Summit Midstream Partners LP (SMLP) 2016 Q1 法說會逐字稿

Welcome to the first-quarter 2016 Summit Midstream Partners LP earnings conference call. My name is Sherry, and I'll be the operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I would now like to turn the call over Marc Stratton. Marc, you may begin.

Great. Thanks, Operator, and good morning, everyone. Thank you for joining us to discuss our financial and operating results for the first quarter of 2016. If you don't already have a copy of our earnings release, 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 earnings is 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 volume, 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 if such expectations will prove to be correct. Please see our 2015 annual report on Form 10-K, which was filed with the SEC on February 29, 2016, 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 comparable GAAP measures in our most earnings release.

With that, I will turn it over to Steve Newby.

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call today. I will begin with a few comments on the quarter, and then I will turn it over to Matt for more detail on our quarterly financial results. I will then wrap things up by discussing our outlook for the balance of the year.

Yesterday we announced our first quarter of 2016 operating and financial results for SMLP. Our first quarter results, along with all prior period results, including our earnings release, and discussed on the call today, includes the as-is pooled results from the 2016 drop-down assets. What this means is that the actual operating and financial results for the drop-down assets are already included in all periods, making the comparison between all periods apples to apples.

Overall, it was a strong quarter, particularly given the continuation of a challenging commodity price backdrop. Adjusted EBITDA totaled $70 million for the first quarter of 2016, which was up 14% over the first quarter of 2015, and up 2% over the fourth quarter of 2015. Our first quarter results of adjusted EBITDA included $1.2 million of transaction expenses related to the 2016 drop-down transaction. When you add that one-time expense back, adjusted EBITDA was up 16% over the first quarter of 2015, and up 4% over the fourth quarter. Adjusted distributable cash flow totaled $52.7 million for the quarter, which was up 23% over the first quarter of 2015, and up 4% over the fourth quarter of 2015. In fact, our first quarter adjusted EBITDA and adjusted distributable cash flow results represent new record highs for the Summit family on a consolidated basis.

We announced our first quarter distribution of $0.575 a unit on April 21, and we covered the distribution at 1.28 times in the first quarter. The distribution will be paid on May 13. During the first quarter, we dropped down all of the remaining operating assets from Summit Investments to SMLP, including both of our Utica shale-based gathering systems, the 40% interest we own in the Ohio gathering system, and the wholly owned and operated Summit Utica gathering system. This transformational acquisition also included our interest in additional Williston-based crude oil, natural gas, and produced water gathering assets, as well as our gathering and processing system located in DJ Niobrara.

To remind everyone, the acquisition consideration included a deferred payment component, which will be based on a 6.5 times multiple of the average EBITDA in 2018 and 2019 from the acquired assets. We paid $360 million of the purchase price at the initial closing in March, and the balance will be paid in 2020, based on actual performance of the assets, adjusted for cumulative CapEx and cumulative EBITDA during the deferral period. We remain excited about the future growth potential that this acquisition provides us and the prospect of broadening our geographic reach into the high growth Utica.

Operationally, our first quarter was highlighted by quarterly sequential volume through-put increases across four of our five operating segments. Leading the strong performance was our newly acquired Utica operations. Summit Utica, our wholly owned system in Belmont County, Ohio, had a 76% increase in volume through-put over the fourth quarter of 2015, as we completed pipeline connections to additional path sites. Relative to the first quarter of 2015, volumes on Summit Utica increased by nearly elevenfold. We continued to build out this system and connect new sources of production during the first quarter, and we anticipate additional well connections and continued growth throughout the balance of 2016.

Drilling activity remained consistent during the first quarter of 2015, with our anchor customer running one to two rigs in the AMI. At Ohio Gathering, we saw 6% sequentially quarterly volume growth, with first-quarter volumes averaging 888 million cubic feet. This growth was driven by completion activity by our anchor customer in the dry gas window of the Utica during the fourth quarter of 2015 and the first quarter of 2016, and the reversal of curtailment activities from some of our customers in the fourth quarter of 2015. Relative to the first quarter of 2015, Ohio Gathering's volumes increased by more than 79% in the first quarter of 2016.

Looking ahead, our expectations for the Utica have not changed. We expect to see continued sequential quarterly volume growth from the Summit Utica system throughout 2016, although it could be a little lumpy given construction of well connects and timing of completion activity. On Ohio Gathering, we would expect sequential quarterly volumes to flatten out a bit, but significant year-over-year volume increases, with increasing dry gas volumes offset by flat and declining wet gas volumes, given current NGL pricing's impact on wet gas economics and dry gas drilling.

