SMLP - Summit Midstream Partners LP (SMLP) Q3 2022 Earnings Call Transcript

Summit Midstream Partners LP (SMLP)

Q3 2022 Earnings Conference Call

November 04, 2022, 10:00 ET

Company Participants

Randall Burton - IR

Heath Deneke - President, CEO & Chairman

William Mault - EVP & CFO

Conference Call Participants

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Q3 2022 Summit Midstream Partners, LP Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference call is being recorded. I would like to turn the conference over to your speaker for today. You may go ahead, sir.

Randall Burton

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 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 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 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

Great. Thank you, Randall. Good morning, everyone. Summit reported third quarter adjusted EBITDA of $54.7 million, representing an 8% quarter-over-quarter growth which keeps us on track to achieving maybe even slightly exceeding the high end of our 2022 adjusted EBITDA guidance range of $205 million to $220 million. We're very excited about the increased activity we are seeing virtually across all of our operating segments as well as the progress that we've made on strategic acquisitions and divestitures over the past couple of months. We certainly have a lot of positive momentum to discuss in both areas. So let me start with the base business updates, and then we'll get into a little more detail on the previously announced acquisitions and divestitures.

We connected about 40 new wells in the third quarter, which drove strong volumetric growth quarter-over-quarter across the portfolio. In the Northeast, we experienced approximately 40% increase in volumes through our OGC joint venture which was driven by 12 new wells that produced over 300 million a day during the quarter. On the SMU system, we connected 4 new wells that led to approximately 6.5% increase in volumes quarter-over-quarter. We continue to see new wells that are connected behind our systems in the Utica outperform our internal type curves, which is great. Maybe we need to think about adjusting them, but continue to see some really, really nice wells out there.

We're also excited about the potential step-up in drilling activities and production uplift from workovers of existing wells by our anchor customer and this is on the acreage that they recently acquired from XTO, which, as a reminder, is already connected and dedicated to our SMU system. In the Williston, we experienced over 20% growth in liquid volumes, primarily due to 9 new wells that were connected during the quarter and also a return of the previously curtailed liquid volumes that resulted from the winter storm that occurred during the second quarter.

In the fourth quarter, we're expecting additional 40 new wells, which will continue to drive volumes on the system volume growth on the system in the fourth quarter and also provides a really solid foundation to continue to see volume growth as we head into 2023. In the Barnett, we experienced a moderate increase in volumes from 8 new wells that were connected to the system 4 of which though occurred at the end of September, which really will kind of have more of an impact on volume growth in the fourth quarter. In total, we added 12 new wells in the Barnett during 2022, and we really remain very excited about our customers' plans to add more than 30 new wells to the system next year. Certainly will result in some pretty significant growth in the Barnett segment.

As we look ahead to 2023, we continue to see producer activity levels increasing across virtually all of our operating segments and if you include the recently announced DJ acquisitions, we would expect to add more than 300 new wells to our systems next year. We're very excited about this opportunity set that we also have in the Permian to further add to the contract portfolio on the Double E pipeline.

Turning over to the M&A front, in September, we completed the sale of our Bison Gas Gathering System in North Dakota for $40 million in cash. This is similar to the divestiture of our Lane G&P system in June, which is a continuation of our strategy to prune the portfolio of underperforming and/or less strategic assets through deleveraging and liquidity enhancing transactions, all while positioning us to capitalize a more strategic and accretive bolt-on opportunities across our footprint. It certainly was the case. If you take a look at the recently announced DJ acquisitions, it's very much the type of strategic opportunities that we're talking about and that we've been able to capitalize on as a result of those 2 divestitures.

