DEFA14A: Summit Midstream Reports Q3 2024 Results, Announces Tall Oak Midstream III Acquisition

Summit Midstream Corporation announced its Q3 2024 financial results, highlighted by a net loss of $197.5 million, adjusted EBITDA of $45.2 million, and the transformative acquisition of Tall Oak Midstream III.

Summary

• Summit Midstream Corporation (SMC) 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 C-Corp conversion.
• Adjusted EBITDA for Q3 2024 was $45.2 million, representing a 9% increase quarter-over-quarter.
• Distributable Cash Flow (DCF) was $22.1 million, and Free Cash Flow (FCF) was $9.9 million.
• The company expects to generate approximately $45 million to $50 million of adjusted EBITDA in the fourth quarter of 2024.
• SMC connected 38 wells during the quarter and maintains an active customer base with six active drilling rigs and over 100 drilled but uncompleted wells (DUCs).
• The acquisition of Tall Oak Midstream III in the Arkoma Basin is expected to close in the fourth quarter of 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 transported increased by 20.4% to 661 MMcf/d, generating $8.5 million of adjusted EBITDA, net to SMC.
• Capital expenditures totaled $10.9 million in Q3 2024, including $1.3 million for maintenance.
• As of September 30, 2024, SMC had $17.8 million in unrestricted cash and $349.2 million of borrowing availability under its ABL Revolver.
• The board of directors continued to suspend cash dividends on common shares and Series A preferred shares.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the company reported a significant net loss, there are positive aspects such as adjusted EBITDA growth, the Tall Oak acquisition, and compliance with financial covenants. The suspension of dividends and decrease in throughput temper the overall outlook.

Positives

• Adjusted EBITDA increased by 9% quarter-over-quarter.
• Double E Pipeline volumes saw a significant increase, contributing positively to adjusted EBITDA.
• The company is actively connecting wells and maintaining a strong customer base.
• The Tall Oak Midstream III acquisition is expected to drive further growth.
• The Rockies optimization project is anticipated to improve adjusted EBITDA margin beginning in the second quarter of 2025.
• The company is in compliance with all financial covenants, including interest coverage of 2.4x relative to a minimum interest coverage covenant of 2.0x and first lien leverage ratio of 0.8x relative to a maximum first lien leverage ratio of 2.5x.

Negatives

• The company reported a significant net loss of $197.5 million for Q3 2024.
• Average daily natural gas and liquids throughput decreased compared to the previous quarter.
• Cash dividends on common and preferred shares remain suspended.

Risks

• The company faces risks and uncertainties that could cause actual results to differ materially from forward-looking statements, as detailed in their Registration Statement on Form S-4.
• Operational downtime impacted volume throughput in the DJ Basin, although repairs have been completed.
• Natural production declines in the Piceance segment led to a decrease in volume throughput.

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 same period.

Management Comments

• Heath Deneke, President, Chief Executive Officer and Chairman, commented, Summits third quarter operating and financial results were in line with management expectations, reflecting a very active quarter both corporately and operationally.
• Heath Deneke stated that the C-Corp conversion, balance sheet refinancing, and Tall Oak acquisition position Summit for further growth and significant value-creation for shareholders.
• Heath Deneke noted that the Tall Oak management team executed a new contract for approximately 20 MMcf/d of existing in-basin production expected to begin deliveries in the second half of 2025.

Industry Context

The announcement reflects ongoing activity in the midstream energy sector, with companies focused on optimizing operations, expanding infrastructure through acquisitions, and managing capital structure. The acquisition of Tall Oak Midstream III is in line with the industry trend of consolidation to gain scale and access new production areas.

Comparison to Industry Standards

• While the document does not provide specific comparisons to industry standards, companies like Kinder Morgan, Energy Transfer, and Williams Companies are often benchmarks for midstream performance.
• Summit's leverage ratio of 4.58x is within a typical range for midstream companies, but higher than some peers with stronger balance sheets.
• The adjusted EBITDA growth of 9% quarter-over-quarter is a positive sign, but the net loss indicates challenges in overall profitability.

Stakeholder Impact

• Shareholders will be impacted by the continued suspension of cash dividends.
• Employees may be affected by the integration of Tall Oak Midstream III.
• Customers will benefit from the expanded service offerings resulting from the Tall Oak acquisition.
• Creditors are impacted by the company's compliance with financial covenants and debt management.

Next Steps

• Close the Tall Oak Midstream III acquisition in the fourth quarter of 2024.
• Hold the special meeting of stockholders on November 29, 2024, to vote on the Tall Oak acquisition.
• Implement the $10 million optimization project in the Rockies segment.
• Attend the 2024 Bank of America Leverage Finance Conference and the 2024 Wells Fargo Midstream, Energy, & Utilities Symposium in December 2024.

Key Dates

Keywords

Summit Midstream, Adjusted EBITDA, Tall Oak Midstream, Financial Results, Midstream, Acquisition, Throughput, Double E Pipeline, DCF, FCF