Summit Midstream Partners LP (SMLP) 2017 Q4 法說會逐字稿

Welcome to the Q4 2017 Summit Midstream Partners LP Earnings Conference Call. My name is Richard, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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

Thanks, operator, and good morning, everyone. Thank you for joining us today to discuss our financial and operating results for the fourth quarter of 2017. 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 or in the news section.

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

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 of such expectations will prove to be correct. Please see our 2016 annual report on Form 10-K, as updated and superseded by our current report on Form 8-K, filed with the SEC on November 6, 2017, as well as our other SEC filings for a listing of factors that could cause actual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 and distributable cash flow. These are non-GAAP financial measures, and we've 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 Steve Newby.

Thanks, Mark. Good morning, everyone. Thanks for joining us on the call this morning.

As usual, I'll begin with a few comments on the quarter and then I'll turn it over to Matt, for more detail on our quarterly financial results. I'll then wrap it up by discussing our 2018 financial guidance, which we released last night.

Yesterday, we announced our fourth quarter and full year 2017 operational and financial results which are in line with our guidance with fourth quarter adjusted EBITDA of $72.9 million and full year adjusted EBITDA of $290.4 million. On January 25, we announced our fourth quarter 2017 distribution of $0.575 per unit which implies a fourth quarter distribution coverage ratio of 1.09x and distribution coverage for the full year at 1.14x.

During our third quarter earnings call, I addressed the topics of Summit's commitment to maintaining a strong balance sheet in a conservative financial profile. We execute on this commitment in the fourth quarter of '17 with our issuance of $300 million of perpetual preferred equity which allowed us to repay outstanding debt and significantly reduced leverage. At year-end, SMLP had nearly $1 billion of committed liquidity under our revolver and our leverage ratio of 3.6x. While this preferred offerings will impact DCF by approximately $29 million per year and call our distribution coverage ratio to average approximately 1x for 2018, we're comfortable with our leverage metrics relative to our commercial project backlog and associated CapEx.

We also announced yesterday our 2018 financial guidance with adjusted EBITDA expected range from $285 million to $300 million. On the segment basis, this guidance represents roughly 10% growth year-over-year in our Williston segment an approximate 5% year-over-year decline in our Barnett segment, and then roughly flat year-over-year EBITDA expectations for our Piceance/DJ segment, our Utica segments and our Marcellus business unit. It is important to note that our recently announced expansion projects in the northern Delaware Basin and the DJ Basin will be a big focus of ours in 2018 and will represent a majority of our capital programs, but will provide little EBITDA contribution in '18, given the expected timing of project commissioning and associated volume ramp. So our guidance range includes very little contribution from 2 big projects that are coming on in 2018.

For our Utica assets, which are included in our 2016 drop-down transaction in our deferred purchase price obligation, our guidance reflects a more measured pace of drilling and well completion, relative to our prior communications from our customers. Further, the timing of systemwide compression on our summit Utica system is now expected to begin in 2019 versus 2018, previously. These 2 updates are the largest drivers of the roughly $200 million decrease quarter-over-quarter in the undiscounted amount of the deferred purchase price obligation or DPPO. This reduction really underscores how the DPPO is working exactly as it was intended to work. The variability in the price that we ultimately pay shields SMLP from the volume and capital risk associated with our 2016 drop-down assets.

With that, I'll also want to make several points abundantly clear as it relates to our Utica business. First, the changes that I just mentioned, impact the rated growth of our Utica assets. We expect that these assets will continue to grow just over a longer period of time that will still be on the DPPO measurement period. Some of this more measured growth is correlated our producers focusing on drilling within their internally generated cash flow. Second, the DPPO calculation only contemplates EBITDA contribution through 2019. The change in producer activity I just discussed on balance is not due to the net decreasing growth but instead a shifting growth into 2019 and beyond. This represents a positive for the MLP and that the growth in inventory are still there but will come in a lower incremental cost to the partnership given the way DPPO formula works.

