Is Summit Midstream teeing up their Marcellus pipeline gathering system for a sale? Late last week Summit Midstream, which has a meaningful presence in the Marcellus/Utica region, released its first quarter 2019 numbers and held a conference call to discuss the company’s performance. As was the case for fourth quarter and full year 2018 (see Summit Midstream Fires CEO; M-U Volumes, Profits Down in 2018), Summit’s volumes and profits continued a downward trend in 1Q19. However, interim CEO Leonard Mallett says things are about to turn around.
Summit reported a net loss of $36.9 million for 1Q19, compared to a net loss of $3.8 million for 1Q18. However, the net loss in 1Q19 included a $45 million impairment write-off, meaning no cash changed hands. It was a paper loss.
Summit has operations in a number of shale plays. According to interim CEO Len Mallett, the company is now concentrating its time and money on four “core focus areas” including: the Utica, the Williston (i.e. Bakken), the DJ Basin and the Permian.
In the official update, we get the following opening statements and comments from Len Mallett:
Leonard Mallett, interim President and Chief Executive Officer, commented, “Our financial results for the first quarter of 2019 were generally in line with our expectations. Our outlook for the balance of 2019 remains strong and is supported by 16 active rigs currently running upstream of our gathering systems and more than 100 DUCs that our customers maintain in inventory. This customer activity is the best indicator of future growth, and gives us visibility for the pace of volume throughput and adjusted EBITDA throughout the balance of the year, with significant growth expected from our Core Focus Areas, which include the Utica, Williston, DJ and Permian segments. As such, we are affirming our 2019 adjusted EBITDA guidance of $295 million to $315 million. Our first quarter financial results enabled us to generate a strong distribution coverage ratio of 1.7x and we expect this metric will continue to strengthen, in line with adjusted EBITDA growth, throughout the year.”
“Our team continues to focus its efforts to successfully execute on key projects, including the completion and commissioning of our new 60 MMcf/d processing plant in the DJ Basin, which is expected this quarter, increasing the utilization and efficiency of our newly-commissioned Permian Basin gathering and processing assets, and the development of the Double E Pipeline Project. The DJ plant commissioning and expected volume ramp on the Permian system, together with new pad connections in the Williston Basin and infill drilling and completion activities behind our SMU system, represent near-term catalysts that we expect will drive volume and adjusted EBITDA growth higher throughout the balance of 2019. In addition, we are actively evaluating opportunities to further strengthen the balance sheet and accelerate deleveraging, including non-core asset sales.” (1)
Keep an eye on that last sentence about non-core assets. We’ll circle back to it in a minute.
Next thing we noticed is how much gas was flowing through Summit’s pipe system by region/sector:
As you can see both the Utica and Marcellus decreased a lot year over year–down 20% in the Utica and 27% in the Marcellus. Summit is a joint venture partner in the Ohio Gathering System, hence a separate listing. Gathered volumes for Ohio Gathering decreased just 8%.
From the official update, the section talking about Summit’s Utica operation (called Summit Midstream Utica, or SMU), along with a discussion about Ohio Gathering:
The Utica Shale reportable segment includes Summit Midstream Utica (“SMU”), a natural gas gathering system located in Belmont and Monroe counties in southeastern Ohio. SMU gathers and delivers dry natural gas to interconnections with a third-party intrastate pipeline that provides access to the Clarington Hub.
Segment adjusted EBITDA for the first quarter of 2019 totaled $6.2 million, up from $5.8 million in the fourth quarter of 2018. Volume throughput averaged 286 MMcf/d in the first quarter of 2019, and included 205 MMcf/d of volumes gathered from pad sites directly connected to the SMU system, and 81 MMcf/d from the TPL-7 Connector project, which generates a substantially lower gathering margin. Volumes from pad sites directly connected to the SMU system increased by 22.8% compared to the fourth quarter of 2018, due to the completion of four wells late in the fourth quarter of 2018 and the completion of four additional wells in the first quarter of 2019. In April 2019, our anchor customer mobilized a drilling rig upstream of our SMU system. Based on our expectation for additional well connections in 2019, we anticipate the mix of volumes throughout 2019 to continue to shift toward higher margin pad site volumes. As a result, we expect disproportionally higher segment adjusted EBITDA growth relative to total volume growth.
