Summit Midstream Corporation

Good morning, and thank you for standing by. Welcome to the Summit Midstream Partners fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Randall Burton.

Please go ahead.

Thanks, operator, and good morning, everyone. 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, events and presentations section, or quarterly results section. With me today to discuss our fourth quarter of 2022 financial and operating results is is Heath Deneke, our President, Chief Executive Officer, and Chairman, Bill Maltz, 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. 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 that such expectations will prove to be correct. Please see our 2021 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2022, our 2022 Annual Report on Form 10-K, which will be filed soon, as well as our other SEC filings for listing of factors that could cause actual results to defer materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA, distributable cash flow, and free cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. And with that, I'll turn the call over to Heath.

Great. All right. Thank you, Randall, and good morning, everyone. We're going to start the call with a recap of key highlights on Summit's performance and major accomplishments during 2022, and then set the stage for what we think is a very exciting outlook for 2023, which is expected to generate 40% or more year-over-year adjusted EBITDA growth. Then I'll hand the call over to Bill to provide more details on our fourth quarter segment results, as well as additional details on our 2023 financial guidance. Starting with our 2022 financial results, we generated $212.3 million of adjusted EBITDA for the year, which exceeded the midpoint of our original guidance range. As Bill will elaborate further on in the call, our fourth quarter results were negatively impacted by approximately $4 million of one-time adjustments for compensation-related expenses and some production shut-ins that were caused by extreme weather along the front range in December. Otherwise, we should have come in closer to the top end of our guidance range. On the strategic front, Summit made a tremendous amount of progress, executing on our plans to high-grade our portfolio of assets and generate scale in a balance sheet-enhancing manner. During the year, we sold our underperforming Lane G&P system and Bison Gas system for approximately 15 times LTM EBITDA multiple, which generated about $115 million of cash proceeds. We then utilize those proceeds along with a well-executed $85 million second lien tack-on financing, which by the way was executed in a very challenging high yield market. And we use those proceeds to help fund two synergistic and value-accretive bolt-on acquisitions around our Hereford DJ system. Closing four separate A&D transactions over roughly a six month period is no small task. And I wanted to recognize and thank all of the Summit employees for their extraordinary efforts accomplishments to not only close the deals but also superbly manage a safe smooth transition and integration of the assets employees into our operations i'm pleased to report that within two months from closing the dj transactions we're now fully now running a fully integrated super system in the dj basin which is driving a lot of growth in our 2023 outlook we also launched our first fulsome esg annual report in the second quarter which has been very well received by our employees and stakeholders. We also set up a new group that we refer to internally as Summit Climate Solutions, which is focused on energy transition and emission reduction opportunities in the U.S. Our BD and commercial team originated several new commercial opportunities and contracts around our existing footprint to really help expand our dedicated inventory and acreage around our footprint. And also our ECNO team has stepped up in a big way to really help plan for a busy year with more than 300 new wells that are slated to come online during 2023. And roughly about two thirds of which are actually scheduled to come online during the first half of the year. And that's on top of connecting roughly 50 new wells during the fourth quarter of 2022. So look, it's been a very busy year, a very productive year for Summit and our employees for sure. So let's shift gears now to our 2023 outlook. Earlier this morning, we announced full year 23 adjusted EBITDA guidance of $290 to $320 million, which at the midpoint represents, again, over 40% year-over-year growth on an absolute basis and approximately 15% growth after you normalize for the 2022 acquisitions and divestitures. With more than 350 new well connects on our producer schedules this year, 23 is shaping up to be a year that is much more in line with our historical levels of activities on our systems versus what we have experienced and frankly endured over the past couple of years during the pandemic. There are currently 12 active rigs running on our system as we speak, and we already have roughly 235 ducts drilled but incomplete wells in our inventory across our footprint. While crude prices have held out relatively well in the upper 70 plus levels, we're very mindful that gas prices have declined by more than 45% since October. And therefore, we have really intensified our efforts to update and reconfirm all of our producer plans, particularly those in our gas weighted basins. As always, our producer plans can and do change at times throughout the year. But our well counts and the turn-in-line dates and schedules reflect real-time feedback from each of our producers, and we have taken steps to further risk those plans in the 2023 guidance range that we have provided. If our producers hit their current turn-in-line dates and production targets, we expect to be at the high end of our adjusted EBITDA guidance range. The low end of our range reflects roughly a 20% reduction in planned well connects. and we have further risked the timing of wells that are slated to come online in the second quarter and beyond. As always, we'll continue to monitor customer activity and we'll provide updates as we progress throughout the year. While we're certainly seeing the ramp up in activity levels and volumes, we continue to benefit from the fact that our systems are largely built out and have plenty of available capacity to handle the anticipated volume growth. For our 2023 capital guidance ranges from 45 to 65 million this year, including maintenance, and that also reflects 10 to 15 million of one-time expenditures to kind of fully integrate and optimize the Hereford, Outrigger, and Sterling systems in the DJ. Moving to the balance sheet, which remains at the top of our priority list, we expect to generate between 100 to 130 million of free cash flow that's available for debt pay down within our range. At the midpoint of the range, we expect total leverage at year end to be around 4.35 times, which keeps us on track to achieve our long-term target leverage ratio of three and a half times or less by the year end of 2024. So before I turn over the call to Bill, I wanted to spend a minute on EE and other strategic objectives for Summit in 2023. As we've been discussing, fundamentals in New Mexico continue to support further commercialization of our EE pipeline system. As you all know, New Mexico has been extremely active with over 100 rigs running for several quarters now, which we continue to believe will lead to residue gas pipeline constraints as early as late 2023, early 2024. Summit continues to progress and gain traction on commercial discussions with various customers along the pipeline system, and we remain optimistic that we'll be successful in securing new FT commitments to fill up our existing capacity. which would have a very meaningful impact starting in 2024 and beyond. On the M&A front, while we will continue to opportunistically evaluate both value and credit accreted bolt-ons, as well as non-core divestitures that could further accelerate de-levering and improve our credit metrics, our focus is on executing and optimizing our existing business and the footprint that we have. fully capturing the synergies and the opportunity set around our newly acquired DJ assets, and building liquidity while we maximize debt pay down throughout the year. So with that, I'll hand it over to Bill to provide additional details on our financial results and 2023 guidance. Bill?

