SMLP - Summit Midstream Partners LP (SMLP) CEO Heath Deneke on Q2 2022 Results - Earnings Call Transcript

Summit Midstream Partners, LP (SMLP)

Q2 2022 Earnings Conference Call

August 05, 2022, 10:00 AM ET

Company Participants

Heath Deneke - President, CEO and Chairman

William Mault - CFO

Conference Call Participants

Presentation

Operator

Welcome to the Second Quarter 2022 Summit Midstream Partners, LP Earnings Conference Call. My name is Hilda, and I will be your operator for today. [Operator Instructions]

I will now turn the call over to [Randall Burton], Director of Finance, Treasurer and Investor Relations. Sir, you may begin.

Unidentified Company Representative

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 second quarter of 2022 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 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 2021 annual report on Form 10-K, which was filed with the SEC on February 28, 2022, 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 and distributable 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

All right. Great. Thanks, Randall, and good morning, everyone.

So Summit reported second quarter adjusted EBITDA of $50.5 million, which exceeded our internal expectations despite over $3.6 million of unexpected weather, maintenance and deal expenses incurred during the quarter.

North Dakota experienced a severe winter storm that started in late April and impacted SMLP's operations for just over a month. The North Dakota team did a great job getting things back online quickly and safely despite those very challenging conditions.

I'll let Bill get more into the details, but we estimate the North Dakota storm and as well as some of the frac protect and related maintenance activities in the Northeast were the primary drivers of the quarterly decline in liquids and natural gas volumes.

During the quarter, we successfully closed our Lane G&P asset sale for $75 million, which materially improved our leverage outlook and significantly increased our liquidity to $255 million as of June 30.

We also had 14 wells that were connected during the second quarter, which beat our expectations as well. And as of now, we currently have 8 rigs running across our systems which -- and generally have about 60 wells that are either drilled but uncomplete or are in the process of being drilled as we speak.

So -- look, as a result of our year-to-date outperformance, the performance from several new wells connected to the system in July, we believe that we are going to trend towards the higher end of our 2022 adjusted EBITDA guidance range of $205 million to $220 million.

As we look ahead into '23, we're very encouraged by the increasing level of activities from our customers. Our latest producer development plans are now projecting over 200 well connections behind our systems. We're obviously very excited and encouraged by this level of activity as it generally represents about 80% growth in new well connect activity relative to 2021 and 2022 average well connects. It's also a very significant step forward towards the historical level of activity that we've experienced over the few years prior to the pandemic, which is roughly 250 to 300 wells per year.

In addition, we've continued to benefit from consolidation in the upstream sector, most recently with Ascent, latest bolt-on acquisition, of approximately 27,000 net acres in the Utica, which is already dedicated to our SMU system.

Ascent was the optimal buyer, certainly, given that their -- the acreage is contiguous to their existing acreage position, and they also owned a material working interest in the production. We expect this transaction will drive a significant amount of free cash flow for Summit going forward as Ascent develops the substantial inventory of identified drilling locations, which are mostly behind pads that are already connected to the SMU system.

In the Piceance, we continue to make progress on the 200-well development program, which is expected to result in 15 to 20 well connects starting in the second quarter of 2023 and continually I believe thereafter. As a reminder, development in this region includes directional wells that have an initial IP rates of, call it, 1 million to 1.5 million Mcf per day. Based on these well characteristics and the cadence of development, we do think that this relativity will result in flat to modest volume growth in our overall Piceance segment over the longer term.

Within the Barnett, we continue to see strong performance from the 15 wells that have been connected and turned online to the system over the past 9 months, with the latest four wells starting to flow in late July. We have an active rig running behind our system, and our customers have recently informed us of plans for more than 30 new wells in 2023. So we believe that gas prices, the overall improvement in well performance as well as the Barnett's proximity to the Gulf Coast LNG markets really positions this segment for continued growth over the next several years.

While Williston volumes were significantly impacted by the North Dakota storm this quarter, the volumes did normalize in June, and we continue to be encouraged by the well performance in Central Williams County as well. We currently have four rigs running in the Williston today.

And our customers are planning for approximately 60 wells in 2023, which would include 7 wells from a customer that will involve both crude and produced water gathering services. With nearly 50 wells expected in the second half of 2022 and the approximate 60 wells they're on the plans thus far for '23, we definitely expect to see meaningful volume growth behind the systems over the next several quarters.

Well, obviously, it's still early to make a call on official guidance for 2023, but if you assume that the customers execute on the development plans that are in front of us today, we anticipate that Summit will experience double-digit EBITDA growth in 2023. At this level of growth would significantly improve SMLP's balance sheet and further position the business for success going forward.

As we have discussed, growth in the base business is only one aspect of our overall story, we are pursuing and continuing to pursue leverage and value accretive bolt-on acquisitions and divestitures, and we're also making great progress on commercializing and potentially expanding the Double E pipeline in the Permian. And we also expect that, that would drive tremendous growth for Summit, not only as we kind of look into next year and the contractual step-ups, but certainly in the out years as we bring new contracts to the table.

So with that, I'll hand the call over to Bill Mault to provide some additional details on the financial results.

William Mault

Thanks, Heath, and good morning, everyone.

I'll get started in the Northeast, which, as a reminder, includes our SMU system, proportionate share of our Ohio Gathering joint venture and our Marcellus system. The segment averaged 1,194 million cubic feet per day during the quarter. That's inclusive of 562 million cubic feet of 8/8ths OGC volumes and segment adjusted EBITDA totaled $18.7 million, which decreased $1.5 million from the first quarter.

