Summit Midstream Partners' (SMLP) CEO Steve Newby on Q2 2016 Results - Earnings Call Transcript

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Summit Midstream Partners (NYSE:SMLP)

Q2 2016 Earnings Conference Call

August 05, 2016 10:00 AM ET

Executives

Marc Stratton - SVP and Treasurer

Steve Newby - President and CEO

Matt Harrison - CFO

Analysts

Kristina Kazarian - Deutsche Bank

Tristan Richardson - SunTrust

Lane French - Robert W. Baird

John Edwards - Credit Suisse

Jeff Birnbaum - Wunderlich

Charles Marshall - Capital One

Operator

Welcome to the Second Quarter 2016 Summit Midstream Partners, LP Earnings Conference Call. My name is Eric, and I'll be the 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 will now turn the call over to Marc Stratton. Mr. Stratton, you may begin.

Marc Stratton

Thanks, operator, and good morning everyone. Thank you for joining us today to discuss our financial and operating results for the second quarter of 2016. If you don't already have a copy of our earnings release, please visit our website at www.summitmidstream.com, where you’ll find it on the Homepage or in the News section. With me today to discuss our earnings is Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer.

Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance of such expectations will prove to be correct. Please see our 2015 Annual Report on Form 10-K as updated and superseded by our current report on Form 8-K which was filed with the SEC on June 6, 2016 as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call we will use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjusted distributable cash flow. These are non-GAAP financial measures and we've provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release.

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

Steve Newby

Thanks, Marc. Good morning everyone and thanks for joining us on the call today. I will begin with a few comments on the quarter and then I will turn it over to our CFO Matt Harrison for more detail on our quarterly financial results. I will then wrap up the discussion on our outlook for the balance of the year including our decision to increase the midpoint of our full-year 2016 adjusted EBITDA and distribution coverage financial guidance. Yesterday, we announced our second quarter 2016 operating and financial results for SMLP. Overall, it was another solid quarter particularly given the continuation of a challenging commodity price backdrop. Adjusted EBITDA totaled $72.4 million for the second quarter, which was up 17% over the second quarter of 2015 and up 3.4% over the first quarter of 2016. Adjusted distributable cash flow totaled $51.1 million for the quarter, which was up 11.9% over the second quarter of 15 but down 3% over the first quarter of this year. The slight decrease in adjusted distributable cash flow quarter over quarter was primarily due to higher maintenance capital expenditures in the second quarter versus the first quarter.

Just to point out the second and third quarters of the year are typically a higher period for us for maintenance capital expenditures than the first and fourth quarters given the weather. In addition, our second quarter cash interest expense was about $700,000 higher than the first quarter due to a full quarter of interest expense related to our $360 million borrowing in March to fund an initial payment made on the 2016 dropdown assets. On July 21, we announced our second-quarter 2016 distributions of $0.575 a unit, which was flat with the first quarter and up 0.9% over the prior year period. We will pay that distribution on August 12. This is the second consecutive quarter following our 2016 drop-down transaction in which we've exceeded our distribution coverage target of 1.1 to 1.2 times. In fact, we covered the second quarter distribution by 1.25 times and year to date we have covered the distribution at 1.27 times. Matt will discuss this further in his remarks but given our results through the first two quarters of ‘16 and our firming outlook on the balance of the year, we are raising the midpoint of our adjusted EBITDA guidance to $280 million with the new range of $270 to $290 million. We are also raising our full-year distribution coverage guidance from a prior range of 1.1 to 1.2 to the new range of 1.15 to 1.25. As I briefly referenced earlier, during the first quarter of 2016, we dropped down all of the remaining operating assets from Summit Investments SLMP including both of our Utica shale assets which include our 40% interest that we own in Ohio Gathering alongside MPLX and EMG and our wholly-owned and operated Summit Utica dry gas gathering system.

The acquisition also included our interest in our Williston Basin crude oil, natural gas and produce water gathering assets as well as our associated natural gas gathering and processing system located in the DJ of Niobrara. To remind everyone, the acquisition consideration was structured in a manner that allowed us the 100% debt financed $360 million initial payment which represents a 4.5 times multiple of our $75 to $85 million 2016 adjusted EBITDA guidance for these assets. The balance of the purchase price was referred to as the deferred payment and will be paid in 2020 based on a 6.5 multiple of the average actual historical EBITDA in 2018 to 2019 from the acquired assets, adjusted for cumulative CapEx and cumulative EBITDA during the deferral period.