Next, we remain encouraged by the underlined reservoir. For example, one of our customers turned in line 2 drive gas wells behind our SMU system late in the fourth quarter of '17. These 2 wells IP at 30 million cubic feet a day each and are still flowing at those levels today. So this is not a reservoir prospectivity issue. Finally, we are beginning to see more drilling activity and some attractive well results in the wet gas and condensate windows of the play. We think that this is a precursor for more positive things to come, particularly given some of the recent acreage transactions and the recent strength we've seen in crude oil prices. We have a tremendous amount of existing infrastructure in [guided] capacity in this part of the Utica and volume growth in this area will be highly incremental to SMLP.

Turning to our operational results, total operating natural gas volumes averaged 1.76 Bcf a day in fourth quarter, a 17% increase over the prior year period, led by higher volume growth throughput in the Utica and the Marcellus. In the Utica, our wholly own and operated Summit Midstream Utica system guided 369 million cubic feet a day in the fourth quarter, down 8.4% from the third quarter of '17. The quarter-over-quarter decline can primary be attributed to our customers, temporarily shutting in producing wells for maintenance and simultaneous completion activities related to new wells being completed on pad sites with existing producing wells. These activities occurred primarily behind acreage that is serviced by our TPL-7 connector. We anticipate temporary production curtailments from producers will continue in 2018 as producers shutting existing producing pad sites to drill and complete new wells on those pad sites. The benefit of this infill drilling were more than offset than temporary curtailments in the long term as we are able to increase our utilization on existing infrastructure. Lower volumes from production curtailments were partially offset by 2 new wells behind the SMU system which I mentioned previously, that came on at very attractive IP rates that contributed a minimal amount for our quarterly results, given the timing of those completions.

We currently have 1 rig operating on our SMU system and beginning in the second quarter of 2018, we expect that our customers will operate 2 additional rigs behind the system. We expect to see the production impact from this drilling program beginning in the first quarter of 2019.

SMU volumes have benefited overall from our TPL-7 connector pipeline which was commissioned in the April of 2017. We expect that beginning late in the first quarter of '18 we'll begin to see the benefit from over 20 new wells turned in line behind the TPL-7 connector project. For our 40% owned Ohio Gathering interest, volume throughput in the fourth quarter of '17 was 825 million cubic feet a day, up 8% from third quarter of '17 volumes. Volumes increased in the fourth quarter relative to the prior quarter due to the completion of 28 wells behind the system in the second half of '17 including completion of 7 new wells in the fourth quarter of '17. There are currently 4 rigs running behind the OGC system and we expect to see the benefit of new well completions beginning in the second quarter of '18.

We are forecasting the completion of over 40 new wells in 2018 on OGC. Due to some compression overhaul work and right-of-way repair expense, we do expect increased operating expenses year-over-year in this segment, but we forecast these expenses to normalized again in 2019. Our liquids gathering business in Williston averaged 74,000 barrels a day in the fourth quarter, relatively flat to the third quarter. 20 new wells were completed late in the fourth quarter but liquids volumes were negatively impacted by third-party operational issues and by temporary production curtailments from customers' completion activities on pad sites connected to our system with producing wells. Majority of these curtailments will result in January, and we're optimistic about liquids volume growth heading into 2018. We expect volume growth to resume in the first quarter and continues throughout the remainder of '18, supported by existing backlog of approximately 40 DUCs and in addition, there are 2 rigs currently working on Summit's acreage in the Bakken.

