Q1 2021 Summit Midstream Partners LP Earnings Call
Welcome to the first quarter 2021 Summit Midstream Partners LP Earnings Conference call. My name is Danny and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct the question and answer session. During the question and answer session. If you have the question. Please press Star then one on your.
The Touchtone phone.
Please note that this conference is being recorded I went and I'll turn the call over to Ross <unk> Senior director of corporate development and finance Mr. Wang you may begin.
Thanks, operator, and good morning, everyone if.
If you don't already have a copy of our earnings release that was issued earlier. This morning. Please visit our website at Www Dot summit midstream Dot com, where you'll find it on the homepage and that's the presentations section or quarterly result section what's the.
And today to discuss our first quarter of 2021 financial and operating results is Heath Deneke, our president and 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 volume.
Operating expenses and capital expenditures.
And they May also include the statements concerning anticipated cash flow liquidity business strategy and the other plans and objectives for future operations.
Although we believe that the expectations reflected in such forward looking statements are reasonable and we can provide no assurance that such expectations will prove to be correct.
The our 2020 annual report on form 10-K, which was filed with the SEC on March 4th of 2021 as well as our other SEC filings for a list and the 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 and our most recent earnings release and with that I'll turn the call over to Heath.
Thanks, Ralph Good morning, everyone and I. Thank you for joining us for our first quarter 2021 and earnings call.
And so this morning summit reported first quarter, 'twenty, and 'twenty, one and the financial and operating results, which exceeded our and our internal expectations, including adjusted EBITDA of the raw.
Roughly 64 million.
Our results were primarily driven by volumetric outperformance and needed the shell 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 the three.
Repayment represents nearly 40% of our full year debt reduction and guide.
Guidance target.
Although we still expect 2020, one will be of 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 on second half of 2021 than we initially planned however at this time.
And are maintaining our full year 2021, adjusted EBIT EBITDA guidance range of $210 million to $230 million and 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 and the first quarter.
And that's an example in early March and you four well the Utica pad came online ahead of schedule and has outperformed roughly of producing about 20% higher than our internal expectations and there are some of the largest wells that we've seen Bob on really anywhere in the Utica.
Although these new wells are still on the early stages. The typical production profile of these wells.
Generally hold flat roughly for about six months before declining so if our new pads all of that same profile. We do think it will contribute to volumes and EBITDA in excess of our expectations for at least the next two quarters.
And usually wells, where the first of all of us to come on line.
We're a part of our previously announced gathering agreement and that was structured to incentivize upstream activity and accelerate activity behind our SMU system.
The strong well results are demonstrating the you know the top tier quality of the rock behind our system and we're super excited about the future development and and around this.
The acreage.
On the cost front, we've continued to make really good strides and further streamlining our cost and organizational structure, while we're gaining operational efficiencies and the field.
This is pretty evident.
Look at our quarterly operating expenses of roughly $4 9 million I'm sorry, our operating expenses are lower by roughly $4 9 million this quarter relative to our quarterly average in 2020.
I do expect that will continue to realize additional cost savings benefits and the future and our operational efficiency and excellent has excellent has become more ingrained in our culture across the entire company I do want to take this opportunity to thank the the summit team for the continuous improvement mindset the crew.
<unk> and the commitment to continue to find ways to improve our overall operational efficiency and effectiveness and by the way. This is all done without compromising our commitment to safety compliance environment and providing excellent service to our customers.
We also had several notable achievements during the quarter in the Permian, we closed on the $175 million commercial bank and project financing for our double E project and we are also able to pick off the construction activities.
And the security of this bank financing for the project really and despite this challenging market and we're in and I think with the not only of great outcome for summit, but really a testament to the high quality nature of the of the double E pipeline project as well as the customer base now.
And now that the financing has closed.
Secured a clear pathway.
Summit to advance and fund the double E pipeline without for the burdening pets and Melky balance sheet.
Our wholly owned the unrestricted subsidiary summit Permian and transmission of utilized the <unk>.