This deferred payment structure provides SMLP with a tremendous amount of free cash flow and distribution coverage that we are able to reinvest into our business. The structure also includes an embedded option value that allows us the ability to opportunistically choose how and when to finance the deferred payment which isn’t due until 2020. Until 2020, we have more than adequate liquidity to continue to fund all of our existing development plans. Operationally, our systems gathered an average of 1.5 Bcf a day of natural gas volumes in the second quarter which excludes our 40% proportional share of Ohio gathering volume. This amount was relatively flat to the first quarter. Just to remind everyone approximately 70% of our expected 2016 adjusted EBITDA which is primarily underpinned by fee-based gathering agreements will be generated from natural gas gathering versus approximately 30% from liquids.

Although given the high correlation between our unit price relative to crude oil prices might infer the opposite. Nonetheless, we expect that this ratio will increase over time as gas volumes from our Utica assets grew disproportionately higher versus our Williston assets. Our results primarily benefited from the continued volume growth across our recently acquired high-growth UP gathering system. Volumes on our Summit Utica system increased by more than 26% over the first quarter volumes to 167 million cubic feet a day as a result of ongoing development of our system to connect consistent drilling and completion activities by our anchor customer. We exited the quarter with June volumes on the system approaching 200 million cubic feet a day versus the second quarter average of 167 million cubic feet a day. And we have visibility towards additional completion across the system of the remainder of the first quarter. In addition, we are scheduled to bring on our third dehy station in the third quarter which will increase our total capacity of Summit Utica to 450 million cubic feet a day.

Our Ohio gathering JV volumes averaged 937 million cubic feet a day in the quarter on an [indiscernible], this was up 5.5% over the first quarter of the year and 78% over the same period last year. This increase was primarily due to the release of shut-in volumes from curtailment activities that occurred in the first quarter due to low natural gas price environment. In addition, we have 13 dry gas wells completed late in the first quarter which helped increase volumes in the second quarter. As we stated during our first-quarter call, we would expect the balance of the year slightly lower sequential volumes at our Ohio Gathering given lower completion activity during the second quarter. We expect completion activity to pick up during the third quarter but we would anticipate it being in late in the third quarter before we see an impact. Interestingly given the outlook for improving NGL prices, we expect the higher level of completion activity to occur in the wet gas window. The larger sequential quarterly volume decline in the second quarter was associated with our Marcellus segment which declined by 37 million cubic feet a day versus the first quarter of ‘16.

We estimate that approximately 20 million cubic feet of this decline was due to an operational issue with the third-party takeaway pipeline that affected the amount of gas that we could deliver to the Sherwood Processing Complex. We are happy to report that this issue was resolved in the early part of July and that volumes have quickly returned to levels that were experienced prior to the third-party operational issue. Looking forward, we still have visibility towards the sizeable backlog of approximately 27 docks behind Summit Mountaineer Midstream. We expect a handful of these docks to be completed in the late 2016 and the majority of these completions to be pushed to 2017. In the Barnett, our second quarter volumes were flat compared to first quarter as completion activity during the quarter offset natural declines from older wells. We continue to benefit from our customer diversity in this area as certain of our ten customers have been active throughout the cycle which is largely offset volume declines from a couple of our larger customers.

To that end, we have been visibility towards additional six wells which are expected to come online in the fourth quarter of ‘16 that have already been drilled on our system. We are also encouraged by some recent customer turnover on acreage located behind our gathering system. There was a recent AND transaction in the first quarter related to approximately 10,000 acres on our AMI. We expect that this new privately held customer will begin drilling again in this area towards the back half of ‘16 and into ‘17. Our final natural gas focus segment is Piceance and DJ Basin, which consists of our legacy Western Colorado gathering and processing systems and our new DJ Niobrara associated gas gathering and processing system. This is a segment that has experienced sequential volume declines for much of the past three years largely related to one producer. However, because of the highly contracted nature of the gathering system, our cash flow declines have largely been mitigated. An interesting dynamic is occurring in the beyond Piceance and DJ and then now four of our six largest customers are owned by private equity groups that have a limited drilling alternatives outside of this area. And over the last several months these companies are beginning to accelerate drilling and production plans and activities on acreage located behind our gathering system. It’s too early to call but we are becoming much more optimistic about the outlook for this segment and particularly the impact it may have on 2017.

