DT Midstream, Inc. (NYSE:DTM) Q1 2024 Earnings Call Transcript

DT Midstream, Inc. (NYSE:DTM) Q1 2024 Earnings Call Transcript April 30, 2024

DT Midstream, Inc. beats earnings expectations. Reported EPS is $1.24, expectations were $0.95. DT Midstream, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the DT Midstream First Quarter 2024 Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Todd Lohrmann, Director of Investor Relations. Please go ahead.

Todd Lohrmann: Good morning, and welcome everyone. Before we get started, I would like to remind you to read the safe harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP contained in the appendix. Joining me this morning are David Slater, President and CEO, and Jeff Jewell, Executive Vice President and CFO. I’ll now turn it over to David to start the call.

David Slater: Thanks, Todd. And good morning, everybody. And thank you for joining. During today’s call, I’ll touch on our financial results, provide an update on the latest commercial activity and construction progress on our growth projects. I’ll then close with some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance and outlook. So with that, we’re off to a great start in 2024, giving us confidence in our full year plan. We are reaffirming our 2024 adjusted EBITDA guidance range and our 2025 adjusted EBITDA early outlook range. Our construction and commercial teams continue to make great progress on our backlog of organic growth projects, setting the company up for continued success.

This morning, we are excited to announce a new expansion on our Stonewall system, which includes additional mainline capacity, incremental compression, and a new interconnect with Mountain Valley Pipeline. This project will provide a new production outlet to the mid-Atlantic market, which we expect will become a fast growing region with new data center and AI powered demand load emerging. The project is anchored by a 15-year agreement with a large investment grade producer, which includes an acreage dedication and a minimum volume commitment. In conjunction with our new Stonewall development, we have also upsized our Appalachia Gathering System phase 3 expansion. The capital investment to support both these projects was already contemplated as highly probable as part of our capital guidance.

And our capital plan for the year remains within our free cash flow after dividends. Staying in Appalachia, initial volumes began flowing on our Ohio Utica System in March. As a reminder, we expect production volume to ramp over an 18 to 24 month period as our customer executes on its development plan and delineates this emerging play. And our revenues are fully protected under a take or pay contract structure. The liquids rich Ohio Utica resource play is highly economic in today’s price environment and further diversifies our Gathering segment. We expect this emerging basin to continue to grow. They’re observing increased drilling activity from both our anchor customer, as well as other producers in the region. Turning from Appalachia to the Haynesville, we are pleased to announce the completion of our new interconnect between our Haynesville system and the Gillis Access project.

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Q&A Session

This strategic interconnect will provide greater optionality to LEAP customers, directly connecting the system to approximately 6 bcf a day of expected new LNG export demand growth and further strengthening our competitive position. Our Blue Union Carthage area connection was also completed in mid-April, offering additional supply access, increasing our ability to further diversify customers on our Haynesville system. Our LEAP Phase 3 expansion remains ahead of schedule and on budget and, once completed, will bring the system’s total capacity to 1.9 bcf a day. We remain in active discussions for LEAP Phase 4 expansion and are well positioned in the basin to grow and have proven our ability to serve our customers in a timely and efficient manner.

While Haynesville producers have acted rationally to respond to short-term prices, there is strong recognition of the coming demand starting next year and the long-term need for production access to the Gulf Coast markets. Turning to our energy transition platform and our carbon capture and sequestration project in Louisiana, in the first quarter, we successfully drilled our Class V test well. Completing the Class V test well was an important milestone in the development process as we continue to de-risk the project with minimal capital spend. Early results indicate that the sequestration site meets or exceeds our initial view of the geology, and we remain on track for our second half 2024 FID. Following the recent EPA announcement of new regulations mandating a 90% reduction or capture of CO2 emissions from new natural gas plants, we are poised to capitalize on this rapidly expanding market for carbon capture and sequestration.

Our Louisiana carbon capture and sequestration project’s methodical approach underscores our proficiency in development and execution and establishes us as a credible first mover, capable of providing complete source-to-sink carbon capture solutions. Finally, I want to take a moment to address the natural gas market fundamentals and producer activity across our footprint. As we described on our year-end call, our guidance for 2024 was based on producers’ plans that reflected the gas price environment at the time, which was impacted by warm winter weather. The activity that we are observing to this point remains in line with our plan for the year. In Haynesville, drilling has commenced on 90% of the wells that we’ve included in our 2024 plan.

