Summit Midstream Partners LP (SMLP) 2020 Q4 法說會逐字稿

Welcome to the Q4 2020 Summit Midstream Partners LP Earnings Conference Call.

My name is Rebecca, and I will be your operator for today's call. (Operator Instructions)

I will now turn the call over to Ross Wong, Senior Director of Corporate Development and Finance.

Ross, you may begin.

Thanks, operator. And good morning, everyone.

If you don't already have a copy of our earnings release that was issued earlier this morning, please visit our website at www.summitmidstream.com, where you'll find it on the homepage, events and presentations section or quarterly results section.

With me today to discuss our fourth quarter 2020 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Marc Stratton, our Chief Financial Officer; along with other members of our senior management team.

Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include but are not limited to our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2019 annual report on Form 10-K, which was filed with the SEC on March 9, 2020; and 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'll use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release.

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

Great. Thank you, Ross. Good morning, everyone. Thanks for joining us for our fourth quarter 2020 earnings call.

Earlier this morning, Summit reported fourth quarter 2020 adjusted EBITDA of $61.8 million, which was in line with our expectations and represented an improvement of approximately $2 million over our third quarter results. Our quarterly financials were influenced by a variety of factors, including strong performance from our Utica and Ohio Gathering segments, including the return of more than 50 million a day of production net to Summit which was shut in, in the third quarter. We also brought on 8 new wells that were connected to our Williston liquids system, and we've continued to gain cost reductions across our back-office and field operations. Our Utica and Ohio Gathering segments each experienced quarter-over-quarter volume increases of more than 20% and then in the aggregate produced an incremental $2.6 million of adjusted EBITDA relative to the third quarter of 2020.

For the full year, Summit generated $252.1 million of adjusted EBITDA, which was within our guidance range that we established in July that reflected the implications of the COVID pandemic, the lower commodity price environment and the slowdown that we expected in customer activity across our footprint.

We continued to generate a substantial amount of cash from our primarily fee-based low-CapEx business. And during the fourth quarter, we generated $37.4 million of free cash flow based on $51.8 million of cash flow from operations, $7.8 million of capital expenditures and a $6.6 million cash investment in Double E. In total for the year, we generated approximately $135 million of free cash flow, which enabled us to pursue strategic and accretive opportunities for our stakeholders as demonstrated by the series of liability management-related transactions that we executed throughout the -- throughout last year. Given our portfolio of fixed-fee contracts, our continued emphasis on financial discipline and extracting operating efficiencies, we're very well positioned to continue to generate a meaningful amount of free cash flow going forward even if there is an extended challenging macro environment.

One other important matter in today's earnings release that I want to touch on is a $17 million contingent loss that the partnership accrued during the fourth quarter of 2020. For background: This accrual relates to a previously disclosed incident dating back to 2015 that involved a rupture of a 4-inch produced water disposal pipeline on our Meadowlark system in the Williston Basin. Since discovering the rupture in January 2015, the partnership and its affiliates have spent nearly $75 million on environmental remediation costs and preventative system improvements associated with this very unfortunate incident. We refer to this as the Meadowlark rupture in our financial reporting disclosures, and I encourage readers to reference annual and quarterly disclosures that we have provided on the subject dating back to 2015. Since the incident occurred, we've been engaged with federal and state agencies and the U.S. Department of Justice regarding the resolution of potential criminal and civil violations under statutes such as the Clean Water Act. At this point, it remains unclear if a resolution to these potential violations could be achieved through a negotiated settlement or through litigation, and the timing of any resolution is unknown at this point. However, to comply with certain GAAP requirements, the partnership accrued a $17 million loss contingency in the fourth quarter of 2020. Though we continue to believe that a loss is probable at this point in time due to the complexity of resolving the issues surrounding this matter, we cannot reasonably predict whether any actual loss if incurred will be materially higher or lower than the accrued amount.