Switching to pour liquids business in the Williston, we saw our liquids volumes decline 9.5% over the first quarter, which included a slight increase in our produced water volumes that was offset by a decline in crude oil volumes. The crude oil volume decline was primarily driven by natural declines that occurred related to well completions made during the fourth quarter of 2015 and the first half of the year. However, we were also affected by volume shut-ins as certain of our customers took down existing production from wells located in the vicinity of ongoing completion activity. We are already seeing the benefit from these completion activities in the first half of the third quarter. We estimate that our producers have approximately 60 docks on our crude oil system. In addition, we continue to work to gain market share from trucks particularly with regard to produce water volumes. This is an area that we may see increase volumes in the back half of 2016 despite flattening underlying crude oil volumes.

Looking forward, we are working diligently to position our crude oil gathering system in channels approximately 50,000 to 60,000 barrels a day of crude oil to be a staging area for volumes delivered to a new large takeaway pipeline and it is expected to be placed into service by the end of this year. Currently, these crude oil volumes are being delivered to the COLT rail terminal and other pipeline interconnects that we currently have access to. The new pipeline will not only be an important transportation option for future Balkan barrels but it will also allow us to earn incremental revenue on existing gathered volumes in our system through our interconnect with the pipeline. One final note on our cost control initiatives before I turn it over to Matt, I would like to applaud our team for its continued focus on managing the expenses while maintaining the safety and integrity of our gathering system. A statistic we monitor closely is our controllable OpEx for 1,000 cubic feet equivalent. And in the second quarter of ’16, this metric was the lowest in the span at SMLP in the past two years and over 7% lower than what it was just one year ago. We will continue to focus closely on cost management and it was proving to be a longer cycle that many of us have originally anticipated.

So with that I will turn it over to Matt who will review the quarter in more detail.

Matt Harrison

Great, thanks Steve. SMLP reported a net loss of $50.6 million for the three months ended June 30, 2016 compared to a net loss of $2.4 million in the second quarter of 2015. This includes an impairment charge of approximately $37.8 million net to SMPL associated with Ohio Gathering’s 23,000 barrel per day condensate stabilization facility and approximately 17.5 million of deferred purchase price obligation expense. In conjunction with the 2016 drop-down transaction, we recognized a liability on our balance sheet for the deferred purchase price obligations to reflect an estimate of the remaining consideration to be paid in 2020 for the acquisition of 2016 drop-down assets. We discount the remaining consideration on the balance sheet and recognized a change in present value on the income statement. The change in present value comprises both a time value of money concept as well as any adjustments to the expected value of the deferred purchase price obligation.

Adjusted EBITDA for the second quarter of 2016 was $72.4 million compared to $61.9 million for the second quarter of 2015, a $10.5 million increase in adjusted EBITDA was primarily due to increased natural gas volume throughput on our Summit Utica and Ohio Gathering systems and increased liquids volume throughput on our Williston Basin gathering systems. These volume throughput increases were partially offset by volume declines in our DFW Midstream, Grand River and Mountaineer Midstream systems in the second quarter of 2016 compared to 2015. Adjusted EBITDA in the second quarter of 2016 included approximately $16 million related to MVC mechanics from our natural gas gathering and crude oil transportation agreements. Additional tabular detail regarding MVCs is included in the second quarter earnings release.

Adjusted distributable cash flow totaled $51.1 million in the second quarter of 2016, this implies a distribution coverage ratio of 1.25 times relative to second quarter 2016 distribution of $0.575 per limited partner unit to be paid on August 12. CapEx for the second quarter 2016 totaled approximately $30 million of which approximately $5.3 million was classified as maintenance. The partnership did not make any capital contributions related to its Ohio gathering JV in the second quarter of 2016. We had $720 million of debt outstanding under our $1.25 billion revolving credit facility at June 30, 2016 which implies $529 million of available borrowing capacity. There was zero net borrowings under our revolving credit facility in the second quarter. Total leverage as of June 30, 2016 was 4.50 times. SMLP updated its 2016 adjusted EBITDA guidance from a previous range of $260 $290 million to a new range of $270 to $290 million. We expect SMLP’s average full-year 2016 distribution coverage ratio to range from 1.15 times to 1.25 times.