One item that we are watching closely as the year progresses is the rebound occurring in NGL prices. I think it's too early in the cycle to see drilling come back to the wet window in a [mature] way, but I don't believe we are too far away on NGL prices to spur additional activity in that area. The benefit of our acreage position in the Utica is that we have natural diversification across the dry gas, wet gas, and condensate windows.

Switching to our Bakken business, we saw sequential quarterly volumes increase in both our liquids and natural gas operations in the first quarter. Our liquids volumes averaged 95,000 barrels a day in the first quarter of 2016, representing an increase of 78% over the first quarter of 2015 and 10% over the fourth quarter of 2015. Natural gas volumes in Bakken averaged 25 million cubic feet in the first quarter of 2016, which was up 19% relative to the first quarter of 2015, and flat relative to the fourth quarter of 2015.

Liquids volume growth benefited from strong fourth quarter and early first quarter of 2016 activity on the crude oil completion side, as well as displacing additional truck gathering. In addition, during the first quarter we brought on our previously announced Stampede Lateral Transmission project, which added an additional interconnect to our crude oil system. As a reminder, the Stampede project was built pursuant to a long-term MVC contract. Subsequent to first quarter of 2016, we also added the Little Muddy interconnect, which further diversifies our connectivity by adding a pipeline takeaway option in Enbridge's North Dakota pipeline system. Both projects provide our customers with the ability to access alternative in-markets and maximize their net-backs. These projects allow us to earn incremental fee-based revenue on the barrels we already gather, depending on the delivery point.

Given the current weakness in the crude oil markets, we are seeing completion delays and significant reductions in drilling activity. These reductions were anticipated and were built into our FY16 financial guidance. Obviously, over the last month or so, we have seen crude prices bounce off the lows of early 2016; however, we remain cautious on the balance of 2016, particularly the latter half of 2016, as it relates to crude volumes.

At DFW we gathered an average of 341 million cubic feet a day in the first quarter of 2016, which was down 15% from the first quarter of 2015 but up 5% from the fourth quarter of 2015. The increase relative to the fourth quarter is attributable to volume tailwinds from the completion of a ten-well pad that occurred in early December. Looking forward, we have another 11 well pad sites that began initial flow back earlier this week. During the first quarter of 2016, we also had a rig working in our area, so we anticipate seeing the benefit of those completions during the second half of this year.

Volume through-put on our Mountaineer midstream system, which is our high-pressure system that delivers gas to the Sherwood processing complex, averaged 453 million cubic feet a day in the first quarter, which was down 17% from the first quarter of 2015, but up 24% from the fourth quarter of 2015. Volume increases compared to the prior quarter, with a result of eight new well completions during the quarter, along with the commissioning of a new third party regional takeaway pipeline, which increased net-backs for our customer and prompted them to bring production back online. Negatively affecting this quarter was a right-of-way slip that we repaired at a cost of $1.2 million. Looking forward, our customer still maintains a sizable backlog of approximately 27 drilled but uncompleted wells behind the system. We expect a handful of these docks to be completed in the next several months, while the majority of these completions will be pushed to 2017. We also had an average of one to two rigs working in the first quarter, in areas behind the Mountaineer system, that will add to the [documentary] backlog by the end of 2016.

Our Piceance and DJ operations, which consist of our Western Colorado gathering and processing systems, and now includes our Niobrara associated gas gathering and processing system, was the one segment where we saw sequential quarterly volume and adjusted EBITDA declines. First quarter of 2016 volumes averaged 572 million cubic feet a day, down 8% from the first quarter of 2015, and down 5% from the fourth quarter of 2015. Segment-adjusted EBITDA for the first quarter totalled $24.8 million, which was down 13.5% from the first quarter of 2015, and down 9% sequentially. The negative variance in this area was primarily related to the lack of drilling from our anchor customer in the region, together with the sharp price decline in crude oil and NGL prices, which impacted our drift condensate sales and processing margins.

Lower volumes from our customers that are not covered by MVCs or who are producing an excess of MVCs, and the write off of approximately $1 million of previously recognized MVCs from a private customer that represents less than 1% of our total Piceance volumes. We determined during the quarter that this producer was unlikely to pay its MVCs, so we decided to reserve for the MVC shortfall recognized in 2015 and the portion of the expected 2016 MVC shortfall that we have recognized to date. We are still flowing this customers gas because it is predominantly nonoperated production and are getting paid for that transportation. So this was just related to the shortfall amount.

