Q1 2024 Summit Midstream Partners LP Earnings Call

Participants

Randall Burton; IR; Summit Midstream Partners, LP

Heath Deneke; President, CEO, Chairman; Summit Midstream Partners, LP

Bill Mault; EVP, CFO; Summit Midstream Partners, LP

Gregg Brody

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Q1 Summit Midstream Partners LP earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Randall Burton, Director of Investor Relations. 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 (technical difficulty) discuss our first quarter 2024 financial and operating results as 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. That 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 2023 Annual Report on Form 10-K, which was filed with the SEC on March 15, 2024, 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

Thanks, Randall, and good morning, everyone, and thank you for joining us today to discuss our first quarter 2024 results. We had a very busy first quarter, really on really on all fronts. Starting on the strategic perspective, we successfully wrapped up our strategic alternatives review announced the divesture of our Utica position. And as we announced this morning, we've also closed on the sale of our Mountaineer gathering system in West Virginia.
In the aggregate, we sold our Northeast segment for approximately $700 million, and we're now shifting our focus on several organic and bolt-on acquisition opportunities in and around our Rockies and Permian segments, with our pro forma leverage of around 3.9 times, a completely undrawn $400 million revolver and a little over $350 million of pro forma unrestricted cash.
We are very well positioned to pursue those opportunities while we further de-lever the balance sheet and continue to progress our entire to make progress towards achieving our long-term leverage target of sub 3.5 times commercial discussions on W. continue to remain extremely productive. And earlier this week, we concluded a successful open season that resulted in the award of $75 million a day of incremental 10-year take-or-pay commitments with a subsidiary of Matador Resources.
This commitment was really there to support their $200 million a day expansion of the Marlin processing plant in New Mexico at the Marlin plant complex is already connected to the W. pipeline and their plant expansion is scheduled to come online in the first half of 2025. In addition to the new volume commitment, the amended and restated Matador firm service agreement provided for an approximate 2.5 year extension of their existing agreements and now are extended to a 10-year term effective May 1 of 2024.
Additionally, as part of the open season, we received $150 million a day of non-binding 10-year take-or-pay bids from other third parties that are looking for new plant connections in 2025. We've also had a dialogue with multiple parties that have recently announced plant expansions in along the W. Corridor. And furthermore, we are finding a new max rate interruptible agreement in Mexico for up to $150 million a day of incremental volumes.
So look, both of these contracts for Matador contract and this IP contract for processing plants are already connected to our system. So therefore, it really truly value accretive to definitely if there's really not much or any capital associated with these connections, we're very excited to see the increasing level of demand for residue gas takeaway capacity out of the Delaware Basin materialize, and we continue to believe that WD is uniquely positioned to meet both the near term and long term needs of market.
Operationally, we had a great start to the year despite some severe weather primarily in the DJ Basin. We turned-in-line 71 wells during the first quarter, which pro forma for the Utica Marcellus transaction represents nearly half of the wells that were expected to be turned on turned in line for the full year 2024. This level of activity exceeded our expectations for the quarter and should put us in a good position to continue to execute operationally and achieve our revised pro forma adjusted EBITDA guidance range of $170 million to $200 million.
So in summary, we're off to a great start for the year about strategically operationally and financially, and we look forward to maintaining that momentum through the rest of the year. So that I'll hand the call over to Bill to provide some additional details on our financial results.

