Summit Midstream Partners, LP (NYSE:SMLP) Q4 2022 Earnings Call Transcript

Summit Midstream Partners, LP (NYSE:SMLP) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good morning, and thank you for standing by. Welcome to the Summit Midstream Partners Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Randall Burton. Please go ahead.

Randall Burton: Thanks, operator, and good morning, everyone. 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, Events and Presentations section or Quarterly Results section. With me today to discuss our fourth quarter of 2022 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Bill Mault, 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 2021 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2022, our 2022 Annual Report on Form 10-K, which will be filed soon, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA, distributable cash flow and free 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.

Heath Deneke: Great. All right. Thank you, Randall, and good morning, everyone. I’m going to start the call with a recap of key highlights on Summit’s performance and major accomplishments during 2022 and then set the stage for what we think is a very exciting outlook for 2023, which is expected to generate 40% or more year-over-year adjusted EBITDA growth. Then I’ll hand the call over to Bill to provide more details on our fourth quarter segment results as well as additional details on our 2023 financial guidance. Starting with our 2022 financial results. We generated $212.3 million of adjusted EBITDA for the year, which exceeded the mid-point of our original guidance range. As Bill will elaborate further on in the call, our fourth quarter results were negatively impacted by approximately $4 million of one-time adjustments for compensated €“ compensation-related expenses and some production shut-ins that were caused by extreme weather along the front range in December.

Otherwise, we should have come in closer to the top end of our guidance range. On the strategic front, Summit made a tremendous amount of progress executing on our plans to high-grade our portfolio of assets and generate scale in a balance sheet enhancing manner. During the year, we sold our underperforming Lane G&P system and Bison Gas System for approximately 15 times LTM EBITDA multiple, which generated about $115 million of cash proceeds. We then utilized those proceeds along with a well executed $85 million second lien tack-on financing, which by the way was executed in a very challenging high yield market, and we used those proceeds to help fund two synergistic and value accretive bolt-on acquisitions around our Hereford, DJ System. Closing four separate A&D transactions over roughly a six-month period is no small task, and I wanted to recognize and thank all of the Summit employees for their extraordinary efforts and accomplishments to not only close the deals, but also superbly manage a safe, smooth transition and integration of the assets, employees into our operations.

I’m pleased to report that within two months from closing the DJ transactions, we’re now fully €“ now running a fully integrated super system in the DJ Basin, which is driving a lot of growth in our 2023 outlook. We also launched our first fulsome ESG Annual Report in the second quarter, which has been very well received by our employees and stakeholders. And we also set up a new group that we refer to internally as Summit Climate Solutions, which is focused on energy transition and emission reduction opportunities in the U.S. Our BD and commercial team originated several new commercial opportunities and contracts around our existing footprint, to really help expand our dedicated inventory and acreage around our footprint. And also, our EC&O team has stepped up in a big way to really help plan for a busy year with more than 300 new wells that are slated to come online during 2023 and roughly about two-thirds of which are actually scheduled to come online during the first half of the year.

And that’s on top of connecting roughly 50 new wells during the fourth quarter 2022. So look, it’s been a very busy year, a very productive year for Summit and our employees for sure. So let’s shift gears now to our 2023 outlook. Earlier this morning, we announced full year 2023 adjusted EBITDA guidance of $290 million to $320 million, which at the mid-point represents again over 40% year-over-year growth on an absolute basis and approximately 15% growth after you normalize for the 2022 acquisitions and divestitures. With more than 350 new well connects on our producer schedule this year, 2023 is shaping up to be a year that is much more in line with our historical levels of activities on our systems versus what we have experienced and frankly, endured over the past couple of years during the pandemic.

There are currently 12 active rigs running on our system as we speak. And we already have roughly 235 DUCs drilled, but uncomplete wells in our inventory across our footprint. While crude prices have held out relatively well in the upper 70-plus levels, we’re very mindful that gas prices have declined by more than 45% since October. And therefore, we have really intensified our efforts to update and reconfirm all of our producer plans, particularly those in our gas-weighted basins. As always, our producer plans can and do change at times throughout the year. But our well count and the turn-in line dates schedules reflect real-time feedback from each of our producers, and we have taken steps to further risk those plans in the 2023 guidance range that we have provided.

