DT Midstream - Q2 2023

Transcript

Operator (participant)

Welcome to the DT Midstream Q2 2023 earnings call. I will now turn it over to our speaker today, Todd Lohrmann, Director of Investor Relations. Please go ahead.

Todd Lohrmann (Director of Investor Relations)

Good morning, welcome everyone. Before we get started, I would like to remind you to read the safe harbor statement on page two of my presentation, including references to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP containing the appendix. Joining me this morning are David Slater, President and CEO, and Jeff Jewell, Executive Vice President and CFO. I'll now turn it over to David to start the call.

David Slater (President and CEO)

Thanks, Todd. 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 close with some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance. With that, we had another strong quarter, and the business continues to perform in line with our full year plan, giving us confidence in our full year adjusted EBITDA guidance for 2023 and the early outlook for 2024. As a reminder, we expect growth to be weighted towards the H2 of the year as we bring new projects online. 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 has 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 million of committed capital forward a few months from early 2024 into the H2 of 2023. The initial backbone build-out of this natural gas gathering system will provide over 200 million cubic feet a day of capacity and go into service in the H1 of 2024. 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 18-24 month time period as the acreage is delineated. As such, we don't expect a meaningful EBITDA contribution until 2025. Longer term, we expect a larger scale build-out across a customer's sizable acreage position, as well as future integration with their downstream assets, such as NEXUS. In summary, this opportunity checks all the boxes for DTM. Accretive 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 3D seismic survey data indicates the geology we are targeting is favorable for permanent CO₂ sequestration. During the quarter, we filed our Class V characterization well permit application, which we expect to drill in the Q4 of this year. We plan to spend approximately $15 million this year for these activities. Assuming the characterization well results are favorable, we would then plan to FID the project in the H1 of 2024. 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.

We have made excellent progress on our LEAP phase I expansion. 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. We expect an early Q4 2023 in-service date, 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.

With extreme hot weather occurring across large portions of the country. This is driving strong power demand for natural gas. LNG feed gas deliveries have returned to high levels following summer maintenance. All of this is beginning to reduce the current storage surplus that has created the near-term price weakness, resulting in some price improvements. Gas prices look favorable in 2024 and 2025, in the $3.50-$4.00 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.

Jeff Jewell (EVP and CFO)

Thanks, David. Good morning, everyone. In the Q2, we delivered overall adjusted EBITDA of $224 million, which is in line with our full-year plan. Our pipeline segment results were $2 million 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 2.9 billion cubic feet a day in the Q2. In the Northeast, Q2 volumes were up compared to the Q1 due to higher volumes on Appalachia Gathering. In the Haynesville, Q2 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 million-$750 million and lowering our 2024 committed growth CapEx by $100 million. Our committed capital over 2023, 2024 of approximately $800 million remains unchanged, as the increased 2023 growth CapEx guidance solely reflects an acceleration of timing driven by our customers' development plan. This accelerated CapEx timing fits within our longer-term investment plan, and we are maintaining our five-year $1.7 billion-$2.2 billion growth CapEx range.

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 4x 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 4.2x, 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 3.8x. Also in the quarter, funds from the NEXUS 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 million.

Today, we also announced the declaration of our dividend, which is unchanged at $0.69 per share. We remain committed to growing the dividend in line with cash flows. I'll now pass it back over to David for closing remarks.

David Slater (President and CEO)

Thanks, Jeff. In summary, we're feeling good about our full-year guidance for 2023 and 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. 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 (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll take our first question from Jeremy Tonet at JPMorgan.

Rohan Reddy (VP of Software Engineering)

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

David Slater (President and CEO)

Sure. This is David. We laid out our development schedule on our CCS project in our deck. I maybe point you there. As we said, I think historically, on this project, this project has two strategic drivers for us. One, it significantly reduces our direct CO₂ emissions for the company. It's a significant contributor to our march towards net zero. 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. We'll provide more refinement on the schedule and more refinement on capital. Based on where we're at in the development cycle, I think the disclosures that we laid out in the deck is the current disclosures we're providing.

Rohan Reddy (VP of Software Engineering)

Okay, great. For my second one, I wanted to hit on leverage, which you guys talked out a bit about, 2023 earlier in the call. Could you walk us through, I guess, thoughts on staying at or below the 4x leverage, with CCS or, and/or, any LEAP expansion CapEx in 2024?

Jeff Jewell (EVP and CFO)

Yes. Hi, yeah, this is Jeff Jewell. Yeah, that's what our plan is. Again, we've been pretty clear our ceiling is at 4x, you know, long term as a part of the play. As we 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. Again, we feel good that we'll be at or below the 4x in 2024. Then as a reminder, remember that's at the proportional level is where we are. At a on balance sheet, like for this year, we'll be at, like, 3.8 at the end of this year. Again, we're very comfortable where we are from a leverage standpoint.

Rohan Reddy (VP of Software Engineering)

Great. I'll leave it there. Thanks.

Jeff Jewell (EVP and CFO)

Yeah, thanks.

