Summit Midstream Corporation (SMC) Earnings Call Transcript & Summary

Good day, and welcome to the Second Quarter 2026 Summit Midstream Corporation Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to Randall Burton. Please go ahead.

Thanks, operator, and good morning, everyone. If you don't already have a copy of our earnings release, please visit our website at summitmidstream.com, where you'll find it on the homepage, Events and Presentations section of Quarterly Results section. With me today to discuss our second quarter 2026 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; and Bill Mault, our Chief Financial Officer, along with other members of our senior management team. Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see SMC's annual report on Form 10-K for the fiscal year ended December 31, 2025, which the company filed with the SEC on March 16, 2026, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA, distributable cash flow and free cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. And with that, I'll turn the call over to Heath.

All right. Thanks, Randall, and good morning, everyone. Summit announced strong second quarter results today with adjusted EBITDA of $60.7 million, which is a 12% increase relative to the first quarter. The second quarter increase was driven by growth in both our Rockies and Mid-Con segments. And as we look ahead to the rest of the year, we are very encouraged with the level of activity we are experiencing across our systems and we're seeing our customers accelerate plans to bring on new wells that are expected to be turned in line towards the end of 2026. Additionally, as we'll discuss further in the call, we have a lot of continued commercial momentum in the Rockies and the Permian segments as we keep securing new contracts to support very attractive high-returning expansion projects. Touching on the second quarter a bit more. We turned in line 36 wells, 16 in the DJ and 20 in the Mid-Con, right after the quarter closed, we brought on another 17 wells in the Williston, and we now have roughly 75 drilled but uncompleted wells across the footprint. It's exciting to see our customers responding to the higher crude price environment, as we speculated could occur back in our earnings call back in May, we now have a total of 8 rigs running behind our Rockies system, which, by the way, is up from 5 in the previous quarter. And 6 of those rigs are in the Williston. And I'd tell you that's a level we're excited about. We haven't seen in several years in the basin. So part of that activity pickup in the Williston is existing customers, accelerating their programs in a stronger crude environment. But part of it is also our commercial success. As we previously announced, we've secured 2 new gathering agreements in Divide County during the first half of the year. Both of the new customers have a rig running behind the system today. And as a result, we now have visibility to approximately 30 new well connections in the Williston that were not contemplated when we set our guidance for the year. These are weighted towards the fourth quarter. So we do expect limited volume contribution in 2026, but they do position us for a very strong start as we look into 2027. In the DJ, we also see our customers ramping up plans that we expect will be a big catalyst for late '26, early '27 as well. We recently signed a new 20-year extension of a gathering and processing agreement with one of our existing anchor customers in the basin. And we're also working with other customers to potentially dedicate new acreage to our growing DJ footprint. It's really an exciting time to see this level of activity ramping up in the Rockies segment and what that means for the future. On Double E, we executed additional firm transportation agreements during the quarter, which brought total contracted volume on the pipe to just over 1.9 Bcf per day. We continue to see a tremendous amount of customer interest in the mainline compression expansion open season, and we have extended that open season now through the end of August as we work to finalize additional firm transportation agreements that will support the project. We expect to be in a position to make a final investment decision prior to the open season conclusion, and we will provide updates as they become available. And just to mention the Mid-Con segment. One of the highlights there is that we're very encouraged with the performance of new wells that have recently been turned in line in an emerging dry gas region within our Arkoma footprint. This, again, is a development that could be a major catalyst for the segment in 2027 and beyond. And finally, before handing the call over to Bill, I'd like to hit on the guidance real quick. As we said, we've had a solid first half in the books, and we now have a far better line of sight into second half volumes than we did back in March with the activity level now accelerating as well across the footprint. So as a result, we are tightening our full year 2026 adjusted EBITDA guidance to a range of $235 million to $255 million. We are also raising full year capital expenditure guidance to $100 million to $120 million, which is inclusive of the contributions to the Double E JV. Look, the first driver of that capital increase is the approximate 30 new wells that we talked about earlier in the call, which were not part of our original plan. as well as the second, I guess, would be the incremental capital at Double E, which is tied to the new firm transportation agreements that we executed this year. As a reminder, those -- that Double E capital will be funded through our new term loan that we executed earlier in the year. So look, both of these increases in expenditures are going to be really high returning dollars and tied to activity that is either contracted or committed, and in both cases, we see that the earnings benefits will start showing up in 2027. So with that, I'd like to turn the call over to Bill now to walk through the financials.