Bill Mault

Thanks, Heath, and good morning, everyone. Site reported first quarter net income of $132.9 million, adjusted EBITDA of $70.1 million and capital expenditures of $16.4 million, with the majority of the CapEx spent in the Rockies associated with pad connections.
With respect to SMLP's balance sheet, we had net debt of approximately $700 million with an undrawn $400 million ABL credit facility. Our available borrowing capacity at the end of the first quarter totaled $384 million, which includes $4.3 million of letters of credit and $12 million of commitment reserve for the upcoming 2025 unsecured notes maturity.
Now turning to the segments in the Rocky segment, which is inclusive of our DJ and Williston Basin systems, we generated adjusted EBITDA of $22.9 million, an increase of $0.5 million from the fourth quarter, largely due to increased project margin from our percentage of proceeds contracts from higher commodity prices, which was partially offset by lower liquids and natural gas volumes.
Liquid volumes averaged 74,000 barrels a day, a decrease of 7,000 barrels a day relative to the fourth quarter due primarily to natural production declines. Natural gas volumes averaged 124 million a day, a decrease of 2 million a day relative to the fourth quarter, primarily due to extreme weather and operational downtime we experienced in the DJ Basin that negatively impacted volumes by approximately nearly 9 million cubic feet per day during the quarter.
We connected 39 wells in the DJ and 18 wells in the Williston during the quarter, which we expect will drive liquids and natural gas volume growth in the second quarter. The Rockies segment currently has two rigs running on the systems and more than 50 dots. Permian Basin segment, which includes our 70% interest in the Dubberly pipeline, reported adjusted EBITDA of $7.3 million, a decrease of $0.7 million relative to the fourth quarter, due primarily to $1 million of other revenue recognized in the fourth quarter.
Volume throughput on double the average 467 million cubic feet per day, representing an increase of 21% relative to the fourth quarter. As Heath already mentioned, with the significant momentum in contracting the remaining capacity, we remain extremely excited about the long-term prospects for WD piano segment reported adjusted EBITDA of $15.2 million down $0.9 million relative to Q4, due primarily to natural production declines and no new well connections to the system.
During the quarter, volume throughput averaged 312 million cubic feet a day during the quarter, a 5 million cubic feet a day decline. Relative to the fourth quarter, Barnett segment reported adjusted EBITDA of $5.9 million a decrease of 0.7 million relative to fourth quarter, primarily due to lower volume throughput, partially offset by four new wells connected to the system.
There is currently one rig running and 24 docks behind the system and a customer continues to keep approximately $30 million a day of production shut-in due to low natural gas prices. We estimate that the 30 million cubic feet a day of shut-ins negatively impacted adjusted EBITDA by $2 million during the quarter.
Briefly on the Northeast, the segment average 1.56 bcf per day during the quarter, inclusive of a 149 million cubic feet a day of (technical difficulty) . So do you see volumes and segment adjusted EBITDA totaled $29 million an increase of $0.6 million relative to Q4. During the quarter, we connected three wells beyond the SMU system and seven wells and ODC.
And as we announced today, as of May 1, with the sale of the Mountaineer system to Antero Midstream, we have successfully exited the Northeast segment with $700 million in aggregate asset sale proceeds. And with that, I'll turn the call back over to Heath for closing remarks.

Heath Deneke

Yes, thanks, Bill. So look, as I said earlier, I'm very pleased with the first quarter performance. The activity levels on our system and certainly the progress great progress that we've made on the balance sheet. We believe we're in an opportunity-rich environment, and we look forward to continue to build on our progress and momentum throughout the year.
Before opening up the call for questions, I wanted to remind everyone of the upcoming annual meeting of limited partners, which will be held virtually on May 9, 2024 at 2 PM. Central Time. All unitholders should have received proxy materials associated with meeting certainly are a number of important items on the agenda they're important to the partnership, and we certainly encourage everyone to vote. Additionally, we are making good progress in preparing for the previously announced C-Corp conversion by including a subsequent proxy and special meeting where we will intend to seek approval from Summit's unit holders to convert the partnership to a C-Corp.
While the exact timing is depends on a number of factors, we are on track to file the C-Corp proxy statement and provide unitholders with the additional information about the rationale and the benefits of the conversion as early as the second quarter and currently expect to hold a special meeting sometime during the third quarter of the year. We continue to strongly believe that converting to a C-Corp positioned the Company to maximize value for our unit holders and will certainly provide significant long-term tax savings for current and future shareholders going forward.
With that, I would like to thank you for your time and continued support and operator, please open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Gregg Brody, Bank of America.

Gregg Brody

Good morning, guys, and congrats on all the transactions.

Heath Deneke

Thanks, Greg.