As we discussed on the investor call a couple of weeks ago, Summit entered into purchase and sale agreements to acquire the Outrigger DJ and Sterling DJ Systems for $305 million in cash. which represents a very value and credit accretive transaction multiple of approximately 4x our 2023 estimated EBITDA. The transactions represent a reinvestment in an integrated G&P platform that provides us a scalable, reliable and sustainable solution to enhance both the quality and availability of services that we can offer our combined customer base in the DJ. On a pro forma basis, our footprint will consist of 735 miles of gas gathering pipelines, over 40,000 horsepower of compression and 185 million a day of processing capacity that has great access to multiple residue gas and NGL outlets.

We've also expanded our services to include crude oil and water for our diversified customer base. Our integrated system traverses several highly economic areas in the DJ Basin and is backed by a combination of long-term fixed fee and percent of proceed contracts, which is over pinned by over 500,000 leased mineral acreage within a 1.7 million acre dedicated area. We expect to close both transactions by the year-end and are working on transition plans to ensure a smooth integration of the systems in the coming months. We're very excited about the DJ opportunity set, both operationally and commercially and look forward to hitting the ground running in early 2023. Given our strong momentum in the back half of 2022, and the expected addition of at least 275 wells in 2023, pro forma for the DJ Basin acquisitions, we would expect our 2023 adjusted EBITDA to exceed $300 million, which would result in more than $125 million in free cash flow and a meaningful reduction in leverage to approximately 4.25x at year-end 2023. To the extent that similar level of that well connect activity would continue into 2024, we would expect to be in a position to achieve a long-term total leverage target of sub 3.5x in 2024, which is a major milestone for all of Summit stakeholders.

With that update, I will hand the call over to Bill to provide more details on our financial results. Bill?

William Mault

Thanks, Heath, and good morning, everyone. We'll start in the Northeast, which, as a reminder, is inclusive of our SMU system, proportionate share of our Ohio Gathering joint venture and our Marcellus system. The segment averaged 1,420 million cubic feet per day during the quarter, inclusive of 783 million cubic feet a day of 8/8ths OGC volumes and segment adjusted EBITDA totaled $19.4 million, which increased $0.8 million from the second quarter of '22. This was primarily due to a 39% increase in volume at our Ohio Gathering joint venture from 12 wells connected to the system during the quarter. We also connected 4 new wells directly behind our wholly-owned SMU system in August that produced approximately 100 million a day during the third quarter. Additionally, the anchor customer behind our SMU system performed a workover on an existing 3-well pad that resulted in an increase of over 15 million a day in gas production.

These activities resulted in a 6.5% volume growth behind our SMU system, which was partially offset by natural production declines behind our Mountaineer system as no new wells were connected behind that system year-to-date. There are currently 5 rigs running and over 25 docks behind the SMU and OGC systems, and we expect another 5 to 10 wells to come online here in the fourth quarter. The Rockies segment, which is inclusive of our DJ and Williston Basin systems generated adjusted EBITDA of $14.3 million, which decreased $0.4 million relative to the second quarter. Natural gas volumes averaged 31 million cubic feet a day and liquids volumes averaged 66,000 barrels per day. Natural gas volumes were relatively flat quarter-over-quarter as there were no new wells connected behind those systems during the quarter.

And in September, we closed on the sale of our Bison Gas Gathering System in the Williston Basin for $40 million cash and beginning in the fourth quarter, our Williston position is now exclusively oil and produced water gathering. Liquids volumes increased over 20% quarter-over-quarter and based on activity in the third quarter and projected activity in the fourth quarter, we expect continued liquids volume growth as we head into 2023. The segment was negatively impacted by a onetime $700,000 contract adjustment attributable to our DJ Basin business. And currently, there are 2 rigs running behind the system with over 50 docks and approximately 40 wells expected to come online here in the fourth quarter of 2022.

