Post-Earnings Update on SMC

The setup remains compelling at the current stock price levels.

Summit Midstream Corporation (SMC) — initial post here, last update here

Today, I’m back with a quick update on SMC following the company’s Q3 results, which were reported yesterday.

For a quick recap of the investment thesis, SMC is a natural gas gathering-focused midstream company that, earlier this year, divested several non-core assets and, more recently, completed a value-accretive acquisition of Tall Oak. The company is trading at c. 7x pro-forma 2025E EBITDA, which is significantly below the 8x+ multiples where peers are trading and the 10x+ multiples for comparable industry transactions. Several near- to medium-term catalysts could help the stock re-rate, including the continued ramp-up of the company’s crown jewel Double E asset, a potential dividend reinstatement, and the ongoing influx of institutional investors following the C-Corp conversion completed earlier this year.

Now, onto the quarterly results. Q3 was a solid quarter from an operational performance perspective, with mid-single-digit throughput and EBITDA growth compared to Q2. This was driven by solid performance across most of the company’s segments, including Barnett, Double E, and Rockies, due largely to new well connections.

What I’d like to elaborate on a bit more here is the continued ramp-up of SMC’s crown jewel asset, Double E—a natural gas transmission asset located in the Permian Basin, in which SMC holds a 70% stake. In Q3, Double E’s throughput increased from 549 MMcf/d in Q2 2024 to 661 MMcf/d, marking yet another quarter of rapid growth. For context, Double E’s throughput in Q3 2023 was 327 MMcf/d, so roughly half the volume seen in the most recent quarter.

And Double E’s throughput is highly likely to continue growing at a rapid pace in the coming quarters. As a reminder, Double E has a transmission capacity of 1.35 Bcf/d, with over 1 Bcf/d already committed under long-term contracts. Given the already contracted capacity, I would expect Double E’s throughput to approach 1 Bcf/d in the coming quarters. As for the remaining uncontracted capacity, during the conference call, management stated—consistent with previous quarters—that it "continues to work on additional commercial contracts." So, I anticipate that the remaining capacity will be filled in the short term.

Why is this important? Well, let’s examine the potential EBITDA contribution of Double E. At the Q3 2024 run rate, Double E would generate $34m in EBITDA. SMC’s management has previously guided for $45m in annual EBITDA once the asset reaches its full 1.35 Bcf/d capacity. This would represent a sizable portion of SMC’s total 2024E EBITDA of around $205m (including Double E). Here, I’d like to emphasize a few points:

• Management’s guidance for Double E might be conservative. With around half of its current capacity operational, Double E is already generating about 75% of the guided $45m in EBITDA. So, if the company successfully contracts the remaining capacity at similar terms, I would expect Double E to generate closer to $50m–$60m in EBITDA.

• SMC has the option to expand Double E's capacity to 2 Bcf/d. Management has previously indicated that such an expansion would increase Double E's EBITDA to $60m. Again, this estimate might be too cautious, but even assuming it is correct, $60m would represent nearly double Double E's current run-rate EBITDA.

The point I am trying to make here is that management’s guidance might be too conservative and that at full capacity—whether current or expanded—Double E would significantly boost SMC’s profitability.

As for the outlook for the other assets, SMC expects total EBITDA growth to continue in Q4, with a 5% growth at the midpoint compared to Q3 2024, driven largely by new well connections.

So, that’s a quick overview of SMC’s Q3 results. The business continues to perform solidly across most segments. More importantly, quarterly earnings provide further evidence of Double E’s potential to materially boost SMC’s EBITDA.

Let’s now briefly discuss valuation. Here’s where SMC’s EV stands, pro forma for the recent Tall Oak acquisition:

• $380m current market cap

• Plus $919m in net debt as of September 2024

• Plus $107m in Series A Preferreds

• Plus $447m in consideration paid for a 60% stake in Tall Oak. This includes 1) $155m payable in cash, 2) $25m in an earn-out payable on or before Q2 2026 and 3) $267m payable in SMC stock (at the current share price)

This results in a pro forma EV of $1853m. At the time of the Tall Oak acquisition, SMC’s management stated that the company could generate c. $265m in 2025E EBITDA, implying a 7x 2025E EBITDA multiple. As shown in the slide from the Tall Oak acquisition, this is below the 8.5x+ multiples where most of SMC’s peers have been trading. The current valuation also contrasts with the 10x+ multiples seen in recent industry transactions. So, it is safe to conclude that SMC is undervalued, with substantial potential for a stock price re-rating. What could the upside look like? Given SMC’s high leverage, even a relatively modest 0.5x multiple re-rating would imply a 35% upside from the current stock price levels.

And there are several potential catalysts that could help spark a re-rating, most notably the potential dividend reinstatement. Here, I’d highlight SMC’s recent acquisition of Tall Oak. During the conference call, management reiterated that the acquisition is expected to be completed in Q4. Why is this important? The transaction is expected to materially reduce SMC’s leverage ratio from c. 4.4x to 3.8x upon closing, bringing it much closer to management’s 3.5x target required for reinstating the dividend. With the transaction closing and SMC’s ongoing cash flow generation, I’d expect the company to turn on common distributions over the coming year. This was confirmed during the recent Tall Oak acquisition announcement, where management stated it will “consider returning capital to shareholders, for example, through preferred dividends, common dividends, and/or share buybacks starting in 2025.” A potential dividend reinstatement would likely be a significant catalyst, as it could attract a dividend-focused investor base.

I would also highlight the C-Corp conversion completed earlier this year. While the reorganization has yet to catalyze a stock price re-rating, I believe it will take time for the expected influx of new institutional and index investors to fully materialize. To illustrate this point, I would note that following the conversion, SMC is now eligible for inclusion in the Russell 2000 index, with the next rebalancing scheduled for mid-2025.

With SMC trading at a low multiple and several catalysts on the horizon, I continue to like the setup and have maintained my position.