And in Appalachia, drilling has commenced on nearly 60% of the wells included in our 2024 plan. Looking ahead, gas prices in 2025 and 2026 remain in the $3.50 to $4 range, which we believe reflects the new LNG demand and will support production growth on our assets as we close in on 2025, with potential for an earlier response if hot summer weather increases the call on natural gas for power demand. Like the rest of the sector, we’re closely monitoring the developments around expanding demand to support data center and AI growth. While it’s still early days, it’s an exciting development. As emerging power demand is expected to increase the call on natural gas fired generation, supporting the need for natural gas and natural gas infrastructure for decades to come.

Additionally, many of our assets serve the regions that are expected to see this power demand growth fueled by data centers and AI deployment. I’ll now pass it over to Jeff to walk you through our quarterly financials and outlook.

Jeffrey Jewell: Thanks, David. And good morning, everyone. In the first quarter, we delivered overall adjusted EBITDA of $245 million, representing a $6 million increase from the prior quarter. Our Pipeline segment results were in line with the fourth quarter 2023, reflecting the higher firm revenue on LEAP, offset by lower short term revenue. Gathering segment results were $6 million greater than the fourth quarter 2023, reflecting a lower overall O&M and a ramp up in contribution from the Ohio Utica Gathering System. Operationally, total gathering volumes across both the Haynesville and Northeast averaged approximately 3.1 billion cubic feet per day in the first quarter, in line with the prior quarter. Our financial plan and 2024 guidance assumed that gathering volumes and adjusted EBITDA will be lower in the second and third quarters due to planned maintenance in the Haynesville as well as expected timing of producer activity.

Volumes and EBITDA are expected to increase in the fourth quarter, driven by incremental contributions from our new projects and a more constructive market environment for producers. As David mentioned, we are confident in our full year outlook and reaffirming our 2024 adjusted EBITDA guidance range and our 2025 adjusted EBITDA early outlook, reflecting the strong positioning of our assets. We’ve increased our committed capital in 2024 and 2025 to reflect new organic projects reaching FID, with $265 million to $295 million committed in 2024 and approximately $140 million committed in 2025. This increase is reflective of projects from our prior backlog that were already contemplated in our guidance, and we will continue to expect to spend within free cash flow in 2024 and 2025.

If incremental growth investments do not reach FID in 2024 or 2025, we will evaluate the most accretive options for the excess cash flow, with our current view that it will likely be deployed towards debt reduction. We are committed to preserving the strength of our balance sheet and achieving an investment grade credit rating, and are looking forward to our annual meetings with the rating agencies in early May. Finally, today, we also announced the declaration of our first quarter dividend of $0.735 per share, unchanged from the prior quarter. We remain committed to growing the dividend 5% to 7% per year, in line with our long-term adjusted EBITDA growth. I’ll now pass it back over to David for closing remarks.

David Slater : Thanks, Jeff. So in summary, we’re very pleased with the start of the year and are feeling confident in our full year guidance for 2024 and early outlook range for 2025. Our short cycle growth investments continue to track on budget and on schedule, with some projects running ahead of schedule, resulting in meaningful growth contributions in 2024 and 2025. Our approach to capital allocation remains thoughtful and disciplined, with our focus on spending within cash flow over the balance of our five-year plan and achieving an investment grade credit rating. As we look across the portfolio, we continue to see significant growth opportunity, with our integrated and strategically located asset footprint building torque and our capital investment program laying a strong foundation to build upon. We can now open up the line for questions.

Operator: [Operator Instructions]. We’ll go first to Jeremy Tonet at J.P. Morgan.

Jeremy Tonet: Just want to kind of start off with some of the commentary you laid out with regards to AI and data centers and how that could be beneficial potential for DTM and specifically as it relates to NEXUS. Seems like there’s a good amount of latent capacity there. So just wondering if you could help us think through when this might kind of come to fruition, those types of opportunities.

David Slater: Our high level view is that the market right now is under forecasting power demand, especially in that Midwest, mid-Atlantic area. When you look at where a lot of the investments for data centers are happening, they’re happening in those geographies. We’ve been seeing a lot of inbound inquiries, as you alluded to, on our network for incremental capacity that’s emerging here in the next couple years. These centers are popping up everywhere. It’s a very short cycle turnaround in terms of when they announce a center and when that demand shows up on the grid. And in terms of incremental generation to supply, that is base load demand. So it’s going to fall upon natural gas fired generation predominantly to serve that incremental load.

