Summit Midstream Partners LP (SMLP) 2021 Q1 法說會逐字稿

Welcome to the First Quarter 2021 Summit Midstream Partners, LP Earnings Conference Call. My name is Jenny. I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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

Thanks, operator, and good morning, everyone. If you don't already have the 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 first quarter 2021 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 2020 annual report on Form 10-K, which was filed with the SEC on March 4, 2021, 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 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.

Thanks, Ross. Good morning, everyone. Thank you for joining us for our first quarter 2021 earnings call. So this morning, Summit reported first quarter 2021 financial and operating results, which exceeded our internal expectations, including adjusted EBITDA of roughly $60.4 million. Our results were primarily driven by volumetric outperformance in the Utica Shale segment and continued gains from our focus on cost management.

During the first quarter, we generated $51 million of free cash flow from operations, which enabled repayment of $55 million worth of debt on our revolver during the quarter. This repayment represents nearly 40% of our full year debt reduction guidance target. Although we still expect 2021 will be a trough year for new well activity, certainly relative to historical periods, we are off to a very strong start and we do see several encouraging signs that we think could lead to a more bullish second half of 2021 than we initially planned. However, at this time, we are maintaining our full year 2021 adjusted EBITDA guidance range of $210 million to $230 million for the year.

Our customers continue to deliver very impressive wells, particularly on the acreage behind our Utica system, which certainly helped contribute to the outperformance in the first quarter. As example, in early March, new 4 well Utica pad came online ahead of schedule and has outperformed, roughly producing about 20% higher than our internal expectations. These are some of the largest wells that we've seen brought on really anywhere in the Utica.

Although these new wells are still in the early stages, the typical production profile of these wells generally hold flat roughly for about 6 months before declining. So if our -- if this new pad follows that same profile, we do think it will contribute to volumes and EBITDA in excess of our expectations for at least the next few quarters. These new wells were the first wells to come online that were a part of our previously announced gathering agreement that was structured to incentivize upstream activity and accelerate activity behind our SMU system.

So these strong well results are demonstrating the top tier quality of the rock behind our system and we're super excited about the future development in and around this acreage. On the cost front, we continue to make really good strides in further streamlining on our cost and organizational structure, while we're gaining operational efficiencies in the field. This is pretty evident, if you look at our quarterly operating expenses of roughly $4.9 million -- sorry, our operating expenses are lower by roughly $4.9 million this quarter relative to our quarterly average in 2020. I do expect that we'll continue to realize additional cost saving benefits in the future as our operational efficiency and excellence has become more ingrained in our culture across the entire company.

I do want to take this opportunity to thank the Summit team for the continuous improvement mindset, the creativity and the commitment to continue to find ways to improve our overall operational efficiency and effectiveness. By the way, this is all done without compromising our commitment to safety, compliance, the environment and providing excellent service for our customers. We also had several notable achievements during the quarter. In the Permian, we closed on $175 million commercial bank project financing for our Double E project and we are also able to kick off construction activities. Securing this bank financing for the project really despite this challenging market that we're in, I think was a not only a great outcome for Summit, but really a testament to the high quality nature of the Double E pipeline project as well as its customer base.

Now that the financing has closed, we've secured a clear pathway for Summit to advance and fund the Double E pipeline without further burdening SMLP's balance sheet. Our wholly-owned unrestricted subsidiary, Summit Permian Transmission utilized this financing to fund all of Summit's investment in Double E In the first quarter. And we expect these credit facilities will be sufficient to finance nearly all, if not all of Summit's remaining investment in Double E going forward.

As a reminder, all of the pipe has been procured. The rights-of-way has been acquired. Construction is well underway and we are very pleased with how this project is progressing. As a reminder, on the commercial front, over 75% or nearly 75% of the pipeline, 1.35 Bcf a day of capacity has been secured through long-term take-or-pay firm transportation agreements really with multiple customers, including Exxon as a -- who is the anchor shipper.

Now that construction is underway, we also have started to see a lot more converse -- or have had a lot more conversations pick up with the existing and prospective shippers really relative to potentially contracting for some of the incremental capacity that we have available. We continue to expect that Double E will be completed by the end of 2021 and we are very excited about continuing to find opportunities to further reduce the cost of the project.

As a reminder, we are -- our current estimate is roughly $425 million, roughly $35 million of that is in unidentified project contingency and we believe that there is a good chance that we won't have to spend all of that contingency. So good progress, just this project, when we originally FID-ed, it was $500 million and we have a really good chance of driving the project in service at below $425 million.

