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Back of the envelope investment Summary –

    Summit Midstream Partners (SMLP) owns midstream infrastructure assets primarily to gather, process, and transport natural gas and crude oil. Due to the high leverage of SMLPs, the investment is riskier .  From 2019 to 2022, the CEO and management team have reduced fixed obligations by 850 million dollars.  A dividend yield of around 20% can be expected in 2025 (see below Valuation  Table 2 for more details), and with  potential stock price increase, this investment has a good chance to be a winner

Company Overview –

 SMLP has gas and oil gathering, processing and transmission pipeline assets in Permian, DJ, Williamston (Rockies), Utica, Marcellus, Barnett and Picenance. This diversification reduces SMLP’s dependence on one client or one region.  According to management most of the  assets are fully developed and with utilization only at  37 %, to support any additional volume minimum Capex is needed

Table 1 – 

Area	AMI	Main Clients	Contract Life
Permian	Gas Pipeline  -130 miles	5+ clients	9.8 yrs
Williston	1120000 acres	15+ customers	5.8 yrs
DJ	185,000 acres	Civitas, large independent operator	5.8 yrs
Ultica	912,000 acres	Ascent, Gulf port	9.0 yrs
Marcelus	912,000 acres	Antero	9.0 yrs
Piceance	513,000 acres	Taerra , Caerus	12.4 years
Barnett	124,000 acres	Total	5.9 yrs

Description about each region from Management comments – 

Barnett – 

    The system is fully developed with a minimum capex requirement.  Estimated Ultimate Recovery has been increasing  and Barnett’s proximity to Gulf Coast LNG markets  gives confidence that drilling companies are going to continue drilling in this area, at least for the next 3 to 5 years.  According to management “ Anchor customer TOTAL’s Barnett acreage is its only operated source of production to meet its LNG commitments”.  This gives additional confidence that Barnett is going to be productive for the next few years

Improving per well EUR(Estimated Ultimate Recovery)  trend: 

• 2009: 2.8 Bcf

 • 2011: 3.2 Bcf 

• Current: 4.5+ Bcf 

Marcellus and Ultica shale (North East Segment) – 

       Asset in the Marcellus region are well developed requiring minimum capex . Marcellus cash flows are highly contracted with MVCs . Ascent recently bought approximately 27,000 net acres in the Utica from XTO which is already dedicated to SMLP should result in more drilling in the near future. SMLP’s amended contract to incentivize drilling behind the SMU and OGC system should result in additional well activity for several years

Permian – 

    Double – E, 70 % owned by SMLP,  is a natural gas pipeline with XTO as the main customer. By 2024, EBITDA is expected to reach 45 million dollars with the potential to expand pipeline capacity to earn 60 million dollars. The management is confident of obtaining new clients and indicates that it’s negotiating new development plans with clients.

Williston Basin and DJ  (Rockies Segment) – 

      15+ customers and a substantial PDP base of ~ 1,000 wells. Volume growth is highly incremental to adj. EBITDA . Attractive offset wells continue to extend the boundaries of the northern DJ and undedicated operators serve as additional growth targets for SMLP

Piceance –

    High FCF generation with minimum CAPEX requirement. Significant customer diversity provides support even if anchor customers have lower activity. MVCs provide protection during lower commodity cycles. 

Above facts about each asset region gives some level of confidence that SMLP assets  are in productive regions and even if 1 or 2 assets have declining volume , other assets should be able to generate cash with minimum CAPEX for the next 5-10 years .

Management –

              Management, led by the CEO Heath Deneke , is excellent. The new management started in 2019 and has successfully reduced debt and kept operating costs in check

  ➢ Through the repayment of debt, open-market repurchases, cash tenders, and equity exchanges, management retired over $850 million of fixed obligations at a weighted average discount of 55% of par. 

➢ SMLP refinanced $1 billion in debt in 2021 with an ABL credit facility of $400 million and a 2L note of $700 million

➢ Non-core assets were sold after gas and oil prices recovered  

➢ An independent board was implemented and the organizational structure was simplified

Valuation –

   Current Stock price  ~15  $

   Outstanding shares = 10.2 million

Table 2 – 

End of Year	Debt (millions)	EBITDA (millions)	Debt/EBITDA	Dividend (millions)	Dividend/share	Dividend yield	Expected stock price with 10 % yield
2022	$1,170.00	$220.00	5.318181818	0
2023	$1,040.00	$230.00	4.52173913	0		0
2024	$910.00	$230.00	3.913043478	0		0
2025	$760.00	$230.00	3.260869565	$30.00	$2.94	19.61%	$29.40
2026	$650.00	$230.00	2.826086957	$50.00	$4.90	32.68%	$49.00
2027	$600.00	$230.00	2.608695652	$60.00	$5.88	39.22%	$58.80

SMLP’s current debt stands at around $1,170 million.  For the next five years, we can assume an average EBITDA of $230 million. It might be higher or lower in some years, so an average of $230 million is reasonable. When debt goes down, interest payments decrease, which can be used for dividends and investing for future growth.  A conservative estimate of $30 million as dividend payout for 2025 would be appropriate, since accumulated preferred dividends must be cleared before ordinary dividends can begin.

Reducing debt by 130 million each year for the next three to four years seems reasonable considering the fact they had repaid 170 million dollars of debt  in 2022 till September  using operating cash flow and non-core asset sales with minimum impact to EBITDA.

Risks –

Bankruptcy  –

 700 million dollars of debt is due in 2026 so bankruptcy is unlikely until then unless client drilling activity drops drastically in their areas of interest.  By selling non-core assets and paying off debt, management has reduced the likelihood of bankruptcy. The debt has been reduced from $1355 millions at the end of 2021 to approximately $1170 million by September 2022 giving confidence that bankruptcy is not likely in the near future.

Demand risk –

            Global warming and the migration to renewables will reduce the demand for natural gas over time. However, it’s not a big threat for the next 10 to 15 years. The most common uses of natural gas are electricity generation (38%), industrial (33%), residential (15%), commercial (10%), and transportation (3%).  Natural gas accounts for at least 40 percent of the electricity generated in the US. Surprisingly, 19% of US electricity is generated by coal, and there is a good chance that coal will be partially replaced by natural gas in the future. There should be consistent demand for Natural gas for at least for the next 10 years.  Recession poses a big demand risk since it would reduce natural gas and oil consumption. But even if US and global consumption slows down, exports of natural gas to Europe should put a floor under prices. 

Supply Risk –

    SMLP’s operations depend on drilling activities around its processing areas. Clients might stop drilling if natural gas and oil prices fall. Diversification of the region provides some protection. The export of natural gas to Europe to replace Russian gas should also reduce supply-side risk by putting a floor on natural gas prices. There is also a possibility that SMLP’s assets could run out of oil and gas (or become uneconomical), but long-term contracts (look Table -1) and recent asset transactions (ex: Ascent buying XTO Ultica asset) suggests otherwise. SMLP is not dependent on any single clients drilling activity which reduces supply side risk.

Competition –

        For midstream companies, govt regulation prevents entry of any new competitors.  Once midstream companies have a pipeline in place, no other company is going to get approval to put another pipeline in the surrounding areas because permits won’t be given.    Also because of the NIMBY (Not in my backyard) effect, even if something new is approved, court cases will be filed to stop the development. 

Catalyst

 Debt payoff 

 EBITDA stability and growth

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