IPO Preview: Summit Midstream Partners, LP

| About: Summit Midstream (SMLP)

Based in Dallas, Texas, Summit Midstream Partners, LP (NYSE:SMLP) scheduled a $250 million IPO with a market capitalization of $1 billion at a price range mid-point of $20 for Friday, September 28, 2012.

For the week of October 1, 2012, seven IPOs are scheduled. Full IPO calendar available here.

S-1A filed September 24, 2012.

Manager, Joint Managers: Barclaysl BofA Merrill Lynch; Goldman; Morgan Stanley.
Co Managers: BMO; Deutsche; RBC; Baird; Janney Montgomery.

SMLP is a growth-oriented limited partnership focused on owning and operating midstream energy infrastructure that is strategically located in the core producing areas of unconventional resource basins, primarily shale formations, in North America.

At the price range mid-point the minimum estimated payout is 8%, with future growth potential in shale play regions.

Buy SMLP on the IPO because it should edge higher over time.

SMLP is priced mid-range compared to its competitors, all of whom are much larger and don't offer such a focused plan on shale gas growth, as does SMLP.

Mid stream L.P.s


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Crestwood Midstream Partners LP (NYSE:CMLP)




Summit Midstream Partners, LP (SMLP)




Williams Partners L.P. (NYSE:WPZ)




Access Midstream Partners, L.P. (NYSE:ACMP)




Enterprise Products Partners L.P. (NYSE:EPD)




Financial term glossary

SMLP is a growth-oriented limited partnership focused on owning and operating midstream energy infrastructure that is strategically located in the core producing areas of unconventional resource basins, primarily shale formations, in North America.

SMLP currently provides fee-based natural gas gathering and compression services in two unconventional resource basins: (NYSE:I) the Piceance Basin, which includes the Mesaverde, Mancos and Niobrara Shale formations in western Colorado; and (ii) the Fort Worth Basin, which includes the Barnett Shale formation in north-central Texas.

As of June 30, 2012, SMLP gathering systems had approximately 385 miles of pipeline and 147,600 horsepower of compression.

During the six months ended June 30, 2012, SMLP systems gathered an average of approximately 909 MMcf/d of natural gas, of which approximately 64% contained natural gas liquids, or NGLs, that were extracted by a third-party processor.

SMLP generates a substantial majority of revenue under long-term, fee-based natural gas gathering agreements.

SMLP customers include some of the largest natural gas producers in North America, such as Encana Corporation, Chesapeake Energy Corporation, TOTAL, S.A., Carrizo Oil & Gas, Inc., WPX Energy, Inc., Bill Barrett Corporation, Exxon Mobil Corporation and EOG Resources, Inc.

Substantially all of SMLP's gas gathering agreements are underpinned by areas of mutual interest, or AMIs, and minimum volume commitments.

SMLP AMIs cover approximately 330,000 acres in the aggregate, have original terms that range from 10 years to 25 years, and provide that any natural gas producing wells drilled by customers within the AMIs will be shipped on SMLP gathering systems.

The minimum volume commitments, which totaled 2.5 Tcf at June 30, 2012 and, through 2020, average approximately 639 MMcf/d, are designed to ensure that SMLP will generate a certain amount of revenue from each customer over the life of the respective gas gathering agreement, whether by collecting gathering fees on actual throughput or from cash payments to cover any minimum volume commitment shortfall.

SMLP's minimum volume commitments have original terms that range from 7 years to 15 years and, as of June 30, 2012, had a weighted average remaining life of 11.4 years, assuming minimum throughput volumes for the remainder of the term. The fee-based nature of these agreements enhances the stability of cash flows by limiting direct commodity price exposure.

SMLP was formed in 2009 by members of management and Energy Capital Partners, which together with its affiliated funds, is a private equity firm with over $7.0 billion in capital commitments that is focused on investing in North America's energy infrastructure.

Energy Capital Partners has significant energy and financial expertise to complement its investment in us. To date, Energy Capital Partners and its affiliated funds have 22 investment platforms with investments in the power generation, electric transmission, midstream natural gas and renewable sectors of the energy industry.

In August 2011, Energy Capital Partners sold an interest in Summit Investments to GE Energy Financial Services. GE Energy Financial Services invests globally in essential, long-lived and capital-intensive energy assets.

To date, GE Energy Financial Services has invested over $20 billion in energy investments worldwide, of which approximately $2.4 billion has been committed to midstream-related portfolio companies.

The sponsors, Energy Capital Partners and its affiliates and GE Energy Financial Services, are experienced energy investors with proven track records of making substantial, long-term investments in high-quality midstream energy assets.

Energy Capital Partners has indicated that it intends to use us as its primary platform for the acquisition, construction and development of future midstream infrastructure assets; however, it is not obligated to do so.

For example, Summit Investments recently entered into a purchase agreement with a third party to acquire a natural gas gathering and processing system that gathers and processes production from the Piceance and Uinta basins in Colorado, and Utah, for a purchase price of approximately $207 million.

The system consists of over 1,600 miles of gathering pipelines, 44,200 horsepower of compression, five propane refrigeration plants, two amine treating plants and two NGL injection stations.

These assets will not be part of the assets that Summit Investments will contribute to SMLP in connection with the closing of this offering, and Summit Investments has no obligation to offer these assets to SMLP in the future.

While there are no assurances that SMLP will benefit from the relationship with its sponsors, SMLP believes its relationship with both of its sponsors will be a competitive advantage.