On the liability management front, we completed a successful common equity for Series A preferred unit exchange recently. This transaction closed on April 15, when we exchanged $18.7 million worth of the Series A preferred units and eliminated roughly $2.5 million of accrued unpaid distributions. We exchanged that for 560,000 SMLP common units, which represents roughly a 42% discount relative to par value.

So in total, we have now reduced our debt and fixed capital obligations by roughly $687 million or we really cut it nearly a third since we originally began the liability management program this past summer. And these liability management activities really have kind of pave the way, if you will, for the next step in our process. So looking forward, we've really shifted our focus towards implementing a comprehensive and holistic solution to address our 2022 debt maturities.

While we certainly have more wood to chop, I will say the markets are very open and constructive and we received a tremendous amount of interest from banks and bond investors regarding this comprehensive refinancing solution. As I said in earnings release, our refinancing goals are really to not only extend our 2022 maturities, but we also want to build in additional financial flexibility that we think will help us over the next several years as we continue to improve the balance sheet and transform the overall business. So we're very excited about the progress we've made to-date on these refinancing efforts and are very much looking forward to providing additional details ahead of our next scheduled earnings call.

So with that, I will hand the call over to Marc to review our financial results.

Thanks, Heath, and good morning, everyone. I'll begin with a discussion of our quarterly financial performance around the segments that comprise our core focus areas. Starting with the Utica Shale. The SMU system averaged 410 million cubic feet a day in the first quarter and segment adjusted EBITDA totaled $7.7 million, which was down $1 million relative to the fourth quarter of 2020. A 7.4% quarter-over-quarter volume decrease was primarily driven by natural production declines, partially offset by volumes from a new 4 well pad that came online ahead of schedule in early March. This 4 well pad has averaged 180 million cubic feet a day since inception and these are the largest volumes per well we've ever seen in the Utica. Each of the wells in this pad were drilled using 3 mile laterals and production per lateral foot is in line with the 2.5 mile lateral wells on a nearby pad that drove strong segment results for us last year.

If these new wells continue to produce at their current daily rate, we should see a material throughput and EBITDA increase in the Utica for the second quarter relative to the first quarter of 2021. In addition, due to these encouraging results, we're currently in discussions with our customer to accelerate the connection of a nearby pad and could see those wells turned in line during the fourth quarter of this year instead of our prior expectations for the first quarter of next year.

At the end of the first quarter 2021, there were 6 DUCs behind our TPL-7 interconnect, which have now all been turned in line and should add incremental volumes to our second quarter results. For our Ohio Gathering segment, adjusted EBITDA totaled $6.9 million for the first quarter, a $1.6 million decrease from the fourth quarter of 2020, largely driven by a 10.2% decrease in volume and higher spend on repairs and maintenance. 4 new wells were connected to OGC during the quarter and there were 5 DUCs in inventory as of March 31.

In April, 3 of those DUCs were turned in line and based on the latest customer forecast, we expect the other 2 DUCs to come online in the third quarter of this year. Williston segment adjusted EBITDA totaled $10.8 million in the first quarter, a 5.5% decrease from the fourth quarter of 2020, primarily due to reduced volumes and the impact of a now expired MVC contract that contributed $3.8 million in shortfall payments in 2020. These headwinds were partially offset by more than $650,000 of lower operating expenses during the quarter. No new wells were connected during the quarter resulting in decreased volumes of 2 million cubic feet a day of natural gas and 6,000 barrels per day for liquids.

We're still expecting producer activity in the area later this year and there were 8 DUCs in inventory at the end of the first quarter, including 6 wells behind our liquid systems and 2 wells behind our Bison gas system. We expect the wells in the Bison system to be online in the second quarter and for all 6 wells in our liquid system be online in the third quarter. Each of the 6 wells connected to our liquid system will be more impactful to our EBITDA, since we will generate a gathering fee on 2 commodity streams, crude oil and produced water. Additionally, another customer has indicated that they're evaluating plans to accelerate production from an incremental 7 new wells in the fourth quarter, which if this occurs, would represent a beat relative to our current expectations. DJ Basin segment adjusted EBITDA totaled $5.3 million in the first quarter, a 20.6% increase from the fourth quarter of 2020, due to positive impacts from cost reductions and the change in customer volume mix.

No new wells were connected during the quarter and volumes averaged 23 million cubic feet a day, a 2 million cubic foot a day decrease relative to the fourth quarter 2020. There are no DUCs behind the DJ system, however, in April, one of our larger customers was acquired by another in-basin producer, resulting in a pro forma counterparty with a strengthened balance sheet that is better positioned to withstand commodity price cycles and support larger scale development.

