Q1 2022 Summit Midstream Partners LP Earnings Call
Welcome to the Q1 2022 Summit Midstream Partners LP Earnings Conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session.
If you have a question. Please press zero then one on your Touchtone phone.
I will now turn the call over to Ross long, Vice President Finance Treasurer and Investor Relations.
Thanks, operator, and good morning, everyone.
You don't already have a copy of our earnings release. Please visit our website at Www Dot summit midstream Dot com, where you'll find it on the homepage events and presentations section for quarterly results section.
With me today to discuss our first quarter of 2022 financial and operating results.
Heath Deneke, our president.
Chief Executive Officer, and Chairman Bill.
Bill <unk>, our Chief Financial Officer, along with other members of our senior management team.
Where we start I'd like to remind you that our discussion today may contain forward looking statements.
Statements may include but are not limited to our restaurants of future volumes operating expenses and capital expenditures.
So include statements concerning anticipated cash flow.
<unk> 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, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results.
Also note that on this call.
We use the terms EBITDA adjusted EBITDA and distributable cash flow.
These are non-GAAP financial measures, we have provided reconciliations to the most directly comparable GAAP measures and their most recent earnings release.
And with that I'll turn the call over to Keith.
Thank you Ross and good morning, everyone.
Summit reported first quarter, adjusted EBITDA of $56 8 million, which exceeded our internal expectations and provided a strong start to the year.
We experienced over 20% quarter over quarter growth in crude oil volumes, which was driven by 25 wells that came online over the past six months we.
We also benefited from a full quarter contribution of seven large Utica wells that produce over 200 million a day on average during the quarter.
We also connected 50 wells during the first quarter, which was in line with our expectations and we had approximately 35 drilled but uncompleted wells as of quarter end.
Looking ahead, we are very encouraged by the increasing levels of producer activity across many of the basins that we operate in.
It's been quite a turnaround in the projected activity from our customers over the past few months.
Now we currently have seven rigs running behind our systems and based on updated producer guidance. We now expect to bring on 30 to 40, new well connects during the latter half of 2022.
With these additional wells, we're now projecting 105 to 150 wells for the year, which is nearly a 40% increase relative to the assumptions we used in our original guidance range.
Given the anticipated timing of these new wells. However, we expect this activity will mostly impact our fourth quarter results and 2022, but it will build a lot of momentum as we head into 2023.
This new activity in combination with our strong Q1 gave us confidence to increase the bottom of our original adjusted EBITDA guidance range by $10 million.
And establish a new range of $205 million to $220 million.
We believe the increase in activity levels, we're seeing at summit and within the U S. More broadly there's a clear sign that producers are now beginning to build confidence in market fundamentals that support the backend of the forward price curves.
Since the beginning of the year, we've seen a 17% increase in <unk> futures, 29% increase in Henry hub futures, along with an approximate 20% increase in U S rig count.
With long term natural gas and crude oil futures currently trading around $4 premium btu over $70 a barrel virtually all of the inventory behind our systems is economic to develop at current levels.
As a result, we start machine permanent activity levels increase and are having very encouraging conversations with producers regarding their plans to further ramp activity levels on our system in 2023, particularly in the Barnett the Piceance Utica and Williston basins.
As an example in the Barnett we have 23 recently approved drilling permits and in the Piceance. We are working with our customers on a 170, well development program, which is scheduled to start in 2023.
In the Utica, we're currently expecting a steady increase in new well connect activity next year, which could be further bolstered by upstream consolidation in the region.
And in the Williston, we are excited about the commercial prospects related to an agreement, we previously announced with a new customer that includes a new 50000 acre area of dedication a longer program devised liquid systems and we're also in the process of securing new commercial agreements that we think can add significant acreage to our buy some gas system later in the year.
Last but certainly not least the Permian basin continues to lead the way and the resurgence of producer activity levels in the U S, which we believe will drive significant volume growth in the basin and behind our LN system and the <unk> pipeline.
At the current level of rig activity and Eddy and Lea counties, our projections indicate that existing residue gas takeaway capacity out of new Mexico will become constrained in late 2023 to the early 2024 time frame.