Our Piceance/DJ Basin segment averaged 575 million cubic feet a day in the fourth quarter which included higher volumes and cash flow contribution from our higher-margin DJ Basin asset. We had 17 new wells turned in line in the fourth quarter of '17 partially offsetting natural production declines. Our customers currently have 4 rigs working across our Piceance/DJ Basin segment and we anticipate 6 wells in the first quarter of '18. We currently have over 70 DUCs behind our system that we expect will be turned in line over the course of '18. As well completions occur, we expect to see volume increases to offset natural production declines in the Basin. Our customers continue to implement upgraded technologies and efficiencies in the Piceance, and with a substantial gathering footprint in the Basin, we believe we are in advantage to see benefits from these improvements with producers. Supported by the positive outlook on producer activity, in November we announced a new 60 million cubic feet a day cryogenic processing plant expansion in the DJ Basin. This project is on budget and on schedule and is expected to be operational in the fourth quarter of '18. We're excited about the drilling results in this more than extension of the DJ and it anticipates that our added processing capacity will be quickly utilized once it comes on.

In the Barnett, volumes throughput increased slightly from the third quarter due to the commissioning of 7 new wells late in the quarter. We expect our customers will commission 6 new wells during the first quarter of '18 and will operate drilling rigs in the second quarter and third quarters of '18 with additional well completions in the fourth quarter of this year. This drilling activity will help mitigate natural production declines in 2018.

We continue to see encouraging results from Marcellus Gathering assets. Volume throughput in the Marcellus average 540 million cubic feet a day in the fourth quarter, a slight decline from the previous quarter but approximately 44% higher than the volumes in the fourth quarter '16. Fourth quarter volumes were positively impacted by the completion of 12 wells including the earlier than anticipated completion of a 5 well pad sites in late December. Well completions in the Marcellus have been driven impart by the continued expansion of the Sherwood Processing Complex, which in 2017 increased its capacity by 600 million cubic feet a day.

Further processing capacity increases our expectation in 2018 and we believe that our Mountaineer Midstream system is well-positioned to participate in volume growth over the coming years as processing capacity expands. We expect 9 DUC completions in the first half of 2018 in the -- on the Mountaineer system.

So with that, I'll turn it over to Matt to review our financial results in more detail.

Great. Thanks, Steve. SMLP reported net loss of $18.3 million for the fourth quarter of 2017 compared to net income of $14 million in the fourth quarter of 2016. Net loss in the fourth quarter of 2017 included a long-lived asset impairment of $187.1 million related to our Bison Midstream system in the Williston Basin segment and $145.6 million of noncash income related to the decrease in the present value of the estimated deferred purchase price obligation at December 31, 2017 compared to September 30, 2017. In conjunction with the 2016 drop-down acquisition, we recognize a liability in our balance sheet from 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 of money concept as well as any adjustments to the expected value of the deferred purchase price obligation. Adjusted EBITDA for the fourth quarter of 2017 totaled $72.9 million compared to $72.7 million for the fourth quarter of 2016.

Relative to the fourth quarter of 2016, natural gas volume throughput declined on Ohio our Gathering, Piceance/DJ and Barnett Shale segments and liquids volumes throughput decreased on our Williston Basin segment. These decreases were offset by increased natural gas volume throughput on our Utica Shale and Marcellus Shale segments. While aggregate volume throughput increased relative to the fourth quarter of 2016. Adjusted EBITDA was relatively flat primarily due to the rate mix associated with the volume increases on our Marcellus segment and our TPL-7 connector project at SMU. Adjusted EBITDA for the fourth quarter of 2017 included approximately $15.1 million related to MVC mechanisms from our natural gas gathering and crude oil transportation agreements. Additional tabular details regarding MVCs is included in the fourth quarter earnings release.

Distributal cash flow totaled $49.2 million for the fourth quarter of 2017. This implies the distribution coverage ratio of 1.09x relative to the fourth quarter of 2017 distribution of $0.575 per limited partner unit paid on February 14.

CapEx for the fourth quarter of 2017 totaled $41.9 million, of which approximately $4 million was classified as maintenance Capex and $3.9 million was related to capital contributions at Ohio Gathering. We had $261 million of debt outstanding under our $1.25 billion revolving credit facility at December 31, 2017, and $989 million of available borrowing capacity. Total leverage as of December 31, 2017, was 3.62x. SMLP also provide its 2018 financial guidance. We expect 2018 adjusted EBITDA to range from $285 million to $300 million. We expect Capex to range between $175 million and $225 million, which includes $15 million to $20 million of maintenance Capex.

