Q2 2023 DT Midstream Inc Earnings Call
Speaker 1: Welcome to the DT Midstream Second Quarter 2023 earnings call. I will now turn it over to our speaker today, Todd Lorman, Director of Investor Relations. Please go ahead.
Good morning and welcome everyone.
Before we get started, I would like to remind you to read the Safe Harbor statement on page two of the presentation.
including the reference to forward looking statements.
Our presentation also includes references to non-GAAP financial measures.
Please refer to the reconciliation to GAAP containing the appendix.
Joining me this morning are David Slater, President and CEO , and Jeff Jewell, Executive Vice President and CEO .
I'll now turn it over to David to start the call.
Thanks, Todd, and good morning everyone and thank you for joining. During today's call, I'll touch on our financial results and provide an update on our growth projects, including our CCS project in Louisiana. I'll then close with some commentary on the current market fundamentals.
for turning it over to Jeff to review our financial performance. So with that, we had another strong quarter and the business continues to perform in line with our full year plan.
giving us confidence in our full year adjusted EBITDA guidance.
for 2023 and early outlook for 2024. As a reminder, we expect growth to be weighted towards the second half of the year as we bring new projects online.
I am very excited to announce that we made a final investment decision on a new greenfield gathering opportunity.
the Ohio Utica. This opportunity originated from an acreage dedication we held with a small private producer.
That acreage has since been acquired by a large cap investment grade producer who was committed to developing this area.
This opportunity has always been in our plan for 2024 and now with the development schedule finalized and a restructured commercial agreement in place we are shifting approximately a hundred million of committed capital forward a few months from early 2024 into the second half of 2023.
The initial backbone build out of this natural gas gathering system.
will provide over 200 million cubic feet a day of capacity and go into service in the first half of 2024.
The Gathering System will transport a associated gas from new wells being drilled in the rich window of the Utica.
These wells are highly economic under current market prices.
and our investment is underpinned by a long-term contract with minimum volume commitments that fully protect project returns.
As is typical with any new resource development, there will be a production ramp up expected to occur over an 18 to 24 month time period as the acreage is delineated. As such, we don't expect a meaningful EBITDA contribution until 2025. Longer term, we expect.
a larger scale build out across a customer's sizable acreage position, as well as future integration with our downstream assets such as Nexus.
So, in summary, this opportunity checks all the boxes for DTM.
So in summary, this opportunity checks all the boxes for DTM. Acretive organic growth.
highly economic resource
Long-term contract with MVCs.
Strong producer that diversifies a customer mix and significant follow on opportunities for existing assets.
In our emerging energy transition platform, we continue to progress our CCS opportunity in Louisiana.
Our initial 3D seismic survey data indicates the geology we are targeting is favorable for permanent CO2 sequestration.
During the quarter, we filed our Class 5 Characterization Well Permit application, which we expect to drill in the fourth quarter of this year. We plan to spend approximately $15 million this year for these activities.
Assuming the characterization well results are favorable, we would then plan to FID the project in the first half of 2024.
Overall, we continue to make great progress advancing organic opportunities across our portfolio in both our conventional business lines and our emerging energy transition business platform.
Turning now to our projects currently under construction, I am happy to report that all projects remain on budget and on schedule.
We have made excellent progress on our Elite Phase 1 expansion.
And I'd like to acknowledge and thank our dedicated team in Louisiana for doing exceptional work on this project.
Pipeline expansions currently running ahead of schedule, and we expect an early Q4 2023 in service state, with the potential to pull that forward into late Q3 if we maintain our current pace.
Finally, I want to take a moment to address the natural gas market fundamentals and produce your activity across our assets.
We are observing moderating production levels and some short-term deferral of activity in both basins.
as producers continue to operate in a disciplined manner given the near-term weak prices.
This is all fully reflected in our guidance.
On a positive note, over the past few weeks, we have seen rig reductions stabilize.
With extreme hot weather occurring across large portions of the country, this is driving strong power demand for natural gas.
And all of this is beginning to reduce the current storage surplus that has created the near-term price weakness, resulting in some price improvements. Four gas prices look favorable in 2024 and 2025. In the $3.50 to $4 range is the market anticipates the next wave of LNG demand. Our assets are well positioned to participate in this growth. I'll now pass it over to Jeff to walk you through our quarterly financials and outlook. Thanks, David, and good morning, everyone.
