Summit Midstream Partners LP (SMLP) 2022 Q1 法說會逐字稿

Welcome to the Q1 2022 Summit Midstream Partners, LP Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions)

I will now turn the call over to Ross Wong, Vice President, 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 & Presentations section or Quarterly Results section. With me today to discuss our first 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 list 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.

Thank you, Ross, and good morning, everyone. Summit reported first quarter adjusted EBITDA of $56.8 million, which exceeded our internal expectations and provided a strong start to the year. We experienced over 20% quarter-over-quarter growth in crude oil volumes, which was driven by 25 wells that came online over the past 6 months. We also benefited from a full quarter contribution of 7 large Utica wells that produced over 200 million a day on average during the quarter. We also connected 15 wells during the first quarter, which was in line with our expectations, and we had approximately 35 drilled but uncompleted wells as of quarter end.

Looking ahead, we are very encouraged by the increasing levels of producer activity across many of the basins that we operate in. It's been quite a turnaround in the projected activity from our customers over the past few months, and now we currently have 7 rigs running behind our systems. And based on updated producer guidance, we now expect to bring on 30 to 40 new well connects during the latter half of 2022. With these additional wells, we are now projecting 105 to 150 wells for the year, which is nearly a 40% increase relative to the assumptions we used in our original guidance range. Given the anticipated timing of these new wells, however, we expect this activity will mostly impact our fourth quarter results in 2022 but it will build a lot of momentum as we head into 2023. This new activity, in combination with a strong Q1, gave us confidence to increase the bottom of our original adjusted EBITDA guidance range by $10 million and establish a new range of $205 million to $220 million.

We believe the increase in activity levels we're seeing at Summit and within the U.S. more broadly is a clear sign that producers are now beginning to build confidence in market fundamentals that support the back end of the forward price curves. Since the beginning of the year, we've seen a 17% increase in WTI futures, 29% increase in Henry Hub futures along with an approximate 20% increase in U.S. rig count. With long-term natural gas and crude oil futures currently trading around $4 per MMBtu and over $70 a barrel, virtually all of the inventory behind our systems is economic to develop at current levels.

As a result, we've certainly seen permanent activity levels increase and are having very encouraging conversations with producers regarding plans to further ramp activity levels on our systems in 2023, particularly in the Barnett, the Piceance, the Utica and Williston basins. As an example, in the Barnett, we have 23 recently approved drilling permits, and in the Piceance, we are working with our customers on a 170-well development program, which is scheduled to start in 2023. In the Utica, we're currently expecting a steady increase in new well connect activity next year, which could be further bolstered by upstream consolidation in the region. And in the Williston, we are excited about the commercial prospects related to an agreement we previously announced with a new customer that includes a new 50,000-acre area dedication along their Polar & Divide liquid systems. And we're also in the process of securing new commercial agreements that we think can add significant acreage to our Bison gas system later in the year.

Last but certainly not least, the Permian Basin continues to lead the way in the resurgence of producer activity levels in the U.S., which we believe will drive significant volume growth in the basin and behind our Lane system and the Double E Pipeline. At the current level of rig activity in Eddy and Lea Counties, our projections indicate that existing residue gas takeaway capacity out of New Mexico will become constrained in late 2023 to the early 2024 time frame. And I'm sure many of you are also following the news regarding new pipeline expansions to increase residue gas takeaway from Waha, Texas to the Gulf Coast. Both of these dynamics put Double E in a great position to fill up the remainder of our current 1.35 Bcf a day of capacity over the next couple of years. Additionally, we are advancing plans to potentially expand Double E to over 2 Bcf a day via very timely and cost-effective midpoint compressors on the project. We think we're very well positioned to see meaningful growth out of this highly strategic Permian asset in the coming years.

Before turning the call over to Bill, I also wanted to spend a little bit of time on M&A. So look, I think we all know M&A activity is certainly continuing to pick up momentum in the midstream sector. We've had several G&P transactions that have been announced over the past several months. And at Summit, we continue to think that M&A will be an important part of the story going forward. We are pursuing both acquisition and divestiture opportunities that can help streamline our portfolio while building in-basin scale and synergies that we believe will lead to accelerated and highly accretive growth in the coming years.

As we have discussed previously, anything that we transact on will be both credit accretive and long-term value accretive for our unitholders. While we're certainly encouraged with the opportunity set around our footprint, both organically and through strategic A&D opportunities, let me be clear that we will remain fully committed to maintaining our capital discipline, growing free cash flow and continuing to improve the balance sheet.

With that, I'll hand the call over to Bill Mault to provide additional details on our financial results.

Thanks, Heath, and good morning, everyone. As Heath mentioned, we had a good start to the year that really positioned us to take the low end of our guidance range off the table.

