Summit Midstream Partners: There Is A Lot Of Value Left To Capture

seekingalpha07-25

Summit Midstream Partners (SMLP) continues restructuring the business and balance sheet.Our current wager that Heath Deneke and team will straighten this company out is looking like a decent one.We ...

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Summit Midstream Partners (NYSE:SMLP)  Summit Midstream Partners (SMLP) continues restructuring the business and balance sheet. Summit Midstream is more a bet on the jockey than the horse. This wasn't the case when I made the initial investment several years ago and I'm guilty of shifting my original investment thesis, as one is prone to do when a stock goes down over 70%. Nine out of ten times this is a big mistake, but our current wager that Heath Deneke and team will straighten this company out is looking like a decent one. Within the past couple months the company divested $700mn worth of assets (the Enterprise Value was only $1.6 billion the day before the announcement), added long-term take-or-pay contracts to the Double E pipeline, and announced a C-corp conversion. The asset sales occurred in two separate transactions, allowing SMLP to fully exit their position in the Utica and Marcellus basins at a 7.4x multiple. After the asset sale, management embarked on a broader refinancing package, issuing new Senior Secured 2nd Lien Notes due 2029 at 8.625%, while redeeming all other maturities with a little help from the credit facility. With several quarters of FCF capable of paying down the ~$120mn drawn on the revolver, by 2026 the only debt remaining should be $575mn from the new Notes. The chart below illustrates the progress made since Heath joined the company.   ($ in millions) Pre-Heath 6/30/23 9/30/23 6/30/24 - PF 7/30/24 - PF   Unrestricted Cash   $14 $17 $210 $20   ABL Revolving Credit Facility   $328 $295 - $120   8.625% Senior Secured Second Lien Notes (due 2029)         $575   8.50% Senior Secured Second Lien Notes (due 2026)   $785 $785 $785 -   5.75% Senior Notes (due 2025)   $259 $50 $50 -   12.00% Senior Notes (due 2026)     $210 - -   Total Debt   $1,372 $1,339 $835 $695   Total Debt, net of Cash $1,814 $1,359 $1,322 $625 $675   Series A Prefs $300 $91 $94 $100 $100   Recource Obligations, net of Cash $2,114 $1,450 $1,416 $725 $775    Double E Related: Sub Series A Prefs    $121 $123 $127 $127   Permian Transmission Credit Facility   $150 $148 $141 $141   Click to enlarge Total net obligations are down 63% in 4-years and leverage has declined from 5.4x at the end of last year to 4x today. As a result, interest expense continues to decrease materially, from $127mn in 2023 to potentially as low as $50mn by late 2025. Management has a leverage target of 3.5x before distributions on the preferred or common equity are reinstated, but we think there is a far better use of capital than dividends. The base business is worth $60-$70 a share in our opinion and Double E is worth $18+ a share, for a combined value of ~$80, or 125% above the current price. At such a steep discount to intrinsic value investors would be far better served by share repurchases than they would by dividends. We hope Heath and team change tact when that time comes, but regardless there is a lot of value left to capture.   Disclaimer & Footnotes This letter is for informational purposes only and does not reflect all of the positions bought, sold, or held by Legacy Ridge Capital Partners Equity Fund I, LP. Any performance data is historical in nature and is not an indication of future results. All investments involve risk, including the loss of principal. Legacy Ridge Capital Management LLC disclaims any duty to provide updates to the information contained within this letter. This letter may include forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause actual results and performance to be materially different from any future results and/or performance expressed or implied by such forward looking statements. Performance for 2018 is provided by Richey May & Associates, our auditor, and was provided via a Performance Review for a separate account that was transferred into the Fund and constituted 100% of the assets of the Fund as of November 1, 2018. Results are net of fund expenses. All performance related figures for the Partnership are unaudited. Indices are provided as market indicators only. It should not be assumed that any investment vehicles managed by Legacy Ridge Capital Management will, or intend to, match provided indices in holdings, volatility or style. Index returns supplied are believed to be accurate and reliable. The S&P 500 is a market capitalization weighted index that measures the performance of the 500 largest US based companies. The Russell 2000 Index is a market capitalization weighted index that measures the performance of the smallest 2000 stocks in the Russell 3000 Index and is a common benchmark for smaller companies. The MSCI World Index is a market capitalization weighted index that is designed to be a broad measure of equity-market performance throughout the world. It is comprised of stocks from 23 developed countries and 24 emerging markets. The AMZ is an index provided by VettaFi and measures the return of 19 Master Limited Partnerships on a total return basis. The S&P 500 Energy sub-index comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector. There are currently 25 constituents in the S&P 500 Energy sub-index. The XAL is the NYSE Arca Airline Index. There are currently 16 constituents in the XAL, with most domiciled in the US. This letter does not constitute an offer or solicitation to buy an interest in Legacy Ridge Capital Partners Equity Fund I, LP. Such an offer may only be made pursuant to the delivery of an approved confidential private offering memorandum to an investor. This reporting does not include certain information that should be considered relevant to an investment in Legacy Ridge Capital Managements investment vehicles, including, but not limited to significant risk factors and complex tax considerations. For more information please refer to the appropriate Memorandum and read it carefully before you invest.  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