Thanks, Heath, and good morning, everyone. Summit reported 2026 adjusted EBITDA of $60.7 million, distributable cash flow of $36.8 million and free cash flow of $9.4 million. Total capital expenditures were $25 million for the quarter, inclusive of $4.1 million of maintenance CapEx, with the majority of capital directed toward pad connections in the Rockies and Mid-Con segments. With respect to Summit's balance sheet, we ended the quarter with $21 million of unrestricted cash and $79 million drawn on our revolver, with approximately $418 million of available borrowing capacity after accounting for $2.7 million of undrawn letters of credit. Total leverage at the end of the quarter was approximately 4.1x and the Summit Permian Transmission term loan had a balance of $350 million at quarter end and remains nonrecourse to Summit. With all the commercial progress and our expectation to FID compression in the near term, we are also working with our financial partner at Summit Permian Transmission to secure the $50 million uncommitted accordion to support the compression expansion project. During the quarter, we also began executing on the $35 million share repurchase program authorized by the Board, repurchasing approximately 35,000 shares for $1 million. As of June 30, we had approximately $34 million of remaining capacity under the program. Now on to the segments. The Rockies segment generated adjusted EBITDA of $30.4 million, an increase of $4 million relative to the first quarter of 2026, driven by a 6.3% increase in liquid volume throughput and higher realized crude oil and NGL prices, partially offset by a 3% decline in natural gas volume throughput Liquids volumes averaged 68,000 barrels per day and natural gas volumes averaged 162 million cubic feet per day during the quarter. Realized crude oil prices and composite NGL prices were both up approximately 30% quarter-over-quarter, benefiting both our customers and Summit's earnings associated with percentage of proceed contracts in the DJ Basin. We connected 16 wells in the DJ Basin during the quarter. And subsequent to quarter end, we connected an additional 17 wells in the Williston Basin including 9 wells for which we provide both crude oil and produced water gathering services. And just as a reminder, the water to crude ratio in this area of the Williston is approximately 3 barrels to 1, so these wells are extremely impactful to volume throughput. While those 9 wells are still ramping through August to date, they've averaged approximately 15,000 barrels per day of combined crude and produced water throughput. We are excited about the growth trajectory of this segment, not only from the acceleration of activity, but continued delineation and development of the significant remaining inventory in both Williams and Divide Counties. Additionally, in the DJ, Peoria Resources, who entered the basin acquiring Verdad earlier this year announced the acquisition of Fundare Resources last week. As you know, Fundare is a key customer behind the Moonrise Midstream asset that we acquired back in March of 2025, and this transaction offers Peoria additional contiguous acreage to drill longer laterals, drive down breakevens and fully develop the resource behind the Moonrise processing plant. There are 8 rigs currently running behind the systems, 6 in the Williston and 2 in the DJ with approximately 75 DUCs. The Permian segment reported adjusted EBITDA of $9.4 million, an increase of $0.6 million relative to the first quarter, driven by a 6.7% increase in Double E volume throughput with Double E averaging 859 million cubic feet per day of throughput during the quarter. The Piceance segment reported adjusted EBITDA of $8.7 million, a decrease of $0.9 million relative to the first quarter primarily due to a 5.7% decline in volume throughput driven by continued temporary shut-ins from low regional gas prices, natural production declines and no new well connections during the quarter. However, as of the end of July, all of the previously shut-in production had begun flowing. Finally, the Mid-Con segment reported adjusted EBITDA of $21.4 million, an increase of $2 million relative to the first quarter, primarily due to a 9.9% increase in natural gas volume throughput to 523 million cubic feet per day. This was driven by 17 new Barnett wells and 3 new Arkoma well connections during the quarter. These wells are either performing in line or slightly above our expectations and we are encouraged with how long these wells are holding production before starting their initial declines. And with that, I'll turn the call back over to Heath for closing remarks.

All right. Thanks, Bill. So to wrap up, we are very excited about the trajectory of the business through the remainder of '26 and into '27 as well. Volumes are growing and customer activity behind our systems is accelerating. As we've laid out in our recent investor presentation, the business is poised to deliver over $100 million of organic growth by 2030, which is driven by the Rockies and Permian segments primarily. Look, all of this, you can see materializing real time. When you look at the commercial success that we're having along with the development activity levels that we're experiencing. Our current focus is completing a successful conclusion to the Double E compression expansion open season in the coming weeks as well as staying ahead of our customers in the Rockies segment with our well connect programs that will enable our customers to even maybe further accelerate their development activity. On the corporate front, we continue to make progress towards achieving our 3.5x leverage target and making our goal of resuming a common dividend in the near future a reality. We think the combination of Summit's robust growth outlook, our current and projected high free cash flow yield our improving balance sheet and our current valuation all provide a very clear and compelling value proposition for new and existing investors in Summit. So with that, I would like to thank everyone for joining the call and I look forward to answering questions. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Mark Reichman with Noble Capital Markets.

