Summit Midstream - Q3 2023

Transcript

Operator (participant)

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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising 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 turn the conference over to your host, Randall Burton. Please go ahead.

Randall Burton (VP of Finance, Treasurer, and Investor Relations)

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 third 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. 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-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 differ materially from expected results. Please also note that on this call, we used 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. And with that, I'll turn the call over to Heath.

Heath Deneke (Chairman, President, and CEO)

All right. Thanks, Randall, and good morning, everyone. So today I'll, I'll start by discussing our third quarter financial and operating results, and then I'll briefly touch on the strategic alternatives review that, that we launched in October. So, as we previously mentioned, you know, we did have a slower than expected 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 second quarter. We've now regained that momentum in the third quarter, with about 74 new wells turned in line behind our systems, which of course drove significant volume in Adjusted EBITDA growth of roughly 20% quarter-over-quarter.

We're pleased to report today that our third quarter adjusted EBITDA equaled about $72.8 million, which was above the midpoint of our original guidance range, and certainly demonstrates that we're back on track to achieve $300 million of LTM 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 third quarter, we have connected an additional 11 wells, which we expect will continue to drive volume and EBITDA growth behind our SMU system throughout the fourth quarter and into next year.

Despite the timing delays that we had in the first half of the year in this segment, our activity levels are now have fully caught up with 76 wells connected year to date. And we're also pleased to announce, as we did this morning, that we kicked off a multi-phase project, a centralized compression project, that will provide low-pressure service on parts of our SMU system. The first phase of the project will be in service during the first quarter of 2024 and will result in an incremental compression fee on about 20 million a day of existing production. And we anticipate installing additional phases of the centralized compression project over the next couple of years, which again will add additional revenues behind the 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 six in the DJ and 31 in the Williston, which drove about 20% volume growth on the liquids system and nearly 50% Adjusted EBITDA growth. 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 fourth quarter. 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: We recently executed 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-2024. And additionally, we had two of our major customers in the Williston segment merged during the third quarter. And, you know, 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 forma combination.

The contiguous acreage position here, you know, will certainly create and enable our anchor customer here to develop more three-mile laterals versus two-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 15-20 wells in the first half of 2024, 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 million a day of production, really, just anticipating much higher gas prices in the future than, than what we've experienced, thus far in the year. We're hopeful that that production will also come back online soon as, as we see prices continue to strengthen. So, look, with the 224 wells that we've connected through the third quarter and at least 75 new wells that are expected to turn online by year-end, you know, we continue to expect fourth quarter Adjusted EBITDA to range from $75 million-$85 million. Looking further ahead, we're very pleased with the cadence of customer activity.

As we said, we have about 220 wells that are slated to turn in line between now and the first half of next year. We believe this level of activity demonstrates that the momentum of the business will continue next year and really keeps us on track to achieve, again, $300 million of LTM adjusted EBITDA sometime during the first half of next year. Before handing the call over to Bill, I also wanted to touch on the strategic alternatives review we announced in early October. We're pleased with the level of interest that we've received from multiple parties that involve various transactions, ranging from, you know, specific asset sales to sale of the whole partnership.

The board and I felt it was prudent to engage external advisors to help evaluate these alternatives, obviously, with a goal of maximizing our, you know, 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, sale of certain assets, refinancing parts or the entirety of the capital structure, sale 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 this review, the company remains focused on its operational performance and execution of its existing business plan. So with that, let me turn the call over to Bill to give more details on segment results and expectations.

Bill Mault (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 1,622 million cubic feet per day during the quarter, inclusive of 870 million cubic feet a day of 8/8ths OGC volumes. Segment Adjusted EBITDA totaled $27.8 million, an increase of $7.6 million, representing 37% growth relative to the second quarter. 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 SMU system and eight new wells behind our OGC joint venture. Subsequent to quarter end, we've connected an additional 11 wells behind the system, and there's currently two rigs running with approximately 14 DUCs.