And answering the phone all of them some of its investment and <unk> and the first quarter and we expect these credit facilities will be sufficient to finance nearly all of the if not all of summit remaining investment and <unk> going forward.
As a reminder, on 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% of nearly 75% of the pipelines 135 Bcf a day of capacity has been secured through long term take or pay firm transportation agreements and really with multiple customers, including Exxon as a who is the anchor shipper.
Now the construction is underway. We also have started is the a lot more comverse has had a lot more conversations kickoff with existing and prospective shippers.
Really relative to the potentially contracting for some of the incremental capacity that we and we have available.
We continue to expect that <unk> will be completed by the end of 2021 and.
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 estimates roughly 425 million roughly 35 million of the.
That is in and identified project contingency and we believe that there's a good chance that we won't have to spend all of that contingency. So the good progress just this project and when we originally it was $500 million and I think we haven't really good chance of driving the project and service.
And at the low $425 million.
On the liability management front, we completed a successful common equity for series, a preferred Luna and exchange recently.
This transaction closed on April 15th when we exchanged the $18 7 million worth of the series a preferred units and eliminated the roughly $2 5 million of accrued unpaid distributions, we exchange that four of 560000.
And they'll be common units, which represents roughly a 42% discount relative to par value.
So in total we have now reduced our debt and the fixed capital obligations by roughly $687 million and we've really cut it nearly a third since we originally began the liability management program and this past summer.
And look these managed the liability management activities really has kind of paved the way if you will for the next step and our process.
So looking forward, we've really shifted our focus towards implementing a comprehensive and holistic solution to address our 2022 debt maturities.
And certainly have more wood to chop the I will.
Say of 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.
And as I said in the earnings release of our refinancing goals are really.
And not only extend our 2022 maturities and 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 transformed the overall business.
Very excited about the progress we've made to date on these refinancing efforts and are very much looking forward to providing additional details.
And ahead of our next scheduled earnings call.
And with that I will hand, the call over to Mark 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 and the first quarter and segment adjusted EBITDA totaled $7 $7 million, which was down $1 million relative to the fourth quarter of 2020.
A seven 4% quarter over quarter volume decrease was primarily driven by natural production declines partially offset by volumes from a new four well pad that came online ahead of schedule and early March.
This four well pad has averaged 180 million cubic feet of day since inception, and these are the largest volumes per well we've ever seen in the Utica.
Each of the wells on this pad were drilled using three mile laterals and production per lateral foot is in line with the two and a half mile lateral wells on the 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 of 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 of 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 six ducks behind our TPS <unk> and interconnect, which have now all been turned in line and should add incremental volume through our second quarter results.
For our Ohio gathering segment, adjusted EBITDA totaled $6 $9 million for the for the first quarter of $1 6 million decrease from the fourth quarter of 2020.
Largely driven by of 10, 2% decrease in volume and higher spend on repairs and maintenance.
Four new wells were connected to <unk> during the quarter and there were five ducks and inventory as of March 31st and.
On April three of those Ducks were turned in line and based on the latest customer forecast, we expect the other two ducks come online and the third quarter of this year.
Williston segment, adjusted EBITDA totaled $10 $8 million and the first quarter of five 5% decrease from the fourth quarter of 2020, primarily due to reduced volumes and the impact of and now expired MVC contract that contributed $3 $8 million and shortfall payments in 2020.
These headwinds were partially offset by more than $650000 of lower operating expenses during the quarter.
No new wells were connected during the quarter, resulting in decreased volume of 2 million cubic feet, a day of natural gas and 6000 barrels per day for liquids.
We're still expecting producer activity and the area of later this year and there were eight docks and inventory at the end of the first quarter, including six wells behind our liquid systems and two wells behind our bikes and gas system.
We expect the wells and the base of system can be online and the second quarter and for all six wells on a liquid system to be online and the third quarter.
Each of the six wells connected to our liquid system will be more impactful to our EBITDA since we will generate the gathering fee on to commodity streams crude oil and produced water.
