Summit Midstream - Q1 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the first quarter 2023 Summit Midstream Partners, LP Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Randall Burton, Director of Investor Relations. Please go ahead.

Randall Burton (Director of Investor Relations)

Thanks, operator. 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 first quarter of 2023 financial and operating results is Heath Deneke, 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. It may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2022 annual report on Form 10-K, 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 defer materially from expected results. Please also note that on this call we use terms EBITDA, Adjusted EBITDA, distributable cash flow, and free cash flow. These are non-GAAP financial measures, and we have provided reconciliation to the most directly comparable GAAP measures in our most recent earnings release. With that, I'll turn the call over to Heath.

Heath Deneke (President, CEO, and Chairman)

Great. Hey, thanks. Thanks, Randall. Good morning, everyone. Summit this morning reported first quarter Adjusted EBITDA of $60.4 million, which was in line with our internal expectations. As expected, we had a very active quarter operationally, with over 60 new wells added to our systems, over half of which were in the Rockies region. Despite experiencing some timing slippage and longer than anticipated frac protect shut-ins during the quarter, these new well additions resulted in 17% liquids volume growth quarter-over-quarter and 14% gas volumes growth in the DJ Basin relative to December of 2022. Shifting to the full year picture, customer activity levels remain healthy across most of our operating segments.

There are currently nine rigs running behind our systems and over 225 drilled but uncompleted wells that we expect will continue to drive significant volume and EBITDA growth throughout the remainder of the year. Based on recent discussions with our customers in the Barnett and Piceance, we do expect that continued downward pressure on near-term gas prices will likely result in some delays and pullbacks of plant activity in 2023 versus beginning of the year expectations. We believe those changes are largely accounted for in the lower end of our original segment guidance range in those particular regions.

In the Williston, DJ, and Utica Shale Basins, we continue to see resiliency in our original customer plans for the year, which we believe keeps us on track overall to achieve strong sequential quarterly growth in 2023 and deliver on our Adjusted EBITDA guidance range of $290 million-$320 million for the year. Our focus this year is on operational execution, given the significant number of wells that we're connecting behind our system this year. Over the last five months, we have successfully integrated and continued to optimize our recently acquired DJ Basin assets. Our capital program in the Williston and DJ Basins continues to progress on time and on budget.

Additionally, in the Delaware Basin, we achieved an important milestone on Double E during the quarter by receiving FERC authorization to construct a new lateral to the Red Hills processing facility in Eddy County, New Mexico. At over 1.25 BCF per day of processing capacity, the Red Hills plant is the largest processing complex in the state of New Mexico. We'll be ramping up marketing activities this summer to solicit interest from new and existing customers to hopefully provide firm transportation services from the Red Hills complex and other plants in the area, across the whole Double E pipeline system to downstream delivery points in the Waha, Texas area. In summary, we're off to a good start with our Q1 financial and operating results.

We're excited about the cadence and level of customer activity we continue to see across our systems, we remain on track to achieve the significant year-over-year EBITDA growth that we guided towards at the beginning of the year. With that, let me hand the call over to Bill to provide additional detail on our segment financial results.

Bill Mault (EVP and CFO)

Thanks, Heath, and good morning, everyone. In the Northeast, which is inclusive of our SMU system, proportionate share of our Ohio Gathering joint venture and our Marcellus system, the segment averaged 1.3 BCF per day during the quarter, inclusive of 598 million cubic feet a day of OGC volumes and segment Adjusted EBITDA totaled $17.9 million, a decrease of $1.2 million from the fourth quarter of 2022, primarily due to a decline in volumes from frac protect activities Heath mentioned early on in the call. We estimate those frac protect activities negatively impacted volumes by approximately 50 million cubic feet a day at OGC and 20 million cubic feet a day at SMU, and gross margin net to SMLP by approximately $1 million during the quarter.

We expect these impacts to moderate in the second quarter of 2023 as these new and existing wells are brought back online. Five new wells were brought online behind our wholly owned SMU system, and 12 new wells were connected behind our OGC joint venture during the quarter. There are currently four rigs running behind the systems, including three rigs behind our wholly owned SMU system, with more than 55 DUCs behind the systems. Our customers are well hedged, and while some are expecting significant growth behind its systems, we estimate our customers' overall basin activity to remain relatively flat to 2022 production levels.

The Rockies segment, which is inclusive of our DJ and Williston Basin systems, generated Adjusted EBITDA of $23.2 million, an increase of $9.4 million from the fourth quarter of 2022, due primarily to the DJ Basin acquisitions made in December. Liquids volume throughput averaged 74,000 barrels per day during the quarter, a 17% increase relative to the fourth quarter of 2022, and natural gas volume throughput averaged 108 million cubic feet a day, representing approximately 14% growth relative to volume throughput in December of 2022. There were 36 new wells connected during the quarter. There are three rigs running and more than 150 DUCs behind the systems.

The Permian segment, which includes our 70% interest in the Double E Pipeline, reported Adjusted EBITDA of $5.1 million, an increase of $0.9 million relative to the fourth quarter of 2022, primarily due to contractual step ups and take-or-pay contracts at our Double E joint venture. The Piceance segment recorded Adjusted EBITDA of $14.1 million, a decrease of $0.7 million relative to the fourth quarter. Volumes averaged 287 million cubic feet a day, a decrease of 2.7% relative to the fourth quarter, primarily due to natural production declines, partially offset by volume from eight wells that were turned in line in March. There are nine more wells on that same pad site that have been drilled, completed, and expected to be turned in line this month.