And I'm sure. Many of you are also following the news regarding new pipeline expansions to increase residue gas takeaway from <unk>, Texas to the Gulf Coast.
Both of these dynamics put <unk> in a great position to fill up the remainder of our current 1.35 Bcf a day of capacity over the next couple of years.
Additionally, we are advancing plans to potentially expand <unk> to over two Bcf a day would be a very timely and cost effective mid point compressors from the project.
We think we're very well positioned to see meaningful growth out of this highly strategic Permian asset in the coming years.
Before turning the call over to Bill also wanted to spend a little bit of time on M&A.
So look I think we all know M&A activity is certainly continuing to pick up momentum in the midstream sector. We've had several G&P transactions that have been announced over the past several months and that summit. We continue to think that M&A will be an important part of the story going forward.
We are pursuing both acquisition and divestiture opportunities that can help streamline our portfolio, while building and based on scale and synergies that we believe will lead to accelerated in highly accretive growth in the coming years.
As we have discussed previously anything that we transact on will be both credit accretive and long term value accretive for our unitholders.
We're certainly encouraged with the opportunity set around our footprint, both organically and through strategic A&D opportunities. Let me be clear that we will remain fully committed to maintaining our capital discipline growing free cash flow and continuing to improve the balance sheet.
With that I'll hand, the call over to Bill Mudd to provide additional details on our financial results.
Thanks, Steve and good morning, everyone. As Heath mentioned, we had a good start to the year that really positioned us to take the low end of our guidance range off the table.
Starting in the northeast, which is inclusive of our SMU system proportionate share of Ohio gathering joint venture and our Marcellus system.
Segment averaged approximately one three bcf per day during the quarter, which is inclusive of approximately 600 million a day of eight eight OTC volumes and segment adjusted EBITDA totaled $20 1 million, which increased $1 1 billion from the fourth quarter.
This was primarily due to a four 4% increase in volumes on our wholly owned systems and a 12.9% increase in volume on our Ohio gathering joint venture.
We continue to be excited about the productivity of the wells in the region.
There were four wells brought online behind our wholly owned SMU system in mid November and these wells have produced over 100 million a day since early December .
As we have discussed previously we generally expect these wells to hold flat for four to six months before they begin to decline.
Our next slate of four wells is expected in the summer and the rig is currently at work. These four wells will be the next volumetric catalysts behind our SMU system. This year.
There are also three new wet gas wells that came online late last year behind our OTC joint venture.
That also produced over 100 million a day during the quarter.
While we havent heard of producers increasing activity levels in the Utica during 2022 at this point.
We remain very excited about the natural gas price fundamentals productivity of the wells in the region and prospects for potential upstream M&A that could represent a significant catalyst behind our systems.
The Rockies segment, which is inclusive of our DJ and Williston Basin systems generated adjusted EBITDA of $15 8 million, which increased <unk> 9 million relative to the fourth quarter.
Natural gas volumes averaged 29 million a day and liquids volumes averaged 65000 barrels a day.
As Heath mentioned crude oil volumes increased over 20% during the quarter, which was above our expectations and was driven by 25 well connects over the past couple of quarters.
The segment also benefited from a reduction in operating expenses quarter over quarter, but was partially offset by several operational and weather related interruptions that impacted volumes.
We estimate that liquid volumes were impacted by approximately two to 3000 barrels per day during the quarter and natural gas volumes by approximately 0.6 to 0.8 billion cubic feet per day.
Which we estimate equates to quarterly gross margin impact of approximately half a million dollars for the quarter.
While North Dakota continues to experience severe weather in April we would expect the system and volumes to normalize during the second quarter.
There are currently four rigs running and 19 docs behind the system.
Now expect approximately 45 to 65, new wells on the system for 2022.
This should drive segment adjusted EBITDA towards the high end of our original guidance range within this segment.
In the Permian Basin segment, which includes our wholly owned land GMP system, and our 70% interest in doubling pipeline reported adjusted EBITDA.
$4 2 million.
Representing a $1 $6 million increase relative to the prior quarter.
