We circled again onto the midstream LP high-yield path this week to cowl Summit Midstream Partners LP (SMLP), considered one of many midstream corporations we have written articles about.
Profile: Formed in 2012, SMLP supplies pure gasoline, crude oil and produced water-gathering providers, primarily through long run, fee-based contracts with its prospects in these 5 unconventional useful resource basins:
– The Appalachian Basin, which incorporates the Marcellus and Utica shale formations in West Virginia and Ohio.
– The Williston Basin, which incorporates the Bakken and Three Forks shale formations in North Dakota.
– The Fort Worth Basin, which incorporates the Barnett Shale formation in Texas.
– The Piceance Basin, which incorporates the Mesaverde formation in addition to the Mancos and Niobrara shale formations in Colorado and Utah.
– The Denver-Julesburg Basin, which incorporates the Niobrara and Codell shale formations in Colorado.
(Source: SMLP website)
SMLP reported its Q3 ’17 earnings final week, and the income and web revenue progress have been strong yr over yr:
Revenues, web revenue and EPU all hit firm information, whereas EBITDA and DCF have been down -Four% to -5% vs. Q3 ’16, however improved sequentially vs. Q2/17:
SMLP has had good income progress in its Utica, Williston, Piceance/DJ, and Marcellus segments in 2017:
However, this did not translate into EBITDA progress within the Ohio, Williston and Barnett segments, the place some prospects delayed finishing new wells in Q1-2 ’17. The Ohio phase improved in Q3, however Williston and Barnett nonetheless lagged Q3 ’16 figures.
Management was upbeat although about This autumn exercise to date for its Williston, Barnett and Utica segments on the Q3 earnings name.
“We have already begun to see completion activity accelerate in the fourth quarter of 2017 from a number of customers across several of our gathering systems, including in the Utica, Williston, and Barnett. We continue to expect that these activities will lead to volume and cash flow growth across these badets throughout the rest of 2017 and into 2018.”:
“Total operated natural gas volumes averaged 1.83 bcf a day in the quarter, a new record for the Partnership, and a 2.6% sequential increase over the prior quarter. Gathered volumes for SMLPs Ohio gathering JV Utica averaged 763 million cubic feet a day in the third quarter, up 8% over the second quarter ’17.”
“This was primarily due to the completion of more than 20 wells across OGC system in July and August. Natural gas throughput on our operated badet was led by the Marcellus segment, which averaged 554 million cubic feet a day in the quarter, our highest quarterly volume ever and a 15% sequential increase over the second quarter ’17.”
“We are seeing an uptick in drilling and completion activity across our DJ Basin badet as operators experienced badess in drilling the Codell Niobrara formations in the northern extension part of the play. September volumes for this sub-system were up nearly threefold from year ago levels and are approaching our current 20 million a day of processing capacity. These are higher margin volumes and contributed to our sequential segment adjusted EBITDA growth in the overall Piceance/DJ segment.”:
(Source: SMLP Q3 ’17 Earnings launch)
Looking again over the previous 4 quarters reveals an identical sample – income and web revenue grew very properly, however EBITDA and DCF not a lot. The whole distributions protection fell from 1.27x to 1.16x, which remains to be a good determine, notably as models grew by 7.69%, and bumped up whole distributions by over 9%:
Management has stored the quarterly distribution at $.575 since November 2015. They commented on this on the earnings name, when requested if any distribution hikes could be within the offing:
“A distribution increase just really isn’t in the cards currently.”
Not very upbeat, however they did level out that, “Since 2014, 32 of the 50 Alerian Index constituents have successfully minimize their distribution, both via an outright minimize or a merger that resulted in a minimize. Summit has not. And in actual fact, since 2014, we have grown our EBITDA by 12% per yr. During that point, our distribution protection has elevated and our leverage metrics have remained fixed.”
Like most of the LPs we have coated, SMLP pays in a Feb-May-Aug-Nov. cycle. Unit holders obtain a Ok-1 at tax time. You can monitor SMLP’s present value and yield in our High Dividend Stocks By Sector Tables, (within the Basic Materials part).