There are multiple bright spots that is give us reason to be optimistic about near term activity in the Piceance and DJ Basins. Just a few weeks ago, Terra Energy closed on their acquisition of Piceance crudes from WPX, which we believe will be a positive for us long term. WPX is our second largest customer on the grand river system by volume, and we expect to see a consistent level of drilling and completion activity from Terra in the immediate term. In general, upstream acreage M&A is positive for the midstream provider, as new capital is typically being deployed at levels that account for current market conditions, effectively allowing the buyer to reprice the acreage and reset the bar on drilling economics. In our experience, we have typically seen higher levels of drilling activity post-purchase, and we plan to work with Terra closely over the next several month to determine the game plan for the area. Currently, there are two rigs working in our Western Colorado acreage, with one of those being a Terra rig. In addition we have identified more than 80 wells upstream of our system that have either already been drilled or are in the process of being drilled.

Finally, we have not yet had any of the 70 new wells that were committed to be drilled by one of our customers by the end of 2017, pursuant to a negotiated transaction in the fourth quarter of last year, which called for 70 new wells by the end of 2017 in return for an [insini]-drilling rig. Collectively, this activity will be a growth catalyst for our Piceance and DJ Basin segment volume and adjusted EBITDA over the coming quarters.

Now I will turn it over to Matt to review the quarter in more detail.

Thanks, Steve.

I would like to reiterate that all current and historical periods include the additive pooled results for the 2016 drop-down assets. Therefore, all of the periods we discuss this morning include the actual financial and operational results from the 2016 drop-down assets. Adjusted EBITDA for the first quarter of 2016 was $70 million, compared to $61.6 million for the first quarter of 2015. The $8.4 million increase in adjusted EBITDA was primarily due to increased natural gas volume throughput, our Summit Utica and Ohio gathering systems, and increased liquids volume throughput on our Williston Basin gathering systems. These volume throughput increases were partially offset by volume decline on our DFW midstream, Grand River, and Mountaineer midstream systems in the first quarter of 2016, compared to 2015.

Adjusted EBITDA in the first quarter of 2016 was impacted by approximately $1.2 million of transaction costs associated with the 2016 drop-down, $1 million related to a reserve for gathering receivables from a small private Grand River customer, and approximately $1.2 million related to repairs to rights of way on our Mountaineer midstream system. These expenses did not impact the comparable period in 2015. Adjusted EBITDA in the first quarter of 2016 included $15.2 million related to MVC mechanisms from our natural gas gathering and crude oil transportation agreements. Additional [caduate] detail regarding MVCs is included in the first-quarter earnings release.

SMLP reported a net loss of $3.7 million for the three months ended March 31, 2016, compared to a net loss of $2.5 million in the first quarter of 2015. This includes approximately $7.5 million of deferred purchase price obligation expense. In conjunction with the 2016 drop-down acquisition, we recognized that liability on our balance sheet for the deferred purchase price obligation to reflect the estimate of the remaining consideration to be paid in 2020 for the acquisition of the 2016 drop-down assets. We discount the remaining consideration on the balance sheet and recognize the change in present value on the income statement. The change in present value comprises both a time/value/money concept as well as any adjustments to the expected value of the deferred purchase price obligation.

Adjusted distributable cash flow totaled $52.7 million in the first quarter of 2016. This implied a distribution coverage ratio of 1.28 times relative to the first quarter 2016 distribution of $0.575 per limited partner unit to be paid on May 13.

CapEx for the first quarter of 2016 totaled approximately $61.3 million, of which approximately $3.2 million was classified as maintenance CapEx. This CapEx does not include our proportionate share of capital calls of approximately $15.6 million related to the Ohio gathering assets in the first quarter of 2016.

We had $720 million of debt outstanding under our $1.25 billion revolving credit facility at March 31, 2016, and $529 million of available borrowing capacity. Total leverage as of March 31, 2016 was 4.47 times.

SMLP reaffirmed financial guidance for 2016 with adjusted EBITDA expected to range from $260 million to $290 million. Given the challenging commodity price backdrop, SMLP will take a measured approach regarding distribution per unit growth in 2016. And in the near-term, SMLP intend to focus on building distribution coverage and strengthening its balance street. We expect SMLP's distribution coverage ratio from 2016 to range between 1.1 times and 1.2 times.