Additionally, another customer has indicated that they are evaluating plans to accelerate production from an incremental seven new wells and 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 and the first quarter of 26% increase from the fourth quarter of 2020 due to positive impacts from cost reductions and the change and customer volume mix.
No new wells were connected during the quarter and volumes averaged 23 million cubic feet. A day of 2 million cubic foot of day decrease relative to the fourth quarter of 2020.
There are no ducks behind the DJ system, However, and the April one of our larger customers was acquired by another in based on 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 $700000 and the first quarter and increase of approximately 600000 compared to the fourth quarter of 2020, primarily due to reduced operating expenses. Despite the volume decrease of approximately 12, 1%.
Two 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 of day lower than the fourth quarter of 2020.
No additional new wells are contemplated before and our full year of 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've already initially planned for.
Our legacy areas, which include the Piceance and Barnett and Marcellus segments generated $34 $7 million of combined segment adjusted EBITDA and the first quarter and produced $34 $4 million of free cash flow after $300000 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 nine Marcellus wells the starting to come online in late April.
There's been a steady pace of Workovers and re completions and the Barnett during the first quarter and we have line of sight on eight new wells on our DFW system, including seven new wells and the third quarter from our largest customer representing the first new Barnett wells and almost two years.
Now turning back to the partnership.
Ethanol P reported first quarter net income of $9 million, adjusted EBITDA of $64 million and DCF of $46 $2 million.
Capital expenditures totaled $2 $6 million from the first quarter, which was $5 $2 million lower than the fourth quarter 2020, and included $900000 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 and the fourth quarter of this year.
As Heath mentioned, one of our highlights from the quarter included closing the $175 million of nonrecourse senior secured credit facilities and early March.
This financing was critical and transitioning our funding sources for double the away from ethanol piece balance sheet. So that we could continue to focus on delevering.
Summit Permian transmission and funded all of ethanol piece $4 $6 million of first quarter investment and double H using these credit facilities and we expect the vast majority of additional double of development capital net to ethanol P 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 was down $55 million from year end 2020.
As the 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 was a result of our efforts to control our costs and minimize capital expenditures and suspend our equity distributions.
The 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 5.0 times compared to a maximum limit of five seven and five times and first lien leverage was three one times compared to a maximum limit of three five times.
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 560000 ethanol P common units.
Although this transaction isn't reflected on our March 31st financial statements through this transaction, we captured $8 $8 million of value for our equity holders and.
<unk> $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.
Out of $300 million.
Now I'll turn the call back over to Heath for closing remarks.
Great Alright, thanks Mark.
So look as we've talked about and I think some of it is really off to a great start from 2021, we've got the one quarter on the books that meet our internal expectations and while there is 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 and our customers accelerate activity.
<unk>.
That was originally planned in 2022 into the fourth quarter. So it could be a nice.
Nice tailwind for us second half of the year, but as Mark just shared.
And our expense control is really starting to show up and in the first quarter results and we made great progress again on completing the double the pipeline.
From a macro perspective.
Things are looking more positive commodity prices continued to strengthen leverage finance and bank markets are opening and the economy appears to be headed and the right direction.
Through the administration of the vaccines and and.
And the light so so look.
Additionally, I would say that the dialogue around both corporate and asset level M&A is increasing and across the midstream sector and I think the industry is really prime for activities is 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 of the future of going to be centered around increased efficiencies scales and generating and obviously greater returns. So following our 2022 refinancing.
We think M&A will take on even more significance.
For summit and particular as we keep looking for ways to enhance our scale and deliver value and credit accretive growth.
On the meantime.
And we're extremely focused on creating the additional financial flexibility and balance sheet strength that 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 next earnings call.
So that's one of the.
And thank you again for your time today Super excited about some of its results to date are go forward and the trajectory and look forward of capitalizing on future opportunities that are ahead of us so with that operator I'd like to open the call up for questions.
Thank you if you have a question. Please press Star then one on your Touchtone phone and.
We wish to be removed from the queue. Please press the pound or the hash key if you use the new speaker phone you may need to pick up the handset first before pressing the numbers. Once again the have you have a question. Please press Star then one on your Touchtone phone.