This was primarily due to a full quarter contribution of our double E pipeline, which went into service in November of last year.
Volumes averaged two 7 million a day behind our G&P system, a 3 million a day increase relative to fourth quarter and double the volumes averaged 187 million a day I'm 80 eights basis for the quarter.
Four new wells were connected to the JMP system and we saw an increase in volume from recently executed commercial agreements with neighboring midstream company during the quarter.
Based on recent upstream Andy activity, one of our new customers are expected to bring on a couple of new wells later in the year.
We remain encouraged by the level of activity in the region and the increase in scarcity of our processing capacity relative to other processors in the area.
So in the P&C segment, we reported adjusted EBITDA of $15 8 million in line with the fourth quarter.
Volumes averaged 312 million a day a decrease of approximately one 6% relative fourth quarter. Miss was primarily due to natural production declines partially offset by volume from the new nine well pad that was turned online in October of 2021.
We still expect 17 permitted wells to be turned in line in the latter half of 2022 and continue to expect a larger scale drilling program from this customer in 2023 with initial plans of over 70 wells.
Our commercial team is also advancing conversations with another operator in the area that has expressed an interest in over 100, well connects behind our system beginning in 2023.
This improving level of commercial discussions in the Piceance really illustrates just how economic it is for producers to have developed in this commodity price environment.
The Barnett segment reported adjusted EBITDA of $9 3 million a decrease of 0.9 billion relative to the fourth quarter, primarily due to natural production declines from the seven new wells that were brought online in late September 2021.
While those seven wells drove most of the sequential volume decline we had another four well pad that was completed in late April that should help mitigate those declines beginning in the second quarter.
In addition, one of our customers currently has a rig running the hydro system on another four well pad that will be connected during the summer.
Based on recent customer conversations we now expect eight to 12, well connections in 2022 and have line of sight towards significant development activity in 2023.
There are over 20 recently approved permits behind the system and we had conversations with another customer regarding the potential for 16 additional wells in 2023.
It's obviously early but this level of customer activity would be a major catalyst for MLP in 2023.
Quickly turning to the partnership a small P reported first quarter net loss of $5000 and adjusted EBITDA of $56 8 million.
Recognized a noncash gain on derivatives of $7 million during the quarter, primarily due to changes in fair market value of certain hedges, we have in place behind our double the related debt.
Capital expenditures totaled $8 7 million for the quarter, which included $2 9 million of maintenance Capex. Most of the Capex was associated with growth capital to connect new pad sites, and our Utica Permian and Williston systems.
During the quarter, we also saw approximately $2 million of latent inventory.
With respect to some of its balance sheet, we had $233 million outstanding under our $400 million ABL credit facility, a decrease of 34 million relative to our year end balance.
Our available borrowing capacity at the end of the first quarter totaled approximately $150 million, which included approximately $18 million of Lcs.
With that I'll turn the call back over to Heath for closing remarks, great Alright. Thank you Bill. So as you can tell we're very happy to see the pick up in our customers' 2022 development plans since the beginning of the year.
And we're particularly encouraged by the continued strengthening of longer term fundamentals that support a more robust outlook for summit and our stakeholders as we look ahead to 2023 and beyond.
We are actively working with our customers across many of our systems to evaluate further price response drilling activities. Both in late 2022 as well as early 2023, and we will continue to provide updates throughout the year at these as these plans further materialize.
We're very excited about the prospects surrounding <unk>, which we expect will drive significant growth for summit in the coming years, and we will also continue to evaluate M&A opportunities across our footprint, which we think can further accelerate delevering helped streamline our portfolio and create long term value for the company.
Lastly, I wanted to remind everyone of the upcoming annual meeting of limited partners, which will be held virtually on may 10th 2022 at two P. M Central time.
All unit holders should have received proxy materials associated with meeting there's certainly a lot of number and Theres certainly a lot of important items on the agenda that are very important to the partnership and we certainly encourage all of our unit holders to vote.
Thank you for your time and continued support and with that operator, I'd like to open the call up for questions.
Thank you we will now begin our question and answer session. If you have a question. Please press zero then one on your Touchtone phone.