Permian segment adjusted EBITDA totaled $700,000 in the first quarter, an increase of approximately $600,000 compared to the fourth quarter of 2020, primarily due to reduced operating expenses, despite a volume decrease of approximately 12.1%. 2 new wells were turned in line during the quarter, however, the combination of natural production declines and lower volumes resulting from severe winter weather in February, caused volumes to be approximately 4 million cubic feet a day lower than the fourth quarter of 2020. No additional new wells are contemplated for -- in our full year 2021 guidance, but we believe there is upside potential for our Permian segment, if crude prices continue to hold. We're having active commercial discussions regarding additional activity beyond what we have already initially planned for.

Our legacy areas, which include the Piceance, Barnett and Marcellus segments generated $34.7 million of combined segment adjusted EBITDA in the first quarter and produced $34.4 million of free cash flow after $300,000 of aggregate capital expenditures. Although there were no new wells connected during the quarter behind our legacy areas, we expect new wells to be turned in line over the coming months, including a set of 9 Marcellus wells that started to come online in late April. There has been a steady pace of workovers and recompletions in the Barnett during the first quarter and we have line of sight on 8 new wells on our DFW system, including 7 new wells in the third quarter from our largest customer, representing the first new Barnett wells in almost 2 years.

Now turning back to the Partnership. SMLP reported first quarter net income of $9 million, adjusted EBITDA of $60.4 million and DCF of $46.2 million. Capital expenditures totaled $2.6 million for the first quarter, which was $5.2 million lower than the fourth quarter 2020 and included $900,000 of maintenance capital expenditures. The majority of our first quarter CapEx was associated with growth capital to connect the Utica pad that has the potential to commence production in the fourth quarter of this year. As Heath mentioned, one of our highlights in the quarter included closing the $175 million of non-recourse senior secured credit facilities in early March.

This financing was critical in transitioning our funding sources for Double E away from SMLP's balance sheet, so that we could continue to focus on de-levering. Summit Permian Transmission funded all of SMLP's $4.6 million first quarter investment in Double E, using these credit facilities and we expect the vast majority of additional Double E development capital net to SMLP will be funded by these credit facilities.

With respect to the balance sheet, we had $802 million outstanding under our $1.1 billion revolving credit facility as of March 31, 2021, which is down $55 million from year end 2020. As a point of reference, since the end of 2019, we've repaid total debt by $183 million or by more than 12% of what was outstanding at the end of 2019. We've done this by maximizing our free cash flow, which is a result of our efforts to control our costs, minimize capital expenditures and suspend our equity distributions. This strategy will continue for the foreseeable future and we have visibility for significantly higher levels of debt reduction through the balance of the year.

Subject to covenant limits, our available borrowing capacity at the end of the first quarter totaled $115 million and with cash-on-hand, we had approximately $131 million of total liquidity, which is sufficient, given our free cash flow profile. Total leverage at quarter end was 5.0x compared to a maximum limit of 5.75x and first-lien leverage was 3.1x compared to a maximum limit of 3.5x.

We continue to make good progress on paring down the amount of outstanding Series A preferred units on our balance sheet and in April, we exchanged $18.7 million face value of our Series A preferred units for approximately 560,000 SMLP common units. Although this transaction isn't reflected on our March 31 financial statements, through this transaction, we captured $8.8 million of value for our equity holders, including $2.5 million of accrued unpaid distributions that were eliminated. The principal balance of our Series A preferred units is currently down to $143 million, which represents a 52% reduction from the original principal amount of $300 million.

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

Great. All right. Thanks, Marc. So look, as we talked about, I think Summit is really off to a great start for 2021. We've got 1 quarter in the books that meet our internal expectations and while there's no change to our guidance, I am optimistic about the remainder of the year. I think, we can really gain some further momentum to the extent that our customers accelerate activity, that was originally planned in 2022, into the fourth quarter, so could be a nice tailwind for us second half of the year. But as Marc just shared, our expense control has really started to show up in the first quarter results and we've made great progress again on completing the Double E pipeline.

From a macro perspective, things are looking more positive. Commodity prices continue to strengthen, leverage finance and bank markets are opening and economy appears to be headed in the right direction through the administration of vaccines and alike. So look, additionally, I'd say that the dialog around both corporate and asset level M&A is increasing across the midstream sector. And I think, the industry is really praying for activities as companies continue to adjust or adapt to a little more mature model going forward. And we think that the requirements to really grow and add value in the future are going to be centered around increased efficiency, skills and generating obviously greater returns.

