Summit Midstream Partners LP (SMLP) 2014 Q3 法說會逐字稿

Welcome to the third-quarter 2014 Summit Midstream partners LP earnings conference call. My name is Christine and I will be the operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mr. Marc Stratton. You may begin.

All right, thanks, Christine, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the third quarter of 2014. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.SummitMidstream.com, where you will find it on the homepage or in the news section.

With me today to discuss our quarterly earnings are Steve Newby, our President and Chief Executive Officer, and Matt Harrison, our Chief Financial Officer.

Before we start I would 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 Please see our 2013 annual report on Form 10-K as updated and superseded by our current report on Form 8-K filed with the SEC on July 3, 2014, as well as our other SEC filings for a listing of factors that could cause actual results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, distributable cash flow and adjusted distributable cash flow. These are non-GAAP financial measures and we provide a reconciliation to the most record comparable GAAP measures in our most recent earnings release. And with that I will turn the call over to Steve Newby.

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call this morning. I will begin by discussing our third-quarter highlights and our forward outlook for each area, and then I'll turn it over to Matt for more details on our financial results. I will then end the call with some additional comments on the remainder of 2014 and our 2015 outlook and guidance.

Yesterday we announced our financial and operating results for the third quarter of 2014. For the quarter we reported adjusted EBITDA of $50.3 million, which was up 13.5% over the third quarter of 2013 and up approximately 5% over the second quarter of 2014. Adjusted distributable cash flow totaled $35 million which was up 5.8% over last year and flat to the second quarter of 2014.

On October 23 we announced our third-quarter distribution of $0.54 a unit, which was up 17.4% over the third quarter of 2013 and 3.8% increase over last quarter. Our average coverage ratio for the year has been 1.1 times.

We reported a record 1.5 Bcf of volume throughput in the third quarter, up 25% over last year and up 4.4% over the second quarter. This volume growth was a result of our diversified service area and customer base and was the major driver in our continued growth in adjusted EBITDA.

Distributable cash flow for the quarter was flat largely due to the investment we made in our balance sheet in mid-July when we issued $300 million of senior notes and higher than anticipated maintenance CapEx during the quarter.

During the third quarter we incurred higher than expected maintenance capital expenditures on our DFW system in order to address a vibration issue at our Bulldog Compressor Station. The issue resulted in approximately $1.2 million of higher maintenance CapEx during the quarter, but the situation has been fully remediated and we don't anticipate a recurrence of those costs going forward.

Before I discuss each of our assets at SMLP let me first discuss the activity level at Summit Investments, our general partner development company.

Activity levels remain high as we continue to execute on $2 billion of investment over the next several years, including approximately $800 million in 2015. Given current dialogue with producers in our key growth areas, the Bakken and Utica, we feel confident that that $2 billion of investment will continue to grow over the near-term as those shale plays remain resource rich but infrastructure constrained.

This activity continues to increase the growth visibility of the MLP which will have access to a portion of this development backlog once the assets are de-risked over the next several years. I will discuss these future drop downs and their potential impact later in the call.

Now to the MLP and specifically on the volume throughput front. As I mentioned earlier, total average throughput for the third quarter was 1.5 Bcf a day which was up 24.6% over year ago levels and 4.4% over the second quarter. The largest driver of our volume increase was our Marcellus asset, Mountaineer Midstream, which was up 14% over the second quarter and averaged 416 million cubic feet a day in the third quarter.

In addition, Mountaineer volumes increased despite no contribution from our Zinnia Loop project which was commissioned at the very end of the third quarter. The commissioning of the project increased our throughput capacity on Mountaineer to over 1 Bcf a day. We expect to see continued growth on the Mountaineer system through the end of 2014 and into 2015 as our anchor customer, Antero, continues to be very active in the area.

At Bison we were very encouraged by our third-quarter performance as volumes increased 40% over the second quarter averaging 21 million cubic feet a day for the quarter. In addition, we have now experienced six consecutive months of volume growth at Bison from 12 million cubic feet a day in March to 22 million cubic feet a day in September. Increases in volume throughput at Bison came from our two most active customers on the system, Oasis and Statoil.

