SMLP up +40%
Strategic transaction announced, what now
This is a quick note on the strategic transaction SMLP announced last Friday, which is the conclusion of the strategic review that I last commented on here.
While it is perfectly reasonable to exit +40% as a tactical trade, I continue to think that SMLP looks compelling.
Transaction benefits:
Delivers significant value and dramatically improves credit profile and financial flexibility
Reduces Summit's current net leverage by 1.5x to sub-4.0x, furthering progress toward achieving 3.5x net leverage target
Increases liquidity with undrawn $400 million credit facility and more than $325 million of unrestricted cash
Shifts Summit's portfolio to approximately 55% crude oil-oriented basins
Accelerates timing of potential preferred equity and common equity distributions
Positions Summit to continue to fund and execute on organic growth projects including further commercialization of Double E and potential synergistic bolt-on acquisitions, primarily in its Rockies segment
Enables Summit to further reduce cost of capital in elevated interest rate environment
Revised pro forma 2024 Adjusted EBITDA guidance of $185 million to $220 million1
While the formal strategic review is complete, CEO Deneke mentioned that they will continue to be open to selling assets at the right price. He sees substantial potential to further build scale and increase value, particularly in the Permian and Rockies segments.
While I think many SMLP investors would prefer it if management continued to focus on asset sales or a full sale, such an outcome is not precluded from the go-forward plan - the best course of action is to focus on creating value regardless of the end-game.
Perhaps the most interesting element of the review was the decision to convert SMLP from an MLP structure to a C-Corp. This suggests that Deneke is serious about lifting SMLP out of the micro-cap MLP backwater.
Value
Using a methodology that breaks out the potential value of Double-E from the rest of the asset base (see below, from page 8 this presentation) SMLP looks cheaper at $28/unit than it did before the transaction.
Pre-transaction
Post transaction
Updating the numbers above for the asset sale, I get around 6.4X EV/EBITDA. At 7.5X EV/EBITDA (the strategic transaction took place at ~8X), the units would trade near $48/share.
Add to this whatever Double-E is reasonably worth (at 1.35Bcf/d capacity it would add $18/unit of value) and it is clear that there continues to be substantial upside potential.
Conclusion
The company is significantly de-risked
Units are cheaper than pre-transaction
Management sees opportunities to enhance value/optimize within current asset base and has a solid track record
C-Corp plan will vastly expand ownership/index inclusion
Accelerated potential to restart distributions/dividends
I see substantial additional upside potential and reduced risk.
I/we own units of SMLP
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