With that I will turn the call back over to Steve.

Steve Newby

Thanks Matt, I think our financial results this quarter displayed a diversity and resiliency of our business model and a positive impact of the 2016 dropdown transaction that was completed in the first quarter. The dropdown assets are performing as expected and we continue to believe they will drive future growth at SMLP. In addition, through the first six months of the year our base business has exceeded our expectations highlighting the impact of our highly contracted key base business model and the diversity of our customer mix ultimately leading to an increase to the midpoint of our adjusted EBITDA guidance. Through the second quarter, we have trended toward the higher end of our financial guidance above our quarterly distribution coverage estimate and below our expected leverage levels, all three positive data points. Looking forward across the balance of ’16, out outlook is firming, but we continue to remain cautious.

In the crude markets, we are encouraged with the long-term fundamentals but remain cautious in the near term. Inventories are near record levels with producers continue to maintain a robust inventory of drill but uncompleted wells not only upstream of our system but throughout the lower 48. Both of which we think will limit price of site in the short term as the market works to rebalance itself over the next 6 to 12 months. We've had a very constructive spring in the summer in the natural gas market with power burn and production declines from legacy gas basin. However, we continue to think that storage levels are weighing on prices with the primary risk being at another warm winter gets us back to a similar position as where we were earlier this year. We are encouraged by the number of demand projects slated to come online in the near term, which should serve to dilute the impact that whether has on gas prices.

And our biased to be upside as a normal winter this year has on the potential to provide a boost to prices relative to the current strip. Although we continue to believe the volume outlook for the entire midstream industry will be more challenging in the second half of ‘16 versus the first half of ’16, we believe our diversified operations and customer base along with our strong portfolio of key based gathering arrangements in MVC will provide stability and growth in our business during the continued depressed commodity cycle. On DPU growth, we will continue to take a measured approach and as I said in the past, a quarter by quarter approach regarding the pace of distribution growth per unit in 2016. DPU growth will be dependent on not only our current financial results but also the outlook for commodity prices and the impact that it will have on our customers drilling and completion activities. Our focus continues to be on building distribution coverage and strengthening our balance sheet.

So with that I will turn it over to the operator to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Kristina from Deutsche Bank.

Kristina Kazarian

So we think some of the Utica guidelines [indiscernible] construction or at least talking about higher ’17 production, can you guys give us some color on how much if we’re looking out into ’17, you think you might see on your system or general color on what you’re thinking?

Steve Newby

Hey Kristina, it’s Steve. I think it is a positive, I don't think we were surprised up their - some of the comments on forward outlook and growth. It's probably a little early to know exactly where they plan on boosting, I think we will get some of it, I think Ohio Gathering will get some of that, given its very large position versus others, it’s hard to know exactly where but I think given their increase I think it is pretty fair to assume they’re going to be running some - having some activity on our system in ‘17. I think it is positive, I’d add, I think the increase in NGL prices and expected sort of outlook by most into ’17, I think you’ll see activity in the wet gas window as well too.

Kristina Kazarian

And then liquid volumes in the Bakken where challenged this quarter, looked a little worse I think and so pads are brought offline for further completion. Can you talk about if this downtime was expected and how we should think about growth coming online in terms of second half of ‘16 volumes?

Steve Newby

Yes, I’ll give you a little bit of sense, I mean, it’s two things, one, I don't want to minimize that lower activity also is going to, you know, is not great for volumes either, it’s not completely related to completions. But the other phenomenon that you mentioned is we do, what we see there is as produces complete pads, due to pressure issues will tend to bring down pads in and around the area where they are completing. So we saw that affect us mainly towards the back half of the quarter as completions picked up and I think we're seeing the impact of some of those completions I would say as we are month and a half into the third quarter. So we do expect to see some positive impact from dock completions.

Kristina Kazarian

And then last one, I don't want to frighten anymore you guys for next week but just general guide on how we should maybe be thinking about the Analyst Day?