We have continued to invest heavily in Bison both with new compression assets and with maintenance capital to increase the efficiency of our existing assets and those efforts are beginning to pay off. During the fourth quarter and into the first quarter of 2015 we will bring on two additional compressor stations which will help further reduce field pressures and provide us with additional capacity to move more volumes and capture flush IPs when the well is turned over to sales.

Producer activity remained constant during the third quarter and producers are currently completing wells that we expect will be brought online over the next several months. Looking into 2015 we are confident in further growth on Bison, but we are also monitoring the crude oil price situation carefully and its effect on producer drilling activity.

At DFW total volumes for the third quarter averaged 361 million cubic feet a day which was up 3% from the second quarter and marked the second consecutive quarter of volume growth. The increase did not include any contribution from the Texas Energy Midstream acquisition that we announced on our second-quarter earnings call.

That acquisition closed on September 30 due to a delay in obtaining certain approvals which we have now obtained. Currently the Texas Energy Midstream system is moving approximately 15 million cubic feet a day.

For the balance of 2014 and into 2015 we expect volume to increase from third-quarter levels across the DFW system as we bring on several pad sites that are currently down for drilling and completion activities and as Vantage, our most active customer on the system, increases its activity under the expansion project we announced last quarter.

Our DFW system and the Barnett is positioned in what we call the core of the core and the acreage remains one of the most economical dry (technical difficulty) gas areas in the country. Recently producers in our system have announced rates of return in excess of 60% plus at current pricing and basis in this area is not nearly the problem that we see in the Northeast.

So the DFW system continues to provide significant free cash flow for SMLP while also giving us upside to increase in natural gas prices and production.

For Grand River, which now includes our legacy Red Rock assets that we acquired in the first quarter of 2014, volume averaged 667 million cubic feet a day in the third quarter which was virtually flat over second quarter of 2014 volumes.

The third-quarter results reflected a consistent theme to the second quarter at Grand River with declines from Encana's reduced drilling activity being offset by growth from several other Red Rock customers including WPX and Ursa. We expect that this theme will continue in the fourth quarter and into 2015.

Our current expectation is that Encana will again minimize drilling under their JV agreement with Nucor in our area for 2015 before picking it back up in 2016. Although they are focusing their efforts on maximizing production from existing wells, we do expect continued volume declines related to their inactivity.

We expect other customers in the area, namely WPX, Black Hills and Ursa, to continue to be active in the Piceance Valley which will help offset declines from Encana in 2015. Further, we remain highly contracted in this area. Our Grand River MVCs will increase in the aggregate from 2014 to 2015 and average over 750 million cubic feet a day over the next four years versus our third-quarter reported volume of 667 million cubic feet.

For Encana specifically, our contracted MVCs run through 2026, so our cash flows are well protected against further volume declines.

The other trend we are seeing in this area is acreage trading hands. During the third quarter of 2014 we had several transactions related to acreage sales including three of our customers. As we have said in the past, we believe acreage transactions on balance are positive to midstream providers as acquirers are able to reprice the acreage and are usually buying to further develop the area.

So before I turn it over to Matt to summarize the quarter, volume growth continues to be consistent which is leading to solid adjusted EBITDA growth. DCF for the quarter was impacted by higher maintenance CapEx at DFW and Bison along with higher interest cost related to investment in our balance sheet with our high-yield notes deal.

For 2015 our diversified and highly contracted asset base should deliver solid baseline great while the continued robust development activity at Summit Investments will afford us visible accretive growth opportunities while further scaling and diversifying our business mix. So with that I will turn it over to Matt.

Great, thanks, Steve. I will cover the results of Summit Midstream Partners LP, or SMLP. SMLP acquired Bison Midstream and Red Rock Gathering from a subsidiary of Summit Investments on June 4, 2013 and March 18, 2014. The transactions were considered acquisitions from an entity under common control.

Therefore the Bison and the Red Rock drop-down acquisitions have been accounted for on an [asset] pool basis for all periods in which common control existed. Therefore Bison Midstream financial results are combined with SMLP beginning on February 16, 2013 and Red Rock Gathering beginning on October 23, 2012.