During the fourth quarter, we continued to execute successfully on our liability management initiatives. In total, we eliminated more than $350 million face value of our recourse fixed-capital obligations, capturing a weighted average discount of roughly 67%. This was done through the repurchase of our 2025 notes and the settlement of the $180 million DPPO in conjunction with closing of the term loan restructuring transaction and also the cash tender offer for $75.1 million of our Series A preferred units. In total for 2020, we retired more than $625 million of recourse fixed-capital obligations, which included a reduction in Summit's indebtedness by over $138 million. And in addition, we also were able to extinguish our GP's $155.2 million term loan.

We capped off our 2020 liability management program in December of 2020 completing an amendment to our revolving credit facility that provides additional features to support the next phase of our liability management program, which will largely focus on our 2022 debt maturities. The newly added $400 million junior lien basket under our revolver provides us with another option to recapitalize our balance sheet. Further, the revolver amendment also increased our total leverage covenant threshold to 5.75x, which provides Summit with additional financial flexibility and covenant headroom in what we expect that could be a continuation of the challenging market environment into 2021.

Now that we've completed the first phase of our liability management initiatives and with the revolver amendment in place, we are turning our attention towards addressing our 2022 debt maturities, including the senior notes and the revolving credit facility. We are focused on developing a -- comprehensive and long-term solutions that we believe will provide us ample flexibility and liquidity over the next several years to continue to delever the balance sheet and position the business to excel as commodity prices improve in the future. We recognize that high-yield markets are currently robust. And we are evaluating multiple financing options, including but not limited to using an up-tier exchange, potentially raising new capital in the form of secured debt and a hybrid approach of the two. Over the past few months, numerous leading financial institutions have proactively reached out to us and expressed interest in being involved in Summit's future liability management program and the related transactions. While we have yet to decide on the exact path we're going to take, the key takeaway is that we believe there are a lot of options, very attractive and viable options, available to Summit to refinance these maturities. I would also like to note that, while addressing our debt maturities and -- or 2022 maturities is a focus, we will still continue to look for opportunities to capture further value throughout our entire capital structure, which we believe would even further enhance our financial flexibility [on the other road].

We have continued to make great progress on the Double E pipeline project having received all necessary FERC and BLM approvals to proceed with construction. And we have also, as previously announced, secured bank financing commitments for the project. With the receipt of the notice to proceed in January, we have initiated construction activities and expect to bring the project online during the fourth quarter of 2021. The team has also continued to make great progress reducing and derisking the overall project budget. We continue to expect that Double E will be completed at or below our current $425 million capital budget. As a reminder: When we started the project, FID-ed the project, the original capital budget was $500 million, and we have since reduced it to $425 million. As of February, we had approximately $35 million of unidentified project contingency remaining in the budget, which could lead to further realization of capital savings.

As previously announced, our wholly owned unrestricted subsidiary Summit Permian Transmission received $175 million of commitments from 3 leading commercial banks to finance the development of Double E in early February. We expect this financing to fully fund Summit's estimated $150 million investment in the project for 2021. This was a very important achievement for Summit because it allows us to advance the Double E project without utilizing additional cash from SMLP's balance sheet, which thereby creates more financial flexibility and a clear path to continue enhancing the balance sheet in the near term. We are very excited and well on our way to bring this important northern Delaware pipeline into service later this year. Not only will this project provide a cost-effective gas transportation solution for our customers and providing them with great access to attractive downstream markets, but it will also benefit the local communities economically and it will also help improve the environment by reducing the need for flaring in both Texas and New Mexico.

Now shifting to our 2021 outlook and guidance. In mid-February, we disclosed 2021 adjusted EBITDA guidance of $210 million to $230 million. This range is down from the $252 million of additional -- I'm sorry, of adjusted EBITDA that we generated in 2020. This was primarily due to an expected slowdown of customer activity, together with an approximate $10 million reduction in MVC shortfall payments. So look, as I've committed to do in the past, we set the 2021 financial guidance with the objective of being very transparent with our stakeholders about our expected results and also setting a realistic range that we believe includes appropriate risking to our customer development plans. Marc will speak about some of the detailed segment-level assumptions later in the call, but at a high level, I'd like to summarize some of the key considerations behind our 2021 outlook.

