Summit Midstream Partners LP (SMLP) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Summit Midstream Partners earnings conference call. My name is Richard, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

Okay, thanks, Richard. Good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the first quarter of 2013.

If you do not already have a copy of our earnings release that was issued yesterday, please visit our website at summitmidstream.com, where you'll find it in the news section. With me today are Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer.

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 through future operations.

These statements are based on management's beliefs and assumptions. 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. Such statements are subject to certain risks, uncertainties, and assumptions. If one or more of these risks materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those expected. These risks are discussed in greater detail in our Form 10-K on file with the Securities and Exchange Commission.

Please also note that on this call, we will use the terms EBITDA, adjusted EBITDA, distributable cash flow, and adjusted distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our first-quarter 2013 earnings release.

With that, I'll turn the call over to Steve Newby.

Thanks, Marc. Good morning, everyone. Thanks for joining us today. I'll discuss our first-quarter financial highlights, our business operations, and then I'll turn it over to Matt for more details on our financial results. I'll end the call with some key growth areas that we're focused on for the balance of 2013.

Yesterday we announced our financial and operating results for the first quarter of 2013. We had an outstanding quarter, with adjusted EBITDA of $31.4 million and adjusted distributable cash flow of $27.1 million. Both of these measures were up significantly over the first quarter of 2012.

Adjusted EBITDA was up 26%, while adjusted distributable cash flow was up 23%. Sequentially, adjusted EBITDA and adjusted distributable cash flow were up about 10% over the fourth quarter.

Based on our previously announced distribution of $0.42 per unit, our coverage for the quarter was 1.29 times. Given the performance that we are seeing across our business lines and the outlook for the rest of 2013, we are revising our previous adjusted EBITDA guidance from $110 million to $120 million to $115 million to $125 million.

With that, we also expect our distribution growth to be at the high end of our previous guidance, which was 8% to 10% over our $0.40 MQD. Total throughput volumes in the first quarter averaged 944 million cubic feet per day. This was 3.5% higher than our average daily volumes in the first quarter of 2012. Driving this increase was volume increases related to our DFW system, which were up 31% over the first quarter of 2012 and up 8% over the fourth quarter of 2012.

During the quarter, we connected nine new wells to the system and three new pad sites, while also commissioning our Unit 10 project, which increased our overall capacity to 450 million a day. One of those pad sites was significant -- the Beacon pad site, which expanded our acreage area north in Arlington, in what we called North of I-30.

We're encouraged by the early results we are seeing in that area from drilling activity, and we're optimistic that this new acreage area could be a future growth area for us.

For Grand River, volumes decreased 4% over the fourth quarter of 2012. Lower volumes were due to some continued freeze-offs from the colder winter, but also, several of our producers that used our high-pressure and compression services had reduced volumes from lower drilling activity. All of these customers are under long-term minimum volume commitments, so the volume decline did not affect our cash flow.

If you recall, on our fourth-quarter call we had mentioned that we do believe overall volumes on Grand River will decline this year. However, our MVCs provide significant protection against the effects of this on our cash flows.

Interestingly enough, our low-pressure and higher-margin wellhead gathering service was actually up 3% over the fourth quarter of 2012. Also, our condensate revenue was up significantly in the first quarter over the fourth quarter of 2012. And that was just due to the colder winter. We got more -- basically more drip condensate from the pipeline. I'll caution everyone on this, as it is seasonal, and we don't project that going forward.

So if you step back on Grand River, even though volumes were down quarter over quarter, when you look at our revenue line and adjust for our MVCs, our revenue line was actually up 8% over the fourth quarter 2012. In addition we took several steps in the first quarter to permanently lower our operating expenses around our compression assets in Western Colorado. We purchased some previously leased compression that will add $2 million to EBITDA annually on a go-forward basis.

We also continue to optimize our operations in that area, and we're seeing some nice savings from those efforts. With that, I'll turn it over to Matt to review the financial results in more detail.

Thanks, Steve. I will cover the results of Summit Midstream Partners LP and Summit Midstream Partners LLC, the predecessor of Summit Midstream Partners LP or SMLP.

SMLP completed its Initial Public Offering on October 3, 2012. Results prior to our IPO refer to our predecessor, and results subsequent to our IPO refer to SMLP.