Steve Newby

Yes, I think we’re going to go through a lot information, we are going to take through outlook by area, outlook position by area and I think as you probably would expect we’re going to talk a lot about our views on the deferred payment and the benefits of that and how we plan on addressing it over the next couple of years.

Operator

And the next question comes from Tristan Richardson from SunTrust.

Tristan Richardson

Could you talk a little bit about Summit Utica and the investment you talked about in the second half getting to the 450 a day capacity? Is that the bulk of the plant spent on that system for the remainder of the year. And then when you look forward in terms of additional spend to build that out, will that sort of just be concurrent with your customer’s plan and sort of yet to be determined?

Steve Newby

Yes, I’ll try to give you some color, a little bit of color. I would tell you we definitely spend the bulk, call it two thirds or so of Summit Utica's ‘16 CapEx in the first half of the year. So it will come down in the back half of the year and our dehy station is literally in the middle of being commissioned now. So the CapEx for that has virtually been spent. So I would think about remaining CapEx for ‘16 as more well-connect CapEx for us for the most part. So it will be connecting additional production and we’re pretty in sync with our customers there and mainly our anchor customer on connecting a pad and that pad flowing pretty soon thereafter. So we don't have a lot of lag time between our CapEx spend and getting additional revenue. And I would say I've made this comment before, we do get paid to dehy gas in addition to gather it. So there is additional incremental revenue for when we bring on a station and start using it.

Matt Harrison

Chris, the next real big spend in the Summit Utica system would when we bring on the compression. So, we have three dehy stations right now that have room for compression and then so when we step back, when the volumes of the high-pressure gas starts to require compression, then we’ll bring that on and then also charge another fee for that as well.

Tristan Richardson

And now, is that sort of an out year type, a, spend and b, would you expect all the volumes coming from your customers on that system to be compressed or will it not quite track one-to-one?

Steve Newby

So, I’m not Matt, but -- the way it works is, our customer set and we have to request compression. We have a fairly, as you would imagine, a fairly long lead time to put that compression in and on Summit Utica, they had not requested us to do that yet. And it’s a 18-month type timeline for us to put it in once they request it. I would expect depending -- and then your second question, it's a little harder to answer, because we could segregate some of the systems have some of the areas on compression, some other areas not necessarily on compression. So it just depends on where we set compression first with volumes we have. So, it’s not necessarily everything goes on compression at once.

Tristan Richardson

Great, okay. And then Steve, you talked a little bit about just seeing some interesting dynamics in the Piceance and DJ and I'm curious, I mean, is that primarily based on the fact that some of that acreage has changed hands, and so economics are reset or is there some other macro aspect going on there that we should be thinking about. And then also was that an impact on the quarter, because I think numbers were a little better there than I think some expected?

Steve Newby

Yes. So let me, I’ll take them in pieces. First, we’ve had actually -- most of our acreage trade hands, absent in Encana’s frankly. So most of the other areas, larger areas for us have, so, three of our top customers now in that area are owned and this has happened in the past 2 years, 2.5 years, are now private companies, private equity-backed companies. Really, this is the only area of significance that acres they have and so we've seen in the last several months in particular, seen a pretty aggressive uptick in those customers activity in the area. And that could be gas price related, I don't necessarily think it’s basin, reservoir related. We are seeing some data points on better completion, that’s just completion technology though.

They can affect and taken hold, versus what it was three, four, five years ago. So we are seeing some positives from that. But I think it’s mainly due to, you guys coming in, repricing the acreage, usually when private equity comes in and buys acres, they don’t buy to sit on it. So we are seeing them develop it. Second part of your question on impacts, frankly, there wasn't much of an impact at all in the second quarter related to the activity, a lot of completion activity happened late in the quarter and it’s happening now as well too. So I expect we’ll see more impact through the second half of the year than we did in the first half of the year that increased activity.

Tristan Richardson

Steve, that's great. Thank you guys very much.

Operator

And our next question comes from Lane French from Robert W. Baird.

Lane French

Good morning. Can you guys provide us with an update on in your Piceance and DJ segment, was there a plan to drill 70 wells by the end of 2017, any update on the potential timing of volumes for the number of wells brought online under that agreement so far would be appreciated?

