Summit Midstream Corporation

good morning and welcome to the fourth quarter 2021 summit midstream partners lp earnings conference call my name is brandon and i'll be your operator for today at this time all participants are in a listen-only mode later we will conduct the question and answer session during which you may dial star 1 if you have a question i will now turn the call over to ross wong and ross you may begin thanks operator and good morning everyone if you don't already have a copy of our earnings release

please visit our website at www.summitministry.com, where you'll find on the homepage, events and presentations section, or quarterly results section. With me today to discuss our fourth quarter of 2021 financial and operating results is Heath Deneke, our President, Chief Executive Officer, and Chairman, Bill Malt, our Chief Financial Officer, along with other members of our senior management team. 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. It 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 that such expectations will prove to be correct. Please see our 2020 Annual Report on Form 10-K, which was filed with the SEC on March 4, 2021, our 2021 Annual Report on Form 10-K, which will be filed soon, 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 use the terms EBITDA, adjusted EBITDA, and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable gap measures in our most recent earnings release. And with that, I'll turn the call over to Heath.

Thanks, Ross. Good morning, everyone. Thank you for joining our earnings call. So I'd like to start off by providing a recap of 2021, as we certainly had a lot going on throughout the year. So first, Summit reported full-year adjusted EBITDA of $238 million, ending the year at the top end of our $225 to $240 million guidance range, and exceeding the midpoint of our original 210 to 230 million guidance range by nearly 10%. This was an all-hands effort on cost control, achieving some commercial wins, customers hitting and, in many cases, exceeding their original expectations, and general tailwinds from the economic recovery. As a reference point, our original 2021 guidance assumed 45 to 75 wells, and we ended the year with 95 wells added to the systems. I'll elaborate on this further in a few minutes, but we are hopeful that the prevailing commodity price environment will continue to pull forward activity as we progress throughout 2022. We also successfully placed the W pipeline in service in November. We were able to do so safely and approximately 20% below the original $500 million budget that was established at original FID. With nearly 90 rigs running in New Mexico today, we're very excited about the near and long-term outlook for this new and very critical gas pipeline system for the Northern Delaware Basin. We also exchanged over $115 million of our preferred equity and accrued distributions into common equity that continues to reduce our overall financial leverage and eliminated over $17 million of accrued but unpaid distributions from the balance sheet. These series of transactions reduced our Series A preferred face value below $100 million, which enabled us to – or will enable us to issue unlimited parity preferred equity in the future, which we believe will be an important strategic tool for Summit in the coming years. We refinanced nearly a billion dollars of debt maturities that were coming due in 2022 with a capital structure that provides us the flexibility that we believe we needed to help us navigate an ever evolving and uncertain oil and gas market. We expected that the economic recovery and the pressures placed on our upstream customers would result in an extended U-shaped recovery for Summit, And this capital structure certainly provides us with a multi-year runway and extended opportunity for that recovery to occur. Now let's dive into 2022 guidance. First off, you know, given the commodity price environment that we're in and the momentum and activity that we experienced during the second half of 2021, you know, we are very disappointed with a limited amount of new wells that our customers' latest plans are indicating will be turned online behind our systems in 2022. The guidance range we announced earlier this morning is based on approximately 75 to 110 new wells, which is basically flat to the historically low levels of activity we experienced during the 2020 and 2021 downturn, and certainly well below our pre-pandemic three-year average of approximately 260 new wells per year, which, as a reminder, were developed during the time when Henry Hub averaged below $3 and WTI averaged below $60 a barrel. We're obviously now in one of the best commodity price environments that we've seen in quite some time, with the WTI strip north of $80 a barrel, approaching $100, and the interheb strip above $4 for MMVTU. At these pricing levels, we believe that virtually all of the remaining inventory behind our gas and crude systems will be economic to develop. Furthermore, our customers have significantly improved their balance sheets, and financial capability through a combination of industry consolidations, restructuring activities, and good old-fashioned capital discipline over the past couple of years, and are now in a much better position to increase development spending to capture what we believe are very high return and compelling opportunities on inventories behind our system. While we understand that despite the bullish commodity price outlook, you know, producer restraint is a continued theme among public companies and even some private companies. These are themes that are generally in place to appease investors by holding production flat year over year, continuing to strengthen the balance sheet, and continuing to return capital to shareholders via share buybacks and distributions. Look, I mean, as a result, upstream equity values are now up, but certainly make buybacks more expensive. We think free cash flow generation is nearing an all-time high. and balance sheets have certainly improved significantly. We think these factors, as we continue to progress into 2022 and the fundamentals hold, we think that that will support