In developing guidance, we took a similar approach to last year and used the latest drilling and completion schedules and production forecasts that were provided by our customers as the starting point. We also then applied some risking assumptions at the midpoint of the range and then we applied even further risking at the low end of the range. For 2021, we're expecting 45 to 75 new wells to be connected to our systems, in 2021, which compares to 104 new wells in 2020 and 262 new wells in 2019 and 334 wells in 2018. So 2021 is definitely a low amount of activity for us in 2021, and I'll come back to that here in a minute.

So look. While we think this is an abnormally low amount of activity, we believe that this is the most probable range given the data we have at the moment. There is a clear line of sight to these wells coming online, and approximately 75% of the new wells that are included in our forecast at the midpoint are either drilled or currently being drilled. The remaining new wells that -- in our forecast have active permits and have recently been affirmed by our customers to be included in their 2021 capital programs. We expect limited 2021 activity behind our systems in the DJ, Permian and Williston Basins. However, we do believe we could see some upside from these areas as oil prices continue to increase. As a reminder: There's a bit of a lag in response time for our customers to bring new wells online despite the recent rally that we've experienced in oil and gas prices. We're very hopeful that this improving commodity outlook will drive further drilling activity during the second half of 2021 that will certainly benefit us towards the end of the year and as we head into 2022.

Now so for some additional commentary on the [bookends] of our guidance range. If our customers achieve their stated plans and expected IP rates, we would expect to achieve the upper end of the guidance range of roughly $230 million. And as I previously said, we spend a lot of time evaluating those customer plans, looking at potential volume risks as well as schedule risks. And the lower end of our guidance range at $210 million does reflect the -- what we believe to be a substantial amount of risking to the timing of those new wells and the related corresponding volumes. And as I previously mentioned, the guidance also includes a step down of roughly $10 million of lower EBITDA in 2021 versus 2020 as a result of some contractual MVC roll-offs.

Also, given our emphasis on capital discipline, free cash flow generation, we expect total growth capital expenditures of [$10 million to $25 million], which is inclusive of approximately $10 million for maintenance capital expenditures. Majority of this growth capital is to accommodate near-term volume growth in the Utica segment as a result of an incentive agreement that we put in place with a customer last year. So although we expect our top line metrics to soften relative to 2020, we still expect to generate sufficient cash in 2021, after interest expense and all capital expenditures, to reduce outstanding indebtedness by approximately $130 million to $150 million.

While it's not included in our guidance range, we also continue to have construction -- constructive conversations regarding divestitures and potential joint venture opportunities within our legacy and core focus area assets. And we have -- we certainly have seen a renewed interest in activity, certainly as we've seen commodity prices strengthened recently particularly on the natural gas side. We will continue to evaluate these opportunities in a very disciplined manner. And we remain optimistic that we can execute an accretive transaction that we believe could further enhance our financial flexibility and strengthen our balance sheet. And look, we also recognize that 2021 could be [ripe] for corporate M&A and a consolidation theme, and we will plan to continue to monitor the market closely from that vantage point as well.

And with that, I'll hand it over to Marc to review our financial results.

Great. Thanks, Heath. And good morning, everyone.

I'll begin with a discussion around the segments that comprise our core focus areas.

Starting with Utica Shale. The SMU system averaged 443 million cubic feet a day in the fourth quarter. And segment adjusted EBITDA totaled $8.7 million, which was up $1.3 million over the third quarter of 2020. A 25.9% quarter-over-quarter volume increase was primarily driven by 7 new wells that were turned in line in September and the return of 22 million a day of temporarily shut-in production relative to the end of the third quarter. There were 10 DUCs in the Utica Shale segment at the end of 2020. And we expect all of them to be turned in line in 2021, including a new 4-well pad in the next few weeks.

As we've noted previously, last year, we amended the gathering agreement with one of our larger SMU customers to incentivize accelerated upstream activity and bring forward wells on our system. We expect this incentive arrangement will be a catalyst for development behind our SMU system over the near term. Overall, we expect 2021 Utica Shale segment adjusted EBITDA to be in line with full year 2020 results.

