CorEnergy Infrastructure Trust Inc (CORR) 2015 Q4 法說會逐字稿

Greetings, and welcome to the CorEnergy full year 2015 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Lesley Robertshaw, Manager, Investor Relations. Thank you. You may now begin.

Thank you, and welcome to CorEnergy Infrastructure Trust's fourth quarter and FY15 earnings call. I'm joined today by Rick Green, CorEnergy's Executive Chairman; David Schulte, CEO and President; and Becky Sandring, Treasurer, Secretary and Chief Accounting Officer. The presentation materials for this call, as well as information included in our press release issued Monday, and an audio replay of this conference call, will be available on CorEnergy's website.

We would like to remind you that statements made during the course of this presentation that are not purely historical may be forward-looking statements regarding CorEnergy or Management's intentions, estimates, projections, assumptions, beliefs, expectations, and strategies for the future. All such forward-looking statements are intended to be subject to the Safe Harbor protection available under the applicable securities law.

Because such statements deal with future events, they are subject to various risks and uncertainties, and actual outcomes and results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements.

At this time, I would like to turn the call over to President and CEO, Dave Schulte.

Thank you, Lesley.

On slide 3, we highlight a few key events, which occurred in recent months. We announced our fourth-quarter dividend in January of 2016, of $0.75. This was in line with what we had previously messaged to investors. An important fact is that we continue to receive the contracted lease payments from all of our tenants, even in the current volatile energy market, and it's from these minimum base rents that we set our dividend.

In January, we extended our contract for 10 years with the Department of Defense, to continue to provide Fort Leonard Wood with natural gas through our Omega pipeline. We also filed an application with FERC regarding our MoGas pipeline. This is the first step in approving a lease structure, which would have the potential for us to receive income that is re-qualifying, without needing an inter-company mortgage loan on our taxable subsidiary. We successfully completed the $10 million construction project on the Portland terminal, resulting in an increase in base rents on that facility. Finally, to protect our investments in saltwater disposal wells, we foreclosed on our Black Bison financing note, and due to a default by SWD Enterprises, have entered into negotiations to restructure those financing notes, as well.

Turning to slide 4, based on CorEnergy's specialized strategy as an energy infrastructure REIT, we have a number of criteria to fulfill when looking at each asset, the key one of which is the criticality of the asset to revenue generation of our tenant, which we want to emphasize in our remarks today. Our revenue is based upon long-term contracted rents. These rents support our sustainable dividend. We have historically targeted returns of 8% to 10% from base rents, potential escalators and acquisitions, although in this market we're not predicting significant growth from our base dividend.

We believe the REIT structure is the most elegant way to access direct ownership of these assets. This structure, and our dividend characterization, benefit investors who would otherwise have a difficult time accessing these assets, by providing a 1099 tax form and not a burdensome K-1 form. These investors include institutional investors, such as mutual funds, tax exempt investors, such as 401(k) and IRAs, and non-US investors. We believe the US energy assets to be one of the most desirable sub-sectors of the infrastructure asset class, because of the dependence of the entire US economy on energy delivery networks, in order to function.

On slide 5, we compare key facts across our major assets and their tenants. Across the top, you'll see each asset that we've acquired since we became a REIT. The range of asset values is between $50 million and $250 million, consistent with the range we expected, and that we continue to re-evaluate. Our two largest tenants are in some financial distress. The percentage of our assets represented by those tenants is meaningful, 30%, for example, with Pinedale, and 38% with GIGS. The annual cost of these assets to those counter-parties, however, is not meaningful as a piece of their total expenses.

The $20 million we received from Pinedale represents only approximately 2% of the operating expenses of Ultra Petroleum. That's about the same percentage for Energy XXI, represented by the Grand Isle Gathering lease.

We'll further examine the impact of our expenses on slide 6. Here, we illustrate the priority and magnitude of the rental payments to CorEnergy, for UPL and for Energy XXI. As you can see, our rent is considered an operating expense occurring at the field level. Payment of field-level cost is governed by each company's joint operating agreement, or JOA, with other commodity owners in their fields.

