Summit Midstream Partners' (NYSE:SMLP) distribution currently yields an eye-popping 20%. That sky-high yield is a clear sign that investors don't believe the master limited partnership (MLP) can maintain its payout for much longer.

Unfortunately, the company's recent second-quarter results didn't instill much confidence that it's heading in the right direction. Because of that, the MLP might need to slash its payout again given the amount of money it will need over the next few years to fund past and future expansion initiatives. 

Drilling down into the numbers


Q2 2019

Q2 2018

Year-Over-Year Change

Adjusted EBITDA

$68.6 million

$73.5 million


Distributable cash flow

$38.4 million

$47.2 million


Distributions paid

$23.8 million

$44.2 million


Distribution coverage ratio

1.62 times

1.04 times


Data source: Summit Midstream Partners.

Summit Midstream Partners posted lackluster second-quarter results, as its earnings slumped 7% year over year while cash flow plunged nearly 19%. While there were some underlying positives, the company continues facing headwinds in several areas:

Summit Midstream's earnings by operating area in the second quarter of 2018 and 2019.

Data source: Summit Midstream Partners. Chart by author.

Earnings in the company's Utica Shale region were a bit mixed. They declined from the year-ago period, mainly because of lower drilling activities because of weaker prices. However, on a more positive note, volumes started improving during the second quarter, yielding a 7.2% sequential earnings increase. The company expects this trend to continue given the current activity levels of its customers.

Another weak spot was in the Williston Basin. That's due to several issues. For starters, the company sold its Tioga midstream system during the first quarter so that it could boost its balance sheet. The MLP also experienced lower oil volumes as drillers completed fewer wells while some maintenance issues on a third-party system negatively affected gas volumes. On a more positive note, the company expects oil volumes to improve given the number of wells its customers plan to complete later this year.

The company's Permian Basin operations, meanwhile, continued running at a loss as it builds out its system in the region. Finally, its legacy areas continued to decline because drillers in those regions aren't as active as they once were due to lower commodity prices.

Those weaker areas clouded some notable positives. The company's Ohio gathering business, for example, continued growing because drillers completed more wells. The company expects this trend to continue throughout the balance of the year.

Meanwhile, its DJ Basin assets also continued growing thanks to the recent completion of a new natural gas processing plant. The company noted that volumes are currently 50% above where they were during the second quarter, which suggests earnings from this segment should keep growing throughout the year.

A scale weighing coins.

Image source: Getty Images.

A look at what's ahead

Despite those positives, the company noted that it expects its full-year EBITDA to come in toward the low end of its $295 million to $305 million guidance range. That's primarily due to more moderate volume growth on its Permian Basin and Utica Shale segments. As a result, the company will generate less cash, which is a concern given its financial needs in not only covering its distribution but also its expansion-related initiatives.

Summit did get some good news on the growth front, as it signed a joint venture with ExxonMobil (NYSE:XOM) to move forward with the Double E Pipeline. That project is crucial in supporting Exxon's growth in the Permian Basin. That's why it not only signed a long-term volume contact to ship gas on the pipeline but will also take a 30% stake in the project. Summit expects to invest $350 million into building this pipeline, which will provide it with stable cash flow backed by long-term contracts with ExxonMobil and others upon its completion in 2021.

By securing Exxon as a partner on that project, Summit will offload about $150 million of the project's $500 million construction cost. That will help alleviate some of its funding concerns. However, it's unclear how the company will fund its remaining $350 million capital commitment, 90% of which will come in the 2020 to 2021 timeframe. The reason that's such a concern is that Summit still owes its parent $303.5 million by the end of next year to pay for an acquisition completed in 2016. With the MLP's leverage ratio at an elevated 4.84 times at the end of the second quarter, it doesn't have very much financial flexibility.

Another distribution cut could be in the cards

Summit Midstream already slashed its payout 50% earlier this year so that it could retain more money to finance expansion projects. However, given the amount of cash it needs over the next two years, another cut might be necessary. In addition to that, the company will likely need to sell more assets so that it can bridge the gap between its financial resources and funding commitments over the next two years.

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