If you wish to be removed from the queue. Please press zero, then Q if youre using a speakerphone. Please pick up the handset first before pressing the numbers. Once again, if you have a question. Please press Star Zero, then one and please standby while we allow parties to queue up.
And we have our first question from Ana <unk> with U S capital advisors.
Yeah.
Hey, guys its James.
Just thinking about the rest of the year.
After $57 million of EBITDA in Q1.
And that kind of analyzed annualized and above.
Above the high end of your guidance range.
With some weather impacts.
Before you kind of added some new wells to the forecast.
So just any thoughts about other things to keep in mind as we progress through the year.
Yes.
Yes, Hey, James Yes. This is heath.
Yeah look I mean, we're we certainly when we when we reset the guidance range, we factored in.
The new wells that were currently know about that are scheduled to come on in the second half of the year and we do think that there is.
Good chance, we'll kind of finished towards the high end of that range based on that activity levels, but it's still a little bit early.
We still want to kind of make sure that producers are hitting their timing and alike. So I think we tried to maintain what we believe to be a conservative range.
I think the key thing to watch for those as we've kind of talked about we certainly have had.
We built up a lot of momentum here over the past few months since we've said original guidance, we have ongoing discussions with producers we could see some additional acceleration of wells into 2022.
Or frankly, as importantly, or more importantly, we're starting to see some pretty robust activity setting up for early 2023. So I think those are kind of the key things to watch for.
And like we said, we'll certainly keep the market updated as as we get new information, but we feel comfortable.
Kind of sticking with the range that we guided to this morning.
Yes, James I'd, just bad right.
Specific example.
And kind of my prepared remarks, I talked about.
The rig that's currently working on that four well pad.
On our SMU system.
That's obviously a good sign as it relates to timing that that's likely going to hit.
Or potentially even exceed kind of our producers expected timing.
What's still outstanding obviously is where those IP and the performance of those wells. So I think we're going to get a lot more line of sight I think the key takeaway though.
Based on kind of permitting rig activity, how we're seeing things kind of progress. So far through here early may everything kind of shaping up for producers to be hitting their targets, which we kind of outlined would push us towards the higher end and.
See how that shapes up over the next couple of months and hopefully be able to update the market. Even further here in a few months.
I appreciate the color and then.
I guess moving over to <unk>.
<unk>.
Pretty.
Positive outlook there.
Wonder if you could just.
Help us understand kind of the playing field what are the big pipe takeaway options currently for new Mexico producers.
How quickly those those fill up and then I guess can you juxtapose that against kind of relatively low current utilization rates for <unk>.
Yes, yes, certainly.
I think I think generally speaking we've got.
90, plus rigs running right now in new Mexico, and when we look at the current takeaway options, which largely includes El Paso natural and.
Transwestern and of course, the double H pipeline and in.
And a few others, but we kind of stack up the available capacity and we look at.
And throw in some type curves associated with that rig activity, we see that the existing infrastructure is going to start getting constrained here in the call. It late.
23 early 2024 time period right. So I think I think that's.
Frankly, what we're.
What we're seeing now.
We're not prompt again and then.
Sorry, we're getting a little feedback there.
So I think thats.
The timing of when we start to see some pretty material constraints there as it relates to double the volume today I mean look we are.
Certainly seeing volumes starting to pick up I do think that the customer base.
Those contracts are going to step up over time, and we do think that we'll continue to see volumes increase throughout the year. So.
I think the key takeaway, though with <unk> is I think we're just really well positioned I think to.
To sustain that level of rig activity, it's only a matter of time before new takeaway solutions are going to have to be offered up.
We think we're very well positioned to fill up the remaining 300 or $350 million that we have available.
For subscription today, and then kind of fast forwarding. If you look at the downstream takeaway that's being developed out of what we think that's going to keep a pretty positive incentive for producers don't want to get their gas out of new Mexico into the <unk> market and I think that kind of positions us well for an expansion project that we think we can get done in the next couple of years if market.
Demand warrants.
And then I guess, you've previously talked about $45 million net to summit.
<unk> fills up.
Is it reasonable to kind of extrapolate that number.