a compelling case for producers to eventually begin increasing development budgets to grow production as they gain further confidence that the fundamentals that we're experiencing will continue to support a healthy commodity price environment going forward. Now to add some commentary, segment level commentary, let me start off in the Rockies. So the majority of the 20 to 30 new wells that we're currently expecting in this segment for 2022 is in the Willison Basin. And it's primarily being driven by private producers behind our polar and divided liquid system. While activity levels are well below historical pre-pandemic levels and certainly below what we would expect them to be in this pricing environment, We continue to be excited about the well results we are seeing in Central Williams County, with nearly 30 new wells having been brought online since 9-30 of last year. More broadly, activity in the Bakken continues to shift westerly towards our footprint as producers deplete top-tier inventory in Southern Williams, McKenzie County, and in particular within the Fort Berthold region. I'm also pleased to announce that we recently secured a new 50,000-acre dedication with a customer that has acreage located in close proximity to our polar and divide system. We think this new dedication could be a significant catalyst for volume growth as this acreage becomes further delineated in 2022 and 2023. Moving to the DJ, we have very little activity planned behind our systems in 2022. We think that this is largely attributable to the producer restraint thesis that I highlighted earlier in the call. But another factor that we think is impacting our near-term outlook is the recent consolidation activity in the basin. One of our large anchor customers in the DJ was acquired last year by a company that has recently completed five large-scale acquisitions to effectively consolidate the basin over the past 18 months. While longer term, we expect this will be a net positive for our DJ acreage position, the successor company appears to be focusing its near-term development activities on acreage in the more densely populated areas within the DJ. We do expect them to return to development activity on our footprint as these areas get more fully developed. And look, in the near term, we are making progress on offload agreements with other processors in the area. that we think can help us improve our outlook in the DJ as we wait on that development activity to pick back up within our dedicated footprint. Now quickly, to hit on the peons, we had nine wells come online during the fourth quarter, which really represent the first wells on the system in more than three years now. We have another 17 wells slated for 2022, And we have recently entered into a capital reimbursement agreement with a customer that would enable us to begin system planning activities for another 74 wells that we think could be brought online behind our systems in the 2023 to 2024 timeframe. In the Barnett, we expect at least four wells behind the system in 2022 and are having conversations for up to seven additional wells in the second half. The 70 wells brought online in 2021 were the best performing wells connected to the system thus far. And we believe that our customers are responding to improving natural gas prices and will continue to be active longer term in this pricing environment. Shifting to the Permian, we remain very optimistic with a long-term outlook for EE. As a reminder, we've placed the pipeline in service with initial capacity to transport an incremental 1.35 BCF a day of natural gas from growing production in Eddie and Lee County, New Mexico, to interconnect with multiple Gulf Coast-oriented pipelines that originate out of Oaxaca, Texas. W is anchored by one BCF a day of long-term, take-or-pay contracts from some of the largest producers in the Permian Basin, and is very well positioned for a highly efficient expansion to two BCF a day as production continues to ramp up in the area. We expect EE will be a significant growth catalyst for Summit as our initial VCF-a-day of sculpted take-or-pay contracts ramp up between 2022 and 2024, and as we secure new contracts from Northern Delaware customers that need incremental gas takeaway capacity to enable production growth. Our Permian GMP position continues to be impacted by our primary anchor customers' deferral of activity in and around our footprint, The timing of when that activity on our dedicated acreage will be developed by this customer does remain uncertain, but we are encouraged to see private producers adjacent to our system beginning to ramp up activity levels. We do expect that some of this volume will find its way to our system through various offload agreements as processing capacity in the area becomes more scarce in the future. We also believe that we will be successful in securing new contracts with other customers in this area. that we are beginning to see that are planning development activity in and around the lane system footprint. And then finally in the northeast, we are currently expecting 30 to 44 new well connects in 2022, and this is relative to approximately 50 wells in each of 2020 and 2021. This lower expected activity for 2022 is in spite of the significant efficiency gains that we've observed through longer laterals and improvement in completion techniques, which have driven really record well performance out of the Utica and behind our systems. Again, we believe that the producer restraint thesis is in play here, despite the highly attractive returns that can be achieved in this gas price environment. Additionally, one of our primary anchor customers behind our wholly-owned SMU system in the Utica has publicly indicated their interest in divesting its anchorage position in the basin. This customer has been virtually inactive in the Utica for the past several years, and the sale of this anchorage could really become a significant catalyst for future incremental development activity in our northeast segment in the coming years. So with that, I'd like to hand the call over to Bill now to let him provide some additional details on our financial results and outlook.