If our producers hit their current turn-in-line dates and production targets, we expect to be at the high end of our adjusted EBITDA guidance range. The low end of our range reflects roughly a 20% reduction in planned well connects, and we have further risked the timing of wells that are slated to come online in the second quarter and beyond. As always, we’ll continue to monitor customer activity and we’ll provide updates as we progress throughout the year. While we’re certainly seeing the ramp-up in activity levels and volumes, we continue to benefit from the fact that our systems are largely built out and have plenty of available capacity to handle the anticipated volume growth. For our 2023 capital guidance ranges from $45 million to $65 million this year, including maintenance and that also reflects $10 million to $15 million of onetime expenditures to kind of fully integrate and optimize the Hereford, Outrigger and Sterling systems in the DJ.

Moving to the balance sheet, which remains at the top of our priority list, we expect to generate between $100 million to $130 million of free cash flow that’s available for debt pay down within a range. At the midpoint of the range, we expect total leverage at year-end to be around 4.35 times, which keeps us on track to achieve our long-term target leverage ratio of 3.5 times or less by the year-end of 2024. So before I turn over the call to Bill, I wanted to spend a minute on Double E and other strategic objectives for Summit in 2023. As we’ve been discussing, fundamentals in New Mexico continue to support further commercialization of our Double E pipeline system. As you all know, New Mexico has been extremely active with over 100 rigs running for several quarters now, which we continue to believe will lead to residue gas pipeline constraints as early as late 2023, early 2024.

Summit continues to progress and gain traction on commercial discussions with various customers along the pipeline system. And we remain optimistic that we’ll be successful in securing new FT commitments to fill up our existing capacity, which would have a very meaningful impact starting in 2024 and beyond. On the M&A front, while we will continue to opportunistically evaluate both value and credit accretive bolt-ons as well as non-core divestitures that could further accelerate delevering and improve our credit metrics, our focus is on executing and optimizing our existing business and the footprint that we have, fully capturing the synergies and the opportunity set around our newly acquired DJ assets and building liquidity while we maximize debt pay down throughout the year.

So with that, I’ll hand it over to Bill and to provide additional details on our financial results and 2023 guidance. Bill?

Bill Mault: Thanks, Heath, and good morning, everyone. As Heath mentioned, we had a great year and are extremely excited about how 2023 is shaping up. I’ll start by discussing our financial performance, followed by providing a bit more color on our 2023 guidance. Summit reported a fourth quarter net loss of $23.9 million, adjusted EBITDA of $50.3 million, resulting in full year 2022 adjusted EBITDA of $212.3 million above the midpoint of our original guidance range and free cash flow of over $70 million for the year. There were approximately $4 million of weather and unusual compensation-related expenses incurred during the quarter. And obviously, there is a bit of noise going on in the fourth quarter, given we sold Bison in September of 2022 and closed on the DJ acquisitions on December 1.

If we’d own the DJ businesses for the full fourth quarter, we estimate we would have generated an additional $8 million of adjusted EBITDA. We want to provide some clarity, as we know a lot of our investors look at run rate EBITDA, so at $50 million of as reported, plus $4 million of weather and unusual expenses, plus another $8 million for a full quarter’s contribution of DJ Acquisitions that would suggest a run rate EBITDA closer to $62 million for the fourth quarter, providing a little bit more context for everyone as we look forward into 2023. Capital expenditures totaled $10.6 million for the quarter and $31.5 million for the full year 2022. And with respect to SMLP’s balance sheet, we had approximately $330 million outstanding under our $400 million ABL credit facility and just over $11 million of unrestricted cash on hand.

Our available borrowing capacity at the end of the fourth quarter totaled approximately $64.1 million, which included $5.9 million of LCs. Given the DJ Basin acquisitions in the fourth quarter, we should see that ABL balance continue to reduce throughout the course of the year. Now turning to the segments. In the Northeast, which is inclusive of our SMU system, our proportionate share of Ohio Gathering joint venture and our Marcellus system, the segment averaged 1.35 Bcf per day during the quarter, which is inclusive of 754 million a day of 8/8ths OGC volumes, and segment adjusted EBITDA totaled $19.1 million, a slight decrease of $0.3 million from the third quarter of 2022. The variance was largely due to natural declines on wells on the system partially offset by higher margin mix behind our OGC joint venture and 14 new wells brought online during the quarter, of which six were connected behind our wholly owned Utica system and the remainder behind OGC.