First quarter of 2019 volumes were negatively impacted by approximately 44 MMcf/d of temporary volume curtailments resulting from (i) 18 MMcf/d associated with producer equipment issues upstream of our gathering system and (ii) 26 MMcf/d associated with infill drilling and completion activities on existing pad sites. The operational issues have been remediated and pipeline flows have been restored; however, we estimate that this interruption, along with associated operating expenses related to remediation activities on the SMU system, negatively impacted our segment adjusted EBITDA by approximately $0.7 million in the first quarter of 2019. The 26 MMcf/d of temporary curtailments associated with infill drilling and completion activities are estimated to have negatively impacted our segment adjusted EBITDA in the first quarter of 2019 by approximately $0.8 million, but these curtailments were anticipated.
The Ohio Gathering reportable segment includes our ownership interest in the Ohio Gathering system, a natural gas gathering system spanning the condensate, liquids-rich and dry gas windows of the Utica Shale in Harrison, Guernsey, Noble, Belmont and Monroe counties in southeastern Ohio, as well as our ownership interest in Ohio Condensate, a condensate stabilization facility located in Harrison County, Ohio. Segment adjusted EBITDA for the Ohio Gathering segment includes our proportional share of adjusted EBITDA from Ohio Gathering and Ohio Condensate, based on a one-month lag.
Segment adjusted EBITDA for the first quarter of 2019 totaled $9.2 million, down from $10.4 million in the fourth quarter of 2018. Volume throughput on the Ohio Gathering system averaged 711 MMcf/d, gross, in the first quarter of 2019, compared to 780 MMcf/d, gross, in the fourth quarter of 2018. Lower volumes were partially offset by 22 new well connections in the first quarter of 2019, including 12 new wells that were connected at the end of the quarter and are expected to have a more meaningful impact on volumes in the second quarter of 2019. Producer activity in our service area continues to be steady with three drilling rigs currently operating upstream of the Ohio Gathering system, supplemented by 26 drilled but uncompleted wells (“DUCs”) that our customers have in inventory. This activity, which remains primarily focused on the condensate window of the play, supports our expectation for volume growth throughout the balance of 2019. (1)
Further down in the update we find the Marcellus mentioned, under the heading “Legacy Areas”:
Our Legacy Areas, which include our Piceance Basin, Barnett Shale, and Marcellus Shale reportable segments, are located in production basins in which we expect our gathering systems to experience relatively lower long-term growth and to represent a minority of our capital expenditures. Our Legacy Areas are served by the Grand River system for the Piceance Basin reportable segment, the DFW Midstream system for the Barnett Shale reportable segment, and the Mountaineer Midstream system for the Marcellus Shale reportable segment.
Segment adjusted EBITDA for the Piceance Basin, Barnett Shale, and Marcellus Shale reportable segments totaled $42.5 million in the first quarter of 2019, down from $45.8 million in the fourth quarter of 2018. Lower total reportable segment adjusted EBITDA for our Legacy Areas was driven primarily by lower volume throughput, which on an aggregate basis for these three reportable segments declined 4.9% compared to the fourth quarter of 2018….