Distribution coverage for the full year is expected to average between 0.95x to 1.05x.

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

Thanks, Matt. 2018 is a big execution year for us given the build-out of our Permian footprint and the increase in our DJ Processing facility. Also, I'm encouraged more today than in any time in the past 3 years with our commercial backlog and growth opportunity set around our assets. We are forecasting significant volumes and adjusted EBITDA growth resuming in 2019, driven by our Delaware and DJ expansion projects, together with the significant growth behind our Utica assets relative to 2017. In our earnings release last night, we announced 2018 CapEx guidance of $175 million to $225 million, which is primarily related to the expansion of our Delaware and DJ systems along with CapEx

(inaudible) in the Utica to comminate anticipated volume growth, most of which we will see in 2019.

Further, given the level of commercial discussions in these areas, I am hopeful that we will be able to supplement this project backlog over the course of the year. Most notable is our proposed EE pipeline, for which we announced an open season, a few weeks ago. The EE will deliver residue natural gas from the northern Delaware Basin at our lane processing plant to the Wahaha. We are currently in the middle of the nonbinding open season and are getting great feedback from a number of potential shippers. Our open season will conclude in early March, and we look forward to sharing more on the status of this project over the next few months. We anticipate we will be able to fully fund our 2018 capital expenditures including the development of the plant expansions in DJ and the gathering and processing expansion in the Delaware from our $1.25 billion revolving credit facility. With the $300 million preferred equity issuance last November, combined with the reduction in the undiscounted value of the DPPO, we do not need to access the debt or equity capital markets in 2018.

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

(Operator Instructions) Our first question online comes from Kristina Kazarian from Crédit Suisse.

Can you guys talk more about the potential EBITDA upside that comes from north Delaware and DJ projects? And I know you mentioned it's not included in guidance, but just remind me how you're thinking about this? And also when these assets come online?

Yes, it's Steve, Kristina. I'll take the sort of inverse last one first. So they'll come on it -- Delaware is going to come on mechanically and it will be completed in the second quarter, late second quarter. We're being fairly conservative while in contribution for '18 because of the anticipated ramp of it. I think that's probably one of the differences between our guidance and some of the street estimate is contribution from 2 plants. The DJ will come on late in the fourth quarter so of '18, and it's underpinned by minimum volumes and we also expect it to ramp up fairly quickly, once it comes on. Contribution wise, I think looking forward, what we announced when we announced the DJ or the Delaware was the initial build-out roughly $110 million initially and that should be -- you should assume that to be a 8x to 10x on a run-rate basis. And then as we add on to the facility add on customers would expect those to be fairly incremental to that multiple.

And maybe on the Utica side. Can you guys talk a little bit about what changed there dramatically on your Utica outlook versus last quarter? And kind of help us understand the activity lags that typically what you're hearing from producers? And how much more this can, kind of, fall to the right?

Yes. So it's a couple of different things. First, the compression situation is we pushed compression back now not coming on in '18 but coming on in '19. And this is on our wholly-owned system, SMU. And that's really due to the strength of the wells on SMU that are outperforming. Our expectations and the producers' expectations, so that they just don't need compression, yet. And again, some of these wells have been on now for over 2 years. And so that's a little unheard-off, but that just shows you the strength of the reservoir. But it is -- that is an incremental project to us and we've pushed it back now and are fairly confident and coming on in '19. So that's one. The other is really a more measured pace by some customers particularly our public companies in their pace of drilling and drilling within cash flow and that is causing a more measured pace, I would say. And that's -- we don't think it's an issue of Utica not going, in fact, I would tell you the Utica still -- we still see pretty significant growth and saw pretty significant growth over the course of '17, actually. So I would say that's the second piece. And then the third piece, we had one of our other large customers, it was a timing-related issues. They pushed wells that we anticipated coming on the middle of '18 are now going to come on at the end of '18 and really the first part of '19. It's several pad sites in the dry gas window it's on SMU, and it's going to be fairly significant and we're actually building out to those pads as we speak. It just is a timing issue. So those are the 3, I would say, biggest issue, Matt, did I miss any?