Steve Newby

Yes. I think, they are in the process, I was trying to get the exact number for you, Lane. They are in the process of completing, I think 16 of those 70 right now and so, there is a few on and they are completing a big pad site. So that’s, they are in process of that, I think we will see more benefit of that also as they finish those out in the second half of this year.

Lane French

Great. And then your operating and maintenance expense fell 9% from first quarter to second quarter, while your top line revenue and your total throughput was basically flat. Can you help us understand what drove those costs lower and if those efficiencies are sustainable through the back half of the year?

Steve Newby

Yes. Part of what skews that a little bit is in the first quarter, we had some slip expense in our Marcellus segment, pipeline slip expense in our Marcellus segment. Those tend to be, I don't want to call them one time, just because they happened, but it was a big one, big cost and it 1 million, 1.2 million, something like that in the first quarter. So that's a little bit of the sequential quarter comparison. And then we’re -- candidly, we’re focused on costs. I think I would tell you, we think it’s sustainable, our levels, absent some one-timer things like slips, but we do think ongoing, it’s fairly sustainable. We are very focused on cost controls, and I would say optimization of our systems.

Lane French

Great. That's all I have. Thanks.

Operator

And our next question comes from John Edwards from Credit Suisse.

John Edwards

Yes, good morning, everybody. Hey, just Steve, you guys raised your guidance and it sounds like, taken into account, you had a write-down in your Utica shale segment, I guess from that joint venture and nonetheless, you're able to raise your guidance, I mean just talk a little bit about how you took that into account. And what if you didn't have to write-off that asset, kind of what was the impact of that and where could you have gone perhaps. I mean, I'm just trying to get a sense for what the kind of, what the real sort of true increase in expectations is here?

Steve Newby

Yes. So, John, the write-down was specific to the condensate stabilizer at our JV. We obviously follow [indiscernible] we got our proportion of share of that. So it is a, I would say a pretty small piece of the JV from a cash flow perspective. It probably doesn't take a lot for you to connect the dots on the write down. There's just not a lot of condensate drilling going on and that’s the biggest piece and I think also operators in the area are also just gotten better on with the field stabilization as well too. So that's a curve. So -- but I would say the impact to us on that, both historically and going forward is just a small piece of business.

John Edwards

Okay. So you’re expecting this really not a big deal, and you’re still expecting a pretty sharp ramp-up in your Utica segment going forward, is that fair?

Steve Newby

That is fair. The biggest driver of our Utica segment is gas, right. So be it from the wet gas area to the dry gas area. So, that’s fair. I think to put in perspective, Matt was telling me the condensate area for us is, I think, less than 1% of our company. Impact is very de minimis, John.

John Edwards

Okay. So it is really, this is really more of a kind of a housekeeping item, this was expected that kind of thing.

Steve Newby

I would agree.

John Edwards

Okay. And then, so I mean, as far as your longer-term outlook then, you raised guidance this year, any change to the longer-term trajectory, you may have commented, I may have just missed it.

Steve Newby

No, we’ve been wanting to shy away from longer than 12 months guidance in this market. I think it’s hard enough to give that, but I think we’re probably on balance a little more cautious than maybe some others on just the commodity outlook over the balance of the year and then going into ‘17 and I think we want to get a little more clarity as we all go through our budgeting season here in the next three or four months, a little more clarity from our customers on their plans for ‘17 before we start talking about longer-term, but for ‘16, as we said in our comments, our prepared comments, I think it's -- the back half of the year is firming up very nicely for us.

John Edwards

Okay, great. That's it from me. Thanks.

Operator

And our next question comes from [indiscernible] from Citigroup.

Unidentified Analyst

Hi, good morning, guys. I was wondering if you could give us a better idea of the relative drilling activity that you’re expecting on your Ohio gathering in Summit Utica Systems, near the end of the year versus what you saw in Q1, sort of irrespective of when the volumes are actually coming online in the system.