Adjusted EBITDA for the three months ended September 30, 2014 was $50.3 million compared to $44.3 million for the three months ended September 30, 2013, an increase of approximately 14%. The $6 million increase in adjusted EBITDA was primarily due to the proportionate contribution of higher margin throughput volumes from certain of our customers on the Grand River system including the volumes associated with the start up in March 2014 of our DeBeque plant, and the increase in volume throughput on the Mountaineer Midstream system which was acquired on June 21, 2013.

These increases in adjusted EBITDA were offset by a decrease at DFW Midstream as a result of lower throughput in the third quarter of 2014 compared to 2013. Also, certain of SMLP's gas gathering agreements on its Grand River system contain annual minimum volume commitments, or MVCs, and gathering rates that increased from the start of 2014.

Adjusted EBITDA in the third quarter of 2014 included approximately $12.1 million related to MVC mechanisms from our gas gathering contracts. This amount included $900,000 of shortfall payments that were recognized as revenue, $7.2 million quarterly adjustments related to future projected annual MVC shortfall payments, and $4 million associated with increased and deferred revenue related to MVC shortfall payments.

$4 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. Additional tabular detail regarding MVCs is included in our third-quarter earnings release. Adjusted distributable cash flow totaled $35 million in the third quarter of 2014. This implied a distribution covered ratio of 1.05 times the third-quarter distribution of $0.54 per LP unit to be paid on November 14, 2014.

CapEx for the third quarter of 2014 was approximately $40.8 million of which approximately $4.2 million was classified as maintenance CapEx.

We had $175 million of debt outstanding under our revolving credit facility at September 30, 2014. The borrowing capacity under our $700 million revolver was approximately $525 million at September 30, 2014. Total leverage at September 30, 2014 was 4.2 times. SMLP tightened its 2014 adjusted EBITDA guidance to $195 million to $200 million and distribution per unit growth to 15% to 17.5%. With that I will turn the call back over to Steve.

Thanks, Matt. First to reiterate what Matt said, we are narrowing our full-year 2014 adjusted EBITDA guidance to a range of $195 million to $200 million and distribution per unit growth to 15% to 17.5% over our fourth quarter of 2013 distribution of $0.48 a unit. We are also issuing 2015 guidance of $215 million to $230 million of adjusted EBITDA.

Driving SMLP's expected growth in 2015 are several factors. First, increases on our DFW system related to the expansion of the system for Vantage; the increased utilization of our Zinnia Loop Project at Mountaineer and continued growth in Antero production; the continued increase we expect on our Bison system associated with Oasis and Statoil; and finally, increases in our Grand River system related to the step ups in our MVCs and production growth from WPX, Black Hills and Ursa.

As usual, our 2015 guidance does not include the impact of any asset drop downs from Summit Investments to SMLP. If -- or should I say when these drop downs occur we will revise our guidance accordingly.

As I mentioned earlier, our general partner, Summit Investments, has a $2 billion contracted backlog of organic capital expenditures that we expect to grow. This backlog provides us with multi-year growth visibility at SMLP.

So with our current outlook on development at our general partner we are revising upwards our projections for drop downs over the next three years. Previously we had guided the market to $300 million to $500 million of drop downs per year over the next several years.

We now believe we will have $400 million to $800 million of drop downs per year over the next three years as our Bakken and Utica developments begin to reach development maturity and cash flow stability. We believe this level of drop-down activity will lead to mid-teens annual LP distribution growth over the next three years.

It is also important to know that as these drop-downs occur they will have organic growth CapEx associated with them. So we anticipate that some amount of the $2 billion of development CapEx at the general partner today will actually be executed by the MLP. Obviously with that comes the accretion from the organic CapEx as well.

In addition, we would expect that as SMLP becomes larger and more diverse we will be able to execute more organic growth activity at the MLP level. Our operating areas are some of the highest growth areas in the country for midstream infrastructure development, so we feel like we are well-positioned for organic growth and bolt-on acquisition opportunities and I think our team has shown the ability to win our fair share of new business and compete effectively in those areas.