Expenses governed by the JOA are necessary to pull the commodity from the ground, prior to payment of royalties to other partners. Direct operating expenses, such as ours, are withheld from the JOA partners, illustrating that our lease payments are more like utility bills. It is the post-royalty cash flows that are available to contribute to corporate overhead and interest expense of the tenant. Before these companies experienced distress due to low commodity prices, we did not have to unpack their income statements for our stockholders in this manner. However, these illustrations reflect the underwriting that we did, prior to closing each acquisition.

These terms were well understood by the management teams we financed, and the lenders to each company, whose consent was obtained for our transactions. Each of our tenants remain compliant with their contracts, including timely payment of rents or usage fees. Both Ultra Petroleum, the parent company of our tenant of our Pinedale liquids system, and Energy XXI, the parent of our tenant of Grand Isle Gathering, have made recent disclosures around their leverage compliance, or have skipped or deferred payments of interest.

During times like this, our underwriting of assets is tested. We believe our assets are critical to the overall operations of these two companies, and uninterrupted access to these assets will be necessary to reach the production guidance each company recently gave to their investors. As such, we believe our leases will continue to be honored with timely payments.

Our Chief Accounting Officer, Becky Sandring, will next provide an overview of our financial results for 2015.

Thank you, Dave.

This week, we filed our 10-K for the year ending December 31, 2015. Today, we would like to highlight key metrics we believe reflect CorEnergy's performance. On slide 7, we show FFO, as calculated by NAREIT, FFO, adjusted to take out the effects of private equity and adjusted FFO. A reconciliation of these measures to net income is provided in slide 14 of these materials. For 2015, AFFO is $3.56 per share, on a fully diluted basis. We believe this metric is a good measure of long-term, sustainable operational performance for CorEnergy.

Investors in REITs often look at the coverage ratio of AFFO to the dividend payment to assess stability. For 2015, our coverage ratio was approximately 1.3 times. The margin between AFFO and dividends provides CorEnergy ample return of capital, via debt repayment and capital reinvestment. As we look at slide 8, total assets have grown significantly since year-end 2014, due to the GIGS acquisition, which was completed at the end of June 2015. As of year end, we had approximately $678 million in assets. This suggests a book value per share of over $30.

Contribution margin is a measure of the earnings from our assets and operations, and the results have grown along with our assets. In 2015, CorEnergy had nearly $65 million of contribution margin, suggesting an approximate 10% return on assets. An important factor to note is that rent payments from our largest asset, GIGS, are only included in the second half of the year. The fourth-quarter contribution margin, annualized, is approximately $84.5 million. Thus, we would anticipate that the yearly run rate for the contribution margin, going forward, would be higher than those experienced this year. It would approximate a return on assets closer to 12%.

Similar to AFFO, the high level of contribution margin suggests the ability to provide a return of capital, which is necessary to continue to pay dividends, absent further acquisitions. On the right, we present how our dividends per share have grown. Our Board declared a $0.75 per share dividend for the fourth quarter, or $3 per share annualized. This suggests a return of approximately 10% on book value per share.

Slide 9, we have an overview of our capital structure, including a summary as of December 31, 2015. Once again, the two ratios that we pay attention to remain within our targeted ranges. Our total debt to total capitalization ratio of 34% remained within our target of 25% to 50%. The second ratio is preferred to total equity, at 13.5%, which is well below our target level of 33%. This conservative capitalization structure allows us to maintain sufficient coverage of our earnings to both fixed charges and preferred dividends, and limits risk to the dividend payment.

As previously announced, we intend to refinance our Pinedale credit facility by the maturity date of March 30, 2016, and expect no material changes in key metrics. We anticipate that, following the refinancing, we will have approximately $65 million of liquidity remaining.

With that, I will turn it back over to Dave.

Thanks, Becky.

In our, overheard in the corridor, discussion on slide 10, we want to discuss the numerous articles and commentary involving financially distressed energy producers and the providers of their midstream services. A common question we are asked is whether the producing company -- in our case, Energy XXI or Ultra Petroleum -- has the right to reject a midstream contract, such as our lease. CorEnergy has always understood that its tenants, if they were to file bankruptcy, would have the legal right to reject our lease.