Steve Newby

Yes. Just Ohio gathering, I think we tried to give you a little bit of color in our comments, but so we saw heavy activity at the end of ‘15 into the first quarter and we saw that completion activity occur and that was primarily in the dry gas area of Ohio gathering. That sort of drove volumes in the first quarter, I would say into the first part of second quarter. Not much activity in the second quarter, drilling or completion activity and then we expect both to occur, drilling and completion activity to occur in the area, and more of an impact later, third and into fourth. That gives you and more so in the wet gas window from our customers and that’s important, just because the magnitude of volumes of molecules we move between wet and dry are just different, right, a little bit lower in the wet gas area versus the dry gas wells tend to be higher IPs. Did that help you?

Unidentified Analyst

Okay. Yes. And how do you see the cash flows net to Summit from those systems, the Ohio versus Summit sort of growing relative to each other over the next couple of years.

Steve Newby

Well, we own 100% of Summit Utica, so that helps and only 40% of Ohio gathering. So I think -- and then Ohio gathering is a more mature system than Summit Utica, Summit Utica, we’re still building out quite significantly and connecting pads and pretty active on the front end of that. So the magnitude of growth in volumes from Summit Utica will be greater, because of those two factors, one, we own 100%, two, we’re still building it out and connecting it. We do still expect obviously OGC to grow and still have very nice growth, but Summit Utica will be the bigger driver.

Unidentified Analyst

Okay. And lastly, I think you touched upon it earlier, but can you give us an idea of the split between dry versus wet gas volumes that you’re currently gathering on your Ohio gathering system, is that mostly dry right now?

Steve Newby

On OGC, yes, it's probably 50-50 is what the guys are telling me.

Matt Harrison

And Summit Utica obviously is a 100% dry.

Unidentified Analyst

Okay, all right. Great. Thanks. That's all for me now.

Operator

And our next question comes from Jeff Birnbaum from Wunderlich.

Jeff Birnbaum

Good morning, everyone. So thanks for taking the question. Most of my questions have already actually been asked and answered. So just -- maybe a few just sort of smaller, housekeeping ones. The connectivity on pull and divide and the new takeaway that you referenced in the release and I think in your prepared remarks, Steve, can you give a little more color on the potential CapEx involved there, is that included in guidance or if that would be incremental to that and sort of what visibility you have into, maybe the impact that could generate on volumes?

Steve Newby

Yes. So, first, yes, it's included in our guidance. It's not a major project, it's an interconnect. So less than $10 million project for us. It's not really a volume impact, Jeff, because it's more of us making incremental margin on our already gathered barrel. So we haven't -- at additional interconnect, potentially, can charge for that additional interconnect to act -- for our customers to access it. So we’re already gathering that barrel, right, so it's a matter, do we take it to X location or Y location and we just make a little bit of additional, if we take it to a different location. So that's how I would think about it, that's very positive for us, right, because you’re making more margin on the same barrel, but it’s not, it's a great little project, but it's a little project, it's not a huge mover.

Matt Harrison

But to be clear, it helps our customers’ netback in the area as well to provide access.

Steve Newby

Yes, we think it’s very strategic to be able to connect to Dapple, obviously.

Jeff Birnbaum

Yes. And that was kind of where I was getting on whether you sort of had an indication from your customers that basically, that improvement in netback would be an incremental differentiator?

Steve Newby

Yes. I’ll put it this way. I think there is a lot of discussion on dapple, because it’s so big, it’s impacting the basin and how customers feel about it, given a $40 crude oil environment. My discussion with them and I have discussions with them, some large shippers on them, I would say and maybe transfer or pay us for some IR here, I would say they are very -- the folks are very positive and looking forward to dapple coming online.

Jeff Birnbaum

Yes, fair enough. And I mean just something if I guess related question, you also mentioned that you’re already seeing some impact from those docks [ph] turning into sales, that were sort of shut in the second quarter, is that pretty locked in as far as you know from your customers’ plans or I guess kind of how dependent is that trend to sales in the back half on pricing?

Steve Newby

Yes. I would say for us, we’re seeing the completions are going on now. So pretty locked in, those decisions were made a couple of months ago, most likely and so, we always, you’ve heard us say that the cycle time from spud to volume for us is, I would call it, 9 to 12 months, but the cycle time from completion to volume to us is probably somewhere in the 3 to 4 months timeframe. So it’s, if that makes sense, it’s pretty, those are pretty well locked in, I would say, additional activity obviously going to be price dependent. What we saw and what we've seen is as prices trend and this is what we thought would occur in the sequence it has, as price has trended towards $50 a barrel, we saw dock completions happen first, and then rigs come in second. And I think that's what we’ll see, I think we’ll continue to see dock completions, as prices bounce between 40 and 50 and then I think it's going to take north of 30 to 40 rigs being added.