For our Ohio Gathering segment, adjusted EBITDA totaled $8.5 million for the fourth quarter, a $1.3 million increase from the prior quarter largely driven by a 21.3% increase in volume throughput. 10 new wells were connected to the OGC system late in the third quarter. And we saw our customers return all temporarily curtailed production from the third quarter, which was as high as 80 million cubic feet a day net to Summit in the third quarter.

We expect our OGC customers to commission 14 new wells in 2021, of which 7 have already been drilled and 4 are in the higher-volume dry gas window. We don't intend to fund our capital contributions to OGC in 2021, which will save approximately $8.5 million of capital from SMLP, and we expect this will have a de minimis impact on our equity ownership in OGC.

Williston segment adjusted EBITDA totaled $11.4 million in the fourth quarter, a 2.4% decrease from the third quarter primarily due to a change in customer volume mix and the impact from recent contract amendments to incentivize and bring forward drilling and completion activity. Liquids volumes increased by 2.9% to 71,000 barrels per day primarily due to 8 new wells that were turned in line during the quarter, which were the first new well connections since the first quarter of 2020. We currently have 6 DUCs in inventory behind our Williston's liquids system and 2 DUCs behind our gas system, all of which we expect will be turned in line in 2021. While we expect a limited number of Williston well connections in 2021, we do think there is an opportunity for increased activity if crude oil prices continue to rise throughout the year.

DJ Basin segment adjusted EBITDA totaled $4.4 million in the fourth quarter, a 7% decrease from the third quarter due to a 7.4% quarter-over-quarter decrease in volume throughput to 25 million cubic feet per day. Quarter-over-quarter volume decreases were primarily driven by natural production declines and partially offset by 2 new pads comprising 10 wells that were connected during the quarter.

As of December 31, 2020, our customers had 20 DUCs behind our DJ system. However, we do not expect them to be completed in the near term. And for 2021, we aren't expecting any new well connections on our DJ system due to special situations for 2 main customers. One of our customers is in the process of being acquired by another DJ Basin-focused company, and they have publicly disclosed that they expect to focus their development opportunities on acreage outside of our service area in 2021. Our other large DJ customer has decided to focus its 2021 development activities in the region to acreage on federal lands and away from acreage contiguous to our service area. While it's too early to make predictions beyond 2021, preliminary customer conversations indicate that 2021 may be an anomaly, and we expect new upstream activity behind our DJ system will return in 2022. In addition, Colorado's 2,000-foot setback rule that was implemented in the fourth quarter is likely to impact customer activity in Colorado going forward. However, we don't expect the rural Hereford area, where we operate, to be adversely affected by this rule.

Our Permian segment adjusted EBITDA totaled $0.1 million in the fourth quarter, a decrease of approximately $0.8 million relative to the third quarter primarily due to decreased margins on natural gas and NGL sales, a $400,000 prior period true-up payment to certain customers and increased expenses for maintenance conducted during the fourth quarter. The 2.9% decrease in volume throughput was largely attributable to natural production declines. Our customers currently have 2 DUCs in inventory behind the Permian system, which we expect will be turned in line in the first quarter of 2021. And these wells represent the only new well connections in the segment in 2021.

We expect one of our customers to continue delivering 10 million cubic feet a day of throughput in 2021, which should partially offset natural production declines. Similar to the Williston, there is upside potential for increased activity in our Permian segment if crude oil prices rise, although the latest feedback suggests that 2021 activities are most likely to be focused outside of our service area.

Our legacy areas, which include the Piceance, Barnett and Marcellus segments, generated $35.4 million of combined segment adjusted EBITDA in the fourth quarter, which translated into $34.5 million in free cash flow after $900,000 of combined capital expenditures. Although there were no new well connects during the fourth quarter, we expect 17 new well connections in 2021, including the first 8 new wells on the Barnett system since third quarter of 2019. There are 10 DUCs behind these systems currently, and 7 new wells are in the process of being drilled. 9 of these DUCs are in the Marcellus and are expected to come online during the first half of 2021. Both our Marcellus and Barnett gathering infrastructure are fully built out, so volume growth on these systems will be highly accretive to cash flow generation and could represent meaningful catalysts to an existing mature base of low-decline production.

