speaker 3

In addition, this anchor customer has communicated initial plans 15 to 20 well connections in the first half of twenty twenty four. There is currently 1 rig running and 21 docks behind the system today. Quickly on the partnership, SMLP reported 3rd quarter net income of $3,900,000 and adjusted EBITDA of 72,800,000 Capital expenditures of approximately $18,000,000 for the quarter, in line with expectations and included approximately $3,000,000 of maintenance CapEx. The majority of the CapEx spent during the quarter was in the Rockies and associated with pad connection costs and DJ Basin integration projects. And in the Northeast, related to the centralized compression project Heath mentioned earlier.

Speaker 3

With respect to SMLP's balance sheet, we had net debt of Approximately $1,320,000,000 Total liquidity at the end of the 3rd quarter totaled approximately $118,000,000 which included approximately $4,000,000 of letters of credit. As a result of the growth in adjusted EBITDA, Total leverage has decreased approximately 0.3 turns quarter over quarter and we continue to expect to see significant delevering Over the next several quarters as we trend towards $300,000,000 of LTM adjusted EBITDA in the first half of twenty twenty four. And with that, I'll turn the call back over to Heath for closing remarks.

Speaker 2

Thank you, Bill. So just to recap, I mean, we remain very excited about the activity levels behind the And the resulting volume and EBITDA growth, the 3rd quarter represents a very strong quarter for the business and we expect to continue to build on that momentum In the Q4 and as we head into 2024. We look forward to closing the year strong and certainly we'll provide further updates regarding our So with that, thanks for the time and continued support. And operator, let's open the call up for questions.

Operator

Thank you. Our first question comes from the line of Gregg Brody with Bank of America. Your line is now open.

Speaker 4

Hey, guys. Thanks for the comprehensive update. I just have a couple. So as we think about the strategic review, I appreciate there's a limit to what you can say. Just sort of two questions there that you might be able to answer without giving too much away.

Speaker 4

Is there Is there any limitation on asset sales we need to think about with respect to taxes? That's something that may limit Selling the company in pieces or anything that we should consider? And then the second question is just Before you announce the strategic review, buying assets seem to be the strategy of that you're focused on. I guess I'd like to say what's changed there that doesn't seem to be part of the priority and Those are my questions.

Speaker 2

Got it. Yes. Thanks, Greg. Look, as far as limit of asset sales, Given

Speaker 5

what particular tax situation that might bring about, I mean, it's certainly something we'll kind of take into consideration. But I think the assets that we're evaluating and the inbounds that we're evaluating, we don't think it's going to be prohibitive from us being able to monetize if we get the right value. As far

Speaker 2

as what's changed, I really don't

Speaker 5

think anything It has changed. I think obviously we're opportunistic in the DJ. I mean we bought those assets for around 5 times and as you Recently announced, I think you can see that some other assets in that area have traded at probably higher multiples than that. So I think we just found a really good buy opportunity, A lot of good synergies with our existing operations that led us to kind of closing on that acquisition last year. I think as we look ahead, obviously this year with the strategic alternatives review is what really prompted this was as we discussed some inbound Activity as well as just not being overly pleased with where our stock price had been trading.

Speaker 5

No, I

Speaker 2

don't think it's a shift in strategy.

Speaker 5

I think we're being responsive to some folks that recognize there's some really high quality assets in the portfolio Frankly, the market value is probably in excess of our enterprise trading multiple now. That's what's prompting us taking a hard look at that. And likewise, for indications on maybe buying the whole partnership, that's something that we're just evaluating relative to Status quo and some of the asset sale case. So, I think that's about really all I can say on it. But again, I think It's not that we still think that there's a lot of good opportunities to tuck in assets in and around the footprint.

Speaker 5

I think that's been a part of what we like about this Position here. Every time, hopefully, we'll be able to find some additional assets that might make sense over time to tuck in.

Speaker 3

Yes. And Greg, the only thing I'd add on the acquisition front, as I kind of mentioned in my prepared remarks, We're seeing kind of quarter 1 of that kind of run rate to $300,000,000 Which resulted in 0.3 turns, total leverage delevering, just rolling 1 old quarter off and bringing in a good solid $73,000,000 quarter this quarter. So as you think about the business, we're really going to accelerate delevering here over the next several quarters. And I think that will also better position us not only for broader refinancing Potentially next year as well as looking at some of these additional highly synergistic bolt ons. But at the moment, we have been focused Integrating that DJ Basin acquisition, having that done by the end of the year here, so that we can really Push kind of some of the commercial synergies we mentioned when we acquired those assets.

Speaker 4

And I'll throw one more in here just related to the business. So clearly, as you pointed out, the ramp is happening just a little delayed this year. What's the sense you're getting of your customer appetites for next year? And you alluded to some of this on the call, Considering where the commodity prices gone to now, in particular gas prices, which have come back quite a bit, and obviously oil, where there Seems to be more upside risk out there than downsize.

Speaker 2

Yes, I think, look, I mean, as we said, I mean, We have

Speaker 5

a good line of sight on the rest of the year and the first half of next year. And I think we've got a little over 2 20 wells That are scheduled to be turned online during that time period. So I think we continue to see at least what we have in front of us is very Much a continuation of what kind of the cadence that we've experienced to date in 2023. Second half of the year, I mean, I kind of generally agree with you. I think the good thing on the gas side, as we said, in the Barnett, our anchor customer there is committed to 10 to 15 to 20 wells 1st half of next year, that's in spite of kind of where the gas prices are now and they've shown the resiliency to kind of drill and Like commodity prices and same thing up in the Utica.

Speaker 5

I think the wells are still economic and I think we're you're not seeing overall production growth necessarily out in Utica, but just given our footprint and the amount of inventory relative to other systems, we're just getting a little bit more than we have been in the past. So far, I'd say we continue to expect there to be some strong momentum as we kind of cover into 2024.

Speaker 3

Yes. And Greg, just breaking down the 220, right? If we've got 75 wells that we expect here in the 4th quarter And then you kind of blend that remaining 145, you're talking about kind of that 70 to 75 wells a quarter throughout the first half and certainly early to kind of make a call on second half and we'll certainly do that during our normal Kind of guidance cadence when we release our 10 ks in February. But I think that just gives you a sense that we've been kind of trending in that 75 ish, 70, 75 wells a quarter type range.

Speaker 4

Great. Thanks for the time guys and all the detail. You bet.

Operator

Thank you. That concludes today's Q and A session. Thank you for participating on today's call. This concludes today's conference. You may now disconnect.

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Earnings Conference Call
Summit Midstream Q3 2023
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