Jeff Birnbaum

Okay, perfect. And just one small last one for me, CapEx looks to be more than half for the year, it looks more than half way done as we kind of get past the halfway point of the year, so I guess it sounds like the second half budget or maybe the one project is mainly well connects. So sorry if I missed it, but do you have an updated sort of expectation for leverage at year end?

Matt Harrison

Yes, absolutely, Jeff. It’s Matt. So just from a CapEx standpoint, right, we spent about $100 million in the first two quarters, and our guidance is 150 to 200. Our expectations right now are to be on the low-end of that guidance from a CapEx standpoint, and most of the activity, as you can imagine, would be kind of Utica related, given dehy is done as well as Bakken related as well is mostly from a CapEx standpoint. From a leverage standpoint, as we’ve mentioned before, so we’re about 4.5 times here at June 30. As the year progresses, we expect it to probably get a little close to 4.75 times, is that any other activity and changes relative to our guidance and then, as we have mentioned, we expect that to delever in 2017.

Jeff Birnbaum

Yeah. Okay, thanks a lot guys.

Operator

And our next question comes from Charles Marshall from Capital One.

Charles Marshall

Hey, good morning, everyone. Most of my questions have been asked and answered, but just a quick couple of ones here, with regard to Encana and the Piceance, do you have any updates with M&A negotiations right now to try to entice activity there or any sort of update with that customer would be helpful?

Steve Newby

I would say not a great one, other than they, I think, have made it pretty clear publicly and some of what they are doing is, I think they are probably studying the aerie on what their plans are going to be. We have a very good relationship with them, stay in contact with them and would love for either them or someone else to be more active for sure. But we're not pretty to their strategic discussions around it, other than what we see publicly going on with capacity, redetermination and things like that. So we are levered to that, if anything, thus trade there, I would say, it's probably a positive for us, in general, acres trades have been very positive for us.

Charles Marshall

And that makes sense. And I guess just kind of extrapolating that forward to the Barnett, I mean do you sort of have that same feeling with Chesapeake and that acreage there and obviously a lot of talks about them looking at the Barnett and maybe still on that acreage, would you see that as a net positive relative to where things are happening today?

Steve Newby

So, yes, Chesapeake and Encana haven't really drilled a well in the last three years on our systems and so there are a lot, and then they are a large acreage, the largest acreage holder, Chesapeake is in the Barnett on our system. And so again, that acres trading usually foreshadows increased activity for us too. So to the extent that occurs and we’ve been watching it, probably just like you guys have pretty closely and are pretty in tune with it, I think that would be a net positive to Summit. And I will say, we also probably have Chesapeake, we, of interest, say, we have their best acreage in the Barnett is around our system.

Charles Marshall

Thanks. And last one from me, I know you guys in some of the outer years have lot of CapEx allocated to compression. Is there any slot of any change in that sort of cadence of spending those dollars for compression, do you see that having to come on sooner rather than later, or just any color around that would be helpful?

Steve Newby

Yes, I think you mean the Utica specifically, it's all tough to tell. I mean, it’s largely customer driven on how they want to manage the fields. That optionality lies with them on when they want us to put compression in, typically. We’re doing that at OGC and in the dry gas area. I think that was mentioned yesterday by Gulfport on the call. So we’re adding compression there. We don't see us adding compression at Summit Utica as I mentioned earlier in the call for a while. Yet, it’s obviously a newer -- it’s a newer development. So that would make sense. So it’s the outer years, we definitely projected and planned for it, the exact timing, the exact quarter, it's a little cloudy right now, because it’s customer driven.

Charles Marshall

Thanks a lot guys. See you next week.

Operator

We have no additional questions at this time. I would like to turn the call over back to Mr. Newby.

Steve Newby

Thanks everybody for joining us and hope everybody has a good weekend and we look forward to seeing you next week, next Wednesday in Pittsburgh for Analyst Day. 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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