This was primarily due to a 14.7% decrease in volume on our wholly-owned systems and 6.1% decrease in volume at our Ohio Gathering joint venture. Approximately half of the volume decline sequentially on our wholly-owned system was due to approximately 45 million a day of maintenance-related downtime upstream of our TPL-7 connection and approximately 9 million a day of volume temporarily shut-in behind our wholly-owned SMU system, while a customer was fracturing a nearby 4-well pad.

We estimate that this activity negatively impacted EBITDA for our wholly-owned systems by approximately $0.7 million during the quarter. And subsequent to quarter end, the four new well pad was brought online in July and had initial production of over 100 million a day. Approximately 17% or 6 million a day of the volume decline behind our OGC joint venture was also due to wells temporarily shut-in for frac protect, which was partially offset by 6 new lower volume condensate wells that came online during the quarter.

We estimate that the temporary shut-ins impacted segment adjusted EBITDA by approximately $200,000 net to Summit during the quarter. Subsequent to quarter end, 9 new wells were connected behind our OGC joint venture that are expected to produce over 180 million a day on an 8/8ths basis.

We believe these activities behind our wholly-owned system and OTC joint venture will serve as a volume catalyst for the Northeast segment beginning in the third quarter of 2022.As Heath mentioned, we look forward to better understanding Ascent's development plans in the Northeast pro forma for their acquisition of dedicated acreage behind our wholly-owned SMU system.

The Rockies segment, which is inclusive of our DJ and Williston Basin systems, generated adjusted EBITDA of $13.9 million, which decreased $1.9 million from the first quarter of '22. Natural gas volumes averaged 29 million cubic feet per day and liquids volumes averaged 54,000 barrels per day.

Natural gas volumes were flat quarter-over-quarter, and there were four new wells connected behind those systems during the quarter. Crude oil volumes decreased approximately 17%, and that was primarily due to the weather that Heath mentioned alongside no new wells being brought on during the quarter.

We estimate that the winter storm reduced liquids volumes by approximately 11,000 barrels a day, which accounted for nearly 100% of the sequential volume decline, and impacted gross margin by approximately $1.7 million during the quarter. Volumes normalized in June, and there are currently four rigs running with over 35 DUCs behind the system and approximately 30 wells expected to come online in the third quarter that we expect to serve as a volume catalyst here in the second half of the year.

The Permian Basin segment, which is inclusive of our wholly-owned Lane G&P system that was sold on June 30 and our 70% interest in the Double E Pipeline reported adjusted EBITDA of $4.8 million, which represented a $0.7 million increase relative to the first quarter. This was primarily due to approximately 70% volume growth behind our Double E joint venture.

Volumes were flat behind our G&P system and Double E volumes averaged 314 million a day on an 8/8ths basis for the quarter. There are approximately 100 rigs running in Eddy and Lea County, New Mexico, of which 14 are existing customers behind our Double E system, and we expect volumes behind our Double E joint venture to continue to increase alongside this increasing production and upstream activity in the region. The Piceance segment reported adjusted EBITDA of $15.4 million and was generally in line with the first quarter. Volumes averaged 312 million cubic feet a day, flat relative to the first quarter and we still expect our customer to move its active drilling rig in the basin to drill up 17 permitted wells and expect those wells to come online here in the fourth quarter.

The Barnett segment reported adjusted EBITDA of $7.2 million, a decrease of $2 million relative to the first quarter. This was primarily due to a $3 million increase in operating expenses resulting from commercial settlements that reduced operating expenses in the prior periods. This was partially offset by a 1.5% increase in volume throughput.

As Heath mentioned, we continue to see great results from the wells connected to the system over the past 9 months. There were four new wells connected to the system at the end of April that achieved peak volumes of approximately 27 million a day. There were also four new wells that came online in late July, and we expect an additional four wells in the fourth quarter that are currently being drilled. This level of activity in 2022 with over 30 wells expected in 2023 should serve as a significant volume catalyst behind the system going forward.

Turning quickly to the partnership, SMLP reported a second quarter net loss of $91.8 million. This was primarily due to an $84.5 million impairment associated with the sale of our Lane G&P system. We generated adjusted EBITDA of $50.5 million, incurred capital expenditures of $6.1 million during the quarter, which included $1.9 million of maintenance CapEx. In addition to the sale of the Lane G&P system for approximately $75 million, we also sold an additional $2.6 million of latent inventory.

Free cash flow generation during the quarter, along with the asset sale proceeds enabled us to pay down the ABL by approximately $82 million. As of quarter end, we had $151 million outstanding under our $400 million ABL credit facility and approximately $12 million of unrestricted cash on hand. Our available borrowing capacity at the end of the quarter totaled approximately $243 million, which included $6 million of letters of credit.

And with that, I'll turn the call back over to Heath for closing remarks.

Heath Deneke

Thank you, Bill.

We're very pleased with the progress that we're making really on all aspects of our corporate strategy. And we believe that the combination of the expected base business volume growth that we talked about, the commercialization and potentially expansion of Double E as well as the leverage and value accretive bolt-on acquisitions and divestitures will drive a tremendous amount of value for really all of our stakeholders going forward.

As always, we'll continue to provide updates as our customer plans and strategic initiatives materialize. I would like to thank you for your time and continued support.

And with that, operator, I'd like to open the call up for questions.

Question-and-Answer Session

Operator

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Summit Midstream Partners, LP (SMLP) CEO Heath Deneke on Q2 2022 Results - Earnings Call Transcript