Summit Midstream's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: Summit Midstream (SMLP)

Summit Midstream Partners, LP (NYSE:SMLP)

Q1 2013 Earnings Conference Call

May 14, 2013 11:30 a.m. ET

Executives

Marc Stratton – Head, Investor Relations and Treasurer

Steven Newby – Chief Executive Officer

Matt Harrison – Chief Financial Officer

Analysts

Ted Durbin – Goldman Sachs

James Jampel - HITE

Darrick Walker – Bank of America Merrill Lynch

Operator

Welcome to the Q1 2013 Summit Midstream Partners Earnings Conference Call. My name is Richard 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. Please note that this conference is being recorded. I would now turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

Marc Stratton

Okay, thanks, Richard, and good morning everyone. Thank you for joining us today as we discuss our financial and operating results for the first quarter 2013. If you do not already have a copy of our earnings release that was issued yesterday, please visit our website at summitmidstream.com, where you’ll find it in the news section. With me today are Steven Newby, our President and Chief Executive Officer, and Matt Harrison, our Chief Financial Officer.

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. These statements are based on management’s beliefs and assumptions. Although, we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance of such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. If one or more of these risks materialize or should the underlying assumptions prove incorrect, actual results may vary materially from those expected. These risks are discussed in greater detail in our Form 10-K on file with the Securities and Exchange Commission.

Please also note that on this call we use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjustable distributable cash flow. These are non-GAAP financial measures and we have provide reconciliations to the most directly comparable GAAP measures in our first quarter 2013 earnings release.

With that, I'll turn the call over to Steve Newby.

Steven Newby

Thanks, Marc, good morning everyone and thanks for joining us today. I will discuss our first quarter financial highlights, our business operations, and then I will turn it over to Matt for more details on our financial results. I will then end the call with some key growth areas we are focused on for the balance of 2013.

Yesterday, we announced our financial and operating results for the first quarter of 2013. We had an outstanding quarter with adjusted EBITDA of $31.4 million and adjusted distributable cash flow of $27.1 million. Both of these measures were up significantly over the first quarter of 2012. Adjusted EBITDA was up 26%, while adjusted distributable cash flow was up 23%. Sequentially adjusted EBITDA and adjusted distributable cash flow were up about 10% in the fourth quarter.

Based on our previously announced distribution of $0.42 per unit our coverage to the quarter was 1.29 times. Given the performance that we are seeing across our business lines and outlooks for the rest of 2013 we are reviving our previous adjusted EBITDA guidance from 110 to 120 million to 115 to 125 million. With that we also expect our distribution growth to be at the high end of our previous guidance which was 8 to 10% overall $0.40 in QD.

Total throughput volumes in the first quarter averaged 944 million cubic feet per day. This was 3.5% higher than our average daily volumes in the first quarter of 2012. Driving this increase was volume increase is related to our DFW system, which were up 31% over the first quarter of ‘12 and now 8% over the fourth quarter of ‘12.

During the quarter we connected 90 wells to the system and three new pad sites. We are also commissioning our unit 10 project which increased our overall capacity to 450 million a day. One of those pad sites was significant, the Beacon pad site which expanded our acreage area, in North, in Arlington, and what we call North of I30. We are encouraged by the early results we are seeing in that area from drilling activity and we are optimistic with this new acreage area could be a future growth area for us.

For Grand River, volumes decreased 4% over the fourth quarter of ‘12. Lower volume were due to some continued freeze offs from the colder winter, but also several of our producers that use our high pressure and compression services had reduced volumes from lower drilling activity. All of these customers are under long-term minimum volume commitments so the volume decline did not affect our cash flow.

If you recall on our fourth quarter call, we had mentioned that we do believe overall volumes on Grand River will decline this year. However, our MVCs provide significant protection against the effects of this on our cash flows.

Interestingly enough, our low pressure and higher margin will go ahead gathering service was actually up 3% over the fourth quarter of ‘12. Also our condensate revenue was up significantly in the first quarter over the fourth quarter of ‘12 and that was just due to the colder winter. We got basically more drift condensate from the pipeline.

I’ll caution everyone on this that it is seasonal. We don’t project that going forward. So if you set back on Grand River even though volumes were down quarter over quarter when you look at our revenue line and adjust for our MVCs our revenue line was actually up 8% over the fourth quarter of ‘12.

In addition, we took several steps in the first quarter to permanently lower operating expenses around our compression assets in Western Colorado. We purchased some previously leased compression that will add $2 million to EBITDA annually on a go forward basis.

We also continue to optimize our operations in that area and we are seeing some nice savings from those efforts.

With that, I turn it over to Matt to review the financial results in more detail.