So we’re very excited about it. I think it’s going to also drive some incremental generation in these regions. A lot of that has been announced already in the mid-Atlantic region and the Southeast. I expect more of that is coming in the Midwest. So, yeah, we’re seeing the early signals of those demands and those companies that are looking to make those investments, looking for incremental fuel supply to those locations. So, we’re optimistic. Again, I feel like the market has under forecasted this demand, and as that becomes more visible across the segments, it’s going to be very favorable. It’s strong fundamentals around NEXUS, around vector. The announcement we made this morning on Stonewall for the interconnect with Mountain Valley, I think that’s a derivative of what’s happening in the Southeast, Mid-Atlantic region where people are seeing a call on natural gas a couple years out that’s going to significantly expand.

We’re bullish. It’s early days, but we’re definitely seeing those fundamental signals coming across the dashboard right now.

Jeremy Tonet: Maybe just pivoting over towards the LEAP system, just wondering if you could help us understand a bit better Southern Louisiana logistics dynamics. And once the gas gets to Gillis, where does it go from there? Can it get to the LNG export facilities or other future, I guess, expansions needed to connect there? Just wondering how you’re seeing that come together and demand for LEAP expansions overall.

David Slater: Yeah, I think the best illustration of that, Jeremy, is the Gillis Access Project. So that’s in service and been flowing gas now for a couple of months. That opens up an incremental 6 bcf a day of demand growth that LEAP will have the opportunity to serve. So that’s some new infrastructure that’s being put in place to directly serve the new LNG demand that’s coming. But LEAP is very well interconnected at Gillis with numerous pathways into the expanding LNG terminals. So it’s complicated down there. There’s a lot of pipe, the last mile of pipe. But that’s why the Gillis Access interconnect was so strategic for us, is that it’s one of those, what I’ll call, last mile projects that is significantly expanding the ability to get incremental gas to these facilities.

Jeremy Tonet: Just a quick last one, if I could. Haynesville activity very much in focus and it looks like Haynesville might be down 10% second quarter versus first quarter here. Just wondering if you could walk us through, I guess, if that pattern holds, what type of impact that has on DTM.

David Slater: Another good question. And I may have Jeff sharing the answer here, but I’ll just start with – the actions that our producers are taking are in line with our full year plan. And we expected that there would be some delays in completion activity in the Haynesville. A lot of the producers in public have said that. And, Jeff, maybe you can describe how we’re thinking about that at a high level on our 2024 plan.

Jeffrey Jewell: Jeremy, the way position ourselves for 2024 is we took the latest information from our producers and then we also built in a little bit of extra softness as a part of the 2024 guidance that we’ve provided, and then as part of my prepared remarks that we did today, we sort of described that the second and third quarter are going to be lower than what we’re seeing here in the first quarter, and that towards the end of the year there in the fourth quarter is when we’re expecting producer volume to start picking up in the fourth quarter, positioning themselves into 2025. But the key point, though, is we’re still very comfortable with our 2024 guidance range that we have provided.

Operator: We’ll move next to Olivia Halferty at Goldman Sachs.

Olivia Halferty: Maybe we could go back to LEAP for a minute. Phase 3 has been tracking ahead of schedule for the past couple of quarters. Can you walk us through how far ahead of schedule the project is tracking and maybe what you would need to see to potentially accelerate that timeline? And more generally on LEAP project timelines, looking forward to the Phase 4 plus expansions, could you walk us through a rough timeline of when you would need to FID if targeting a 2025 or 2026 in service?

David Slater: I’ll start with Phase 3 expansion. Yeah, the project is running modestly ahead of schedule right now. And we’re very happy with how the construction teams have been executing. We’re ahead of schedule and on budget. In terms of additional granularity on that, I’d say we’ll stick with our current disclosures that we expect that to come in Q3, but you can infer from what I’m saying where in Q3 that may come in at. In terms of Phase 4, what I’ll say is the producers are behaving very rationally right now with this low commodity price environment. They’re expecting the market to pivot here in Q3 and Q4. So we’re seeing a lot of torque building right now in the Haynesville with our assets and how we’re positioned. We’ve been able to execute expansions over the last 18 months.

There is going to be incremental capacity required to serve the incremental demand that is under construction and on the eve of going into service year later this year. So, we feel very confident in our positioning. Producers are being rational in this low price environment where they don’t want to make an incremental commitment until they see the market pivot in turn. We are working closely with those customers and fully expect to participate when that market pivots and turns and they’re financially in a position to make incremental commitments. So I’ll just leave it at that.