However, our tenants would also need to demonstrate that rejection was a reasonable exercise of business judgment at that time. Now, to illustrate the difference between our assets and others on a commercial context, we can look to Ultra Petroleum's recent comments regarding its long-term contracts for access to two pipelines: our asset, the Pinedale LGS, and Rockies Express pipeline. We compared the two pipelines, with reference to commercial factors underpinning a reasonable exercise of business judgment, as discussed by various commentators.

First, are the assets connected to reserves, which are meaningful for their producers' overall business? That's a yes for Pinedale and for REX. But from here on, we diverge. Are the assets in physical proximity to their producer's well head? That's a yes for Pinedale LGS pipeline. Has the pipeline been customized to meet their producer's needs? Our assets were clearly customized. In fact, were constructed by Ultra Petroleum specifically for their needs.

And finally, are the economic alternatives to accessing the assets favorable or unfavorable? Again, the Pinedale LGS access cost is the best, most efficient way to serve the field. And the company's own comments in the 10-K reflect the application of these criteria to those two pipeline contracts. Regarding our assets, the company said, a termination of the Pinedale lease agreement would significantly disrupt our ability to produce oil and gas from the Pinedale field, which would have a material adverse effect on our business, financial condition, results of operations, and cash flows.

On the other hand, in speaking to the Rockies Express contract, the company said, any termination of our transportation agreement on REX would not have a material adverse effect on our ability to market our production. Our assets are directly connected to the well head of the reserves they serve, and were built specifically to meet the needs of their producers in the most economical and efficient manner possible, which we believe supports our view that our leases will be honored in times like this.

On slide 11, we believe these are good times for CorEnergy, because they prove out our model. We own economically critical assets. We continue to receive our rents from our tenants. We have modest leverage, with solid liquidity. Our shareholders have direct access to the ownership of assets, from which they receive a transparent dividend, in an investor-friendly vehicle. And we offer capital to the energy sector at a time when banks' and capital markets' support of traditional financing tools are either expensive or not available.

We're a desirable financing partner for our tenants, because they retain full control over their operations. And we thank you for your continued interest in CorEnergy.

And now, I would like to open the line to questions. Operator?

(Operator Instructions)

Our first question comes from Chris Brown from Aristides Capital. Please go ahead.

Good afternoon, guys. This is Chris Brown with Aristides. Looking at the press release, you guys say that you're evaluating a broad set of acquisition opportunities in the $50 million to $250 million range. In the presentation, you say CorEnergy historically targets acquisitions with returns of 8% to 10%. Right now, you've got stockholders who are getting a 20% yield on their shares. You've got bond holders who are at a 17% yield to maturity on your senior unsecured debt. So how could you justify a new investment that's going to be at a higher cost and a lower return than either buying back your stock or buying back your debt?

Thanks for the question. These are transitory times in the market for our capital instruments, in our view, and we don't have a significant amount of liquidity available to us. So to shrink the Company now, rather than deploy the capital in accordance to our plans, might be a short-term, somewhat anti-dilutive event for the remaining shareholders. But it also doesn't help us diversify our asset base, which we think is an important consideration in the long run. Thank you for the question.

Basically, the answer you're giving is, an acquisition would be bad for stockholders, it would be bad for bond holders, but it would be good for Management, because our asset base is higher, so our fees get to be higher. I mean, is that basically what you're saying? It's bad for shareholders and bond holders currently, but we don't care?

No, it's not bad for shareholders or bond holders currently, in our view. That's what I said. And I think diversification that adds -- that reduces risk across our portfolio is instructive. Small cap stocks have trouble developing long-term shareholder followings. And so to reduce our base of equity outstanding would be potentially detrimental in the long run, and we only have availability, under our stock repurchase program, for $10 million, in any event.

So for the current stockholders -- excuse me -- and bond holders whom are suffering because the other investors have had liquidity needs elsewhere in their portfolio, we don't believe is a strategic mandate for our strategy, or for our Company. So I don't think (multiple speakers) I said at all what you re-characterized me as.

I can tell you that your bonds or not suffering because of liquidity constraints on our portfolio. Your bonds are suffering because your two largest customers are looking at bankruptcy. And instead of a sound capital allocation strategy, what you're laying out to the market is, we don't care. When we have 17% or 20% available to us, we would rather extend more leverage, for the possibility of an 8% to 10% return. And we feel that that's irresponsible, and we just don't think it's justified at all. Thank you for your time.