Starting in the Northeast, which is inclusive of our SMU system, proportionate share of Ohio Gathering joint venture and our Marcellus system. The segment averaged approximately 1.3 Bcf per day during the quarter, which is inclusive of approximately 600 million a day of 8/8ths OGC volumes. And segment adjusted EBITDA totaled $20.1 million, which increased $1.1 million from the fourth quarter. This was primarily due to a 4.4% increase in volume on our wholly owned systems and a 12.9% increase in volume on our Ohio Gathering joint venture.

We continue to be excited about the productivity of the wells in the region. There were 4 wells brought online behind our wholly owned SMU system in mid-November, and these wells have produced over 100 million a day since early December. As we have discussed previously, we generally expect these wells to hold flat for 4 to 6 months before they begin their decline.

Our next slate of 4 wells is expected in the summer, and the rig is currently at work. These 4 wells will be the next volumetric catalyst behind our SMU system this year. There were also 3 new wet gas wells that came online late last year behind our OGC joint venture that also produced over 100 million a day during the quarter. While we haven't heard of producers increasing activity levels in the Utica during 2022 at this point, we remain very excited about the natural gas price fundamentals, productivity of the wells in the region and prospects for potential upstream M&A that could represent a significant catalyst behind our systems.

The Rockies segment, which is inclusive of our DJ and Williston Basin systems, generated adjusted EBITDA of $15.8 million, which increased $0.9 million relative to the fourth quarter. Natural gas volumes averaged 29 million a day, and liquids volumes averaged 65,000 barrels a day. As Heath mentioned, crude oil volumes increased over 20% during the quarter, which was above our expectations and was driven by 25 well connects over the past couple of quarters. The segment also benefited from a reduction in operating expenses quarter-over-quarter but was partially offset by several operational and weather-related interruptions that impacted volumes. We estimate that liquid volumes were impacted by approximately 2,000 to 3,000 barrels per day during the quarter and natural gas volumes by approximately 0.6 million to 0.8 million cubic feet per day, which we estimate equates to quarterly gross margin impact of approximately $0.5 million for the quarter.

While North Dakota continues to experience severe weather in April, we would expect the system and volumes to normalize during the second quarter. There are currently 4 rigs running and 19 DUCs behind the system, and we now expect approximately 45 to 65 new wells on the system for 2022. This should drive segment adjusted EBITDA toward the high end of our original guidance range within this segment.

And the Permian Basin segment, which includes our wholly owned Lane G&P system and our 70% interest in Double E Pipeline, reported adjusted EBITDA of $4.2 million, representing a $1.6 million increase relative to the prior quarter. This was primarily due to a full quarter contribution of our Double E Pipeline, which went into service in November of last year. Volumes averaged 27 million a day behind our G&P system, a 3 million a day increase relative to fourth quarter; and Double E volumes averaged 187 million a day on an 8/8ths basis for the quarter.

Four new wells were connected to the G&P system, and we saw an increase in volume from recently executed commercial agreements with a neighboring midstream company during the quarter. Based on recent upstream A&D activity, one of our new customers is expected to bring on a couple of new wells later in the year. We remain encouraged by the level of activity in the region and the increase in scarcity of our processing capacity relative to other processors in the area.

Within the Piceance segment, we reported adjusted EBITDA of $15.8 million, in line with the fourth quarter. Volumes averaged 312 million a day, a decrease of approximately 1.6% relative to the fourth quarter. And this was primarily due to natural production declines, partially offset by volume from the new 9-well pad that was turned online in October of 2021. We still expect 17 permitted wells to be turned online in the latter half of 2022 and continue to expect a larger-scale drilling program from this customer in 2023 with initial plans of over 70 wells. Our commercial team is also advancing conversations with another operator in the area that has expressed an interest in over 100 well connects behind our system beginning in 2023. This improving level of commercial discussions in the Piceance really illustrates just how economic it is for producers to develop in this commodity price environment.

The Barnett segment reported adjusted EBITDA of $9.3 million, a decrease of $0.9 million relative to the fourth quarter, primarily due to natural production declines from the 7 new wells that were brought online in late September 2021. While those 7 wells drove most of the sequential volume decline, we had another 4-well pad that was completed in late April that should help mitigate those declines beginning in the second quarter. In addition, one of our customers currently has a rig running behind our system on another 4-well pad that will be connected during the summer. Based on recent customer conversations, we now expect 8 to 12 well connections in 2022 and have line of sight towards significant development activity in 2023. There are over 20 recently approved permits behind the system, and we had conversations with another customer regarding the potential for 16 additional wells in 2023. This is obviously early but this level of customer activity would be a major catalyst for SMLP in 2023.

