Summit Midstream Partners (SMLP): The Market Has Yet To Understand Its Recent Success

Summit Midstream Partners (NYSE:SMLP) is a company we discussed recently as a valuable investment, with a strong portfolio of assets. However, we also highlighted the company’s debt load as a risk. Since then, the story has changed. The company announced the sale of its Utica shale midstream assets for $625 million to longtime partner MPLX.

The Transaction

We stated in our last article that the company remained beholden to the debt markets, and that hasn’t changed. The company needed to make a move, and it’s made a brilliant one.

The transaction consists of wholly owned Utica assets along with Ohio Gathering and Condensate stakes amounting to just under 40% of those systems. The total transaction price is a massive $625 million. The transaction solves some large parts of the company’s liquidity. The $295 million on the revolving credit facility is now paid off, making it $400 million again.

At the same time, the company now has $325 million worth of cash. The company’s portfolio becomes more crude oil focused and focused on the massive Double E pipeline. Of course, earnings take a hit, with the company’s new guidance for 2024 adjusted EBITDA at just over $200 million, down from prior guidance of $280 million.

The company hasn’t yet said what it’s planning on doing with that $325 million in cash. It’s stated that it could be distributions, or it could be a bolt-on acquisitions.

Remaining Portfolio

The company’s remaining portfolio is strong and crude oil focused, in major markets that will help the company.

The above chart shows the company’s segments. The Utica segment is what was sold, a capital light segment with decent contracts continuing to provide the largest segment of the company’s EBITDA. The company expects an $80 million decline in EBITDA as a result of the deal. The remainder of the company’s portfolio has some strong segments and some weak ones.

The company’s core is continued strength in its existing portfolio. The company has announced a new Double E pipeline season and expects to see at least $15 million in incremental additional EBITDA from existing capacity. The company’s focus on crude is important, but most of its midstream assets have substantial spare capacity.

The company needs to find opportunities, bolt-on acquisitions, and growth to increase volumes and succeed. There are several important 2024 catalysts. For example, the Barnett segment at 38% capacity saw 10 wells in 2023 and expects 15-20 in 1H 2024. Trends for recent wells are 7 MMcf/d, implying 125 MMcf/d, almost doubling current volumes.

With natural gas at sub $2, prices here will continue to be a factor. Success in the remaining portfolio could enable the company to quickly pay down debt.

The Path Out

The question now becomes what is the path out for a company with a market capitalization of just under $300 million.

The company has $140 million in annual interest expenditures, expenditures to the tune of $35 million per quarter. That lines up with the company’s 4Q 2023 results of $75 million in adjusted EBITDA and DCF of $38 million. The company’s interest payments are expensive, and it’s one of the primary factors of the company being able to manage its debt.

It’s tough to manage debt if the company utilizes all of its cash flow for interest payments and has minimal amounts leftover. The company has $1.32 billion in debt net of cash, and that number has now become $1 billion. We expect that change will save the company around $35 million in annual interest expenditures.

We’d like to see the company work to pay off other high-interest debt, specifically those 12% notes. The company’s annual DCF was ~$110 million in 2023. We expect it to be similar, despite the loss of $80 million in EBITDA, supported by lower interest. That $325 million in cash can save the company ~$35 million in further interest.

That would put the company at ~$150 million in annual DCF and $700 million in debt. The company now has a fighting change, with 3 years until its next refinancing, to pay off the majority of its debt. That would enable the company to rapidly ramp up shareholder returns after that point, with continued interest savings stacking up, and a non-interest FCF yield of >60% of its market cap.

Our View

In our view, the path for Summit Midstream Partners is clear. The company has completed the active process of working to drive value for shareholders, but it remains open to new opportunities. However, what it needs to do is not get carried away with its additional cash, diving into shareholder returns in an attempt to juice up immediate returns.

Bolt-on acquisitions and investments are acceptable, assuming they can pay off quickly, but the company needs to remain cognizant of interest rates. The company had a tough enough time rolling over its debt in late-2021, with higher interest rates, rolling off its current debt at an affordable rate would be almost impossible.

Spending all this cash at high rates and struggling to rollover debt would be a missed opportunity. However, the company’s management has shown a unique ability to make intelligent decisions with its resources, and we don’t expect that to change. The path for shareholder returns is enormous. The company has a path forward, it just needs some luck in the market.

Assuming it continues to execute efficiently for the next several years, it could escape what happened in 2020. That would enable the company to hit a point where it can provide massive shareholder returns and make the company a risky but incredible investment risk-adjusted.

Thesis Risk

The largest risk to our thesis is how the company spends its $325 million. The company could utilize acquisitions that hurt it substantially in the long term, it could waste away that cash, or it could continue to invest well in its portfolio. Management has done a great job with its constrained hands, and we expect it to do well going forward, but it remains a risk.

Conclusion

Summit Midstream Partners had an incredibly strong accomplishment recently. The company sold its Utica and Northeast assets for an astounding $625 million, or an almost 8x EBITDA multiple. Those were some of the strongest assets in the portfolio, but it’s still a huge deal for the company’s debt. For perspective, the remaining company trades at 5x EBITDA.

The company has also increased the focus of crude oil in its portfolio at a time of weak natural gas prices. How the company spends its new $325 million in natural gas remains to be seen, but we’re looking to primarily see success in what are heavily underutilized assets. We’re also looking to see the company pay down debt to save on interest.

How that pans out remains to be seen, but we have faith in management. There is still some risk here, but the potential for shareholder returns in the upcoming years is enormous, and we recommend investing in the company at this time for investors with a hefty risk appetite.