Gregg Brody

Just to just prospective strategic review. You concluded if you've sold the Northeast through your it sounds like you're focused on M&A in the Permian and in the Rockies. Could talk about what the opportunity is there and is the conclusion of the strategic review mean that the company is is done drilling assets now and it's all about adding assets? Maybe talk a little bit about that?

Heath Deneke

Yes, good questions. And yes, I think the long and short of it is we think we are kind of done in terms of pruning assets. I mean, obviously, that's at the right value, I think would continue to consider it, but that's not kind of in the base plan. It was a as you see on the balance sheet, we've got to kind of [3.9 times] levered.
Now we think we've got ample amount of liquidity with an undrawn revolver and now close to what, [350] plus of cash on the balance sheet. So that's that's more than enough liquidity to really support your M&A strategy around our Rockies and Permian segments.
Look, I think where you'll target goal number one is to kind of maintain leverage in trying to achieve our long-term target of [3.5]. And but we do see quite a bit of opportunity set in and around both the Rockies and the Permian segment to to do potentially taking advantage of what we think is a good market for buyers. Right?

Bill Mault

Yes, Greg, I'll just add to that. As you think about double the we mentioned we got the $150 million a day of kind of non-binding proposals for additional planned connections. I think there's a really good organic growth strategy out it doubly as well. I think we can finance a lot of that with asset level debt, but there may be some investment opportunities there.
And then as you think about, you know, we keep a pretty a pretty exhaustive list of kind of a high-priority targets from a bolt-on acquisition perspective. And I'd tell you they're all primarily highly synergistic to our existing footprint and we see, you know, a number of opportunities in the Williston and to a greater extent in the DJ.

Gregg Brody

Could you give us a sense of how how big that opportunity set is?

Heath Deneke

Yes, Greg, if we could get them all done, I feel like we could we could double the size of some. And obviously, that's that's a pretty ambitious half strategy, but I would think about them rate ranging from as low as $15 million of EBITDA that was higher, you know, $50 million to $60 million.

Gregg Brody

And is that there's how many type of opportunities are there out there?

Heath Deneke

I'd say there's you now call it, Ken or so that we keep a close eye on, Greg.

Gregg Brody

Got it. And then just the asset sale that the last one that you announced yesterday, I think you saw that for about 3.5 times is based on what I see and tariffs got out there? And is there some other value creation there that we're not thinking about?

Heath Deneke

Yes. So Greg, on that one, if you do the math on our revised guidance at that point you're right at [17.5] at the midpoint reduction in EBITDA. You have to remember though, Greg, there's about almost $7 million of shortfall payments that expire some, you know, in '25 and '26 bond that system. So if you think about it more as like $10 million to $11 million of EBITDA flowing EBITDA, I think that will help bridge kind of the perception on the value gap.

Gregg Brody

Got it. And then as I as I think about the use of cash, you've obviously pointed out M&A. And how do you think about refinancing the capital structure, if you remind us, are there any I'm in mandatory payments associated with the asset sales that we should be thinking about? Yes, go into bondholders.

Heath Deneke

So from the second lien, Greg does have a 365 day reinvestment period provision does have some extensions in certain circumstances. So that would kind of be your back-end, Greg on on when you would be required to make an asset sale offer. And obviously we pay down the revolver, a big chunk of the revolver, and you may have noticed in the release and some of his commentary.
As you know, we've got a tremendous amount of liquidity. I think this is a balancing act, Greg. So you know, having some additional debt paydown. I wouldn't be shocked if you saw us come out and maybe tried trying tried to do some additional debt paydown and balance kind of the liquidity profile with continued debt repayments?

Gregg Brody

And what about just how you think about potentially refinancing the capital structure?

Heath Deneke

Yes. Yes. Look, it's a great question, Tom. We've always kind of said, you know, Q1 '25 is kind of the back, Andy. Obviously, the market is seems to be very open right now, and we're seeing a lot of constructive prints. The harvest deal that got done was in interest income for us from the Greg, as you know, we need to kind of sort out an extension of our bank deal.
So I view it more along the lines of that takes a little bit more time to get everything ironed out. But it's safe to say that we're working on that real time. And when we're in a position to get that extension done, evaluate the market at the time. I think I think we're kind of in the window here between now and the end of the year of trying to get some done on the refi.