Thanks, Heath, and good morning, everyone. As Heath mentioned, we had a great year and are extremely excited about how 2023 is shaping up. I'll start by discussing our financial performance, followed by providing a bit more color on our 2023 guidance. Summit reported a fourth quarter net loss of $23.9 million, adjusted EBITDA of $50.3 million, resulting in full year 2022 adjusted EBITDA of $212.3 million, above the midpoint of our original guidance range, and free cash flow of over $70 million for the year. There were approximately $4 million of weather and unusual compensation-related expenses incurred during the quarter. And obviously, there is a bit of noise going on in the fourth quarter, given we sold Bison in September of 2022 and closed on the DJ acquisitions on December 1st. If we had owned the DJ businesses for the full fourth quarter, we estimate we would have generated an additional $8 million of adjusted EBITDA. We want to provide some clarity as we know a lot of our investors look at run rate EBITDA. So at 50 million of as reported, plus 4 million of weather and unusual expenses, plus another 8 million for a full quarter's contribution of VGA acquisitions, that would suggest a run rate EBITDA closer to 62 million for the fourth quarter, providing a little bit more context for everyone as we look forward into 2023. Capital expenditures totaled $10.6 million for the quarter and $31.5 million for the full year 2022. And with respect to SMLP's balance sheet, we had approximately $330 million outstanding under our $400 million ABL credit facility and just over $11 million of unrestricted cash on hand. Our available borrowing capacity at the end of the fourth quarter totals approximately $64.1 million. which included 5.9 million of LCs. Given the D.J. Basin acquisitions in the fourth quarter, we should see that ABL balance continue to reduce throughout the course of the year. Now turning to the segments. In the Northeast, which is inclusive of our SMU system, our proportionate share of Ohio Gathering Joint Venture and our Marcellus system, The segment averaged 1.35 BCF per day during the quarter, which is inclusive of $754 million a day of 8H OGC volumes. And segment adjusted EBITDA totaled $19.1 million, a slight decrease of $0.3 million from the third quarter of 22. The variance was largely due to natural declines on wells on the system, partially offset by higher margin mix behind our OGC joint venture, and 14 new wells brought online during the quarter, of which six were connected behind our wholly owned Utica system and the remainder behind OGC. There are currently four rigs running behind our system, two behind our wholly owned SMU system, and more than 40 docks behind the OGC and SMU and Mountaineer systems. The Rocky segment, which is inclusive of our DJ and Willison Basin systems, generated adjusted EBITDA of $13.8 million, which was down by 0.4 million relative to the third quarter, largely due to a winter storm in December that caused several days of outages and interruptions in North Dakota and Colorado. We estimate the winter storm negatively impacted gross margin by approximately a million dollars during the quarter. Liquids volumes averaged 64,000 barrels a day, a decrease of 2,000 barrels a day, and natural gas volumes averaged 42 million a day, an increase of 24 million cubic feet per day relative to third quarter. This was primarily due to the addition of the Outrigger and Sterling assets that closed in December of 22. The Rocky segment currently has two rigs running behind the systems and more than 150 docks, which represents nearly every well connection we are expecting in 2023. Onto the Permian Basin segment, which includes our 70% interest in the EE pipeline, reported adjusted EBITDA of $4.2 million, was down $0.7 million relative to the third quarter, primarily due to lower volumes on EE. We believe that the low natural gas prices in Waha were the primary driver for customers diverting some of their volumes off of the EE to other higher-priced end markets during the quarter. The peon segment reported adjusted EBITDA of $14.7 million, up $0.4 million relative to the third quarter, due primarily to lower operating expenses during the quarter, partially offset by natural production declines, and no new wells connected to the system. Volumes averaged 295 million cubic feet per day, a slight decline relative to third quarter. There's one rig running behind the system today, and 17 wells have started coming online here in late February 2023. The Barnett segment reported adjusted EBITDA of $7.2 million, a decrease of $0.6 million relative to the third quarter, primarily due to lower natural gas sales and an increase in direct operating expenses. Volumes were up 8 million cubic