As Heath mentioned earlier, we are seeing some modest delay in development by our customers, still expect to achieve our segment Adjusted EBITDA guidance in the Piceance. The Barnett segment reported Adjusted EBITDA of $7 million, a decrease of $0.2 million relative to the fourth quarter, primarily due to natural production declines and frac protect activities impacting quarterly volumes by an estimated 6 million cubic feet a day and segment Adjusted EBITDA by an estimated $0.3 million. There is still one rig running behind the system and one of our customers has decided to hold wells and dock inventory until natural gas prices improve.

We now expect 15 wells to turn in line this year, which we expect to result in segment Adjusted EBITDA to trend toward or slightly below the low, low end of our segment Adjusted EBITDA guidance range of $35 million-$40 million. Quickly on the partnership, SMLP recorded a first quarter net loss of $14.2 million and Adjusted EBITDA of $60.4 million. Capital expenditures totaled approximately $16 million for the quarter, in line with expectations, and included $4 million of maintenance CapEx. The majority of growth CapEx burnt during the quarter was in the Rockies and associated with pad connections and DJ Basin integration projects. With respect to SMLP's balance sheet, we had net debt of approximately $1.34 billion, a decrease of approximately $25 million relative to year-end 2022.

Total liquidity at the end of the first quarter totaled approximately $100 million, which included $4 million of letters of credit. With that, I'll turn the call back over to Heath for closing remarks.

Heath Deneke (President, CEO, and Chairman)

Great. All right, thanks, Bill. As I said earlier, we are pleased with the first quarter performance. While there have been a few gives and takes across the portfolio, we continue to expect to achieve our 2023 Adjusted EBITDA guidance range of $290 million-$320 million for the year. We look forward to continuing to provide operational update throughout the year. Before I open up the call for questions, I wanted to remind everyone of the upcoming annual meeting of limited partners, which will be held virtually on May 10, 2023 at 2:00 P.M. Central Time. All unit holders should have received proxy materials associated with the meeting. There are a number of items on the agenda that are important to the partnership, and we encourage all unit holders to vote.

Thank you for your time and continued support. With that operator, I would like to open up the call for questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. We have a question from Gregg Brody from Bank of America. Your line is open.

Gregg Brody (Director and High Yield Research Analyst)

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

Heath Deneke (President, CEO, and Chairman)

Yeah. I'll kind of start us off on that. It's Heath, and Bill, you can add some commentary as well. I mean, as we said, we, you know, this quarter is really in line with our, with our expectations and the cadence of activity that we expected throughout the year. You know, if you recall, we had, you know, within our guidance range, I think the midpoint of well connects was north of 300, close to maybe 330 or so. You know, 60 of those got completed in the first quarter, which was, again, kind of, you know, as we expected.

Definitely, you know, when we kind of have looked at the year, it's definitely kind of, you know, late first half to early second half of the year is when the majority of those new wells and the volumes off those wells will kind of come into play. I think at this point, you know, while we definitely in the Piceance and the, you know, in the Barnett, we kind of suggested that, you know, based on the recent discussions with customers and some of them, you know, some pullback there that we probably expect to kind of come close to the lower end in those particular segments.

You know, all the, you know, the timing of all the of, you know, the Utica and the Rocky segments, you know, the timing of those and cadence of well connects and level of well connects are still in line with the producer original plans. And we've risked those quite a bit in the mid. We kinda think the, you know, as long as everything kinda stays on track as it looks right now, you know, we still think kinda coming, you know, within the guidance range. At this point, I'd probably say we're just as likely to end up at the midpoint than we would be the low point.

Bill Mault (EVP and CFO)

Yeah. Gregg, I'd just add a couple more points, right? We highlighted in the Northeast, right? We had about 70 million a day down for frac protect. While certainly that impacted quarterly results by about $1.3 million when you include the Barnett, frac protect. Those are great signals, right? That means that, you know, they're completing wells that are about to come online. Just I think that further gives you a couple more data points on just the cadence. You know, we wouldn't expect those to be shut in for frac protect, you know, more than, you know, three or four months as they're completing wells on existing pad sites. I think that's a good leading indicator.

you know, I think again, as we see kind of construction timeline, you know, we had, while CapEx was in line with our expectations, you know, a decent CapEx this quarter, I think that's all indicating that we're getting pad connects connected and should tee up for a nice summer.

Gregg Brody (Director and High Yield Research Analyst)

I appreciate the color there. Just last one for you. You know, you've talked in the past about strategic opportunities, potentially de-leveraging the balance sheet and just improving the asset base. What's your sense of the opportunities there today? Is that something that we're likely to see this year, or has that changed?

Heath Deneke (President, CEO, and Chairman)

Yeah. I mean, I think our focus right now is really just on kind of, you know, just organic execution around our base business. I mean, we're, you know, we're seeing a lot of new well connects, a lot of new activity. It's, you know, we continue to look at opportunities. You know, we as you, as you well know, I mean, we, you know, we completed the big DJ acquisitions, and we're seeing, you know, a lot of, lot of good stuff kind of happening in the DJ overall. This is a year that we're kind of focused on, you know, getting all the well connects and getting everything we can to move to market and, you know, rebuilding up liquidity under our credit facility that we, you know, that we utilized to help finance that DJ transaction.

I think, certainly lots of opportunity, and we always look into things. I don't think there's anything right now that I would say is imminent or something that we're frankly not, we're just not really all that focused on right now.

Gregg Brody (Director and High Yield Research Analyst)

Got it. Thank you for the time, guys.

Heath Deneke (President, CEO, and Chairman)

You bet.

Operator (participant)

Thank you. That's all the questions we have. This concludes today's conference call. Thank you for participating. You may now disconnect.