In the second quarter, we delivered overall adjusted EBITDA of $224 million, which is in line with our full year plan. Our pipeline segment results were $2 million below the first quarter, reflecting the impact of lower winter-related revenues from our pipeline joint ventures.
Gathering segment results were in line with the first quarter and consistent with our plan for the year.
Operationally, total gathering volumes across both the Haynesville and Northeast averaged approximately 2.9 billion cubic feet a day in the second quarter.
In the Northeast, second quarter volumes were up compared to the first quarter due to higher volumes on Appalachia gathering.
In the Hingsville, second quarter volumes were down compared to the first quarter due to a planned treating outage in April and a weather-related outage in May.
As David previously mentioned, we are accelerating a portion of our 2024 committed capital into 2023 for our new Ohio Udica opportunity and initial investment in our CCS project. As a result, we are increasing our 2023 growth cap ex guidance to 700 to 750 million and lowering our 2024 committed growth cap ex by 100 million. Our committed capital over 2023, 2024 of approximately 800 million remains unchanged.
This accelerated CapEx timing fits within our longer-term investment plan.
And we are maintaining our 5 year 1.7 to 2.2 billion growth cap X range.
Following the completion of the heavier CAPEX spend in 2023,
We expect to fund our growth investments within cash flow after dividends.
Our leverage ratio ceiling now includes our proportionate share of debt at our Equity Method aids.
We expect to end 2023 at approximately 4.2 times, temporarily exceeding our long-term ceiling.
As we complete our heavier organic capital investment program this year.
Our on-balance sheet leverage is expected to end the year around 3.8 times.
Also in the quarter, funds from the Nexus financing were distributed and received and were used to pay down a revolving credit facility.
further bolstering our liquidity, which remains very strong at approximately 900 million.
Today, we also announced the declaration of our dividend, which is unchanged at $0.69 per share, and we remain committed to growing the dividend in line with cash flows.
I'll now pass you back over to David for closing remarks.
Thanks, Jeff.
So in summary, we're feeling good about our full year guidance for 2023 and early ELLIC range for 2024. Our key growth investments are on track and we continue to advance new organic opportunities. We are excited about our new growth platform in the Utica as it further diversifies our customer base and integrates into our regional assets.
Our Energy Transition Platform is also nicely developing, anchored by our CCS project in Louisiana, and our Hydrogen Development Partnership with Mitsubishi. We will grow this business in a disciplined and thoughtful manner, leveraging our core competencies and existing business platforms.
We can now open up the line for questions. Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad.
We'll take our first question from Jeremy Tonette at JP Morgan.
Hey guys, this is Froth and ReadyOn for Jeremy. From my first one, I just want to talk to you on the CCS project. I'm wondering if you could walk us through economics there, as well as any details around capital cost to develop the system. Thank you.
Sure, this is David. We laid out our development schedule on our CCS project in our deck. So I'd maybe point you there. As we've said, I think historically on this project, this project has two strategic drivers for us. One, it significantly reduces our
direct CO2 emissions for the company. So it's a significant contributor to our March towards NED-0. However, with the existing tax credits, it's also a very economic project for investors. The implsystem is just a finding of those capent debts there.
In terms of providing more detailed disclosures around the capital, we plan to do that when we FID the project and we'll provide more refinement on schedule and more refinement on capital. But based on where we're at in the development cycle I think the disclosures that we laid out in the deck.
Is it the current disclosures we're providing? Okay, great. And then for my second one, I wanted to hit on leverage, which you guys talked out a bit about 2023 earlier in the call. Could you walk us through, I guess, thoughts on staying at or below the four times leverage?
with CCS and or any LEAP expansion cap-acts in 2024.
Yes, hi yeah, this is Jeff. Yeah, that's what our plan is again. We've been pretty clear. Our ceiling is that 4 times long term as a part of the play and as we get into 2024 what we're seeing currently in our committed capital and.
and other items that will be inside of our cash flow for 2024. So again, we feel good that we'll be at or below the four times in 2024.
And then as a reminder, remember that's at the proportional level is where we are. And at a on-balance sheet, like for this year, we'll be at like 3.8 at the end of this year. So again, we're very comfortable where we are from a leverage standpoint.
Great, I'll leave it there, thanks.
Great, I'll leave it at that. Thanks. Yeah, thanks.
We'll move next to Michael Blum at Wells Fargo.