feet per day, quarter over quarter, due to eight new wells connected to the system during the second half of 2022. There are currently three rigs running and 13 ducts behind the system today. And with that, I'd like to focus now on our 2023 guidance. And to reiterate a few of Heath's comments, the midpoint of our guidance range risks the timing of well connections relative to what customers provided. The low end risks all of that even further, and the high end assumes customers hit their timing targets. We have 12 rigs behind the system and 235 ducts, which represents just over 70% of the expected well connections at the midpoint of the range. In addition, nearly 65% of those well connections are expected in the first half of 2023, which provides great visibility in the level of activity we are expecting. Breaking the activity down even further, 50% is in crude-oriented areas, 35% is in liquids-rich gas areas, and only 15% is in dry gas areas. We also spent a significant amount of time reviewing customer hedge portfolios and believe a significant portion of 2023 volumes in the Northeast are fairly well hedged. The breadth and depth, the breadth and diversity of the increase in activity is driving volume and EBITDA in every region behind Summit Systems. In the Northeast, we are currently expecting 75 to 85 well connects in 2023, which is nearly double the 41 well connects in 2022. With that level of activity, along with the significant volume growth we've experienced behind OGC in the third and fourth quarter of 2022, we are expecting more than a 10% increase in volume throughput year over year. As we've mentioned on prior calls, the anchor customer behind our SMU system recently acquired 27,000 net acres in the Utica and is beginning development on that acreage with two rigs running currently. In the Rockies, which compared to last year, the region has seen quite a transformation. And just as a reminder, that segment includes our Williston oil and produce water gathering businesses, the Hereford Gathering Processing System, and now the recently acquired DJ Basin Gathering and Processing Systems. 2022 included nine months worth of bison midstream assets, which we sold in September, and only one month of the DJ acquisitions. We are currently expecting 140 to 180 well connects in 2023, with 70 to 80 coming from the Williston, all of which our docks are currently being drilled and the remainder in the DJ. This level of activity will drive significant volume growth in both liquids and gas volumes in 2023. I'd like to add that we've been extremely encouraged by the commercial discussions we've had in the DJ Basin in the last couple months. And while we haven't included any upside in our guidance range, we do believe there are some near-term opportunities that could provide significant long-term value to our stakeholders. Over to the peons, we are expecting 55 to 70 WellConnects in 2023, 17 of which have started coming online in February 2023, compared to zero in 2022. We expect this level of activity will result in flat to modest volume growth and approximately 4% EBITDA growth. Now to the Barnett. We're expecting 25 to 30 wells in 2023, which we expect will result in about 15% volume throughput growth from the prior year. There are currently three rigs running and 13 ducts behind the system, and several of these wells are slated to come online in the next few months, with the remainder expected in the second half of the year. While we have seen a sizable decline in expected 2023 natural gas prices over the last couple of months, the level of activity and recent customer conversations continue to suggest that all these wells will turn in line here in 2023. Shifting to the Permian, as Heath mentioned, we remain very optimistic with the long-term outlook for EE and the commercialization efforts ongoing, and we expect to have some material updates for you all throughout the course of the year. Finally, I'll spend some time discussing capex for the year. We're expecting 35 to 50 million in growth capex for 2023 and 10 to 15 million in maintenance capex. The majority of the growth capex for 23 will be spent in the rocky segment. In the Williston and DJ, we have a number of pad connects given the increase in well connections expected for the year. Additionally, in the DJ basin, we have some additional integration work that we will continue to optimize those systems beyond what's already operational today. This represents approximately 10 to 15 million of our 2023 capital plan. With 290 to 320 million of expected adjusted EBITDA and 45 to 65 million of capital expenditures, we expect significant debt pay down throughout the course of the year. And with that, I'll turn the call back over to Heath for closing remarks.