The success of winning and then executing on growth opportunities in and around our current operating footprints we believe will further enhance our high level of distribution per unit growth over the next several years. So with that I will open it up for questions. Christine?

(Operator Instructions) Gabe Moreen, Bank of America.

This is Derek Walker on behalf of Gabe. I just had a couple of questions around guidance. You obviously increased the drop-down potential to $400 million to $800 million. I guess do you have a sense on sort of the pace of that? Would you do it in two tranches in a year, say call it -- if you are at the lower end of that spectrum, $200 million in 1Q, another $200 million in 3Q? And then I guess what is driving that variation which seems to be relatively sizable?

Derek, this is Steve. So on sort of scaling, I would probably guide you to two transactions a year, most likely. It most likely wouldn't be one large one. And then the variance is really driven around how fast ramp ups occur, particularly in the Utica, and the size of the asset when it comes down. So that is really what is driving the variation.

Got it, got it. And then just given your former remarks, you mentioned you continue to watch producer behavior with regards to where crude oil prices are. I guess have you had any recent conversations around that and any particular changes yet that you anticipate?

Yes, sure, great question, obviously timely. We are dealing in a situation where this -- the crude price drop has been fairly recent, right, in the last couple months. And it is also coming right in the middle of producers setting their budgets too for 2015. So I think everybody, including our customers, are trying to figure out exactly what things are going to look like and how they are going to react.

I think we fully expect and in our guidance I would say is the expectation that if we are sub $80-$85 crude oil we are going to see a slowdown in activity in those areas of -- that we are exposed on the crude side and we have reflected that really in our guidance.

So to that, I mean that is really the extent right now -- as I said, folks are in the middle of setting their 2015 budgets. So I think everybody is trying to figure it out and I really don't think we -- folks will until probably first part of 2015.

Got it. And just the last one for me. On the DFW system, I know previously you mentioned you continue to watch what Chesapeake is doing in that area. Just given what -- the merger with ACMP and WPZ, have you heard any discussions or conversations yet just around what Chesapeake's strategy is with their acreage in that area and how it might impact DFW?

Nothing other than probably what you have heard publicly what they said. I think they are going to -- I think they put out that they are going to run two rigs I think in the Barnett next year. And we will have in our area or have had historically sort of sporadic drilling from them. They will bring a rig in and put down a few wells at a time, but nothing consistent.

So other than that we haven't seen anything. I will tell you for us, and for 2015 guidance, we have assumed they are basically inactive for 2015 in our area.

Got it. That is it for me. I appreciate the time, guys.

(Operator Instructions). Helen Ryoo, Barclays.

I just had a very quick clarification question related to your 2015 guidance. Does that include -- you mentioned that this doesn't include drop downs, but I guess the guidance does include that $400 million to $800 million of drop downs taking place. So if anything happens above that range that is not included? Was that the comment?

Yes, so the EBITDA guidance does not include any drop downs.

Okay.

Including -- it doesn't include anything in the $400 million to $800 million. So anything that occurs -- any kind of drop downs that occur are going to include that or increase that EBITDA guidance. Does that answer your question?

Yes, yes. So you are guiding towards a $400 million to $800 million drop-down next year and then sort of every year for the next three years. So eventually when this drop-down takes place you are going to have to increase the currently established $215 million to $230 million guidance at that time?

That is exactly right, yes.

Okay, okay, that is what I thought, but just wanted to clarify. Thank you very much.

Elvira Scotto, RBC Capital Markets.

Just a couple of quick clarification questions again. So the guidance, the EBITDA guidance does not include drop-down nor does the distribution growth guidance, is that correct?

Yes. So the EBITDA guidance does not include any drop-downs. With the drop downs of the next three years, $400 million to $800 million we expect to be a mid-teens grower over the next three years. So that includes the effect of the drop-downs. So without -- so does that make sense?

It does, it does make sense, okay, okay. So without the drop-downs you wouldn't be mid-teens, but with the drop-downs --?

Yes.

Yes.

That is right, yes. Assume without the drop-downs the base business is probably half of that. So we are in the 6% to 8% range of growth.

Got you, okay that is perfect.

(Multiple speakers) help?