Gregg Brody

And as you think about through the revolver, essentially, are you anticipating any just obviously saying that assuming you don't find anything else, so you have a revolver stays the same size?

Heath Deneke

You know, I think we're certainly trying to upsize it a bit here, Greg, I think, and you know, I don't think you're going to see anything crazy, maybe $50 million, $100 million here or there. I do think and as we've discussed, there really is a sizable opportunity here to continue to kind of regain scale within our footprint. And it's a balancing act between pre-payable debt, no bullet bond as well as having liquidity to continue to Kona, expand the business and take advantage of this opportunities that we see in front of us.
And so those are the things we're balancing. That's what we're chatting with our banks about and potential new banks to join the bank group and will be kind of all part of the decision-making as it relates to the size of any sort of bond deal and the like as we go out to the market here later this year.

Gregg Brody

And then just just turning to operations. Obviously, you've had some contract wins in the Permian and how should we think about the incremental EBITDA associated with those?

Bill Mault

Yes, the the ones that we announced, both the interruptible agreement could start contributing this year. The the Matador contract would kind of step up next year. I think it's just call it kind of somewhere late in the second quarter, mid mid to late second quarter is when the incremental, I think the take-or-pay capacity will kind of step up.
And then again, as we kind of highlighted, we do see quite a few announced publicly announced expansions that are up and down the corridor. Many of those are kind of late '25, early 2026 and service dates. So kind of we think we'll see that sizable step-up in '25 and lots of opportunity that we think could materially drive our '26 and beyond EBITDA?

Heath Deneke

Yes, Greg, as you think about between EOG, our contract that that ramps up to $40 million a day, you got the new Matador, $75 million a day. And then if you kind of exclude all the other opportunities that we're working right now, that will be another $6 million, $7 million bucks of revenue growth once they're fully, you know, fully ramped and then I would just point you to our investor presentation, we kind of show you where we think Summit gone up EBITDA that there's some that will be, you know, if you kind of fill up the free float, actually the pipes. So that will get you somewhere in the mid-40s from EBITDA relative to $30 million today.

Gregg Brody

And then just the last one I had I know you've talked about potentially bringing in and yes, the JV component here for W. of one to leverage is sort of it's sort of it's a neutral transaction based on where things are you're out of today.

Heath Deneke

One, why do you think we can possibly see that happen yet on how we model it out? Greg, I'd tell you, it's probably [26] type timeframe, right? A lot of these contracts are ramping over the next 18 to 24 months. So it's, you know, you kind of need some of that in the rearview mirror, would we be willing to maybe see some marginal uplift in leverage if it was truly just no contractual ramp issue and you knew that LTM EBITDA was going to kind of roll in.
So I'd think about it, you know, 26-ish timeframe that may be another opportunity drag to kind of go pop off a Capital Markets deal as well. But I think that's probably about right as it relates to the contract ramp and the LTM EBITDA profile of doubly, how we see it today.

Gregg Brody

Got it. And just one clarification here. I believe your coupon and the processes that up by another 30 basis points as of April and May there were at unfortunately these asset sale proceeds care can't circumvent that, Greg.

Heath Deneke

But I mean, your second lien holders got a nice win here with the major delevering and a step-up in coupon.

Gregg Brody

And there's no way that's a permanent step up until you refinance next year.

Heath Deneke

If we catch up on ACF next year, theoretically it could go down, Greg, but as I mentioned, I would suspect that you know, we've kind of clean all this up with the refi before we get to that point anyway, thanks for the time, guys.

Gregg Brody

Appreciate. Yes.

Heath Deneke

Thanks for the questions, Greg.

Bill Mault

Thanks.

Operator

Thank you. This concludes the question and answer session. Thank you for your participation in today's conference call. Conclude the program and you may now disconnect.