Summit Midstream Partners, the Houston-based energy infrastructure company, has been making headlines with its recent divestitures and shift towards growth in its Rockies and Permian segments. But buried within the minutiae of their Q1 2024 earnings call lies a potential bombshell: the future of the Double E pipeline, a 135-mile natural gas transmission line snaking through the Permian Basin. Could this pipeline be Summit's ticket to a dramatic resurgence, or is it destined to be another cautionary tale of over-optimism in the oil and gas industry?

The company's excitement about Double E is palpable. Heath Deneke, Summit's CEO, described the commercial discussions as 'extremely productive' and highlighted a recent open season that secured 75 million cubic feet per day of incremental 10-year take-or-pay commitments from Matador Resources, a significant player in the Permian. This commitment supports Matador's expansion of its Marlin processing plant in Mexico, which is already connected to Double E. Furthermore, 150 million cubic feet per day of non-binding bids from other hungry third parties seeking plant connections in 2025 further underscore the surging demand for residue gas takeaway capacity out of the Delaware Basin.

But here's the catch: while Summit touts Double E's 'unique position' to meet this demand, their own financial projections tell a different story. Bill Mault, Summit's CFO, estimates that even with the new Matador contract and other secured commitments, revenue growth from Double E will only reach 6 to 7 million dollars once fully ramped. This translates to a paltry 15% increase over current revenue, a far cry from the 'sizable step-up' and 'material drive' Deneke envisions for the company's future EBITDA.

So, what gives? Are Summit's executives guilty of overhyping a modest asset, or are they privy to information not publicly disclosed? Could the non-binding bids materialize into concrete commitments, creating a much larger revenue stream than currently projected? The answer, I believe, lies in understanding the dynamics of the Delaware Basin's residue gas market.

Summit's bullishness hinges on the assumption that the Delaware Basin's residue gas production will continue its dramatic growth trajectory. But a closer look at production trends and pipeline capacity suggests a potential bottleneck looming on the horizon. While several processing plant expansions are slated for the coming years, other pipeline projects aiming to tap into this growing gas supply are also underway. This competitive landscape could significantly impact Double E's ability to secure the volume commitments necessary for it to become a true game-changer for Summit.

Double E Pipeline: Projected Revenue Growth vs. Potential

Here's my hypothesis: Summit is betting on a 'first-mover advantage,' hoping to lock in commitments from producers before competing pipelines come online. They're dangling the carrot of minimal capital expenditure for connection to Double E, knowing that producers are increasingly sensitive to costs in a volatile gas price environment.

But this strategy is not without risks. Should the non-binding bids fail to materialize, or if competing pipelines offer more attractive terms, Double E could be left with significant unused capacity, translating to missed revenue targets and a disappointing return on investment.

The stakes are high for Summit. After shedding its Northeast assets, the company is banking on organic growth in its core segments to fuel its resurgence. Double E represents a key component of this strategy, but its success hinges on a series of assumptions that may not fully pan out. While the initial contracts are encouraging, Summit needs to deliver on its promises of substantial volume growth and material EBITDA contribution for Double E to truly live up to its name.

"Fun Fact: Did you know that Summit Midstream Partners was initially formed as a joint venture between Energy Capital Partners and Summit Investment Management? This partnership aimed to capitalize on the burgeoning shale gas boom in North America."