And we are on standby for questions.
And our first question comes from <unk>.
Scotto from RBC capital markets.
Hi, good morning, everyone.
And some clarification on that.
Lastly on the email.
And with respect to M&A and so.
And.
We're just on that sit in terms of M&A are you.
And our seller because I thought you were looking to sell from legacy assets, but it sounds like from that last comment you made the once you sort of sort of up your balance sheet with your 2022.
The debt maturities that you could be looking to increase scale, so and you know any additional comments there.
And would be helpful. Thanks.
Yeah. 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're going to be focused on opportunities to further delever.
Yes.
And get to the right that with that we would consider selling assets and so I don't think of any of that necessarily changes, but what we have seen and the market is.
Really not.
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 interesting that the.
We feel we put the balance sheet.
And Brad scored lever up necessarily I think what we're gonna be looking to do the best provider around our footprint and we have operations and seven basins.
Across the U S. There's a lot of assets and around our footprint that we think would be nice.
At the end type acquisition.
That.
Absent the synergies.
And our footprint and 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.
And our focus and will continue to be our focus is to improve the balance sheet and so any transaction that we look at we're going to work on it.
From day, one at least right.
The potential of credit accretive and I think going forward I think that is going to be important an important part of of our strategy going forward I mean, this industry, whether you're talking public the public or you're talking some of the private assets that.
Our out their needs consolidation and and I think the.
The operating synergies the commercial synergies the capital synergies under the hugely important going forward.
Thanks, That's super helpful and then.
And all of this system is just around your cost reduction efforts and it looks like you've been and.
Great job on.
Reducing opex and how do we think about that kind of going forward. I mean is one SKU and good run rate to use or do you think you've hit it.
Drive.
Additional efficiencies and <unk>.
No.
And what specifically.
And we've done or are you doing that dragon teeth.
And then.
Yeah, So look since since I joined back in the fourth.
The firm towards that.
And we immediately just prioritize looking at the organization and finding ways to streamline it we've had.
Two major initiatives and I would point to a one day. They frankly implemented early in the first quarter of 2020.
And of course of the pandemic hit and.
Truthfully, we kind of stalled the second wave of our planned cost reductions just didn't feel right about.
Cutting jobs that's of the pandemic as.
As we kind of got through the year and towards the end of the year, we implemented two of that initiative.
And the combination of the two we've used our controllable opex and G&A by about $20 million of year the aggregate.
Now most of.
And that has come through head count.
Reductions and streamlining the organization.
But a lot of it has come and the people just being more focused around the operating efficiency and reducing cost and.
And that can come through.
Procurement through batching, overhauls and and other work that we do that and the past it's been a little bit more.
The the life, if you will as opposed to looked at as the broader company.
We've also.
<unk> our offices, so I think with the.
And at one point, we had four different corporate offices and.
Throughout the call.
And frankly for a company our size and that's just too much so.
So the guidance that we gave you I definitely feel like that $20 million per year is very sustainable.
I do think that.
We'll continue to find ways reduce cost.
When you go forward I don't think that youre going to see that kind of magnitude available I think we've gotten a lot of we're on.
The call at the low hanging fruit.
Captured but.
Particularly on our legacy areas, where the declining.
Declining.
PDP type decline.
Where we're really going to be focused going forward to make sure that were optimizing both the hydraulics, how where and pressure and how we manage the.
Staff.
And try to head off if you will.
The Dod declines that the volumes are going to decline but.
Hopefully, we can improve margins or at least kind of have a disproportionate decrease and our operating expenses.
Some of those systems decline, so I think that's where you're going to see more of it I don't 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 and we can have on our and our.
Maintenance capital and operating expense.
<unk> programs.
Great. That's very helpful. Thank you very much.
You bet.
As a reminder, if you have a question. Please press Star then one on your Touchtone phone.
Yeah.
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.
Right.
And then.
And.
Yes.
[music].
And then.
And then.
And then.
Yes.
Yes.
And.
[music].
Yes.