Great. All right. Thanks, Bill. So, you know, as we discussed on the call today, we're obviously very pleased with the progress that we made in 2022. And we're really excited about the outlook and opportunity set for Summit in 23 and beyond. We're laser focused on maximizing free cash flow in the business, fully commercializing our recently acquired DJ Basin businesses, as well as our EE systems. And we're also focused on paying down debt and driving leverage to below four and a half times by year end. We thank you for your time and continued support. And with that, operator, I'd like to open the call up for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Please wait for your name to be announced. To withdraw your question, you may press star 1-1 again.

One moment while we compile our Q&A roster. Our first question comes from the line of Greg Brody with Bank of America.

Your line is open. Please go ahead.

Good morning, guys, and I appreciate all the very thoughtful throughput and well-count forecasting to help us think through what's happening. Maybe just to start on the... on the Permian, you said you're thinking about we should expect to hear some announcements this year. How do you see the pipe filling up in your view? Could we see some additional volumes this year and it's just not in the guidance or is that likely a 24 event?

Yeah, I mean, I think we, hi Greg, I think we'll see some volume growth throughout the year on EE. I think what we're stating is that a lot of the conversations we're having about starting up new contracts, you know, it's probably going to be more impactful in a, you know, 24, 25 time period than in 2023.

That's what I heard. So that's helpful. And just It's just turning to the balance sheet. I know you're planning on paying down debt. I know there's a special provision that you have to make an offer to the second main mayor, I believe by in April. If you just remind us how that works and then what you'll do with that cash if the bonds, if it's not accepted, if the offer is not accepted.

Yeah, Greg, good morning, and thanks for joining. So, Greg, given the DJ Basin acquisitions, we actually utilized all our free cash flow in 2022. So, you all should expect a 50 basis point step up here in April. As we look at 2023 and the cash flow profile for the year, As a reminder, if we get to then $100 million of cumulative offers by the end of 2023, that interest rate will step back down to the 8.5%. You know, this was a fairly conscious decision, obviously, when we made the decision to acquire the DJ Basin assets. And, you know, it's – call it another $3.5, $4 million of incremental interest expense for 2023. Am I correct that you're –

the 23 offers wouldn't be made until 24 though, or is there?

Yeah, that's right. Yeah. Yep. So basically after we file our 10 K, we've got a handful of days to make notification to the extent there's cashflow available for sweep. And then, uh, I think the actual, um, process of, of making those offers probably takes up to 30 days. So you're looking sometime in kind of March, April timeframe.

Got it. So for now, the assumption is 50 basis points step up for a year. and next year. You got it. Just the last one, coming back to volumes, I appreciate in the Northeast, the hedging profiles of your customers. How do you think about 24? I know it's a little early to do that, but maybe you can create a frame to sort of frame that first in terms of risk to volumes.