Adjusted EBITDA for the three months ended March 31, 2013, were $31.4 million compared to $24.9 million for the three months ended March 31, 2012, an increase of approximately 26%. The $6.5 million increase in adjusted EBITDA was primarily due to higher volume throughput in our DFW Midstream system, which averaged 419 million cubic feet a day in the first quarter of 2013 compared to 319 MCF a day in the first quarter of 2012.

In addition, certain of SMLP's gas gathering contracts on its Grand River system contain annual minimum volume commitments, or MVCs, and gathering rates that increased in the beginning of 2013. These contractual volume and rate increases helped offset the 11.5% volume throughput decrease on the Grand River system when compared to the first quarter of 2012.

SMLP also benefited from capital efficiency projects that lowered operating expenses in the first quarter of 2013 compared to the first quarter of 2012. During the first quarter of 2013, SMLP acquired previously leased compression assets, which is expected to reduce annual operating expenses by approximately $2 million.

We billed $2.7 million of MVC shortfall payments in the first quarter of 2013 from our gas gathering contracts associated with our Grand River system. This $2.7 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet.

Adjusted EBITDA in the first quarter of 2013 included approximately $6.3 million of adjustments related to MVC shortfall payments, of which $2.7 million was recorded as deferred revenue and $3.6 million was associated with quarterly adjustments related to future projected annual MVC shortfall payments. Additional tabular detail regarding MVCs is included in the first-quarter earnings release.

Adjusted distributable cash flow was $27.1 million in the first quarter of 2013. This implies a distribution coverage ratio of 1.29 times the first-quarter distribution of $0.42 per limited partner unit to be paid on May 15, 2013.

CapEx for the first quarter of 2013 was approximately $21.3 million, of which approximately $2.5 million was classified as maintenance CapEx. We had $214.2 million of debt outstanding on under our revolving credit facility at March 31, 2013. The borrowing capacity under our $550 million credit facility is approximately $336 million. Total leverage at March 31, 2013, was 1.9 times.

As Steve mentioned, management increased its adjusted EBITDA guidance for fiscal year 2013 from the previously guided $110 million to $120 million range to a range of $115 million to $125 million. We believe that the attainment of this increased adjusted EBITDA target should facilitate distribution growth to our limited partners of at least 10% in 2013. Also, this guidance excludes the effect of any potential asset drop-downs from the owner of our general partner, Summit Investments.

With that, I'll turn the call back over to Steve.

Thanks, Matt. As I mentioned earlier, and Matt just mentioned, given the strength that we see in the underlying business and our outlook for the rest of 2013, we're going to raise our adjusted EBITDA guidance from $110 million to $120 million to $115 million to $125 million. This should allow us to hit or exceed the top end of the distribution guidance of 8% to 10%.

No change in our long-term coverage guidance of 1.2 times. That's what we believe we'll average for 2013.

It is important to note -- Matt noted it -- that this guidance excludes the benefit of any drop-downs from the owner of our Group, Summit Investments. We have obviously seen a fairly strong rally in natural gas prices over the winter, but we believe a change in producer sentiment will take time and a belief that prices are sustainable.

We are seeing several producers in the DFW area beginning to discuss increased activity, so we would expect to see some increased drilling activity there in the second half of 2013 and into 2014. You could see volumes move around slightly as producers execute more drilling as they bring pad sites down to do so, but overall we view this as a long-term positive in keeping our high utilization rates on the system.

We're currently in the process of connecting two pad sites that will come on in the second quarter, along with several others that have been connected and that will see first flows in the second quarter. I would tell you and caution you, though, not to assume that we'll see 8% sequential growth again on DFW for each quarter through 2013. But we do feel positive about keeping utilization rates in the 90% range. We also continue to have a good backlog of wells at DFW waiting on completion and wells that are currently curtailed that have previously flowed, and we believe both of those will help sustain volumes.

DFW is one of the most competitive dry gas areas in the country, and it actually competes favorably with even the wet gas areas of the Barnett. This increased activity is not a complete surprise.

On the growth CapEx side in this area, given the activity level previously mentioned from some of our customers, we are in negotiations to expand our acreage or capture area and pick up additional pad site connections. We anticipate these commercial discussions to be finalized in the next few months, so we will keep you posted as things progress.

At Grand River all the volumes are down, as we previously guided they would be. Our MVCs have stepped up on several customers this year, so we'll see increasing cash flows in this area.