Thank you. We targeted, historically, 8% to 10% return. If we have to raise incremental capital at these costs, we wouldn't be able to achieve that. Operator, is there another question?

Yes. Our next question comes from Seth Barkett from Groveland Capital.

Hey, David. How are you?

Good, thank you.

I guess as a follow-up to the previous question, then, are you saying that any new deals that CorEnergy would look at would require a higher hurdle rate?

If we had to raise incremental capital, they would. And to the current market environment, we think we can put money to work at a greater rate than our historical target. But we don't have anything to announce, in that regard, at this time.

I would also say that, as we said last quarter, the reason for the share repurchase program, and anything else we might do, would be in the event that we were dragging cash, or didn't find attractive opportunities in the long run, it gave us the flexibility to redeploy the capital in that way. So not to say we would never do it. Of course, we got authorization to do stuff.

Okay. Were any shares repurchased in the latest quarter, or--

No. No, there have not yet been any.

Okay. All right. I guess my next question, just to confirm, then, the Ultra Petroleum liquids gathering system, that asset is going to be refinanced with your existing line of credit? At the parent company, at CorEnergy?

That's our backup plan. That's what we have available, at this time, to use to refinance the asset level term loan, that's correct.

Okay. So just out of curiosity, how does that -- and if you can't speak to it yet, I understand -- but how would that work with Prudential? Are they putting additional capital into the deal? Or how will that work? Because they do own a percentage of the equity.

Right. It is an additional complicating factor, that we have a partner in that asset. But Prudential and us would each refinance our pro rata share of that term loan, if that's the method we choose to elect, in order to get the extension essentially done without our current lenders needing a consent to an extension. So yes, the answer -- long answer to your question is, yes.

Okay, great. My last question, how are you guys currently thinking about the saltwater disposal assets, particularly the Black Bison assets? What is the game plan, going forward?

Having foreclosed on Black Bison, we are in the position now to be in control of the expenses at the asset level, in order to preserve the best long-term opportunity. We do believe that their -- those assets will be productive. Just barely over a year ago, they were running almost full capacity. So we do not risk losing those assets to another senior lender. We are the senior lender. And so we'll be in exploration mode about what the best long-term alternatives are for those assets, now that we're in control of them.

On the [Fort Wood] asset, we were just notified of expectation of reduced activity in that area. That management team has done a terrific job of taking costs out. We believe they will also survive this, and we're going to try to work with them. As far as any new investments in saltwater disposal, we have none on the horizon, don't expect to make any at this time.

Great. Thank you for your time.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from Edward Okine from Basso Capital.

Hello, yes. I was just wondering if you can just educate us, in terms of the receivables that you have at EXXI and [antas] UPL. I'm just trying to find out how the cash cycle works, from the time the service is done and when you get paid?

We have monthly rent payments. They have been timely. And so our receivable, at any point in time, is no more than 30 days outstanding, at this point.

Okay. So that would be $20 million at UPL, and then about $40 million at EXXI. And just looking at -- it seems like -- from what [the court system] is saying, yes, that yes, the -- your customers can end their contract, obviously, and then they may just have to turn around and re-contract you again. So you would have -- from that instance, like you have about one month of payment, but then the issue what the new contract might look like. Is this something you've been studying, to see what might come out of the other side of bankruptcy?

Both Energy XXI and Ultra Petroleum have announced their production guidance for 2016. And we believe our assets are essential for each company to achieve those expectations, which means we believe our leases are fair, and were fair at inception. So response to your question is, we believe our leases would be honored, and we will continue to receive our monthly rents, even through a bankruptcy scenario. And we won't speculate about bankruptcy, beyond any public information provided by the companies. We did mention, as you are aware, that despite their issues, they have been paying their rent in a timely fashion. Thank you.

Thank you.

Thank you.

(Operator Instructions)

We appear to have no further questions. I will turn the call back over to our speakers for closing comments.

Thank you, everyone. We do believe these are a good time to prove our thesis, and thank you for your continued interest in CorEnergy.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.