Yeah, I think for 24, look, I mean, we're certainly seeing the impact on the gas strip here I think a lot of it is due to just an abnormally warm weather, certainly in the Northeast and most of the US. So I actually feel like if we continue to see these sustained low gas prices, I think that could probably start adversely impacting 24. But I feel like that we're going to see some normalization and hopefully some more normal like weather this upcoming winter that kind of continues to support the trajectory that we're on.

Yeah, and Greg, I'd just add to that, you know, while we're seeing some decent growth behind our footprint, when we look at kind of the aggregate level of activity of our key customers, this isn't necessarily suggesting growth from their perspective, probably more maintenance-related activity levels. And when you look at the Utica in general over the past, call it three years, Rig counts have been actually fairly steady. You didn't see kind of that dramatic increase in rig count like you did in the Haynesville. So a lot of these producers are really just kind of keeping volumes in maintenance mode. And I think this year is a little bit of a tailwind for Summit that more of that activity is hitting our systems than some of our competitors from a midstream perspective over the past couple of years.

I think that's consistent with what we see considering we cover a lot of those northeast guys on the E&P side. I'm curious about maybe in your other basins, what are you seeing there for 24? Or what do you think? How do you think about it?

Yeah, I mean, it's hard to speculate on now. Again, I think in a $3 plus gas price environment, I would expect to see the you know, the programs that our customers, for example, and the peons are working on, you know, they're getting, I think we have over 200 wells that are in the process of getting permitted. And, you know, we're working with them on the infrastructure to be able to, you know, connect and flow those wells. And so, you know, in our 23 guidance, we have shifted some of those volumes and well connect activity out. And some have, we've actually kind of moved that would likely go back into 2024 and So we've tried to reflect that, you know, a bit in 23. But like I said, I think it's really just going to depend on, you know, longer term that we start seeing a little bit more recovery in the gas price depth than what we're seeing here in 23.

Yeah, in the Barnett. Yeah, Greg, in the Barnett, too. We've got, you know, Total is one of our large customers. We've got a private equity-backed customer out there. You know, Total has various uses for that gas, whether it's on the electric generation side or LNG exports. I think there's a little bit of a different equation for a producer like that. But again, I think in a $3 plus environment, given the proximity of the Barnett kind of basis differentials in that area, you know, we think that will continue to support activity. But, you know, I think, as Heath mentioned, where we're seeing prices today is a bit of an anomaly given, you know, how warm of a winter we had.

Great. And last, I appreciate that. And I know it's very early, but I appreciate your perspective. Just last one. M&A, can you talk about the opportunity set? Do you think there's a lot to do? You alluded to it in your press release. Maybe you can give a little color around that.

Yeah, I mean, look, it's clearly not our focus in 23. We do see a fair amount of good opportunities like we did, you know, with the Sterling and Outrigger system. There's more of that around our footprint. But, you know, the focal point here is to continue to build liquidity and, you know, reach our target debt level. So, you know, with that being priority number one, you know, yeah, if we can, you know, execute on a deal that improves our credit metrics and um you know and or a divestiture that that we could sell and and accelerate de-levering you know in a non-core system we'll certainly continue to look at those things but you know i don't think our intent um today or at least what we're what we're staring at today we we kind of feel like we've got a really solid portfolio we've got a lot of activity we're seeing a fair amount of uh a lot of growth actually this year on system and so our focus is really just capturing you know as much uh You know, just ensuring that we execute this year and that we, you know, maximize all the volumes and optimize those assets and really kind of get our debt pay down that we're targeting here. So that's the focal point. But longer term and, you know, certainly as we look out, you know, and, you know, once we get to our – You know, levels, we definitely see quite a few systems that, you know, fit really well that we think we can buy at a good evaluation and that, you know, long-term we can continue to kind of consolidate in and around our footprint. But just not a priority for us in 23.

Thank you for the time, guys.

You bet.

Thanks.

Thank you. And this does conclude today's question and answer session. And ladies and gentlemen, this does also conclude today's conference call. Thank you for participating, and you may now disconnect.

Everyone, have a great day.

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