Note: Investing in LPs and MLPs might current tax issues when carried out in an IRA. Additionally, since LPs normally make tax-deferred distributions, you’d reap extra tax advantages by holding them in a non-IRA account. Please seek the advice of your accountant about this concern.
SMLP’s distributions/unit protection acquired again to a extra typical stage in Q3, rising from 1.11x to 1.17x, and has averaged 1.17x over the previous 4 quarters:
We simply added this March 2018 commerce for SMLP to our Covered Calls Table, which tracks over 25 different trades every day. The March $20.00 name strike is on the cash, and has a $.90 bid.
This commerce consists of one quarterly distribution ($.575 most certainly) coming in early February. It permits you to hedge your wager with SMLP by taking within the additional $.90 in possibility premium. But the trade-off is that the $20.00 name is simply $.35 above SMLP’s $19.65 value/unit.
If your models get badigned earlier than the February ex-dividend date, you’d find yourself with $1.25, the combo of the $.90 possibility premium and the $.35 badigned value achieve. If they do not get badigned, your revenue can be $1.48, the $.575 distribution and the $.90 name premium.
SMLP’s places did not look that enticing at press time, however you possibly can see particulars for over 25 different trades in our Cash Secured Puts Table.
Debt and Dilution – As with most LPs, which pay out the lion’s share of their money movement, SMLP has to entry the fairness and capital markets in an effort to develop. They at the moment have an on the market unit gross sales program below which they’ve issued 763Ok models in 2017 (however none in Q3 ’17) for gross proceeds of $17.7M. Their web debt/EBITDA has risen barely, from Four.23x to Four.46x over the previous 4 quarters, however they’re at the moment inside all of their debt covenants.
Commodity Cycle – Although SMLP’s contracts are fee-based, if there’s one other protracted downturn in power costs, the ending of its prospects’ DUC wells stock may very well be pushed out additional into the longer term, which might strain SMLP’s earnings.
Deferred Payment Liability: In addition to its present debt load, SMLP has a deferred cost due in 2020 as a remaining cost due for a 2016 badet drop-down from its Summit Midstream Partners Holdings LLC. Management organized new financing in Q1 2017, with a watch to making ready for the 2020 cost, which was listed at $508.67M on the steadiness sheet, as of 9/30/17.
“The Deferred Payment calculation was designed to ensure that, during the deferral period, all of the EBITDA growth and capex development risk badociated with the 2016 Drop Down Assets is held by the GP, Summit Investments. The Deferred Payment was structured such that SMLP will ultimately pay a 6.5x multiple of the actual EBITDA generated from the 2016 Drop Down Assets in 2018 and 2019.”
“While we remain bullish about the outlook for volume growth for our Utica badets over the next several years, our current outlook for ’18 is flatter compared to previous expectations, primarily due to volume growth and badociated CapEx projects being delayed to the second half of 2018. This is the primary reason why the undiscounted value of our DPPO decreased in the third quarter and now stands at an estimated $656 million.” (Source: Q3 earnings name)
New Preferred Units: Management simply introduced a brand new Preferred models providing in the present day, 11/eight/17. Normally, most well-liked choices begin out with a short lived ticker for the primary few days, as institutional consumers accumulate them, (usually at a value under the liquidation worth). You can generally purchase them below par additionally, and construct in a small potential value achieve, together with the yield.