No, that is 85% of the -- of decrease.

So that -- and that is reflected in how the deferred purchase price has moved down. So you can draw your own conclusions about the MLP. But we view it as a positive structure to the MLP and the growth is still going to be there in the Utica it's just being, what I would call elongated.

And if I think there was the puts and takes as (inaudible) on the 2 comments that you kind of just gave me. How do I think about that? And I know you haven't given me any guidance around '19 yet, but can you maybe help frame it up in the context that '16, '17, '18 EBITDA, all kind of being roughly flat at this point? How you're thinking about what this setup could be for '19?

Yes, I'll let Matt take it first, and then I may jump in.

So you can kind of back so, if our DPPO is now at $454 million on a discounted basis, right. And you assume kind of CapEx in business just EBITDA of the same that would imply that these drop-down assets would be delivering on average, what between $120 million and $125 million of EBITDA for the 2 years on average. And so that is $20 million to $25 million above where we are today, right? So I think that should help from a drop-down asset standpoint bridge the GAAP a little between our expectations for, kind of, '19 and beyond.

And I'll add to that just to correlate it with the CapEx a little bit, Kristina, because I think there's some discussion around that as well too with us. I think it's important to keep in mind that for '17, we did about $150 million of CapEx. Somewhere in the neighbor of probably $60 million to $70 million of that actually was related to the DJ into the Delaware. So those are all growth projects, they all going to come on, I would say, we're being fairly conservative about the contribution in '18 with them. But I think that's an important point of, sort of, where our CapEx is being spent relative to growth coming on.

(Operator Instructions) We have a question online from Mirek Zak from Citigroup.

I was just wondering if you can give your expectations around sort of the timing and the rate of development that you're kind of expecting in the Delaware business at this point. And kind of, if you can give any color on as to how large of a contributor you expect that to be in the next maybe couple of years?

Yes, I'll try to give you a little bit of color. We expect -- let's just take '18, I think we've said it, I'll reiterate it. We don't expect much contribution in '18. I think we're taking a fairly conservative approach to give ourselves and our large income customer, XTO, a chance to ramp the plant. They're obviously running rigs there, but it takes a little bit of time from a permanent standpoint for them and for us on pipeline buildout. So through '18, I would say limited and then -- but I think you will see, as I mentioned, the initial buildout 8x to 10x on $110 million or so buildout, so you can do that math as it ramps up. And then, look, we're having significant discussions, I mean, EE now itself is a fairly large project hundreds of millions of dollars. In part regulated line, it spend over the course of the next 3 years, so it's not a quick project from CapEx spend or contribution. But it's a significant project. I think we're getting very good interest there. It's going to really enable New Mexico processing capacity because frankly, if you look at the math there -- in the math there we're going to run out of residue capacity over the next couple of years if something doesn't get done. So that's an important project. I think if we got to bring it together. I think if you see Bcf a day or somewhere around their pipeline, originating at our lane processing plant, going to [Wahaha], you can probably correlate that to the prospects of us expanding our lane processing plant. So I think that's going to be a very attractive origination point, which means a very attractive processing point for producers of gas. So we expect to be doing a lot of work in the Delaware over the next couple of years, both on the GAAP side. I think we'll broaden our services to crude as well too. If you ask me what we have in the backlog in the Delaware, its -- we're looking at projects north of $0.5 billion in total over the next several years. So we're pretty excited about the area, but we're not going to get ahead of ourselves, and it's going to take a little bit of time to develop when you do it organically, that's what occurs, but we think long term that's what attracted to our unit holders.

Our next question online comes from Chris Tillett from Barclays.

I was just wondering, you mentioned in the press release that in your Piceance/DJ segment, some of the activity this quarter was affected by an anchor customer sort of spending activity there. I was just wondering if you could give us an update on the outlook for when or if you expect that to resume?