And with that, I will turn the call back over to Steve.

Thanks, Matt.

As Matt mentioned, we are reaffirming our 2016 guidance of $260 million to $290 million of adjusted EBITDA, with average distribution coverage for the year of 1.1 to 1.2. Gross CapEx for 2016 remains within our guidance range of $135 million to $180 million, and we have significant borrowing capacity under our revolver. To remind everyone, in connection with the drop down in the first quarter, we up-sized our revolver from $700 million to $1.25 billion. Together with excess distribution coverage, we have adequate liquidity to fund all current expected obligations in the next several years.

More importantly, I think our financial results this quarter display the diversity and strength of our business model and the positive impact of the drop-down transaction completed in the first quarter. We take comfort in the fact that we planned rigorously for the current downturn, with our high level of MVC commitments and our recent attractively structured drop-down transaction.

With a strong contracted cash flow underpinning, significant distribution coverage, and manageable leverage, we are poised to take advantage of potential opportunities presented to us. On DBU growth, we will continue to take a measured approach, a quarter by quarter approach, regarding the pace of distribution growth per unit in 2016, which will be dependent on not only our current financial results, but also the outlook for commodity prices and the impact that, that will have on our customers' drilling and completion activities. Our focus, as Matt said, continues to be on building distribution coverage and strengthening our balance sheet.

So with that, I will turn it over to the operator to open it up for questions.

Thank you.

(Operator Instructions)

Our first question is from Kristina Kazarian from Deutsche Bank.

Good morning, guys.

Hello, Kristina.

So looks like the Utica is going really well, 19% volume on a quarter-over-quarter basis. So congrats there. Something I struggle with though is the fact that we don't get a lot of color on XTO. It is a great counterparty to have, but I was hoping you might be able to talk a little bit more about how you see their build-out, specifically, there specifically for the next couple of years?

Yes, hello Kristina. It is Steve. The best proxy for XTO is Summit Utica. So when we discuss Summit Utica, specifically, versus the 40% interest in OGC, really XTO is the dominant player there and the one effectively drilling there today and who we're building out for. So that is the view into what their activity is in the area. It is through Summit Utica.

Perfect. And somewhat off that, you have two systems in the Utica, one fully owned and the other JV with MPLX and EMG. I know the latter is significantly larger now, but any color on relative growth between the two? And you kind of touched on it earlier, and how your CapEx spend will trend there?

Yes, so I will take the first part, and I will touch a little on CapEx. Matt, you may want to jump in, too. On relative growth, I think we tried to touch on this in our comments as well, too. For Summit Utica we expect to see pretty significant growth throughout the year, as we are still completing that system. XTO's still actively drilling that area. That's all dry gas, in sort of Belmont County, in the southeast part of the Utica play.

OGC large position, we own the largest percent at 40%, and then MPLX operates it and they split the ownership with EMG as well, too. In that area, we expect to see somewhat, I would say, flattening volumes throughout the rest of the year. Gulfport, the anchor customer there, I think is shifted to the dry gas window outside of OGC for now, and until -- I think we could see some wet gas drilling if NGL prices increase, but for now we're assuming volumes at OGC, I would call them flat basically for the rest of the year.

CapEx spend, I think one thing of note, in our CapEx comments, we -- our CapEx guidance is basically $150 million to $200 million when you include growth and maintenance CapEx for the year. We spent about $75 million in the first quarter of that. So, you know, so first quarter for us was a very heavy quarter, so I think you can -- we are not changing our CapEx guidance, so I think you can probably extrapolate that CapEx will, on a sequential basis, be coming down over the balance of the year.

Perfect.

About 80%, 85% of that, Kristina, of that CapEx in the first quarter was in the Utica.

Yes, I will -- of the drop, about 70% is in the Utica, and about 25% would have been in the Williston Basis. So of the two kind of growth areas, about 91% of our $75 million, $76 million of CapEx in the first quarter. And another thing that may help you out relative to OGC versus Summit Utica, if you look in our calculation of DCF in our earnings release, you can see the contribution from what's called equity method investees or -- constant of, what was it, $12.4 million for the quarter. That would be OGC.

Perfect. Thanks. And one last non-fundamental question. I think the sponsor level buy back should be essentially at that $100 million number now, but I thought I saw another large purchase this week, just maybe any color around that? Because it seems like those numbers have been very strong on them continuing to buy back units.