Volume declines in the first quarter of 2019 for our Marcellus Shale reportable segment moderated compared to declines experienced in the prior two quarters, as production rates began to level off for 35 new wells that were commissioned from the first quarter of 2017 through the first quarter of 2018. In April 2019, our anchor customer mobilized a drilling rig upstream of our Mountaineer Midstream system. We expect higher volumes associated with this drilling activity beginning in the fourth quarter of 2019. (1)
Then we spotted the following chart that shows where Summit spent its money in 1Q19:
Capital expenditures totaled $60.8 million in the first quarter of 2019, including maintenance capital expenditures of $3.3 million. Development activities during the first quarter of 2019 were primarily related to our 60 MMcf/d DJ Basin processing plant, along with approximately $15.8 million of capital expenditures related to our Double E Pipeline Project, which are reported within our Corporate and Other reportable segment. We expect spend to moderate throughout the balance of the year, with total capital expenditures in 2019 closer to the low end of our 2019 guidance range of $150 million to $175 million. (1)
One thing we notice in the chart above is that Summit is spending a LOT less in the M-U region and a LOT more in the DJ Basin. We have to wonder if they’ve made the wrong bet by moving their focus (i.e. spending) to the DJ Basin, which is largely located in the suburbs of Denver, Colorado. The State of Colorado recently passed a new law that allows local municipalities to block drilling, a move largely seen as a threat to new DJ drilling.
Anywho, during a conference call with analysts on Friday, interim CEO Len Mallett opened his prepared remarks with his reasons (excuses?) for why volumes were lower in the Utica (SMU) and Bakken (Williston):
Thank you, Blake and good morning everyone. Thanks for joining us on this call. Yesterday, we announced our first quarter 2019 operational and financial results. Adjusted EBITDA for the first quarter totaled $69 million with the distributable cash flow of $40 million. First quarter results were negatively impacted by temporary operational issues upstream of our SMU system, and we experienced significant weather events in Williston.
Still these results were generally in line with our expectations and we are affirming our full year 2019 adjusted EBITDA guidance range of $295 million to $315 million. As we discussed last quarter, we continue to forecast significant adjusted EBITDA growth over the course of 2019, based on the following key themes. First, our DJ Basin volumes averaged 21 million a day in the first quarter of 2019. This is the second consecutive quarter the existing plant operated at full capacity. And with one rig actively working and 25 duct and inventory, there is a meaningful amount of high margin natural gas supply behind our system. We are currently in the process of completing and commissioning our new 60 million a day processing plant in the DJ Basin. And we expect to see an immediate increase in volumes upon full start up of the new plant. (2)
An opening comment from Len on the Utica (SMU), how it’s about to turn around and do better in 2019:
Next, and we’re going to touch on this topic in more detail later in the call, but high margin volumes that originate on pads directly connected to the SMU system increased over 20% relative to fourth quarter 2018. And we expect continued growth and high margin volumes throughout 2019. There are four ducts behind the systems that are expected to come online later this quarter and our anchor customer brought the rig back to the system to drill eight additional wells that are expected to come online in the second half of 2019. (2)
Len says the company will continue spending most of its money out West this year:
Beyond 2019, we remain encouraged by the growth outlook in our core focus areas with the most notable opportunity being our Double E pipeline project. We continue to make variable progress on project development, regulatory transmittals. And we continue to work with our anchor shippers and expected equity partner on FID. I’ll touch on Double E in more detail later in the call. (2)
Summit’s CFO, Mark Stratton, also had some words about the Utica in his opening/prepared remarks:
Thanks Leonard and good morning everyone. I’ll begin by walking through the segments that comprise our core focus areas. Starting with our Utica Shale segment, the Summit Midstream Utica system, or SMU system, averaged 286 million cubic feet a day in the first quarter, which was down 7.4% from the fourth quarter of 2018.
Despite the volume decline, segment adjusted EBITDA was up 6.2% over the same period as a result of favorable volume mix. First quarter volumes included 205 million cubic feet a day from pad sites directly connected to the SMU system. These pad level volumes increased 22.8% from the fourth quarter of 2018. The remaining 81 million cubic feet a day of volume originated behind the TPL7 connector, which was down 43% from the fourth quarter of ’18.