Matt Harrison

Thanks Steve. I will cover the results of Summit Midstream Partners LP and Summit Midstream Partners LLC, the predecessor of Summit Midstream Partners LP or SMLP. SMLP completed it’s initial public offering on October 3, 2012. Results prior to our IPO refer to our predecessor and results subsequent to our IPO refer to SMLP. Adjusted EBITDA for the three months ended March 31, 2013 were $31.4 million compared to $24.9 million for the three months ended March 31, 2012, an increase of approximately 26%.

The $6.5 million increase in adjusted EBITDA was primarily due to the higher volume throughput on our DFW midstream system which averaged 419 million cubic feet a day in the first quarter of 2013 compared to a 319 MCF a day in the first quarter of 2012. In addition, certain of SMLPs gas gathering contracts on its Grand River system contain annual minimum volume commitments or MVCs and gathering rates that increased in the beginning of 2013. These contractual volume and rate increases had off set the 11.5% volume throughput decrease on the Grand River system when compared to the first quarter of 2012.

SMLP also benefitted from capital efficiency projects and lower operating expenses in the first quarter of 2013 compared to the first quarter of 2012

During the first quarter of 2013, SMLP acquired previously leased depression assets which is expected to reduce annual operating expenses by approximately $2 million.

We built $2.7 million of MVC shortfall payments in the first quarter of 2013 from a gas gathering contracts associated with our Grand River system. This $2.7 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. Adjusted EBITDA in the first quarter of 2013 included approximately $6.3 million of adjustments related to MVC shortfall payments of which $2.7 million was recorded as deferred revenue and $3.6 million was associated with quarterly adjustments related to future projected annual MVC shortfall payments.

Additional tabular detail regarding MVCs is included in the first quarter of our earnings release. Adjusted distributable cash flow was $27.1 million in the first quarter of 2013 this implied to distribution covered ratio of 1.29 times the first quarter distribution of $0.42 per limited partner unit to be paid on May 15th 2013.

CapEx for the first quarter of 2013 was approximately $21.3 million of which approximately 2.5 million was classified as maintenance CapEx. We had 214.2 million of debt outstanding under our revolving credit facility at March 31, 2013. The borrowing capacity under our $515 million credit facility is approximately $336 million. Total leverage at March 31, 2013 was 1.9 times.

As Steve mentioned, management increased its adjusted EBITDA guidance for the fiscal year 2013 from the previously guided $110 to $120 million range to a range of $115 to $125 million We believe that the attainment of this increased adjusted EBITDA target should facilitate distribution growth to a limited partners of at least 10% in 2013. Also this guidance excludes the effect of any potential asset drop down from the owner of General Partner Summit Investments.

With that I will turn the call back over Steve.

Steven Newby

Thank Matt. As mentioned earlier Matt has mentioned given the strength that we see in the underlying business in our outlook for the rest of 13, we are going to raise our adjusted EBITDA guidance from 110 to 120 to 115 to 125 which should allow us to hit or see the top end of the distribution guidance of 8 to 10%. No change in our long term coverage guidance of 1.2 times that we believe will average for 2013. It is important to note Matt noted it this guidance exclusively benefit of any drop downs from the owner of the GP Summit Investments

We have asked to see an fairly strong rally in natural gas prices over the winner but we believe the change and produce resentment will take time and we believe that prices are sustainable.

We are seeing several producers in the DFW area beginning to discuss increased activity so we will expect to see some increased drilling activity there in the second half 2013 and in the 2014 you could see the volumes move around slightly producers execute more drilling as they went pad sites down to do so but overall we view this as the long-term positive and keeping our highly utilization rates on the system.

We are currently in the process of connecting two pad sites that will command in the second quarter along with several others that had been connected in the seat of first flows in the second quarter. I would tell you and caution you though that we have not too soon that will 8% sequential growth again on DFW for each quarter of 2013.

We do feel positive about keeping utilization rates in the 90% range. We also continue to have good backlog wells. A DFW waiting on completion and wells that are currently pertained that are previous flowed and we believe both of those will help to sustain volumes.

DFW is one of the most competitive dry gas areas in the country and competes favorably with wet gas areas of Barnett. This increased activity is not a complete surprise. On the growth CapEx side in this area, given the activity level, previously mentioned from some of our customers we are in negotiations to expand to influential capture area to pick up additional capacity like connection. We anticipate these commercial discussions to be finalized in the next few months so we’ll keep you posted as things progress.

At Grand River all the volumes are down as previously guided as it would be, our MVCs have stepped on several customers this so we’ll see increasing cash flows in this area.

On the drilling side, we believe that challenges still remain for increased activity as NGO prices, particularly ethane prices remained depressed and I’ll remind you this area is liquids rich and it has a heavy ethane barrel.

Similar to DFW, we do see several customers getting more active in the second half of the year and that should help moderate the volume declines as the year progresses and also should help in the 2014.

