8-K: Summit Midstream Reports Q3 2024 Results, Announces Transformative Acquisition

Summit Midstream Corporation announced its third quarter 2024 financial and operating results, highlighted by a net loss due to a non-cash tax expense, but also significant growth in adjusted EBITDA and the announcement of a major acquisition.

Summary

• Summit Midstream Corporation reported a net loss of $197.5 million for the third quarter of 2024, which includes a $142.6 million non-cash income tax expense related to the company's C-Corp conversion.
• The company generated adjusted EBITDA of $45.2 million, a 9% increase quarter-over-quarter, along with $22.1 million in distributable cash flow and $9.9 million in free cash flow.
• Summit Midstream expects to generate approximately $45 million to $50 million of adjusted EBITDA in the fourth quarter of 2024.
• The company connected 38 wells during the quarter and maintained an active customer base with six active drilling rigs and over 100 drilled but uncompleted wells (DUCs).
• Summit Midstream completed its C-Corp conversion and a series of refinancing transactions, which simplified the corporate structure, extended debt maturities, and lowered the cost of capital.
• The company announced the acquisition of Tall Oak Midstream III in the Arkoma Basin, with a special meeting of stockholders scheduled for November 29, 2024.
• Average daily natural gas throughput decreased by 6.8% to 667 MMcf/d, and liquids volumes decreased by 6.7% to 70 Mbbl/d compared to the second quarter of 2024.
• Double E Pipeline gross volumes increased by 20.4% to 661 MMcf/d, generating $8.5 million of adjusted EBITDA for the quarter.
• Natural gas price-driven segments had a combined adjusted EBITDA of $20.1 million, a 1.1% increase from the previous quarter.
• Oil price-driven segments generated a combined adjusted EBITDA of $33.3 million, a 9.1% increase from the previous quarter.
• Capital expenditures totaled $10.9 million in the third quarter, including $1.3 million for maintenance.
• As of September 30, 2024, Summit Midstream had $17.8 million in unrestricted cash and $349.2 million of borrowing availability under its ABL Revolver.
• The company billed customers $5.5 million for MVC shortfalls, which contributed to adjusted EBITDA.
• The board of directors continued to suspend cash dividends on common and preferred shares.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the growth in adjusted EBITDA and strategic acquisition, but the significant net loss and decrease in throughput temper the overall outlook. The successful refinancing and C-Corp conversion are positive steps, but the company still faces challenges.

Positives

• Adjusted EBITDA grew by 9% quarter-over-quarter, indicating improved operational performance.
• The company successfully completed its C-Corp conversion and refinancing, which should lead to long-term financial benefits.
• The acquisition of Tall Oak Midstream III is expected to be transformative and create significant value for shareholders.
• Double E Pipeline volumes increased significantly, demonstrating growth in that segment.
• The company maintained a strong customer base with active drilling rigs and a substantial number of DUCs.
• The company is in compliance with all financial covenants, including interest coverage and leverage ratios.
• A $10 million optimization project in the Rockies segment is expected to have a one-year payback period and improve adjusted EBITDA margin.

Negatives

• The company reported a significant net loss of $197.5 million for the quarter.
• Average daily natural gas and liquids throughput decreased compared to the previous quarter.
• The company continues to suspend cash dividends on common and preferred shares.
• Operational downtime impacted volume throughput in the DJ Basin, although repairs were completed during the quarter.

Risks

• The company's net loss highlights potential financial vulnerabilities.
• Decreased throughput volumes in natural gas and liquids could impact future revenue.
• The suspension of dividends may be a concern for investors seeking income.
• Operational downtime, although resolved, indicates potential risks to consistent performance.
• The Tall Oak acquisition is subject to shareholder approval and may not close as expected.

Future Outlook

Summit Midstream expects to generate approximately $45 million to $50 million of adjusted EBITDA in the fourth quarter of 2024 and anticipates closing the Tall Oak Midstream III acquisition during the fourth quarter of 2024. The company also expects a $10 million optimization project in the Rockies segment to improve adjusted EBITDA margin beginning in the second quarter of 2025.

Management Comments

• Heath Deneke, President, Chief Executive Officer and Chairman, stated that the third quarter results were in line with management expectations.
• He highlighted the completion of the C-Corp conversion, successful refinancing, and the announcement of the Tall Oak Midstream III acquisition as key corporate achievements.
• He also noted the connection of 38 wells and the final investment decision on a $10 million optimization project in the Rockies segment.

Industry Context

This announcement reflects the ongoing activity in the midstream energy sector, with companies focusing on strategic acquisitions, operational efficiency, and financial restructuring. The acquisition of Tall Oak Midstream III is a significant move to expand Summit's footprint in the Arkoma Basin, aligning with industry trends of consolidation and strategic growth. The focus on cost of capital and debt maturities is also a common theme in the current economic environment.

Comparison to Industry Standards

• Summit's adjusted EBITDA growth of 9% quarter-over-quarter is a positive sign, but it is important to compare this to peers such as Kinder Morgan (KMI) and Energy Transfer (ET), which also report adjusted EBITDA as a key metric. Kinder Morgan reported a 6% increase in adjusted EBITDA in their most recent quarter, while Energy Transfer reported a 10% increase, placing Summit in the middle of the pack.
• The company's debt refinancing and C-Corp conversion are similar to actions taken by other midstream companies to improve their financial position and attract investors. For example, MPLX recently completed a debt offering to refinance existing debt.
• The acquisition of Tall Oak Midstream III is a strategic move similar to other midstream acquisitions, such as Williams' acquisition of Trace Midstream, which aimed to expand their footprint in key basins.
• Summit's average daily throughput decrease of 6.8% in natural gas and 6.7% in liquids is a concern, and should be compared to peers to see if this is an industry-wide trend or specific to Summit. For example, Enterprise Products Partners (EPD) reported a 2% increase in natural gas throughput in their most recent quarter.
• The company's leverage ratio of 4.58x is higher than some of its peers, such as Magellan Midstream Partners (MMP), which has a leverage ratio of around 3.5x. This indicates that Summit has a higher level of debt relative to its earnings.

Stakeholder Impact

• Shareholders will be impacted by the net loss and the continued suspension of dividends, but may benefit from the potential value creation from the Tall Oak acquisition.
• Employees may be affected by the integration of Tall Oak Midstream III.
• Customers will benefit from the continued expansion and optimization of Summit's infrastructure.
• Creditors will be impacted by the company's debt refinancing and compliance with financial covenants.

Next Steps

• The company will hold a special meeting of stockholders on November 29, 2024, to vote on the Tall Oak Midstream III acquisition.
• The company expects to close the Tall Oak Midstream III acquisition during the fourth quarter of 2024.
• The company will continue to execute its operational plan, including connecting new wells and optimizing its existing infrastructure.
• The company will attend the 2024 Bank of America Leverage Finance Conference on December 3-4, 2024, and the 2024 Wells Fargo Midstream, Energy, & Utilities Symposium on December 10-11, 2024.

Key Dates

Keywords

Midstream, EBITDA, Acquisition, Natural Gas, Oil, Throughput, Refinancing, C-Corp Conversion, Debt, Capital Expenditures, Distributable Cash Flow, Free Cash Flow, Wells, Drilling Rigs, DUCs, MVC, Double E Pipeline