On the drilling side, we believe that challenges still remain for increased activity as NGL prices, particularly ethane prices, remain depressed. And I'll remind you, this area is liquids-rich, and it has a heavy ethane barrel. Similar to DFW, we do see several customers getting more active in the second half of the year, and that should help moderate the volume declines as the year progresses and also should help into 2014.

We have completed our operational integration in Western Colorado, and as I mentioned earlier, we're beginning -- or being able to drive some significant costs out of our business in that area. These are real savings that will benefit us on into the future, and I commend our team for their focus.

The Mancos and Niobrara continue to get a lot of positive discussion, given WPX's activity, and I think everybody -- including several producers in the area -- are waiting to see how this play develops. On our side, we are very well positioned as it does develop, but we're being fairly cautious on projecting volume growth from this formation in the near term.

As we previously announced, we expect to complete our first drop-down transaction from Summit Investments to the MLP in the next couple of months, consistent with our previous guidance. We're still highly confident in that timing.

Our strategy is to use Summit Investments to develop and incubate assets, particularly ones with large organic CapEx needs, and then offer those assets to the MLP. In 2013 for the year Summit Investments is executing on upwards of $250 million of organic CapEx across the Mancos, the DJ Niobrara, and the Bakken Shales. This buildout includes construction of approximately 300 miles of pipeline and construction of two fee-based processing plants.

We continue to see heavy activity around our asset base at Summit Investments, so we expect that $250 million to grow as the year progresses. We believe this strategy with Summit Investments in coordination will help Summit Midstream maintain significant financial flexibility, reduce development risk at the MLP -- which is important to us, given our size -- while also positioning us to be a top-quartile MLP distribution growth performer.

As we complete these drop-downs, Summit Midstream will become more diversified, with increasing EBITDA contribution from crude oil, liquids, and water transportation services, while maintaining significant upside to increase natural gas production. With that, we'll open it up for questions.

(Operator Instructions). Ted Durbin, Goldman Sachs.

Thanks. I appreciate the commentary around gas prices and whatnot. I was just wondering if you can give us a little more color on how many rigs you think you'll have running in the Barnett area this year, based on what you're hearing from the producers, realizing that it sounds like, as you said, the 8% sequential growth that we saw this quarter probably doesn't continue. But just getting a sense of kind of what the activity looks like?

Hey, Ted, it's Steve. Great question. I think we've seen -- I would tell you, for 2013 so far we've seen on average 1 to 2 rigs in the area. I think we are expecting that we may see another rig or two added as we get into the second half of the year. They tend to move around pretty quickly nowadays, particularly with the larger producers. But we're not projecting or expecting a significant increase in rig activity for the balance of 2013. Maybe one or two extra.

Got it, got it.

It is -- as you know, I will add -- given the backlog we have in wells waiting on connections and also just wells being curtailed in our system, rig activity doesn't necessarily -- it's not a one-to-one correlation to volume sometimes in our system.

Sure. In terms of the CapEx budget for this year, you came in at $21 million for the quarter. Are you seeing that as a good run rate for the year? Was there anything special that happened this quarter? I guess you had about $7 million of acquisition in that number, but how is the budget looking for this year?

Yes. I would tell you the first quarter was high; just given activity level, it's a little lumpy. We finished commissioning Unit 10, so we had some CapEx related to that. We also had pad sites come on in the first quarter, as well, too, that elevated that CapEx amount. So I would tell you, we're still in our previous guidance on CapEx. I wouldn't take the first quarter and just annualize it.

Also, the first quarter included $6.7 million of compression that we bought back in the first quarter as well. That is kind of an unusual deal.

Got it. Appreciate the update on what's happening at Summit Investments. Can you just talk about how those assets are performing, generally speaking? Volumes, revenues -- it sounds like you're investing a lot, so it sounds like there's good volumes behind them. And then can you just remind us, at the SMLP level would you try to get some sort of minimum volume commitments similar to what you have in Grand River? Or would this be more volumetric exposed?

Good question. On the performance side of things, the assets at Summit Investments are at or even slightly exceeding our expectations. The development opportunities on organic activity -- I would say it's very high, particularly in the Bakken, but also in Western Colorado as well, too. So that's good news. And I'm sorry, Ted, what was your second question?