The Rocky segment, which is inclusive of our DJ and Williston Basin systems, generated Adjusted EBITDA of $25 million, an increase of $8.2 million from the second quarter 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 million cubic feet per day, representing 18% increase relative to the second quarter, which is primarily a result of 13 wells connected during the first quarter of the year, starting to reach peak production. We expect the 38 wells connected during the second quarter to reach peak production during the fourth 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, a 17% increase relative to the second quarter, as a result of 31 new wells coming online during the quarter. We continue to expect over 50 new wells to be connected behind the systems in the fourth quarter, mostly in the DJ, which will lead to continued volume growth in the first half of 2024. There are currently three rigs running and more than 115 DUCs behind the systems. The Permian segment, which includes our 70% interest in the Double E Pipeline, reported Adjusted EBITDA of $5.8 million, an increase of $0.5 million relative to the second quarter.

Just as a reminder, the contracts on Double E will ramp again in November, which will bring total contracted volume to 985 million cubic feet per day. Volume throughput on Double E averaged 327 million cubic feet per day, representing an increase of 34% relative to the second quarter. 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 Piceance segment reported Adjusted EBITDA of $15.3 million, an increase of $0.9 million relative to the second quarter.

Volumes averaged 313 million cubic feet per day, an increase of 5.4% relative to the second quarter, primarily due to volume from 12 wells that were turned in line during the quarter. Subsequent to quarter end, eight additional wells have been connected behind the system, and we expect another 13 to be connected by the end of the year, all of which are currently DUCs. The Barnett segment reported Adjusted EBITDA of $6.1 million, a decrease of $1.2 million relative to the second quarter, primarily due to $1.8 million of other revenue recognized in the second quarter. A customer continues to keep approximately 20 million 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 $1.3 million.

Our anchor customer connected 6 wells in September, which will result in volume growth in the fourth quarter. In addition, this anchor customer has communicated initial plans for 15-20 well connections in the first half of 2024. There's currently one rig running and 21 DUCs behind the system today. Quickly on the partnership, SMLP reported third quarter net income of $3.9 million and adjusted EBITDA of $72.8 million. Capital expenditures of approximately $18 million for the quarter, in line with expectations, and included approximately $3 million in 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. With respect to SMLP's balance sheet, we had net debt of approximately $1.32 billion.

Total liquidity at the end of the third quarter totaled approximately $118 million, which included approximately $4 million 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 million of LTM Adjusted EBITDA in the first half of 2024. With that, I'll turn the call back over to Heath for closing remarks.

Heath Deneke (Chairman, President, and CEO)

Thank you, Bill. So just to recap, I mean, we remain very excited about the activity levels behind the system and the resulting volume and EBITDA growth. You know, the third quarter represents a very strong quarter for the business, and we expect to continue to build on that momentum in the fourth quarter as, and as we head into 2024. We look forward to closing the year strong, and certainly we'll provide further updates regarding our strategic alternatives review as they continue to develop. So with that, thanks for the time and continued support. And operator, let's open the call up 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. Once again, that's star one one to ask a question at this time. Our first question comes from the line of Gregg Brody with Bank of America. Your line is now open.

Gregg Brody (Director and High Yield Research Analyst)

Hey, guys, thanks for the comprehensive, comprehensive update. I just have a couple. So do you think about the strategic review, I appreciate there's a limit to what you can say, but just sort of two questions there that you might be able to answer without giving too much away. 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 of that we should consider. And then the second question is just, before you announced the strategic review, buying assets seemed to be the strategy of that you were focused on. I guess I'd like to say, what's changed there that doesn't seem to be part of the priority? That's those are my questions.

