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Summit Midstream (NYSE: SMLP) Shale Gas Investments

Brian Hicks

Written By Brian Hicks

Posted June 6, 2013

The natural gas industry may get a boost with the following acquisitions.

Summit Midstream Partners LP (NYSE: SMLP) announced two acquisitions in the Bakken and Marcellus territories. The acquisitions are worth $460 million and will be purchased from the wholly-owned subsidiaries of its parent company, Summit Midstream Partners LLC, otherwise known as Summit Investments.

super frackBoth deals will be financed by SMLP’s upgraded $600 million credit facility and $150 million in common units and partner interests in SMLP.

In the Bakken, SMLP acquired Bison Midstream LLC, an associated gas-gathering system, for $250 million. The system is located in Mountrail and Burke counties of North Dakota and comprises a 300 mile system with six compression stations.

An additional compression station is expected to increase flow from 20 mcf/d to 30 mcf/d. $200 million will derive from credit liquidated into cash, and the remaining $50 million will come in the form of partnership interests and common units priced at $31.53 per unit.

CEO and President Steve Newby said the deals “will be immediately accretive to our distributable cash flow on a per unit basis and will deliver significant value to our unitholders over the long-term,” according to an official statement from the company.

SMLP also purchased assets from MarkWest Energy Partners, L.P. (NYSE: MWE) in Doddrige County, West Virginia. Titled the Mountaineer Gathering System, SMLP purchased the 40 mile pipeline network for $210 million.

Natural gas from that region funnels to MarkWest’s Sherwood Processing Complex, where capacity is being upgraded from 400 mcf/d to 800 mcf/d. The pipeline itself carries 550 mcf/d to the processing plant. $110 million will originate from credit and $100 million will come from common units, also priced at $31.53 per unit, and partnership stakes.

This acquisition will mark SMLP’s debut into the Marcellus Shale, where the natural gas outlook in that region looks fairly positive thanks to processing and potential relaxed regulations on fracking.

Summit Midstream is in the business of acquiring, constructing, owning and operating pipeline-based systems in areas of North America with significant energy resources. Specific activities of the company include natural gas gathering, compression, dehydration, and engineering. With all employees combined, the company has 200 years of experience in pipeline and gas gathering systems.

A majority of its revenue comes from long-term gas gathering agreements from clients. Some of its customers include Exxon Mobil (NYSE: XOM), Total (NYSE: TOT), Bill Barrett Corporation (NYSE: BBG), Chesapeake Energy (NYSE: CHK), and Encana Corporation (NYSE: ECA), among others. The company was formed in 2009 and went public in September of 2012. Since then, shares have gained over 50%.

SMLP also has compression and fee-based natural gas gathering services in the Barnett Shale of Central Texas and the Niobrara and Mancos formations of Colorado.

SMLP currently transports over 944 mcf/d of natural gas – 60% of which is natural gas liquids.

Recipe for Success

What SMLP has going for it is a successful business model catering to markets with high demand.

And the latest acquisitions are in two vital areas for natural gas.

In the Bakken shale, energy companies waste one-third of natural gas produced in the region by burning it as crude is pumped to the surface. Because there are not enough natural gas pipelines for energy companies to transport the commodity, drillers are forced to flare it, or release it into the atmosphere, which is not only a waste of resources, but energy companies will also still have to pay taxes and royalties on it.

Pipelines like the Bison will help oil and gas companies capture and transform flare gas into an extra resource.

In the Marcellus Shale, processing plants and export facilities are in demand. Dominion Resources (NYSE: D) has an application pending with the Department of Energy that would convert a portion of its Cove Point facility in Maryland into an export terminal.

While drilling for natural gas has slowed down because of low prices, there is still a need for natural gas processing. Various processing construction projects are beginning to show up around the Marcellus and Utica plays throughout the northeast.

SMLP can offer the necessary capital to upgrade facilities and pipelines to transport natural gas to processing centers, and it has the necessary expertise in engineering and management to ensure operations run with efficiency.

And investors should keep an eye on SMLP, as it may add pipelines of its own in the Bakken and Marcellus plays in the future.

Investor Benefit

This company is proving a promising member of the U.S. shale boom for a number of reasons. First and foremost, the two acquisitions are meant to increase cash distributions to investors.

And the company lays out the ways it plans to achieve future growth:

  • Pursing accretive acquisition opportunities from our general partner

  • Diversifying our asset base by expanding our midstream service offerings and exploring acquisition and development opportunities in various geographic areas

  • Capitalizing on organic growth opportunities

  • Increasing throughput volumes on our existing systems

  • Maintaining our focus on fee-based revenue with minimal direct commodity price exposure

  • Partnering with large natural gas producers to provide midstream services for their development projects in high-growth, unconventional resource plays

In addition, the company is already in the midst of a growth spurt.

Summit Midstream is making revisions to its adjusted EBITDA guidance range, shifting from the $115 million to $125 million range to $140 million to $150 million due to healthy operations and newly acquired assets within a seven month period. The company believes the adjusted EBITDA will facilitate an 18% to 22% above-minimum payout to its partners by the fourth quarter of 2013.

SMLP has a solid credit and cash flow system, and leaders of that company know how to seize the moment in strategically important locations. The Marcellus and Bakken plays are not the only places suffering from a lack of infrastructure; the country as a whole is being held back by an inability for pipeline networks to keep up with higher production volumes.

The more the merrier when it comes to pipeline companies that want to contribute on a local or national scale.

As the U.S. continues its production booms in natural gas and crude, there will need to be added facilities and pipes to keep pace with exploration.

Companies like SMLP are playing a small part in helping the energy industry flow smoothly. A lack of pipelines has real consequences on the energy market; it can lead to backlogs, price decreases, and wasted revenue in the form of flaring natural gas.

That is why energy companies with a specialty in pipeline infrastructure will do well, since many natural gas companies do not have funds to build widespread networks. 


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