However, Schwab had no ticker as of but. The prospectus additionally had no yield knowledge as of but both, aside from to say that the models may very well be referred to as in someday in 2022, however that after 2022, they’d commerce at a floating charge. There must be extra data popping out over the following few days:
“Summit Midstream Partners, LP, announced today that it has commenced, subject to market conditions, an underwritten public offering of Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units representing limited partner interests in the Partnership. The Partnership intends to use the net proceeds from the offering to repay outstanding borrowings under its revolving credit facility and for general partnership purposes.” (Source: SMLP website)
“Today, we are announcing an expansion of our existing 20 MMcf/d gathering and processing complex in northern Weld County, Colorado, with the addition of a new 60 MMcf/d processing plant. This $60 million expansion project is designed to support increasing volumes from existing customers. We are encouraged by the increased level of upstream development activity in and around our DJ Basin badets and we expect to place this project in service by the end of 2018. We plan to finance the project with excess distribution coverage and borrowings under our Revolver.” (Q3 earnings name)
When requested on the earnings name about new developments with its buyer XTO within the Delaware Basin (is a extra mature sub-basin within the Greater Permian Basin), administration was upbeat. “The alternative with XTO within the Delaware is mbadive. They’ve (acquired) 275,000 acres – they dominate the Northern Delaware from an acreage place. It’s contiguous acreage as properly too in order that all the time helps. It’s in three completely different blocks of acreage, and we simply acquired proper of method that mainly cuts proper via it, and saves us a couple of yr of timing from a allowing standpoint.”
Analysts’ Price Targets:
SMLP is at the moment ~18% under badysts’ common value goal of $24.00.
Curiously, though it has obtained upward estimate revisions over the previous month, precise EPS estimates have solely risen for 2017 throughout this time. However, the estimates for This autumn ’17, 2017 and 2018 are all greater than they have been 60 days in the past:
SMLP has had a tough time of it in 2017, lagging each the Alerian MLP ETF (AMLP) and the market.
This up to date valuation desk consists of another midstream companies we cowl on SA – Arc Logistics Partners LP (ARCX), PBF Logistics LP (PBFX), Holly Energy Partners LP (HEP), MPLX LP (MPLX), Green Plains Partners LP (GPP), Martin Midstream Partners (MMLP), Delek Logistics Partners LP (DKL), and Plains All American Partners (PAA).
SMLP has the second-highest yield within the group, at 11.68%, whereas its 1.17x protection issue is according to the group common. At 7.35, its Price/DCF is within the decrease tier of valuations, as is its 1.34 value/ebook valuation:
Management has improved the corporate’s ROA, ROE and working margin significantly over the previous 4 quarters. Meanwhile, the debt/fairness and web debt/EBITDA have each crept up a bit.
SMLP’s debt/fairness ratio is likely one of the decrease ones within the group, however they will must ramp up EBITDA to deliver the online debt/EBITDA extra in line. The working margin is above common, however the ROA and ROE are each under group averages:
Debt and Liquidity:
As of September 30, 2017, SMLP had $506.zero million of excellent debt below its $1.25 billion revolving credit score facility and $744.zero million of accessible borrowing capability, topic to covenant limits. Based upon the phrases of SMLP’s revolving credit score facility and whole excellent debt of $1.306 billion (inclusive of $800.zero million of senior unsecured notes), SMLP’s whole leverage ratio and senior secured leverage ratio (as outlined within the credit score settlement) as of September 30, 2017, have been Four.16 to 1.zero and 1.61 to 1.zero, respectively.
SMLP redeemed its 7.5% Senior notes in March ’17, which left it with no maturities coming due till 2022:
(Source: SMLP Q3 ’17 10Q)
We charge the SMLP frequent models a maintain, however we might pursue a place within the new most well-liked sequence, relying upon the ultimate yield construction. As is normally the case, the protection for the preferreds shall be even higher than the frequent models. The long-term story for SMLP looks as if it might probably work out, however we might nonetheless prefer to see some progress in DCF and EBITDA in coming quarters earlier than committing to the frequent models.
Preferred issuance by LPs appears to be on the rise in 2017. It is sensible, notably if the market is not supporting the frequent models’ value. Issuing lower-yielding preferreds can provide the corporate a less expensive supply of capital than doing a secondary IPO of frequent models, when their value has been depressed.
All tables furnished by DoubleDividendStocks.com, except in any other case famous.
Disclaimer: This article was written for informational functions solely, and isn’t supposed as private funding recommendation. Articles posted on SA aren’t meant to be all-inclusive white papers by any means. Please apply due diligence earlier than investing in any funding automobile talked about on this article.
Disclosure: I’m/we’re lengthy PBFX, MPLX, MMLP.
I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.[ad_2]