There are currently four rigs running behind our system, two behind our wholly-owned SMU system and more than 40 DUCs behind the OGC and SMU and Mountaineer systems. The Rockies segment, which is inclusive of our DJ and Williston Basin systems generated adjusted EBITDA of $13.8 million, which was down by $0.4 million relative to the third quarter largely due to a winter storm in December that caused several days of outages and interruptions in North Dakota and Colorado. We estimate the winter storm negatively impacted gross margin by approximately $1 million during the quarter. Liquids volumes averaged 64,000 barrels a day, a decrease of 2,000 barrels a day and natural gas volumes averaged 42 million a day, an increase of 24 million cubic feet per day relative to the third quarter.

This was primarily due to the addition of the Outrigger and Sterling assets that closed in December 2022. The Rocky segment currently has two rigs running behind the systems and more than 150 DUCs, which represents nearly every well connection we are expecting in 2023. Under the Permian Basin segment, which includes our 70% interest in the Double E Pipeline reported adjusted EBITDA of $4.2 million, was down $0.7 million relative to the third quarter, primarily due to lower volumes on Double E. We believe that the low natural gas prices in Waha were the primary driver for customers diverting some of their volumes off of a Double E to other higher priced end markets during the quarter. The Piceance segment reported adjusted EBITDA of $14.7 million, up $0.4 million relative to third quarter due primarily to lower operating expenses during the quarter, partially offset by natural production declines and no new wells connected to the system.

Volumes averaged 295 million cubic feet per day, a slight decline relative to third quarter. There’s one rig running behind the system today and 17 wells have started coming online here in late February 2023. The Barnett segment reported adjusted EBITDA of $7.2 million, a decrease of $0.6 million relative to third quarter, primarily due to lower natural gas sales and an increase in direct operating expenses. Volumes were up 8 million cubic feet per day quarter-over-quarter, did eight new wells connected to the system during the second half of 2022. There are currently three rigs running and 13 DUCs behind the system today. And with that, I’d like to focus now on our 2023 guidance. And to reiterate a few of Heath’s comments, the midpoint of our guidance range risks the timing and well connections relative to what customers provided.

The low end risks, all of that even further, and the high end assumes customers hit their timing targets. We have 12 rigs behind the system and 235 DUCs, which represents just over 70% of the expected well connections at the midpoint of the range. In addition, nearly 65% of those well connections are expected in the first half of 2023, which provides great visibility into the level of activity we are expecting. Breaking the activity down even further, 50% is in crude oriented areas, 35% is in liquids rich gas areas, and only 15% is in dry gas areas. We also spent a significant amount of time reviewing customer hedge portfolios and believe a significant portion of 2023 volumes in the Northeast are fairly well hedged. The breadth and depth €“ the breadth and diversity of the increase in activity is driving volume and EBITDA in every region behind Summit systems.

In the Northeast, we are currently expecting 75 well connects to 85 well connects in 2023, which is nearly double the 41 well connects in 2022. With that level of activity, along with the significant volume growth we’ve experienced behind OGC in the third and fourth quarter of 2022, we are expecting more than a 10% increase in volume throughput year-over-year. As we’ve mentioned on prior calls, the anchor customer behind our SMU system recently acquired 27,000 net acres in the Utica and is beginning development on that acreage with two rigs running currently. In the Rockies, which compared to last year, the region has seen quite a transformation. And just as a reminder that segment includes our Williston oil and produced water gathering businesses, the Hereford gathering and processing system, and now the recently acquired DJ Basin gathering and processing systems.

2022 included nine months worth of Bison Midstream assets, which we sold in September and only one month of the DJ acquisitions. We are currently expecting 140 well connects to 180 well connects in 2023 with 70 to 80 coming from the Williston, all of which our DUCs are currently being drilled and the remainder in the DJ. This level of activity will drive significant volume growth in both liquids and gas volumes in 2023. I’d like to add that we’ve been extremely encouraged by the commercial discussions we’ve had in the DJ Basin in the last couple months. And while we haven’t included any upside in our guidance range, we do believe there are some near-term opportunities that could provide significant long-term value to our stakeholders. Over the Piceance, we are expecting 55 well connects to 70 well connects in 2023, 17 of which have started coming online in February 2023, compared to zero in 2022.

We expect this level of activity will result in flat to modest volume growth and approximately 4% EBITDA growth. Now in the Barnett, we’re expecting 25 wells to 30 wells in 2023, which we expect will result in about 15% volume throughput growth from the prior year. There are currently three rigs running and 13 DUCs behind the system, and several of these wells are slated to come online in the next few months with the remainder expected in the second half of the year. While we have seen a sizeable decline in expected 2023 natural gas prices over the last couple of months, the level of activity and recent customer conversations continue to suggest that all these wells will turn in line here in 2023. Shifting to the Permian, as Heath mentioned, we remain very optimistic with the long-term outlook for Double E and the commercialization efforts ongoing, and we expect to have some material updates for you all throughout the course of the year.