So following our 2022 refinancing, we think M&A will take on even more significance for Summit in particular, as we keep looking for ways to enhance our scale and deliver value and credit accretive growth. So in the meantime, we're extremely focused on creating additional financial flexibility and balance sheet strength. We're going to achieve that through a comprehensive refinancing of our 2022 notes and credit facility and we will continue to work diligently on this with the goal of completing all of these efforts ahead of our next earnings call.

So with that, I want to thank you again for your time today. Super excited about Summit's results to-date, our go-forward trajectory and look forward to capitalizing on future opportunities that are ahead of us.

So with that, operator, I'd like to open the call up for questions.

(Operator Instructions) And our first question comes from Elvira Scotto from RBC Capital Markets.

I just wanted some clarification on that last comment you made with respect to M&A, so is -- where do Summit sit in terms of M&A? Are you an acquirer or a seller? Because I thought, you were looking to sell some legacy assets, but it sounds like from that last comment you made that once you sort of shore up your balance sheet with your 2022 debt maturities, that you could be looking to increase scale, so any additional comments there would be helpful.

Yes. Thanks, Elvira. This is Heath, so I would say it this way, I mean, we have for well over a year -- probably, the last couple of years, we've been more focused on divesting assets and we said we didn't have to, but we are going to be focused on opportunities to further de-lever. If we get to the right value then we would consider selling assets and so I don't think any of that necessarily changes. But what we have seen in the market is, there is really not an abundance of buyer, of quality buyers out there and so we're really thinking about pivoting here. We're not going to go out and do anything splashy necessarily. We're certainly not going to do things that we feel will put the balance at their score lever up necessarily. I think, what we're going to be looking to do is be a suite provided around our footprint. I mean, we have operations in 7 basins across the U.S., there is a lot of assets that are around our footprint that we think would be nice opportunity of tuck-in acquisitions that have some synergies associated with our footprint. And so we're definitely going to be evaluating those opportunities, particularly on the back end of this refinancing effort. But let me be clear, we're -- our focus and will continue to be our focus is to improve the balance sheet. And so any transaction that you look at, we're going to want it to -- from day one at least is the potential credit accretive. And I think, going forward, I think that is going to be important part of our strategy going forward. I mean this industry, whether you're talking public-to-public or you're talking some of the private assets that are out there needs consolidation. And I think, the operating synergies, the commercial synergies, capital synergies are going to be hugely important going forward.

That's super helpful. And then, my other question is just around your cost reduction efforts. Looks like, you've done a great job on reducing OpEx, how do we think about that kind of going forward? I mean, is 1Q a good run rate to use or do you think you could drive additional efficiencies and what specifically have you done or are you doing that driving these cost reductions?

Yes. So look, since I joined back in September of 2019, we immediately just prioritized looking at the organization, finding ways to streamline it. We've had 2 major initiatives and I would point to one that they frankly, we implemented early in the first quarter of 2020. Then of course, the pandemic hit and quickly, we kind of stalled the second wave of our planned cost reductions, just didn't feel right about cutting jobs in to the pandemic. As we kind of got through the year and towards the end of the year, we implemented phase 2 of that initiative and the combination of the 2, we've used our controllable OpEx and G&A by about $20 million a year, the aggregate.

Now, most of our -- that has come through headcount reductions, streamlining the organization, but a lot of it has come in the people just being more focused around operating efficiency and reducing cost, that can come through procurement, that can come through batching overhauls and other work that we do that in the past has been a little bit more (inaudible), if you will, as opposed to looked at as a broader company. We've also consolidated our offices. I think, one point, we had 4 different corporate offices and throughout the country and frankly, for a company our size that's just too much. So the guidance that we gave you, I definitely feel like that $20 million per year is very sustainable. I do think that we will continue to find ways, reduce cost as we go forward. I don't think that, you're going to see that magnitude available.

I think, we've gotten a lot of, what I would call the low-hanging fruit captured, but particularly, in our legacy areas, where you see declining -- PDP type decline, that's where we're really going to be focused going forward to make sure that we're optimizing both the hydraulics, how we run crushing, how we manage staff to try to head off, if you will, EBITDA declines that the volumes are going to decline, but hopefully, we can improve margins or at least kind of have a disproportionate decrease in our operating expenses as some of those systems decline. So I think, that's where you're going to see more. I don't anticipate there being much more on the headcount front. So I think, really everything else is going to have to come through continued operating efficiencies and gains that we can have in our maintenance capital and operating expense programs.

(Operator Instructions) We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.