DT Midstream, Inc. (NYSE:DTM) Q2 2023 Earnings Call Transcript

DT Midstream, Inc. (NYSE:DTM) Q2 2023 Earnings Call Transcript August 1, 2023

DT Midstream, Inc. misses on earnings expectations. Reported EPS is $0.8 EPS, expectations were $0.88.

Operator: Welcome to the DT Midstream Second Quarter 2023 Earnings Call. I will now turn it over to our speaker today, Todd Lohrmann, Director of Investor Relations. Please go ahead.

Todd Lohrmann: Good morning, and welcome, everyone. Before we get started, I would like to remind you to read the safe harbor on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP containing these. Joining me this morning are David Slater, President and CEO, and Jeff Jewell, Executive Vice President and CFO. I’ll now turn it over to David to start the call.

David Slater: Thanks, Todd, and good morning, everyone, and thank you for joining. During today’s call, I’ll touch on our financial results and provide an update on our growth projects, including our CCS project in Louisiana. I’ll then close on some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance. So with that, we had another strong quarter and the business continues to perform in line with our full year plan, giving us confidence in our full year adjusted EBITDA for 2023 and early outlook for 2024. As a reminder, we expect growth to be weighted towards the second half of the year as we bring new projects online. I am very excited to announce that we made a final investment decision on a new greenfield gathering opportunity, in the Ohio, Utica.

This opportunity originated from an acreage dedication we held with a small private producer. That acreage has since been acquired by a large cap investment grade producer, who is committed to move it to developing this area. This opportunity has always been in our plan for 2024. And now with the development schedule finalized and a restructured commercial agreement in place, we are shifting approximately $100 million of committed capital forward a few months from early 2024 into the second half of 2023. The initial backbone build-out of this natural gas gathering system will provide over 200 million cubic feet a day of capacity and go into service in the first half of 2024. The gathering system will transport associated gas from new wells being drilled in the rich window of the Utica.

These wells are highly economic under current market prices, and our investment is underpinned by a long-term contract with minimum volume commitments that fully protect project returns. As is typical with any new resource development, there will be a production ramp-up expected to occur over an 18- to 24-month time period as the acreage is delineated. As such, we don’t expect a meaningful EBITDA contribution until 2025. Longer term, we expect a larger scale build-out across a customer’s sizable acreage position ratio with the downstream assets, such as NEXUS. So in summary, this opportunity checks all the boxes for DTM, accretive organic growth, highly economic resource, long-term contract with MVC’s strong producer that diversifies our customer mix, and significant follow-on opportunities for our existing assets.

In our emerging energy transition platform, we continue to progress our CCS opportunity in Louisiana. Our initial 3D seismic survey data indicates the geology we are targeting is favorable for permanent CO2 sequestration. During the quarter, we filed our Class V characterization well permit application, which we expect to drill in the fourth quarter of this year. We plan to spend approximately $15 million this year for these activities. Assuming the characterization well results are favorable, we would then plan to FID the project in the first half of 2024. Overall, we continue to make great progress advancing organic opportunities across our portfolio in both our conventional business lines and our emerging energy transition business platform.

Turning now to our projects currently under construction, I am happy to report that all projects remain on budget and on schedule. We have made excellent progress on our LEAP Phase 1 expansion, and I’d like to acknowledge and thank our dedicated team in Louisiana for doing exceptional work on this project. Pipeline expansion is currently running ahead of schedule, and we expect an early Q4 2023 in-service date with the potential to pull that forward into late Q3 if we maintain our current pace. Finally, I want to take a moment to address the natural gas market fundamentals and producer activity across our assets. We are observing moderating production levels and some short-term deferral of activity in both basins, as producers continue to operate in a disciplined manner given the near-term weak prices.

This is all fully reflected in our guidance. On a positive note, over the past few weeks, we have seen rig reductions stabilize. With extreme hot weather occurring across large portions of the country, this is driving strong power demand for natural gas. LNG feed gas deliveries have returned to high levels following summer maintenance. And all of this is beginning to reduce the current storage surplus that has created the near-term price weakness, resulting in some price improvements. For gas prices look favorable in 2024 and 2025 and in the $3.50 to $4 range as the market anticipates the next wave of LNG demand. Our assets are well positioned to participate in this growth. I’ll now pass it over to Jeff to walk you through our quarterly financials and outlook.

Jeff Jewell: Thanks, David, and good morning, everyone. In the second quarter, we delivered overall adjusted EBITDA of $224 million, which is in line with our full year plan. Our Pipeline segment results were $2 million below the first quarter, reflecting the impact of lower winter-related revenues from our pipeline joint ventures. Gathering segment results were in line with the first quarter and consistent with our plan for the year. Operationally, total gathering volumes across both the Haynesville and Northeast, averaged approximately 2.9 billion cubic feet a day in the second quarter. In the Northeast, second quarter volumes were up compared to the first quarter due to higher volumes on Appalachia gathering. In the Haynesville, second quarter volumes were down compared to the first quarter due to a planned treating outage in April and a weather-related outage in May.