Operator (participant)

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

Michael Blum (Managing Director and Senior Equity Research Analyst)

Thanks. Good morning, everyone.

Jeff Jewell (EVP and CFO)

Good morning, Michael.

Michael Blum (Managing Director and Senior Equity Research Analyst)

Morning. Just wanted to ask about the Ohio Utica investment. Just to confirm that the MVCs that you'll be receiving, that, that will not cover you to get to the 5x investment multiple you cited. I'm assuming you're going to need a certain amount of volume to get to that, and when, when do you think you'd hit that?

David Slater (President and CEO)

Actually, Michael, that MVC will protect our threshold returns for the segment that will deliver that 5x EBITDA multiple. It's a protected investment, in this market environment.

Michael Blum (Managing Director and Senior Equity Research Analyst)

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

David Slater (President and CEO)

That's correct. We'll, we'll construct here, late in 2023, then their development, the producer's development schedule will start bringing volumes on in 2024. Then, you know, they've got a 18-24 month ramp period as they, as they start to develop the resource, we'll ramp into that volume. There, there's MVCs that ramp along with the producer activity that get us to that higher run rate. Yes, 2025 is when you should see kind of a full year, higher level run rate impact on our EBITDA.

Michael Blum (Managing Director and Senior Equity Research Analyst)

Okay, perfect. Just wanted to ask about the CCS project. The $800 million of CapEx committed for 2024 and 2023 and 2024, is that inclusive of the CCS project, or if you FID the project in early 2024, that would be additive?

David Slater (President and CEO)

Yeah. I think the only thing that we're including right now is the 15 that we detailed. That's what I'll call pre, you know, pre-development capital to de-risk the project. Again, like, 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.

Michael Blum (Managing Director and Senior Equity Research Analyst)

Got it. Thank you very much.

David Slater (President and CEO)

You're welcome.

Operator (participant)

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

Spiro Dounis (Director and Senior Equity Research Analyst)

Thanks, operator. Good morning, guys. First question is on, on CapEx. The sequential decline on CapEx into 2024 from 2023 looks a bit more sizable now. Just curious how you're thinking about plans to, to backfill with other projects from here. You know, it sounds like funding within cash flow is a hard stop for you, so maybe that's sort of the most you'd fill in a year. To the extent you do generate excess cash flow beyond the dividend, safe to assume right now that's entirely getting allocated towards leverage, or, or could we see some other uses?

David Slater (President and CEO)

Good morning, Spiro. Let me start and then I'll pass it over to Jeff, I think you're understanding it correctly. The Ohio project was in the 2024 committed capital, and really, it was just as we refined with our customer, and there was a modest timing shift. We, you know, it, it benefited us, well, by moving us out of winter construction, which de-risks the execution side of this project. What it had the effect of doing is we moved forward a few months, and it moved into the 2023 window. That shift is really just a timing shift of committed capital. You're right, it takes a big chunk of committed capital out of 2024. You know, the, the 2023 free cash flow run rate, you guys know what that is.

Yeah, there's a bunch of uncommitted capital, free cash flow sitting in 2024. Jeff, maybe I'll pass it over to Jeff here to provide commentary on our high-level thoughts today on that uncommitted free cash flow.

Jeff Jewell (EVP and CFO)

Yep. Hey, good morning. Yeah, just like David said, again, you know, given our highly contracted cash flow and contracting that we do. You know, our cash flow, you know, between the years is going to be pretty close to the same. So, like David says, what we've got is on a committed level is well within that cash flow. You know, as you can see on that, on that slide, we kind of talk about on page eight, we've got a lot of potential organic backlog that's out there that we're reviewing and kind of evaluating at this time, and we'll provide updates, you know, either Q3 or at the end of the year, most likely, of additional projects as a part of that.

You're right, we're going to keep that inside the cash flow, inside the leverage that we've talked about.

David Slater (President and CEO)

I think the key thing is that, you know, we expect to be back to four or less on a proportional basis, which is a higher threshold than when we spun the company, because that four was originally measured on an on-balance sheet basis. Yeah, I expect there'll be a combination of incremental organic opportunities that emerge before year-end, but I also expect there'll be some uncommitted free cash flow that'll kind of go towards the balance sheet as well.

Spiro Dounis (Director and Senior Equity Research Analyst)

Got it. Helpful color. Thanks, guys. Second one, quickly just related to natural gas storage. Seen a lot of your peers kind of lean into that more aggressively. Economics there have been improving. Curious how you're thinking about your ability to expand on that front, and if that's something that maybe is already considered inside that long-term capital plan?

David Slater (President and CEO)

Yeah, storage has been a bright spot in the portfolio for the last six months. We did lean on that pretty good in the Q2, and termed up at some pretty attractive rates. Some of the capacity that's just naturally rolling from year to year in the portfolio. That was step number one. I'd say you're alluding to step number two, is looking for expansion opportunities. Our team is assessing that right now, and just stay tuned on that. More to come as we, you know, get a better sense if this market is going to hold at these higher values and, you know, where potential expansion opportunities would exist.