Yes, the other piece was -- you have talked about the drop-down coming in the next couple of months. I'm just wondering if it will have the similar sort of minimum volume commitment or things like that around the assets themselves at the SMLP level?

Yes. I would tell you, in general we are a fee-for-service midstream company. So that will be very consistent. And I think contractually the assets will be consistent with our highly contracted nature at the MLP as well, too.

Okay, that's it for me. Thanks, guys.

James Jampel, HITE.

Thanks for taking the call. Just a reminder, when do the MVCs run out at Grand River?

Hey, James, it's Steve. They're very long term. It depends on the customer. But on average -- we'll pull the number. On average I think our MVCs at Grand River are north of 10 years. Hold on, we're going to pull that up for you. So on average, 12.6 years at Grand River.

I see. So do you foresee those being triggered for the foreseeable future at Grand River?

James, it depends on the customer. You know, as we've told folks in the past, Grand River is not one system; it's three separate systems. And it really depends on the system and depends on the customer. We would expect -- and remember, three of our customers on the Mamm Creek system are high-pressure and compression customers, so we don't do wellhead gathering for them. We would anticipate those customers -- or we foresee getting minimum volume payments from those customers definitely for -- in the near term. In the next 12 months.

Now, you mentioned that you have the ability to have a significant cost reduction initiative by moving the leased compression into owned? Do you see any other opportunities like that in the near future -- that sort of a very high-return operating cost reduction projects? And are those already baked into the EBITDA guidance?

The answer is yes and yes. We continue to get cost synergies. We have a large operating footprint in Western Colorado. One of the larger footprints, actually, out there. So -- that we've basically built and acquired over the last 18 months. And so we're still driving synergies out of that footprint, and we expect to do so through the balance of 2013 and expect to focus on it continuously. So I would say yes, we think we'll still pick up some things; and yes, that is sort of in our guidance thoughts as well.

More strategically, as you pursue the drop-down story, what percent dry gas versus liquids versus crude versus water -- what percent mix do you think would be a good place for Summit to end up?

Yes, that's a great question, and something we focus on pretty significantly here. I would tell you, ideally, think of it as sort of a third crude oil, a third dry gas, and a third sort of in the liquids side of things.

As you know, it won't completely lay out automatically that way as we execute our strategy, but strategically we would like to be a diversified midstream service provider for our customers across commodities. And so we view that as -- from a customer service standpoint as the way to go. And I think we're in the process of executing that, and I think you'll see us move closer to that mix as we drop down the assets.

Just to clarify, we expect about a third to be focused on crude oil areas. So whether it's associated gas gathering, crude oil, water gathering, or actual crude oil gathering would be about a third, and the third focused on kind of liquids-rich gathering, and a third focused on lean gas gathering.

Okay.

And James, that's adjusted EBITDA -- a third of adjusted EBITDA, a third (inaudible). So that's on an adjusted-EBITDA basis.

I see. So at some point it won't be appropriate to call you to dry gas gathering MLP?

Yes. I'll leave that to you, what you want to call us. I've been called worse. (Laughter)

Derek Walker, Bank of America Merrill Lynch.

Hi. Just back on Grand River, you mentioned your cautious outlook there. I know back in Q4 there were some transactions involving some of your customers in the Piceance, particularly with Vanguard and Antero. Any detail there is far as impacts from those transactions?

Hey, Derek, it's Steve. The answer is yes. I think we have seen, particularly on the Antero side, that asset was bought by Ursa, a private company. I think the positive aspects of that is when somebody -- a large purchase like that, a new producer coming in, they are not buying that asset to just sit on it. So I think now that we have seen our data -- roughly 6 months -- or they have roughly 6 months under their belt, we are seeing some indications from them of increased activity.

Got it.

Not so much on the Vanguard in Bill Barrett's side, that we've seen at least. I think Vanguard bought a minority piece, 20% or so.

Okay, great. And then just again on the MVCs, I think previously you have indicated about $20 million is expected from Grand River as far as EBITDA for the MVCs this year? Is that still the case?

That's actually based upon some of the volume declines that we saw in the first quarter. We have updated that closer to $25 million.

That's it for me. Thanks, guys.

(Operator Instructions). And at this time I'm showing no further questions.

Okay, great. We appreciate it, everyone. Thanks for joining us, and obviously, if you have any follow-up questions, please feel free to give us a call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.