The Piceance system continues to generate significant free cash flow, producing $21.6 million and $87.5 million of free cash flow for the fourth quarter and full year of 2020, respectively. Although we aren't forecasting any new well connections in 2021, we are actively engaged in discussions with certain customers, who are considering up to 10 new wells in late 2021, which would help arrest natural production declines. However, at this time, we haven't included these wells in our guidance. We do expect that our Piceance segment will continue generating strong free cash flow in 2021 and beyond due to its fee-based contracts, MVCs and low CapEx requirements.

Now turning back to the partnership.

SMLP reported fourth quarter net income of $103 million, adjusted EBITDA of $61.8 million and DCF of $44.8 million. Net income was positively impacted by a $124.1 million gain from early extinguishment of debt related to the open-market repurchase of senior unsecured notes and the consensual debt discharge and restructuring of SMP Holdings' $155.2 million term loan, partially offset by noncash charges for a $17 million loss contingency expense and a $5.1 million asset impairment charge related to an $8 million sale of compressor equipment which closed in January of 2021.

Capital expenditures totaled $7.8 million for the fourth quarter, which was in line with the third quarter and included $3.1 million of maintenance CapEx. The majority of our CapEx was associated with projects in the Utica and DJ segments, including capital to connect a 4-well pad on our SMU system that's expected to come online in the first quarter of 2021. We also made $6.6 million of cash contributions to Double E during the quarter.

For full year 2020, we incurred approximately $63 million of capital investments, inclusive of $43 million in CapEx for our operated assets and $20 million of contributions to Double E, which was within our guidance range. We don't expect SMLP to make any direct capital contributions to Double E in 2021 due to the committed commercial bank financing that was secured earlier, which results in the reallocation of $150 million that SMLP would have otherwise had to fund. We had $857 million outstanding under our $1.1 billion revolving credit facility at December 31, 2020. Subject to covenant limits, our available borrowing capacity at year-end totaled approximately $105 million, and we have approximately $120 million of total liquidity at year-end 2020.

Total leverage at year-end was 5.1x compared to a maximum limit of 5.75x, and first lien leverage was 3.2x compared to a maximum limit of 3.5x. As Heath mentioned earlier, we expect to generate sufficient cash in 2021, after interest expense and capital expenditures, to reduce outstanding indebtedness by approximately $130 million to $150 million. We have already begun to reduce outstanding indebtedness in the first 2 months of 2021, which was comprised of free cash flow generation and an $8 million sale of unutilized compressor equipment in January. Our revolver balance currently sits at $817 million, which is down $40 million relative to year-end 2020.

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

Great, all right. Thanks, Marc.

Look, I'm really proud of the transformation that the Summit team was able to implement in 2020. This was achieved through a sequence of complex and challenging transactions. It all kind of started with the GP buy-in transaction in May and us closing with a bank amendment and a cash tender for Series A preferred units in December. As a result of the 2020 activities, we've been able to fully align our governance structure with public unitholder interest and we now have a fully independent Board of Directors. We've also simplified our balance sheet while generating a significant amount of value for our stakeholders, again by taking a strategic yet aggressive approach to liability management.

Furthermore, we achieved several critical milestones on Double E that not only helped ensure that the project will be completed on time as planned, but it also is with a financing where we're now able to do that without further burdening SMLP's balance sheet. While -- look, while new well activity behind our systems are projected to be at unprecedented lows in 2021, we do believe that this year will likely represent the bottom of the cycle. We're now beginning to see some signs that point to a -- what could be a substantial recovery of new well activity late in 2021 and early 2022 behind our systems. And I think those are certainly being spurred as a result of higher commodity prices and really overall improvement in capital markets.