That is perfect, yes, no, absolutely. And then just the other question, so just to clarify again, the guidance that you put out assumes some level of sort of lower activity because you are baking in something below an $80 crude price? Just maybe elaborate a little bit on that.

Yes, I think -- first of all, the area where we are exposed at the MLP level to crude oil is our Bison system. So our other areas are not really exposed on the crude side. And in that area our 2015 guidance has -- really has a very reduced level of drilling activity from our customer base based on what we know today. And so, we don't think we are that exposed to 2015 guidance from the reduction in crude oil because we really built it in already.

Okay. So that is just -- is that based on conversations with your customers or just some analysis that you have done on kind of breakeven costs?

Based on conversations with our customers.

Great. Okay, that is all I had. Thanks a lot.

Jerren Holder, Goldman Sachs.

Just wanted to touch on maybe the impact of lower commodity prices on maybe the drop-down backlog, what's being built at the Bakken and Utica and Niobrara, you guys could touch on that. And essentially what is like fully or more advanced in terms of being developed that can be dropped down in 2015 even if we were to see sustained lower prices here?

Yes, I think as far as impact goes it varies depending on what asset we are talking about in the backlog. If you are specifically relating to the crude oil side, that would be our Bakken system, what we call our Meadowlark asset which includes our polar and divide systems.

When we -- when and if those get offered down to the MLP they're going to be offered down in the context of the current commodity price environment. So I think that is a given. And will there be -- as we see in our Bison system, we expected there to be some sort of effect on activity given current commodity prices there.

So our Utica systems are much more gas driven than our Bakken stuff obviously. So -- and different drivers going on there. So does that answer your question?

Yes, yes, it definitely does. And I guess you obviously brought the point about Bison, the only system being exposed to crude oil prices. So what about NGL prices which in a way does trade a little bit with crude here. How does that affect like the Barnett and Piceance from that sense?

Yes. So our Barnett system is dry gas, so that doesn't have much effect. It has some -- our Piceance, our Western Colorado system, there is some effect. Out there it is more gassy than it is NGL exposed, however. But it is -- there is some effect on NGL prices. But they have been in rejection in Western Colorado on that thing for quite some time.

And then in the Utica it spans out there -- we have a condensate window, a wet gas window and a dry gas window. And then in the Marcellus on our Mountaineer system there is exposure to NGL prices. However, it's -- you've probably seen Antero's information. It is a very, very economical area even at this pricing level. So our biggest crude oil exposure and only crude oil exposure really at the MLP is Bison.

I will say on our general partner development on the crude oil side we are still seeing heavy activity. We're in the core area, particularly that southern part of the system near the river is really a very -- really the core area, part of the core area of the Bakken.

So we are still seeing pretty heavy activity and have seen heavy activity even as you go further north because of that Three Forks bench and divide. We've seen one of our customers there, [SM], be pretty aggressive on the acquisition front there and that's -- we think that is pretty positive too, so --.

And, Jerren, just to be super clear on the exposure to NGLs, as Steve talked about the Piceance, we are -- Summit is not directly exposed and we have gathering rates, that is our customers and their returns that are exposed. The same with the Marcellus we are a fee based in the Marcellus as well, but Antero is exposed as they get their net backs.

Thanks. And I guess the last one. Just given I guess the volatility here, what are you guys seeing in terms of M&A opportunities. For the parent to keep building the backlog I would think that maybe more opportunities would be popping up. What are your thoughts there?

Yes, I think it remains fairly robust. I don't think we've seen the effect of commodity prices fully reflected yet probably in seller's valuation consideration. So I think that is to be determined.

But I will tell you we are still probably as if not more bullish on the development side, Jerren, on opportunities in and around our footprints and believe that there is a lot of opportunity in our areas and we think we will be successful in some of those opportunities.

So I would say for us it as much now development in and around our footprint as it is acquisitions. There are going to be things available from a bolt-on standpoint in both the Bakken and the Utica we would expect.

All right, that is great. Thank you.

Thank you. I will now turn the call back to Mr. Steve Newby for closing comments.

Well, we thank everybody for attending. And obviously, as usual, if you have follow-up questions just reach out to us. Thank you.

Thank you. And thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.