As Leonard mentioned, this shift in volume mix is important to understand, given that the volumes gathered directly from the pad site generate a gathering fee that is approximately 3 times higher than volumes of the TPL7 connector. In April, our anchor customer moved the drilling rig back on to our SMU acreage. And over the balance of 2019, we expect eight new well completions on pad sites directly connected to SMU. We expect that this activity together with four wells commissioned in the first quarter of 2019 to be the primary catalyst for volume growth behind Summit Utica.
First quarter SMU volumes were negatively impacted by approximately 44 million cubic feet a day of temporary volume curtailments, including 18 million cubic feet a day associated with a customer experiencing operational issues upstream of our system, and 26 million cubic feet a day associated with in-field completion activities on existing pad sites. The customer’s operational issue was resolved in the first quarter, and pipeline flows have been restored. However, we estimate that volume curtailments associated with the operational issues negatively impacted our first quarter results by approximately $700,000.
And with respect to in-field drilling and completion activities, while this activity negatively impacts our near term results, over the long term, in-field drilling represents very incremental growth for us as it requires no new capital investments. We expect in-field drilling and completion activity to continue into 2020 as our anchor consumer executes its drilling plans behind our system.
Turning to our Ohio Gathering segment. Gross volume throughput in the first quarter 2019 averaged 711 million cubic feet a day, down from 780 million cubic feet a day in the fourth quarter of 2018. Natural production declines were partially offset by 22 new well completions in the first quarter of 2019, including 12 new wells that were connected at the very end of the quarter and will have a more meaningful impact on volumes and segment adjusted EBITDA in the second quarter of 2019.
Our customers are currently operating three drilling rigs upstream of OGC, and we expect producer activity to remain steady with one to three rigs operating at any given time in 2019 with a continued focus on the condensate window of the play. This level of activity is expected to add 40 new wells over the next three quarters, and supports our expectation for volume growth throughout the balance of 2019. (2)
Then Len spoke again, and had this to say about putting “non-core assets” up for sale this year:
Thanks Marc. As discussed previously, the Tioga midstream sale was an attractive transaction for SMLP in the first quarter. And non-core asset divestitures will continue to be a top priority for SMLP in 2019 as we look to reallocate capital from legacy areas to core focus areas, and strengthen our balance sheet.
To that end, we have engaged an investment bank to help us evaluate certain non-core asset sales. On this topic, I’d like to reiterate a key point, which is that any potential transaction will be grounded in Summit’s core objective for this strategy, which includes streamlining our portfolio, refocusing capital deployment in our core focus areas and strengthening our balance sheet.
We intend to be disciplined and will only entertain transactions that meet these criteria and provide an attractive value proposition. (2)
We’ll remind you that the Marcellus is now listed under “Legacy Areas” for Summit, meaning non-core. Which makes us think that Summit is actively looking to sell their Marcellus assets. Just our own connecting-the-dots. Seems to us that the Utica, being one of Summit’s “core areas” is safe, but not the Marcellus.
Following the prepared remarks was a Q&A. You may have noticed we said Mallett is “interim” CEO. In February Summit fired its CEO, and Mallett has been filling in (see Summit Midstream Fires CEO; M-U Volumes, Profits Down in 2018). Mallett got a question about finding a new CEO:
And then just last one from me just progress on executive search and just any update there?
So the board has engaged in very comprehensive search. They’re actually — board members are actually interviewing perspective of candidates. Hopefully, we’ll have something to announce maybe in two or three months. It depends on who the successful candidate is, because sometimes we think we may have to unwind current deployment and that kind of thing. But in meantime, I am being supported very well by our board, I’m in contact with those guys just about every day and certainly, supported by my fellow officers. And so in the interim we are about our business and moving forward. (2)
(1) Summit Midstream Partners (May 9, 2019) – Summit Midstream Partners, LP Reports First Quarter 2019 Financial Results
(2) Seeking Alpha (May 10, 2019) – Summit Midstream Partners, LP (SMLP) CEO Leonard Mallett on Q1 2019 Results – Earnings Call Transcript
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