Quickly turning to the partnership. SMLP reported a first quarter net loss of $5,000 and adjusted EBITDA of $56.8 million. We recognized a noncash gain on derivatives of $7 million during the quarter, primarily due to changes in the fair market value of certain hedges we have in place behind our Double E-related debt. Capital expenditures totaled $8.7 million for the quarter, which included $2.9 million of maintenance CapEx. Most of the CapEx is associated with growth capital to connect new pad sites in our Utica, Permian and Williston systems.

During the quarter, we also sold approximately $2 million of latent inventory. With respect to Summit's balance sheet, we had $233 million outstanding under our $400 million ABL credit facility, a decrease of $34 million relative to our year-end balance. Our available borrowing capacity at the end of the first quarter totaled approximately $150 million, which included approximately $18 million of LCs.

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

Great. All right. Thank you, Bill. So as you can tell, we're very happy to see the pickup in our customers' 2022 development plans since the beginning of the year, and we're particularly encouraged by the continuing strengthening of longer-term fundamentals that support a more robust outlook for Summit and our stakeholders as we look ahead to 2023 and beyond.

We are actively working with our customers across many of our systems to evaluate further price response drilling activities, both in late 2022 as well as early 2023, and we will continue to provide updates throughout the year as these plans further materialize. We're very excited about the prospects surrounding Double E, which we expect will drive significant growth for Summit in the coming years. And we'll also continue to evaluate M&A opportunities across our footprint, which we think can further accelerate delevering, help streamline our portfolio and create long-term value for the company.

Lastly, I wanted to remind everyone of the upcoming Annual Meeting of Limited Partners, which will be held virtually on May 10, 2022, at 2:00 p.m. Central time. All unitholders should have received proxy materials associated with the meeting. There's certainly a lot of number -- there's certainly a lot of important items on the agenda that are very important to the partnership, and we certainly encourage all of our unitholders to vote.

Thank you for your time and continued support. And with that, operator, I'd like to open the call up for questions.

(Operator Instructions) And we have our first question from Amos Carreker (sic) [James Carreker] with U.S. Capital Advisors.

This is James. Just thinking about the rest of the year after $57 million of EBITDA in Q1. And that kind of annualizes above the high end of your guidance range, and that's with some weather impacts before you kind of added some new wells to the forecast. So just any thoughts about other things to keep in mind as we progress through the year?

Yes, James. Yes. This is Heath. Look, I mean, we're -- we certainly -- when we reset the guidance range, we factored in the new wells that we currently know about that are scheduled to come on in the second half of the year, and we do think that there's a good chance we'll kind of finish towards the high end of that range based on that activity level. But it's still a little bit early. We still want to kind of make sure that producers are hitting their timing and the like. So I think we try to maintain what we believe to be a conservative range.

I think the key thing to watch for though is, as we've kind of talked about, we certainly have built up a lot of momentum here over the past few months, as we've set original guidance. We have ongoing discussions with producers. We could see some additional acceleration of wells in 2022. Or frankly, as importantly or more importantly, we're starting to see some pretty robust activity setting up for early 2023. So I think those are kind of the key things to watch for. And like we said, we'll certainly keep the market updated as we get new information, but we feel comfortable kind of sticking with the range that we guided to this morning.

Yes. And James, I'd just add like as a specific example. In kind of my prepared remarks, I talked about the rig that's currently working on that 4-well pad in our -- on our SMU system. That's obviously a good sign as it relates to timing, that that's likely going to hit or potentially even exceed kind of our -- the producer's expected timing. What's still outstanding obviously is where those IP and the performance of those wells. So I think we're going to get a lot more line of sight.

I think the key takeaway though is based on kind of permitting, rig activity, how we're seeing things kind of progress so far through here early May, everything is kind of shaping up for producers to be hitting their targets, which we kind of outlined would push us towards the high end. And we'll kind of see how that shapes up over the next couple of months and hopefully be able to update the market even further here in a few months.

Appreciate the color. And then, I guess, moving over to Double E. A pretty positive outlook there. I wonder if you could just help us understand kind of the playing field. What are the big pipe takeaway options currently for New Mexico producers? How quickly do those fill up? And then, I guess, can you juxtapose that against kind of relatively low current utilization rates for Double E?

Yes. Yes, certainly. I mean, I think generally speaking, we've got, what, 90-plus rigs running right now in New Mexico. And when we look at the current takeaway options, which largely includes El Paso Natural and Transwestern and, of course, the Double E Pipeline and a few others, but when we kind of stack up the available capacity and we look at -- and throw in some type curves associated with that rig activity, we see that the existing infrastructure is going to start getting constrained here in the, call it, late '23, early 2024 time period, right? So I think that's frankly what we're seeing. We're not -- sorry, we're getting a little feedback there. So I think that's the timing of when we start to see some pretty material constraints there.