Natural gas continues to be a critical component of energy supply and demand in the United States. Recently, the price of natural gas has been at historically low levels, with the prompt month NYMEX natural gas futures price reaching $3.21 per MMBtu as of July 31, 2012, compared with a high of $13.58 per MMBtu in July 2008.

The lower price of natural gas is due in part to increased production, especially from unconventional sources, such as natural gas shale plays, high levels of natural gas in storage, warm winter weather and the effects of the economic downturn starting in 2008.

According to the U.S. Energy Information Administration ("EIA"), average annual natural gas production in the United States increased 13.9% from 55.2 Bcf/d to 62.9 Bcf/d from 2008 to 2011. Over the same time period, natural gas consumption increased only 4.5% to 66.6 Bcf/d.

Furthermore, the amount of natural gas in storage in the continental United States has increased from approximately 2.8 Tcf as of August 5, 2011, to approximately 3.2 Tcf as of August 3, 2012, due to the unseasonably warm winter of 2011-2012 and to the decisions of many producers to store natural gas in the expectation of higher prices in the future. In response to lower natural gas prices, the number of natural gas drilling rigs has declined from approximately 1,403 as of December 31, 2008 to approximately 430 as of July 31, 2012, according to Smith Bits, as a number of producers have curtailed their exploration and production activities.

SMLP believes that over the short term, until the supply overhang has been reduced and the economy sees more robust growth, natural gas pricing is likely to be constrained.

Longer term
Over the long term, SMLP believes that the prospects for continued natural gas demand are favorable and will be driven by population and economic growth, as well as the continued displacement of coal-fired electricity generation by natural gas-fired electricity generation due to the low prices of natural gas and stricter government environmental regulations on the mining and burning of coal.

For example, according to the EIA, in December 2008, 49% of the electricity in the United States was generated by coal-fired power plants and in December 2011, 39% of the electricity in the United States was generated by coal-fired power plants. In January 2012, the EIA projected total annual domestic consumption of natural gas to increase from approximately 22.9 Tcf in 2009 to approximately 26.6 Tcf in 2035.

Consistent with the rise in consumption, the EIA projects that total domestic natural gas production will continue to grow through 2035 to 27.9 Tcf. We believe that increasing consumption of natural gas will continue to drive natural gas drilling and production over the long term throughout the United States.

As a result of the current low natural gas price environment, some natural gas producers have cut back or suspended their drilling operations in certain dry gas regions where the economics of natural gas production are less favorable.

Drilling activities focused in liquids-rich regions have continued and, in some cases, have increased, as the high Btu content associated with liquids-rich production enhances overall drilling economics, even in a low natural gas price environment.

Shale play growth
Over the past several years, a fundamental shift in production has emerged with the growth of natural gas production from unconventional resources (defined by the EIA as natural gas produced from shale formations and coalbeds).

While the EIA expects total domestic natural gas production to grow from 20.6 Tcf in 2009 to 27.9 Tcf in 2035, it expects shale gas production to grow to 13.6 Tcf in 2035, or 49% of total U.S. dry gas production.

Most of this increase is due to the emergence of unconventional natural gas plays and advances in technology that have allowed producers to extract significant volumes of natural gas from these plays at cost-advantaged per unit economics as compared to most conventional plays.

In recent years, well-capitalized producers have leased large acreage positions in the Piceance Basin, the Barnett Shale and other unconventional resource plays. To help fund their drilling program in many of these areas, including in the Piceance Basin and the Barnett Shale, a number of producers have also entered into joint venture arrangements with large international operators and private equity sponsors.

These producers and their joint venture partners have committed significant capital to the development of the Piceance Basin, the Barnett Shale and other unconventional resource plays, which we believe will result in sustained drilling activity.

SMLP results are driven primarily by the volumes of natural gas that it gathers across its systems.

For the year ended December 31, 2011, and the six months ended June 30, 2012, approximately 80% and 84%, respectively, of revenue was associated with fee-based gathering services that SMLP provided to customers.

For the six months ended June 30, 2012, approximately 12% of revenue was associated with the sale of physical natural gas that SMLP retained from its DFW Midstream customers to offset the power expense associated with the operation of the electric-drive compression and (ii) the sale of condensate volumes that SMLP collected on its Grand River system.

SMLP generated the remainder of its revenue by charging certain customers with respect to costs we incurred on their behalf to deliver pipeline quality natural gas to third-party pipelines and costs SMLP incurred to operate electric-drive compression on the Grand River system.

SMLP's Minimum Quarterly Distribution is anticipated to be $.40 or $1.60 per year, payable no later than 45 days after the end of each fiscal quarter. This equates to $20 million per quarter or $80 million per year.

"We anticipate that distributions from operating surplus will generally not represent a return of capital"…read more page S-1 61

If distributions exceed the minimum quarterly distribution and target distribution levels, the incentive distribution rights held by the general partner will entitle the general partner to increasing percentages of the distributions, up to 48.0% of the distributions above the highest target distribution level.

Principal competitors in the Fort Worth Basin are Access Midstream Partners, L.P. , Crestwood Midstream Partners LP and Energy Transfer Partners, L.P.

Principal competitors in the Piceance Basin are Williams Partners L.P. , Energy Transfer Partners, L.P. and Enterprise Products Partners L.P.

SMPL expects to net $234 million from its IPO.

Proceeds are allocated as follows:
Repay $140.0 million of debt.

Make a cash distribution to Summit Investments of $88.0 million in order to reimburse Summit for certain capital expenditures.

Pay offering expenses of $6.3 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This SMLP IPO report is based on a reading and analysis of SMLP's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.