The Permian Basin segment, which includes our 70% interest in the Double E Pipeline reported adjusted EBITDA of $4.9 million, which was relatively flat till the second quarter due to flat volumes on a quarter-over-quarter basis. The Piceance segment reported adjusted EBITDA of $14.2 million, down approximately $1 million from the second quarter. Volumes averaged 305 million cubic feet a day, a moderate decrease from the previous quarter due to natural production declines. The segment was also impacted by a $0.8 million increase in operating expenses which was primarily due to an increase in estimated property taxes. We now expect 17 wells currently being drilled to be turned in line in the first quarter of 2023 and due to a slight delay in completion timing, but we don't expect this to have a material impact to 2022 financial results. We continue to expect over 75 wells to be connected to the system in 2023, which should result in modest volume growth beyond the system throughout next year.

The Barnett segment reported adjusted EBITDA of $7.9 million, an increase of $0.6 million relative to the second quarter primarily due to a 2% increase in volume throughput and a $200,000 increase in natural gas sales. There were 8 new wells connected to the system during the quarter and while segment volumes were relatively flat from the previous quarter, we expect continued growth in volumes in the fourth quarter of 2022. The next set of wells to come online are expected in the first quarter of 2023. And with over 30 wells expected to be connected in 2023, we should see strong volume growth behind that system next year.

Moving quickly to the partnership. SMLP reported third quarter net loss of $7.8 million, primarily driven by a noncash impairment associated with our Bison sale. We generated adjusted EBITDA of $54.7 million, an increase of 8.5% from the second quarter and incurred capital expenditures of just over $6 million for the quarter, which was inclusive of $2.3 million of maintenance CapEx. Despite being at the high end of our adjusted EBITDA guidance range, we continue to expect total CapEx for the year to be around the midpoint of our original guidance range of $20 million to $35 million. With the sale of the Bison gas gathering system for $40 million and free cash flow generation during the quarter, we were able to pay down the ABL by $66 million in the third quarter. And as of quarter end, we had $85 million outstanding under our $400 million ABL facility and approximately $10.5 million of unrestricted cash on hand. Our available borrowing capacity at the end of the third quarter totaled approximately $309 million, which included approximately $6 million of letters of credit.

As we discussed on our call a couple of weeks ago, the DJ Basin acquisitions will be financed with $85 million of fully committed second lien notes and borrowings under our ABL credit facility, which really represents a reinvestment of the $115 million in asset sales and free cash flow generated by Summit in 2022. We estimate that we'll end the year with approximately $325 million drawn on our ABL credit facility and given the significant free cash flow generation of our business, we will quickly get back to our target minimum liquidity threshold of $100 million in the first quarter of '23.

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

Heath Deneke

Yes. Thanks, Bill. So as discussed on the call today, we continue to make great progress executing our corporate strategy. And we believe that the combination of the improving base business, leverage and value accretive acquisitions and divestitures and further commercializing Double E will drive tremendous value for all of Summit stakeholders. We continue to work towards closing the DJ Basin acquisitions. And as always, we'll continue to provide updates on development plans and strategic initiatives going forward. We 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

[Operator Instructions]. The first question is coming from [indiscernible]. Please go ahead.

Unidentified Analyst

Upside next year with the high prices of oil, et cetera?

William Mault

Yes, Charles, sorry, you kind of broke up there. Do you mind repeating your question?

Unidentified Analyst

Sure. You have some percentage of proceeds contracts. And I was just wondering if there's any upside on that in the coming year.

William Mault

Yes. No, Charles. Appreciate the question. So as we mentioned a couple of quarters or a couple of weeks ago on the call, pro forma for the DJ Basin acquisitions as well as the Bison sale, we expect to be right around 90% fixed fee. So we do have some modest commodity price exposure. I'll tell you, we kind of underwrote that transaction at a discount for strip call it in the low 70s on a WTI basis. So to the extent that we see strength kind of above those levels, we'd see some modest upside to -- as a result of commodity price increases. But again, primarily fixed fee business, which has kind of been Summit's profile here for really since the beginning.

Operator

[Operator Instructions]. This concludes today's Q&A and today's conference call. Thank you all for joining. You may all disconnect.

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