Thanks. Good morning everyone. I wanted to first just want to ask about the Ohio Utica investment. Just to confirm that the MVCs that you'll be receiving that that will not cover you to get to the five times.
Investment multiple you cited it. I'm assuming you're going to need a certain amount of volume to get to that and when do you think you'd hit that?
Actually, Michael.
That NVC will protect our threshold returns for the segment that will deliver that five times, even a multiple.
So, it's a very protected investment in this market environment.
Got it. But just to clarify, you're saying that the impact to cash flows will really show up in 2025.
and not really in 2024.
That's correct. We'll we'll construct here late in 23.
and then their development, the producer's development schedule will start bringing volumes on at 24 and then, you know, they've got a 18 to 24 months grant period as they start to develop the resource. We have the
and we'll ramp into that volume. But there's MVCs that ramp along with the producer activity that get us to that higher run rate.
And yes, 2025 is when you should see kind of a full year higher level run rate impact on our EBITDA.
Okay, perfect. And then just wanted to ask about the CCS project. The 800 million of CAPEX committed for 2024 and 2023 and 24. Does that include that inclusive of the CCS project or if you FID the project in early 2024? That would be additive.
Yeah, I think the only thing that we're including right now is the 15 that we detailed. So that's what I'll call free development capital to de-risk the project. And again, like I said earlier, when we FID the project will provide a lot more granular disclosure.
on total capex budget and a refinement on timing.
Got it. Thank you very much. You're welcome.
Thanks, operator. Good morning, guys. The first question is on CapEx. The sequential decline on CapEx into 24 from 23 looks a bit more sizable now. So just curious how you're thinking about plans to backfill with other projects from here. It sounds like funding within cash flow is a hard stop for you, so maybe that's sort of the most you'd fill in a year. And to this day, you do generate excess cash flow beyond the dividend. Safe to assume right now that's entirely getting allocated towards leverage, or could we see some other uses.
Good morning, Spiro. Yeah, let me start and then I'll pass it over to Jeff, but I think you're understanding it correctly.
The Ohio project was in the 24 committed capital and really it was just as we refined with our customer and there was a modest timing shift. You know, it benefited us well, by moving us out of winter construction, which de-risked the execution side of this project.
But what it had the effect of doing is we move forward a few months and it moved into the 23 window. So that shift is really just a timing shift of committed capital. So you're right, it takes a big chunk of committed capital out of 2024. And.
the same. And so, like David says, what we've got is on a committed level as well within that cash flow. And then with our, you know, as you can see on that on that slide, we kind of talk about on page eight, we've got a lot of potential organic backlog that's out that we're reviewing and
and I'm kind of evaluating at this time and we'll provide updates you know, either third quarter or the end of the year most likely of additional projects is a part of that. But you're right, we're going to keep that inside the cash flow, inside the leverage that we've talked about.
I think the key thing is that we expect to be back to four or less on a proportional basis, which is a higher threshold than when we spun the company because that four was originally measured on an on balance sheet basis. So, yeah, I expect there'll be a combination of incremental organic opportunities that emerge before year-end.
But I also expect there'll be some uncommitted free cash flow that'll kind of go towards the balance sheet as well.
Got it. Helpful color. Thanks, guys. The second one, quickly just related to natural gas storage. I've seen a lot of your peers kind of lean into that more aggressively. Economics there been improving. Curious, you're thinking about your ability to expand on that front and if that's something that maybe is already considered inside that long term capital plan. Yeah, storage has been a bright spot in the portfolio for the last six months. We.
We did lean on that pretty good in the second quarter and termed up at some pretty attractive rates some of the
capacity that's just naturally rolling from year to year in the portfolio. So that was step number one. I'd say you're alluding to step number two is looking for expansion opportunities. Our team is assessing that right now.
To stay tuned on that, more to come as we get a better sense of this market going to hold at these higher values and where potential expansion opportunities would exist. Great. That's all I have today, guys. Thanks for the time. Yep. We'll go next to Keith Stanley at Wolf Research. Hi. Thank you. First, maybe I could start with the Haynesville.
Just any high-level commentary on where you see volumes directionally on your system over the next year? Is it up meaningfully? Is it flattish? And any color on what producers are saying about how they're approaching activity with the forward curve strengthening and some of the LNG facilities coming on? Sure. Why don't I just start on with the first questions? We're looking at volume growth. We're expecting volume growth towards the back end of the year.