How much incremental adjusted EBITDA could the 30 new Williston well connections contribute in 2027? And how should we think about the broader growth opportunity in the basin beyond those wells?

Yes, thanks for joining. So the 30 incremental wells we're talking about, Mark, I would view that as somewhere around $10 million of kind of EBITDA contribution just from that development. Now obviously, those 30 wells are coming online, call it, late Q4, early Q1. We would expect additional activity to transpire for the remainder of '27 in the Williston. It's a little early relative to producer guidance. But if you just think about that 15,000 barrel a day increase from the 9 crude and water wells, we're talking about sizable volumetric growth relative to kind of the print this quarter on liquids volume. So we've talked about some of that volumetric sensitivity that we include in our investor deck. I think what we're seeing, we're trending towards that higher end of the, call it, 10-ish percent kind of volumetric growth under this type of cadence.

And Mark, just one other thought to add there as well. I mean if you think about when these -- the producers behind these new -- we signed, what, 240,000 acres worth of new dedications to the system in the first half of the year. And a lot of their plans were developed off of a crude strip that was materially below where we are now. So I think if crude holds kind of in this current range that we're in now, I would actually expect to probably see some additional acceleration or maybe additional rigs being added on the acreage position. So a lot of -- and we think we have a lot of upside. And also, we've -- just given our position in Divide and Northern Williams County, I think we've got additional targets out there that we think we may be able to bolt on some additional customers as well. So pretty exciting growth up here in the Williston. Good to see on our system.

That's very helpful. Now what remaining commercial commitments are necessary to reach FID on the Double E compression expansion. And I'm just looking at that slide in your slide deck on Page 7, where you kind of stepped through the volumes and the financial contribution. So maybe you could talk a little bit about that and maybe the incremental EBITDA that you expect if the project proceeds.

Yes, Mark, this is Chris Tennant. I appreciate the question. We're putting the final touches on 2 PA agreements right now that will push us over the FID hurdle here in the next couple of weeks. And the FID case will give us right at a sub-6x build multiple. The asset is in a great position, and we feel very confident about fully contracting it. And as we contract the remaining capacity, we'll see that build multiple go to a 3x or lower build multiple. So we're really excited about that and feel very confident in our contracting and the position around Double E.

And Mark, to bridge the gap on kind of the page you're looking at in the investor deck, we're showing kind of $70 million of existing contracts and then with compression $90-plus million of EBITDA. Think about that FID case being somewhere kind of in between those to get kind of baseline economics for us to make the decision to FID. And then the goal and our expectation would be to fully commercialize the remaining capacity by the end of the year.

Okay. That's really helpful. And then with the Piceance MVC shortfall payments expiring at the end of the third quarter, how should we think about the segment's normalized EBITDA beginning in the fourth quarter and into 2027? I was just kind of wondering if the return of the previously shut-in production and future drilling might offset the loss of the MVC-related earnings? Or should we expect a step down in cash flow?

Yes, Mark, you should expect a step down in cash flow starting in the fourth quarter. And just to provide some high-level numbers, think of that as like there's roughly $4 million of shortfall payments a quarter. So the business -- that segment did around $8.5 million, $8.6 million this quarter. So you're somewhere around $4 million to $4.5 million of kind of flowing EBITDA, which will give you a good run rate for '27. Longer term, Mark, so -- and we can get into this in more detail if you'd like, but longer term in our long-term outlook, the $100 million of EBITDA growth through 2030, we're really not expecting any development in the Piceance under that forecast. I do think that's conservative. I think there are things like the data center build-out in that entire kind of Rockies area as well as Canadian LNG, we really need some gas demand to kind of offset some of the Canadian associated gas that's flooding the market in which these producers sell into on the residue gas side. There's a lot of inventory, there's a lot of upside, but we're not banking on it in our long-term outlook, but I do think we're being a bit conservative long term from that perspective.

Okay. And then on the -- so adjusted EBITDA for the first half was $115 million, and you narrowed your guidance, the midpoint remains kind of $245 million. So what could drive results towards the upper end of the range or even the lower end of the range? I mean, it's a pretty tight range to begin with, I guess.

Yes, Mark, this is Heath. Look, I think we think we're kind of at the midpoint plus is how I would we describe the way things are set up right now. The low end, I would say they have to be a pretty dramatic drop in commodity values. Most of the activity frankly, even third quarter activity, a lot of that's already been turned online or about to be turned in line. And the fourth quarter wells are really slanted more towards December than they are early in the quarter. So I think activity wise, I think we're pretty nailed down here. So I guess if we had some significant underperformance of wells that might kind of skew the numbers are down a little bit. But I kind of think we've got upside beyond the midpoint and that probably more than offsets any kind of risk to the downside in my view. So a lots of good momentum here to hold on to.