Citi Cuts Summit Midstream, Says Growth Looks Challenged

Citi’s Faisel Khan downgraded the rating for Summit Midstream Partners LP SMLP from Buy/High Risk to Neutral/High Risk, while reducing the price target from $22 to $16.50. The analyst believes that the company has limited ability to grow distributions while maintaining its leverage.

Distributions Likely To Remain Flat

Although Summit Midstream’s current distributions are secure, there is limited scope for them increasing in a low commodity price environment, analyst Faisel Kahn said.

He added, “Low gas and oil prices continue to hamper production growth on SMLP’s current asset base and in our view will make it challenging to meet expectations on its recently acquired assets from Summit Investments in the Utica.”

Although the transaction for acquisition of assets in Ultica is being structured in a manner to help Summit Midstream avoid paying a high multiple, the company’s leverage will require that the associated deferred payments be paid in the form of SMLP units in 2020. This is expected to impact coverage and limit Summit Midstream’s ability to grow distributions till 2020, Kahn commented.

“We rate SMLP as High-Risk due to the long-term variability in cash flows based on future commodity prices,” the analyst wrote. An increase in commodity prices resulting in increased production on acreage dedicated to Summit Midstream will lead to better coverage and the company’s ability to raise distributions in the future.