Finally, I’ll spend some time discussing CapEx for the year. We’re expecting $35 million to $50 million in growth CapEx for 2023 and $10 million to $15 million in maintenance CapEx. The majority of the growth CapEx for 2023 will be spent in the Rockies segment. In the Williston and DJ, we have a number of pad connections given the increase in well connections expected for the year. Additionally in the DJ Basin, we have some additional integration work that we will continue to optimize those systems beyond what’s already operational today. This represents approximately $10 million to $15 million of our 2023 capital plan. With $290 million to $320 million of expected adjusted EBITDA and $45 million to $65 million of capital expenditures, we expect significant debt paydown throughout the course of the year.

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

Heath Deneke: Great. All right. Thanks, Bill. So, as we discussed on the call today, we’re obviously very pleased with the progress that we made in 2022. And we’re really excited about the outlook and opportunity set for Summit in 2023 and beyond. We’re laser focused on maximizing free cash flow in the business, fully commercializing our recently acquired DJ Basin businesses, as well as our Double E systems. And we’re also focused on paying down debt and driving leverage to below 4.5x by year end. We thank you for your time and continued support. And with that operator, I’d like to open the call up for questions.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Gregg Brody with Bank of America. Your line is open. Please go ahead.

Gregg Brody: Good morning guys, and appreciate all the very thoughtful throughput on well count forecasting that to help us think through what’s happening. Maybe just to start on the Permian, you said you’re thinking about we should expect to hear some announcements this year. How do you see the pipe filling up in your view? Is it €“ could we see some additional volumes this year? And you’re just €“ is this not in the guidance or is that likely a 2024 event?

Heath Deneke: Yes, I mean, I think we €“ hi, Gregg, it’s Heath. I think we’ll see some volume growth throughout the year on Double E. I think what we’re stating is that a lot of the conversations we’re having about starting up new contracts, it’s probably going to be more impactful in a 2024, 2025 time period than in 2023.

Gregg Brody: Yes. That’s what I heard. So that’s helpful. And just turning to the balance sheet. I know you’re planning on paying down debt. I know there’s a special provision that you have to make an offer to the second Lane there. I believe by in April, could you just remind us how that works and then what you’ll do with that cash if the bonds €“ if it’s not accepted €“ if the offer is not accepted?

Heath Deneke: Yes, Bill do you want to take that one?

Bill Mault: Yes, Gregg. Good morning and thanks for joining in. So Gregg, given the DJ Basin acquisitions, we actually utilized all our free cash flow in 2022. So you all should expect a 50 basis points step up here in April. As we look at 2023 and the cash flow profile for the year as a reminder, if we get to then a 100 million of cumulative offers by the end of 2023, that interest rate will step back down to the 8.5%. This was a fairly conscious decision, obviously when we made the decision to acquire the DJ Basin assets and it’s a €“ call it another $3.5 million, $4 million of incremental interest expense for 2023.

Gregg Brody: Am I correct that your €“ the 2023 offers wouldn’t be made until 2024 though? Or is there…

Bill Mault: Yes, that’s correct. Yes, yes. So basically, after we file our 10-K, we’ve got a handful of days to make notification to the extent there’s cash flow available for sweep. And then I think the actual process of making those offers probably takes up to 30 days. So you’re looking sometime in kind of March, April time frame.

Gregg Brody: Got it. So for now, the assumption is a 50 basis point step-up for a year in next year assuming

Bill Mault: You got it.

Gregg Brody: Got it. And just a last one, coming back to volumes. I appreciate in the Northeast, the hedging profiles of your customers. How do you think about 2024? I know it’s a little early to do that, but maybe you can create a frame €“ to sort of frame that in terms of risk to volumes.

Heath Deneke: Yes. I think for 2024, look, I mean we’re certainly seeing the impact on the gas strip here. Quite a lot of it is due to just abnormally warm weather, certainly in the Northeast and most of the U.S. So I actually feel like if we continue to see the sustained low gas prices, I think that could probably start adversely impacting 2024, but I feel like that we’re going to see some normalization and hopefully, some more normal like weather this upcoming winter that kind of continues to support the trajectory that we’re on.