Spiro Dounis (Director and Senior Equity Research Analyst)

Great. That's all I have today, guys. Thanks for the time.

David Slater (President and CEO)

Yep.

Operator (participant)

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

Keith Stanley (Director and Senior Equity Research Analyst)

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

David Slater (President and CEO)

Sure. Well, why don't I just start with the first question. 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 expansions. We have a series of LEAP expansions coming over the next 12 months. We also are in flight on a series of gathering expansions that both those support each other. So yeah, we fully expect our volumes will ramp as those projects complete and come online. What, what we're seeing, I'd say, generally in the Haynesville from a number of our producers, is rational behavior.

You know, with the current low cash prices, we're seeing that, you know, pausing of activity or short-term deferral of activity, especially when you look at the forward curve, when you look forward to, you know, even as early as November, you have significant price ramping and going into the winter. Then, as I said in my opening comments, you've got Cal 2024, you know, in around $3.50, and Cal 2025 is in around $4. Very healthy numbers for Haynesville producers to drill into. I think the producers are being very rational. They're seeing the way that forward 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, you know, the market's telling them that they need to ramp production in 2024, 2025, and we're sort of seeing them all positioning themselves to do that. In a lot of cases, we're seeing levels of drilling being maintained, but DUC inventory is growing. I think producers, you know, 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.

Keith Stanley (Director and Senior Equity Research Analyst)

Great. Thanks for that. Second question, maybe, maybe just a basic one on the CCS project. Can you talk to the timeline? I guess you're planning to FID it by the 1st half of next year, and you're expecting the Class VI well permit approval later in 2024. Just talk to confidence in getting full permitting for the project and how you would think about plans if, if permitting takes a little longer than expected.

David Slater (President and CEO)

Great question. Permitting is probably the biggest question mark for anybody's CCS project right now. Let me just back up. We're having regular dialogue with both the EPA and the Louisiana DNR. As you know, there's an expectation that Louisiana will receive primacy. There's not clarity on the timing around when that may occur. 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 de-risking the project. The seismic shoot was key to validate the character, you know, to characterize the geological formation we want to sequester in. Two, 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 VI well authorization is kind of laid out in our deck on page seven. Again, that's our best view with the information we currently have. You know, is there opportunity to accelerate that? We're hopeful that, that there is, especially if primacy shifts to Louisiana. I think, I think all of that will be to be determined as we work with the regulatory agencies. You know, we'll be committed to keeping everyone apprised as we get incremental information that could impact our schedule. We'll be very transparent about that with everybody.

Keith Stanley (Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

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

Robert Mosca (Equity Research Analyst)

Hi, good morning, everyone.

David Slater (President and CEO)

Morning, Rob.

Robert Mosca (Equity Research Analyst)

Just wondering.

David Slater (President and CEO)

Hi, Rob.

Robert Mosca (Equity Research Analyst)

Morning. Just wondering if I could get your latest thoughts on a potential NEXUS expansion? Do you still consider federal permitting reform to be the gating item? Just wondering if you view the Utica project as perhaps a way to feed any future expansion of that pipe?

David Slater (President and CEO)

Yeah. 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. We're optimistic. 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 and sort of the steps to take a project from concept to completion. 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.

As you know, NEXUS has a direct open pathway to, you know, some great markets here in the upper Midwest, you know, Chicago through to Eastern Canada, and right across Michigan. That's certainly something that our customer is aware of, and that there is dialogue occurring around. We see that as a nice strategic value in this upfront investment. In terms of NEXUS, and, 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 three or four years to maximize the utilization and capacity available in the system.

This past winter, the pipe's been chock full, I'll say it that way, just running at very, very high utilization. So step one is to optimize it hydraulically. Step two, Rob, is what you're alluding to, is doing more of a permanent expansion on the pipe. We're working on that. There's nothing public on that at this point, but we will certainly be sharing that information when we, when we decide to look at that.

Robert Mosca (Equity Research Analyst)

Great. That, that's helpful. My second question, I think in your prepared remarks, you said something about commercial agreement underpinning the Utica project, that it was restructured, which allowed you to pull it into 2023. Just wondering if 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?

David Slater (President and CEO)

I'd say, what happened there is when the ownership changed, it. You know, the ownership shifted from a, a smaller independent producer to a large cap investment-grade producer. Their development schedule obviously changed after they acquired those assets. Part of restructuring the contract was just readdressing how we were gonna develop this acreage in tandem with our customer and making sure that both companies are aligned in terms of activity, economics, and the like. You know, it's a new area, and we were in a difficult commodity environment. A lot of the features of that agreement kind of reflect the times that we're operating in.

As I said on my opening remarks, you know, there's significant MVCs in this agreement that were important to protect the capital that we're deploying against this acreage and this resource development.

Robert Mosca (Equity Research Analyst)

No, that's helpful. Have a great day, everyone.

David Slater (President and CEO)

Thank you.

Jeff Jewell (EVP and CFO)

You too.

Todd Lohrmann (Director of Investor Relations)

Thanks, Rob.

Operator (participant)

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

David Slater (President and CEO)

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

Operator (participant)

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