Haynesville’s volumes have normalized subsequent to these outages with July volumes averaging approximately 1.6 Bcf per day. As David previously mentioned, we are accelerating a portion of our 2024 committed capital into 2023 for our new Ohio Utica opportunity and initial investment in our CCS project. As a result, we are increasing our 2023 growth CapEx guidance to $700 million to $750 million, and lowering our 2024 committed growth CapEx by $100 million. Our committed capital over 2023, 2024 of approximately $800 million remains unchanged. We as the increased 2023 growth CapEx guidance solely reflects an acceleration of timing driven by our customers’ development plan. This accelerated CapEx timing fits within our longer-term investment plan, and we are maintaining our five-year $1.7 billion to $2.2 billion growth CapEx range.

Following the completion of the heavier CapEx spend in 2023, we expect to fund our growth investments within cash flow after dividends. The strength of our balance sheet and our policy of a 4x long-term leverage ratio ceiling is a continual focus for us. Our leverage ratio ceiling now includes our proportionate share of debt at our equity method investees. We expect to end 2023 at approximately 4.2x, temporarily exceeding our long-term ceiling. As we complete our heavier organic capital investment program this year, our on balance sheet leverage is expected to end the year around 3.8x. Also in the quarter, funds from the NEXUS financing were distributed and received and were used to pay down our revolving credit facility. Further bolstering our liquidity, which remains very strong at approximately $900 million.

Today, we also announced the declaration of our dividend, which is unchanged at $0.69 per share and we remain committed to growing the dividend in line with cash flows. I’ll now pass it back over to David for closing remarks.

David Slater: Thanks, Jeff. So in summary, we are feeling good about our full year guidance for 2023 and early outlook range for 2024. Our key growth investments are on track, and we continue to advance new organic opportunities. We are excited about our new growth platform in the Utica as it further diversifies our customer base and integrates into our regional assets. Our energy transition platform is also nicely developing, anchored by our CCS project in Louisiana and our hydrogen development partnership with Mitsubishi. We will grow this business in a disciplined and thoughtful manner, leveraging our core competencies and existing business platforms. We can now open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Jeremy Tonet at JPMorgan.

Ratan Reddy: This is Ratan Reddy on for Jeremy. For my first one, I just wanted to talk on the CCS project. Wondering, if you could walk us through economics there as well as any details around capital cost to develop the system?

David Slater: Sure. This is David. We laid out a development schedule on our CCS project in our deck. So, I’d maybe point you there. As we’ve said, I think, historically, on this project, this project has two strategic drivers for us. One, it significantly reduces our direct CO2 emissions for the Company. So, it’s a significant contributor to our march towards Net Zero. However, with the existing tax credits, it’s also a very economic project for investors. In terms of providing more detailed disclosures around the capital, we plan to do that when we FID the project, and we’ll provide more refinement on schedule and more refinement on capital. But based on where we’re at in the development cycle, I think the disclosures that we’ve laid out in the deck is at the current disclosures we’re providing, so.

Ratan Reddy: Okay. Great. And then for my second one, I wanted to hit on leverage, which you guys talked a bit about 2023 earlier in the call. Could you walk us through, I guess, thoughts on staying at or below the 4x leverage with CCS or — and/or any LEAP expansion CapEx in 2024?

Jeff Jewell: Yes. Yes, this is Jeff, Joel. Yes, that’s what our plan is. Again, we’ve been pretty clear. Our ceiling is at 4x long term as a part of the play. And as we get into 2024, what we’re seeing currently in our committed capital and other items that will be inside of our cash flow for 2020 for 2024. So again, we feel good that we’ll be at or below the 4x in 2024. And then remember, that’s at the proportional level is where we are. And at an on balance sheet, like for this year, we’ll be at like 3.8x at the end of this year. So again, we’re very comfortable where we are from a leverage standpoint.

Operator: We’ll move next to Michael Blum at Wells Fargo.

Michael Blum: Just wanted to ask about the Ohio Utica investment just to confirm that the MVCs that you’ll be receiving that will not cover you to get to the 5x investment multiple you cited. I’m assuming you’re going to need a certain amount of volume to get to that and when do you think you hit that?

David Slater: Actually, Michael, that MVC will protect our threshold returns for the segment that will deliver that 5x EBITDA multiple. So, it’s a very — and it’s a protected investment in this market environment.

Michael Blum: Got it. But just to clarify, you’re saying that the impact to cash flows will really show up in 2025 and not really in 2024.

David Slater: That’s correct. We’ll construct here late in ’23 and then their development, the producers’ development schedule start bringing volumes on at ’24. And then, they’ve got an 18- to 24-month ramp period as they start to develop the resource and will ramp in volume. But there’s MVCs that ramp along with the producer activity that get us to that higher run rate. And yes, 2025 is when you should see kind of a full year higher level run rate impact on our EBITDA.

Michael Blum: Okay. Perfect. And then just wanted to ask about the CCS project. The $800 million of CapEx committed for ’24 and — ’23 and ’24, does that include — is that inclusive of the CCS project or if you FID the project in early ’24, that would be additive?