Heath Deneke (Chairman, President, and CEO)

Got it. Yeah. Thank, thanks, Greg. Look, as far as limit of asset sales, you know, is given what particular tax situation that might, that might bring about, I mean, it's certainly something we'll, we'll kind of take into consideration. But I, I think it, you know, the assets that, that we're evaluating and the inbounds that we're evaluating, we don't think it's gonna be prohibitive from us being able to, you know, to, to monetize if we get the right, right value. As far as what's changed, I, I really don't think anything, you know, has, has changed. I think obviously we're opportunistic in the DJ.

I mean, we bought those assets for, you know, around 5x, and as you can see, recently announced, I think you can see that, you know, some other assets in that area have traded at probably higher multiples than that. So I think we've, you know, we just found a really good buy opportunity. It had a lot of good synergies with our existing operations that led us to kind of closing on that, that acquisition last year. I think as we look ahead, obviously this year, you know, with the strategic alternatives review, is, you know, what really prompted this was, you know, as we discussed some inbound activity, as well as just, you know, not, not being overly pleased with where our stock price had, had been trading. So I, I don't think it's a, a shift in strategy.

I think we're being responsive to some folks that recognize there's some really high-quality assets in the portfolio, that, you know, frankly, the market value is probably in excess of our, you know, enterprise trading multiple now. That's what's prompting us to take a hard look at that. And likewise, you know, for indications on, you know, maybe buying the whole partnership, that's something that, you know, 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, you know, again, I think you know, it's not that, you know, we still think that there's a lot of good opportunities to tuck in assets in and around the footprint. I think that's, you know, part of what we like about this position here. Over time, you know, hopefully, you know, we'll be able to, you know, find some additional assets that might make sense over time to tuck in.

Bill Mault (CFO)

Yeah, and Greg, the only thing I'd add on the acquisition front, you know, as I kind of mentioned in my prepared remarks, you know, we're seeing kind of quarter one of, you know, that kind of run rate to $300 million, which resulted in, you know, 0.3 turns, total leverage delevering, just rolling one old quarter off and bringing in a good solid, you know, $73 million quarter this quarter. So as you think about the business, you know, we're really gonna accelerate delevering here over the next several quarters.

And I think that will also, you know, better position us not only for, you know, broader refinancing potentially next year, as well as looking at some of these additional highly synergistic bolt-ons. But at the moment, you know, 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.

Gregg Brody (Director and High Yield Research Analyst)

I'll, I'll throw one more in here, just related to the business. So clearly, as you pointed out, the ramp is happening, just, it's 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 price has 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 downside.

Heath Deneke (Chairman, President, and CEO)

Yeah, I think, Look, I mean, as, as we said, I mean, I, we have a good line of sight on the, you know, the rest of the year and, and the first half of next year. And, you know, I think we've got, a little over 220 wells, that are scheduled to be turned online during that time period. So I think, I think we continue to see, you know, at least what we have in front of us is, is very, much a continuation of what, you know, 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. You know, I think the good thing on the gas side, as we said, you know, in the Barnett, you know, our, our anchor customer there is, you know, committed to 10- or 15-20 wells, first half of next year.

You know, that's in spite of kind of where the gas prices are now, and they've shown, you know, the resiliency to kind of drill in, in like, commodity prices, and same thing up in the, the Utica. I think the wells are, you know, still economic, and, and I think we're, you know, you're not seeing overall production growth necessarily out of the Utica, but just given our footprint and the amount of inventory relative to other systems, we're just getting a little bit more activity than we have been in the past. I mean, so far I'd say we continue to expect there to be some strong momentum as we kind of cover into 2024.

Bill Mault (CFO)

Yeah, and Greg, just breaking down the 220, right? If we've got 75 wells that we expect here, you know, in the fourth quarter, and then you kind of blend that remaining 145, you're talking about, you know, kind of that 70-75 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-K in February. But I think that just gives you a sense that we've been kind of trending in that, you know, 75-ish, 70, 75 wells a quarter type of range.

Gregg Brody (Director and High Yield Research Analyst)

Great. Thanks for the time, guys, and all the details.

Bill Mault (CFO)

Thanks.

Operator (participant)

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