Yes, they have a 10b-5 program going that's kind of outside of Management's purview, but I can say that they have purchased about 85 million off of their $100 million program that we announced.

Perfect. That's it for me. Thanks, guys. Appreciate the time.

Thank you. The next question is from Gabe Moreen of Bank of America.

Hello, good morning, everyone. Just a quick question for me. I know in previous calls you had talked about -- or the last call you had talked about the potential for buying back debt. Did you actually do any of that this quarter? I know obviously the debt price were covered pretty nicely, but it seems like they're still reasonably below par. Is that something you might still be contemplating?

So as you know, Gabe, on our amended facility, we included a little piece, a little $100 million basket to buy back bonds. We have not executed any bond repurchases. Our bonds right now are trading around 80% to 90%, you know, we're at $0.90 on a dollar currently, and we have not been in market for those.

Okay. Thanks, Matt. And then just, I don't know if you hit on this with Kristina, but just the run rate on maintenance CapEx this year, was first quarter a little light? And sorry if I missed that in the answer to her.

Yes, so -- Gabe, it's Steve. Maintenance CapEx guidance overall is $15 million to $20 million for the year, I think we did $3.5 million, right? In the first -- or close to that in the first quarter. Usually first quarter for us, Gabe, is fairly light because it is the winter. And even though we didn't have much of a winter this year, we typically do have some seasonality to that number. We would expect we're somewhere between $15 million and $20 million on maintenance.

Got it. Thanks, Steve.

Thank you. Our next question comes from Tristan Richardson of SunTrust.

Good morning, guys.

Hello, Tristan.

Just another quick one on the Utica, given the growth you are seeing in that segment and then some of the puts and takes in the other segments, and then the heavy spend in Q1. I mean is it still the expectation that -- because you guys have talked in the past about the Utica being somewhere around 20% this year and ramping to 40% in the out years. Is that still consistent with your expectations or could you see the Utica be a little bit bigger piece this year?

Yes, I think -- Tristan, it's Steve. I think our expectations today are not any different than they were in what we have announced in the past. We expect in the next three to five years, the Utica to be a pretty large contributor to overall EBITDA. So I wouldn't go north of that, of that 40% range today.

That's helpful. Secondly, you guys talked about the DUC inventory in the Bakken last quarter and you know, obviously your comments about being cautious on volume sequentially, but any update on sort of what the inventory looks like in that region for you guys currently?

Yes. So let me comment first on one of our anchor producers announced here recently on the earnings that they were going to resume completions, some completion activity in the Bakken. I would tell you we haven't really built that activity in for the balance of the year.

You can say we're maybe being conservative on that, but that's our stance right now. As far as DUCs in the Bakken, we probably still have over 50 or so in our area, and that's primarily on pads that we have already connected to.

Great. All right. Thanks, guys, very much.

Thanks, Tristan.

Thank you.

(Operator Instructions)

And then our next question is from Helen Ryoo of Barclays.

Good morning.

Hello, Helen.

A clarification on the, you know, how you show the MVC. Just on like Piceance, you know, year-over-year there's like $4 million of EBITDA decline, but then you had MVC, you know, contribution in your EBITDA to like $6.5 million. So the -- without the MVC, is the right way to read the data that $10 million decline would have taken place if there wasn't the MVC protection there.

Helen, I don't totally understand the question. Can you say it one more time. I'm sorry.

Yes, I was just looking at the Piceance DJ EBITDA year-over-year.

Okay.

So it went from $28.7 million to $24.8 million. So that's a $4 million decline, and then on the MVC side you show, you know $6.5 million on that segment. I just wanted to understand if I was reading, and I could follow up off line if [it is].

No, so the actual MVCs available to us, as you know, in that line you talk about $6.5 million, that's mostly Encana. That MVC is actually -- the commitment is flat year-over-year. And what has happen is actually their volumes declined a little bit more relative to prior years, so their actual MVC payment's a little bit higher. But the impact is flat year-over-year.

Okay. Got it. All right. That's all I had.

And Helen I would add, the other thing we had in the Piceance this quarter is we took a $1 million reserve for a small private producer on their MVCs, so that's an expense we would not expect to incur on a go-forward basis.

Got it. All right. Thank you so much.

Thank you. And at this time I will turn the call back to Steve Newby for closing remarks.

Well thanks, everybody, for joining, and happy early Mother's Day to all the mothers on the phone. For those on the phone, you need to call your mother this weekend. So have a good weekend, and we will talk to you soon. Thanks.

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