We're committed, as always, to providing transparency, as I said before, with our stakeholders. And we also believe that our 2021 adjusted EBITDA guidance of $210 million to $230 million is very realistic and achievable. We'll remain focused on operating the business under our core guiding principles which have guided our success in the past, and we will continue to focus on those things that we can control while also employing strategic and financial discipline. Addressing our 2022 debt maturities and progressing Double E from a development project to an operational asset by year-end are certainly 2 of the biggest priorities for the year. And look, I'm very confident that we have the right people, the tools and resources in place to achieve those goals.

So I'm extremely proud again of what the Summit team has accomplished this past year, but I'm even more excited for what lays ahead.

So with that, operator, I'd like to turn the call over for questions.

(Operator Instructions) And our first question is from James Carreker from U.S. Capital Advisors.

Understanding that you don't want to give 2022 guidance, can you talk a little bit about your expectations for Double E and the EBITDA contribution once it's online?

Yes. Marc, do you want to maybe take that one?

Yes, sure. Yes, James, I appreciate the question. Obviously, our near-term focus here is bringing the financing in place, which as we mentioned will really reallocate capital from what would have otherwise been capital spent on SMLP's balance sheet to third-party bank financing. So we're super excited about that. The project continues to move forward in a very efficient manner. We do expect to bring the project on here by the end of 2021. And I would think about the go-forward EBITDA contribution from that project as somewhere in a 7 to 7.5x kind of build multiple. Obviously, we've laid out the $425 million gross development budget for Double E. Our 70% of that is roughly $300 million. So I think I'd probably point you to those metrics.

That's helpful. And I know this is kind of an accounting question, but I think the book value per share according to your financial statements is somewhere north of about $120 per share. Are there any write-downs or impairments that could be expected in 2021 beyond what you've already announced?

Yes, James, the answer is no. We feel very good about where the book value of our assets is today. It's something that we look at every quarter and run an analysis on every quarter based on undiscounted and discounted cash flows from those assets and the cash flow that those are projected to throw off over time. So I think we've taken some impairments over the last couple of years as needed, but I think we feel very good about the book value of our assets where they sit today.

(Operator Instructions) And our next question is from Elvira Scotto from RBC Capital Markets.

So what we're hearing from the public producers are that, for the most part, they're not really increasing CapEx. They're not really focused on production growth. However, it does seem like the private companies may be ramping production. Can you provide some color there? And then just remind us, what percent of your producer customers are private?

Yes, I'll take a stab at that. I mean I think -- I don't have an exact percentage, but we do have a fair amount of private operators across the footprint. And I think what I'd kind of guide you to -- I mean we are seeing probably a little more activity out of the private side than we are the public operators, but again, I mean, really across the board, I think as you can see in our guidance, I mean, our well counts are down very significantly across the footprint. We do think that is somewhat of a reflection of the environment that we're [leaving] 2020, into 2021, with the very weak commodity price outlook at the time. [So I think we just saw] a lot of slowdown, if you will, in activity levels. I think, now that commodity prices have rebounded [both in] January and in February, we are starting to see and having more conversations that point to activity potentially picking back up as we head into 2022. And we are seeing that from some of the public operators as well, but certainly in 2021 I'd probably say there's -- of the activity that we have, there's probably a little bit more of that coming from the private side.

And then just my second question is on the Williston Basin, your producer customers there. How are they positioned with respect to takeaway and DAPL? Do they ship on DAPL? And do they have contingent plans if DAPL were to shut down?

Yes. I -- so there -- we -- our shippers do deliver into DAPL, but we think there's adequate takeaway capacity for them, if there was a long-term shutdown, [if you will], of the DAPL pipeline, so we just really don't anticipate that being an issue that would curtail production behind our footprint.

And Elvira, I might also add we do have interconnects into Enbridge pipeline systems up there as well as crude-by-rail terminals throughout the basin. So obviously we've been operating in the Williston for years, certainly well before DAPL came online, and we had plenty of interconnectivity to crude by rail at that point in time. So to the extent DAPL were taken out, again, we do have alternative pipeline interconnects and rail terminals that we can interconnect into as well.

(Operator Instructions) We have no more questions at this time.

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