We’ve completed our operational integration of Western Colorado and as I mentioned earlier we are beginning or being able to drive some significant costs out of our business in that area. These are real savings that will benefit us long into the future and recommend our team for the focus.

The Mancos and Niobrara continue to get a lot of positive discussion given WPX’s activity and I think everybody including several producers in the area are waiting to see how this play develops.

On our side we’re very well positioned as it develop but we’re being fairly cautious on projecting volume growth on Bliss formation in the near-term. As we previously announced we expect to complete our first drop-down transaction from Summit Investments to the MLP in the next couple of months consistent with our previous guidance. We’re still highly confident in that timing. Our strategy is to use Summit Investments to develop and incubate assets, particular ones with large organic CapEx needs and then offer those assets to the MLP.

In 2013 for the year, Summit Investments is executing on a upwards of $250 million of organic CapEx across Mancos, the DJ Niobrara and Balkan Shales. This buildout includes construction of approximately 300 miles of pipeline and construction of two fee-based processing plants.

We continue to see heavy activity around our asset bases in Summit Investments, so we expect that $250 million to grow as the year progresses. We believe this strategy with Summit Investments in coordination will help Summit Midstream maintain significant financial flexibility, reduced development risk at the MLP which is important to us given our size while also positioning us to be a top quartile MLP distribution growth performer.

As we complete these drop-downs Summit Midstream will become more diversified with increasing EBITDA contribution from crude oil, liquids and water transportation services while maintaining significant upside to increase natural gas production.

With that we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question on line comes from Ted Durbin from Goldman Sachs. Please go ahead.

Ted Durbin – Goldman Sachs

Thanks guys. The preparatory commentary on the gas prices, while I'm just wondering if you can give us a little more color on how many rigs you think you’ll have run in the Barnett area this year, based on what you're hearing from the producers. We’re realizing that it sounds like, as you said the 8% is controversy sell this quarter probably doesn’t continue, but I’m just get a sense of what the activity look like.

Steven Newby

Yeah, Ted. It’s Steve. Great question. I think we’ve seen, I would tell you for 2013 so far we've seen on average one to two rigs in the area. I think we’re expecting that, we may see another rig or two added as we get into the second half of the year. They tend to move around pretty quickly, now there’s particular with larger producers, but we’re not projecting or expecting a significant increase in rig activity for the balance of 13, maybe one or two extra.

Ted Durbin – Goldman Sachs

Got it.

Steven Newby

As you know I will add, given the backlog we have in wells waiting on connections and also just wells being curtailed on our system, rig activity doesn’t necessarily is not one-to-one correlation of volume sometimes in our system so.

Ted Durbin – Goldman Sachs

Sure. In terms of CapEx budget for this year, you came out, I guess $21 million for quarter. Are you seeing that as a good run rate for the year? Was there anything special happened this quarter, I see you had about 7 million of acquisition that number, but kind of what budget you’re looking for this year.

Steven Newby

Yes, I would tell you the first quarter was high just given activity levels were little lumpy. We finished commissioning of Unit 10, so it’s some CapEx related ad. We also had pad sites come on in the first quarter as well too that elevated that CapEx amount. So I would tell you we're still in our previous guidance on CapEx. I wouldn’t take first quarter and just annualize it.

Matt Harrison

Also the first quarter included $6.7 million of compression that we bought back in the first quarter as well that’s kind of unusual deal.

Ted Durbin – Goldman Sachs

Got it and then I appreciate the update on what’s happened at Summit Investments, I guess, can you just talk about how those assets are performing generally speaking, volumes, revenues, it sounds like you’re investing a lot, it sounds like there’s good volumes behind them. And then, can you just remind us at the SMLP level, would you try to get some sort of minimum volume commitments similar to what you have in Grand River? Would this be more volume metrics exposed?

Steven Newby

Yes, good question. On the performance side of things, the assets at Summit Investments are at or even slightly exceeding our expectations. The development opportunities from organic I would say is very high, particularly in the Bakken, but also in Western Colorado as well too. So that’s good news. And I’m sorry Ted, what was your second question.

Ted Durbin – Goldman Sachs

Yeah, the other piece was, you’ve talked about the dropdown coming in the next couple months, I'm just wondering if it will have a similar sort of minimum volume.

Steven Newby

Oh yes.

Ted Durbin – Goldman Sachs

Tipping like that around the assets themselves at the SMLP level?

Steven Newby

Yes, I would tell you in general, we’re fee-for-service Midstream Company, so that will be very consistent and I think contractually the assets will be consistent with our highly-contracted nature at MLP as well too so.

Ted Durbin – Goldman Sachs

Okay. That’s it for me thanks guys.

Steven Newby

Thanks Ted.