Do you at some point move forward with the expansion up to two b's.
Yeah, well, what we what we kind of obviously James so at the Bcf, we kind of indicated.
$30 million net to summit so at two Bcf.
I just multiply that by two that probably gets you pretty close.
And what we've been guiding to towards.
James just in general.
Think about that as a sub four times project.
If we're going to <unk> 45 up to 60.
That's our next summer.
Right that that incremental $15 million, if you gross that up by 70%.
And then you now.
I assume that it's somewhere between a three to four times build multiple that will kind of get your general sense of the eight eights capex for that midpoint compression project that Heath mentioned.
Got you helpful. Thank you.
Okay.
And as a reminder, if you have a question you can enter the queue by pressing zero than one we have our next question from Gregg Brody with Bank of America.
Good morning, guys.
Good morning.
Just a few follow ups on some of the things you said so just just to follow up on <unk> I believe.
It seems like Youre not.
Seeing much inflationary pressure on.
The area that would drive the multiple up.
As you mentioned sort of three to four times.
Is there any part of your business, where you're seeing inflation that.
You are not able to pass through.
You know I think the inflationary impact thus far has been somewhat limited we haven't seen it.
Anything that really.
It drives a material step change in our operating expenses as an example, clearly we do see pipe prices are up and that's one of the advantages that we think we have with <unk>. We've got the large diameter 42 inch pipe already in place and so what we're looking forward to expand that system to get up to that call. It two bcf.
Two two Bcf a day, it's really just the midpoint compressor project.
And.
Well, certainly we're seeing a little bit of cost creep. If you will on some of the contractors that we've hired to install that compression, it's pretty limited in terms of what.
Hey, Mike.
Like we're having to go out and build.
Long diameter.
Sure.
Significant amount of pipe knowledge, if you will to kind of get to those volume levels.
Great. Thank you.
You can find all of that within them.
The double a structure.
We do.
Yeah Yeah.
And then just you mentioned.
No youre optimistic about about potential mergers in the northeast.
M&A I think you said.
How that is.
As you think about that let's.
Let's say that producers can kind of start to increase.
<unk> increased production.
What becomes the bottleneck.
Just in terms of getting gas either to a market that they wanted to sell to or just out of the basin.
Or is there some limitation there.
Or do you feel like there's ample pipeline capacity.
Global demand to meet between that yes.
Yes, I mean, we think that I mean, clearly you could start to see some in basin pricing just depends on the magnitude of the step up but I think for for what we're seeing in the connectivity that that our assets have the downstream takeaway I mean, we're not anticipating there to initially be a physical limitation.
I mean, clearly there will be at some level, but I think we've got a lot of running room to grow in the comment that we're making around the upstream.
Consolidation and how that could be a positive thing for us is certainly two or three of our customers have been fairly dormant over the past few years, even in these hyper inflated gas prices and just aren't drilling and we think.
And acquire that the likely buyers up there to the extent they were to take on this acreage position, but certainly have a development plan that would help drive.
Some additional volumes through the system.
Alright and just.
Last one for you you highlighted.
M&A has picked up.
Are you seeing opportunities.
Uh huh.
Contract transitions.
If you kind of talk about the size of them.
Yeah, I mean, I think what we're focused on and we are seeing opportunities for acquisitions of course, as we said we were going to make sure that anything that we transact on is going to be credit accretive and certainly has to be value accretive to our unit holders, but we are seeing opportunities around our footprint.
I think what we're focused on or are things that can help us maybe gained some scale and some of the basins that we operate in and we also are evaluating potential divestitures as well if we can get to the right price point that could accelerate delevering in and provide some proceeds for us to kind of redeploy in other areas. So I think.
We're just actively looking at it we did what do you think theres a lot of opportunity on the buy and sell side and.
We're certainly going to evaluate those opportunities.
Great. That's it for me thanks for the time.
You bet.
And thank you.
Once again, if you have a question. Please press star Zero and then one on your Touchtone phone, that's zero that wants to queue up for question standing by.
And we have no further questions in queue at this time.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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Yeah.
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Okay.
Okay.
Yeah.
Okay.