As it relates to Double E volumes today, I mean, look, we're certainly seeing volumes starting to pick up. I do think that the customer base -- certainly, those contracts are going to step up over time. And we do think that we'll continue to see volumes increase throughout the year. So I think the key takeaway though with Double E is I think we're just really well positioned. I think to sustain that level of rig activity, it's only a matter of time before new takeaway solutions are going to have to be offered up. We think we're very well positioned to fill up the remaining 300 million to 350 million that we have available for subscription today.

And then kind of fast forwarding, if you look at the downstream takeaway that's being developed out of Waha, we think that's going to keep a pretty positive incentive for producers to want to get their gas out of New Mexico and to the Waha market. And I think that kind of positions us well for an expansion project that we think we can get done in the next couple of years, if market demand warrants.

And then I guess you've previously talked about $45 million net to Summit if Double E fills up. Is it reasonable to kind of extrapolate that number if you do, at some point, move forward with the expansion up to 2 Bs?

Yes. What we kind of -- obviously, James, so at 1 Bcf, we kind of indicated $30 million net to Summit. So at 2 Bcfs, just multiply that by 2 and that probably gets pretty close. And what we've been guiding to -- towards, James, just in general, think about that as a sub-4x project. So if we're going $45 million up to $60 million, that's net Summit, right? That incremental $15 million, if you gross that up by 70% and then assume that it's somewhere between a 3 to 4x build multiple, that will kind of get you a general sense of the 8/8ths CapEx for that midpoint compression project that Heath mentioned.

(Operator Instructions) We have our next question from Gregg Brody with Bank of America.

Just a few follow-ups on some of the things you said. So just to follow up on Double E. It seems like you're not seeing much inflationary pressure on the area that would drive the multiple up, as you mentioned, sort of 3 to 4x. Is there any part of your business where you're seeing inflation that you're not able to pass through?

I think the inflationary impact thus far has been somewhat limited. We haven't seen anything that really drives a material step change in our operating expenses as an example. Clearly, we do see pipe prices are up, and that's one of the advantages that we think we have with Double E. We've got the large-diameter 42-inch pipe already in place. And so what we're looking for to expand that system to get up to that, call it, 2 Bcf to 2.2 Bcf a day is really just a midpoint compressor project. And while certainly, we're seeing a little bit of cost creep, if you will, on some of the contractors that we've hired to install that compression, it's pretty limited in terms of what -- it's not like we're having to go out and build a long diameter or a significant amount of pipe mileage, if you will, to kind of get to those volume levels.

Great. And you anticipate that you can fund all that within the Double E structure?

We do.

We -- yes, yes.

And you mentioned you're optimistic about potential mergers in the Northeast or M&A, I think you said. And how that -- as you think about -- let's say that producers can start to increase -- decide to increase production, what becomes the bottleneck for you in terms of getting gas either to a market that they want to sell to or just out of the basin? Is there some limitation? Or do you feel like there's ample pipeline capacity or just local demand to meet that?

Yes. We -- I mean we think that -- I mean, clearly, you could start to see some in-basin pricing. It just depends on the magnitude of the step-up. But I think for what we're seeing and the connectivity that our assets have, the downstream takeaway, I mean, we're not anticipating there naturally will be -- there's, of course, limitation that -- I mean clearly, there will be at some level, but I think we've got a lot of room to grow.

And the comment that we're making around the upstream consolidation and how that could be a positive thing for us as certainly 2 or 3 of our customers have been fairly dormant over the past few years, even in these hyperinflated gas prices and just aren't drilling. And we think an acquirer that delights the buyers up there, to the extent they were to take on this acreage position, would certainly have a development plan that would help drive some additional volumes through the system.

And just last one for you. You highlighted that M&A has picked up. Are you seeing opportunities for acquisitions? Can you kind of talk about the size of them?

Yes. I mean, I think what we're focused on -- and we are seeing opportunities for acquisitions. Of course, as we've said, we're going to make sure that anything that we transact on is going to be credit accretive and certainly has to be value accretive to our unitholders. But we are seeing opportunities around our footprint.

I think what we're focused on are things that could help us maybe gain some scale in some of the basins that we operate in. And we also are evaluating potential divestitures as well if we get to the right price point that could accelerate delevering and provide proceeds for us to kind of redeploy in other areas. So I think we're just actively looking at it. We do think there's a lot of opportunity on the buy and sell side, and we're certainly going to evaluate those opportunities.

(Operator Instructions) And we have no further questions in queue at this time. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.