Operator

Our next question online comes from Mr. James Jampel from HITE. Please go ahead.

James Jampel - HITE

Thanks for taking my call. Just a reminder, when do the MVC's run out at Grand River?

Steven Newby

Hey James, it’s Steve. They are very long term. It depends on the customer, but on average, we’ll pull the number, on average I think our MVCs at Grand River North of 10 years. So hold on, we’ll pull up for you. So average 12.6 years.

James Jampel - HITE

Okay great.

Steven Newby

At Grand River.

James Jampel - HITE

I mean, do you foresee those being triggered for the foreseeable future at Grand River?

Steven Newby

James it depends on the customer. As we told folks in the past, Grand River it’s not one system, it’s three separate systems. And it really depends on the system, it depends on the customer. We would expect, and remember three of our customers on the Mamm Creek system are high pressure and compression customer so that we don’t do well high gathering form. We would anticipate those customers or we foresee getting minimum volumes commitments or payments from those customers definitely in the near term, next 12 months.

James Jampel - HITE

Now, you mentioned that you had the ability to have a significant cost-reduction initiative by moving the leased compression into owned. Do you see any other opportunities like that in the near future that sort of very high return operating cost-reduction projects and those already baked into the EBITDA guidance?

Steven Newby

The answer is yes and yes. We continue to get cost synergies. We have a large operating footprint in Western Colorado. One of larger footprints actually out there, so that we basically built and acquired over last 18 months and so we’re still driving synergies out of that footprint and we expect to do so through the balance of 13 and expect to focus on it continuously. So I’d say yes, we think we’ll still pick up some things and yet that sort of in our guidance for us as well.

James Jampel - HITE

And more strategically, I mean as you pursue the dropdown story, what percent dry gas versus liquids versus crude versus water, what percent mix do you think would be a good place for Summit to end up.

Steven Newby

Yes, that’s a great question. It’s something we focus on pretty significantly here. I would tell you ideally, think of it as sort of third crude oil, third dry gas and third in the liquids side of things. As you know it won’t completely layout automatically that way as we execute our strategy, but strategically we like to be diversified midstream service provider for our customers across commodities and so we view that as from a customer service standpoint as the way go. I think we’re in the process of executing that. I think you’ll see us move closer to that mix as we dropdown the assets.

Matt Harrison

Just to clarify, we expect about a third to be focused on crude oil areas, so whether it’s associated gas gathering, crude oil water gathering or actual crude oil gathering will be about third and a third focused on kind of liquids rich gathering and a third focused on lean gas gathering.

James Jampel - HITE

Okay.

Steven Newby

James, that’s adjusted EBITDA. So that’s on adjusted EBITDA basis.

James Jampel - HITE

I see. So at some point it won’t be appropriate to call you the dry gas gathering MLP?

Steven Newby

Yes, I’ll leave that to you, what you want to call us.

James Jampel - HITE

All right. Thanks guys.

Steven Newby

Thank you.

Operator

Our next question comes from Mr. Darrick Walker from Bank of America Merrill Lynch

Darrick Walker – Bank of America Merrill Lynch

Hi Good morning everyone.

Steven Newby

Hi Darrick.

Darrick Walker – Bank of America Merrill Lynch

Just back on Grand River. You mentioned your cautious outlook there. I know back in 4Q there were some transaction involving some of your customers and the PR particularly with Vanguard Antero any detail there as far as impacts from those transactions?

Steven Newby

Yes, hey Darrick it’s Steve. The answer is yes, I think we’ve seen, particularly on the Antero side that asset was bought by Ursa, a private company. I think, the positive aspects of that is when somebody, when a large purchases like that and new producer coming in they're not buying that assets to just sit on it. So I think now that we've seen in our data roughly six months or they have roughly six month under their belt. We’re seeing communications from them of increased activity.

Darrick Walker – Bank of America Merrill Lynch

Got it.

Steven Newby

Not so much on the Vanguard in Bill Barrett’s side that we’ve seen at least that there was I think Vanguard bought a minority piece on option or so.

Darrick Walker – Bank of America Merrill Lynch

Okay. Great. And then, just again on the MVCs, I think previously you’ve indicated about 20 million is expected from Grand River as far EBITDA for the MVC this year, is that still the case?

Steven Newby

It’s actually based upon some of the volume declines that we saw in the first quarter. We’ve updated that closer to 25 million.

Darrick Walker – Bank of America Merrill Lynch

Okay. That’s it from me. Thanks guys.

Steven Newby

Thanks.

Operator

[Operator Instructions]. And at this time I'm showing no further questions.

Steven Newby

Okay. Well, great. We appreciate everyone. Thanks for joining us and obviously if you have any follow-up questions please feel free to give us a call. Thank you.

Operator

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating you may now disconnect.

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