Summit Midstream Partners Successfully Manages Debt And Corporation Conversion

seekingalpha2024-07-29

Summit Midstream Partners has recovered from a downturn, delaying debt by 3 years and converting to a C-Corp, aligning for substantial shareholder returns.SMLP's capital stack shows improved financial...

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We recently discussed the company and its commitment to shareholders. Since then, the company has made two major decisions that re-affirm its ability to provide long-term shareholder returns. First, the company has managed to delay its delay by 3-years. Second, the company's shareholders have approved the conversion to a C-corp. As we'll see throughout this article, these accomplishments line up the company to provide substantial shareholder returns. Capital Stack The company's capital stack highlights its debt, which has been a consistent issue for the company over the last several years. Summit Midstream Partners Investor Presentation The company has no money on its revolver and $420 million in unrestricted cash thanks to its asset sales. It also has $1.045 billion in debt at the top level. The company has announced an upsized offering of $575 million in senior secured second lien notes due 2029 at the same 8.625% interest rate as the 2026 notes. The interest rate staying effectively constant in a higher for longer high-interest rate environment is a great sign of the company's improved financial strength. The company has also had 85% ($650 million out of $765 million) of its 2026 notes validly tendered at 8.5% to roll over this debt into the longer-term debt. The company's post cash net debt is roughly $600 million in line with the company's upsized $575 million offering given that it can comfortably afford to use its cash flow to pay any differences. This also locks the company's interest payments at roughly $50 million / year through 2029, a much better financial position for the company. C-Corp Another major development for the company is that shareholders have approved the announced conversion to a C-Corp. The company had more than 88% of its unitholders agree to this, and this enabled the company to upsize its ABL revolver from $400 million to $500 million giving it optionality should more strategic scenarios reveal themselves. At the end of the day, even if it shouldn't be a major factor, many investors also dislike K-1s and the efforts required to fill them out. It's been shown time and time again that MLPs are a less popular structure that trade at a lower valuation. That'll also remain a factor for SMLP and let the company's valuation increase when it's re-rated. Asset Utilization Concerns We do have continued concerns about SMLP, and that is specifically around the company's asset utilization. Summit Midstream Partners Investor Presentation The company doesn't have top-tier midstream assets, although its Double E pipeline is incredibly strong. The company is working to improve its assets and its utilization and is seeing the number of well connects improve in some segments, while other segments are seeing weakness. That's especially important because MVC continues to have a big impact on EBITDA. The company's Double E pipeline is a prime asset that continues to generate growing EBITDA, but ideally the company will be able to improve its other segments. Natural Gas Prices Natural gas prices have remained weak and that's been a major impact on drilling. That's especially true as oil prices have remained reasonably strong. Natural Gas The consistent weakness in natural gas prices has continued despite continued LNG export growth, as the benefits from Russia's invasion of Ukraine has largely dissipated. LNG approvals were on hold, although we do expect them to likely resume. That will help form a strong baseline for demand; however, power demand remains weak. It is noting that natural gas has remained weak enough that producers are slowing down production, which impacts the company temporarily. However, in the long run we do expect prices to recover into 2025. Of course, that depends on weather and other impacts. Shareholder Returns Summit Midstream Partners has the ability to continue generating strong shareholder returns. Summit Midstream Partners Investor Presentation The company's EBITDA remains strong, with roughly $155 million in EBITDA. The company is cutting its interest expenditures substantially to ~$50 million, which will help FCF to remain much stronger at $75+ million. The Double E pipeline is expected to add $25 million of EBITDA at roughly $100 million of capital costs. We expect the company to move towards $100 million in cash flow, which could comfortably put it at an $800-900 million market capitalization, especially given its debt that can be paid off. That's high interest debt that could save the company substantially. Given the company's $390 million in market capitalization, that could enable the company to generate 150% returns before the end of the decade. Overall, that makes the company a valuable investment. Thesis Risk The largest risk to our thesis is long-term weakness and the company's continued weak utilization rates. At the same time, while the company's debt has been largely rolled over, the company does still have high interest debt and obligations that it needs to handle. A failure to do that will hurt its ability to generate long-term shareholder returns. Conclusion Summit Midstream Partners is a midstream company that's been through some tough times. However, the company has worked hard to right the ship, and even in a tough natural gas price environment, selling more than $600 million of assets has helped it substantially. The company's two recent major announcements are a big factor here. The company has shown an ability to roll over its debt and now make it debt that it can likely pay off to handle the interest obligations on. The company is also merging into a C-Corp, which will help it achieve a higher multiple on its strong cash flow. It can drive a variety of shareholder returns, making it a valuable long-term investment.  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