Yes, that -- so recall that (inaudible) bought and [Carrizo] acreage and so that's, kind of, who are -- who has been and will be our anchor customer. So we have what, 70 to 75 DUCs at the end of the year in the Piceance, we're expecting 110 to 120 wells to come on in '18, with little to none of that activity from our anchor customers. So we were kind of consider that an upside for growth in the future in the Piceance. Right now, from what we can see with Carrizo, the more focused north of the river, but we expect them at some point to come down in our acreage.

Okay. And then on your double eagle projects, have you guys given a CapEx estimate for that pipeline and then how should we think about your plans to fund that as you move forward?

Yes, hey Chris, this is Steve. It's EE instead of Eagle, although I like double eagle. We may change the name, I didn't think of that one. So we haven't given CapEx yet. The reason, Chris, it's pretty simple, we're in a open season. Scope of the project could change and so we got to bring it together and see what it looks like, see who wants us to connect, where they want us to connect, those type of things. So the scope could change, and so I'm hesitant to do it. It's a large project, it can be several hundreds of millions of dollars. But the spend, Chris, is over multiple years, right? Ferc regulated projects, so it's a multiyear spend. In fact, won't be much in '18. '18 will be a permitting year for the most part, we'd expect spend to pick up some in '19 and into '20. And those will be the back half of '19, and '20 will be the heavy years for it. So we anticipate given our current longer-term projections, we would be able to stay within our leverage metrics and be able to fund that project internally. So we don't expect to big need, just given what we called S curve, the length of the spend there and how it lays out.

Our next question online comes from Mr. Michael Gaiden from R.W. Baird.

Can I ask as relates to 2018, can you talk about any expectations for how volumes and EBITDA should progress throughout the year? Do you expect it to be flattish? Should we anticipate any seasonality or any potential build into year-end?

Yes, this is Matt, I'll take that. It's similar to what we experienced in '17 or expected to experience in '17. And that -- relatively flat for the first half and then increasing as we turn the calendar into 2019.

Great. And lastly, can I please ask about any additional color or background you could offer on the impairment on the Bison system recorded in the fourth quarter?

Yes, sure. So in the fourth quarter, as you know, we recognized $187.1 million impairment on our pricing on our Bison system in the Williston segment. This impairment -- it was sort of a strategic review specific to Bison which causes to accelerate the assumptions on timing of realizing cash flows for Bison. And by doing that, it caused us to bring in fixed assets by about $102 million and our contract intangibles by about $85 million. That's what that $187 million impairment was related to.

And was there a change in the commercial backdrop there are any other things that cause the strategic review and these charges?

Yes, so no change in the commercial backdrop. It just timing of, kind of, the cash flows but again, it's nothing that is impacting our outlook for Bison. Just more of how we expect to handle it in the future. So there's no real impact to '18, '19, our expectations relative to Bison.

(Operator Instructions) And at this time I see we've no questions in queue. I'd like to turn the call over to Steve for closing remarks.

Well, thanks everybody for joining us. Before we jump off, I just want to try to help a little -- folk had a little bit on the bridge from our '18 guidance to some of the street estimates since I know it seems to be somewhat surprising. So most street -- as we take the consensus street estimate it was around $330 million. So if you think about the plant contribution, I think most folks had that at $8 million to $10 million for '18. We're taking a conservative approach to that's 0, effectively. We had OpEx of about $8 million going to hit us, we have a large year of compression overhauls, that's just a timing effect that won't be recurring. And then the final piece is Utica and the Utica is about $20 million of that and that is obviously, reflective in the DPPO coming down as well too. So if you're doing that, if you are doing the bridge from street consensus to where we are, I think those 3 things will get you there and help you out. So we'll end the call with that and obviously, if questions -- you have follow-up questions, feel free to call us today, and we'll get back to you. I appreciate it. Bye and have a good weekend.

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