CorEnergy Infrastructure Trust Inc (CORR) 2016 Q1 法說會逐字稿

Greetings and welcome to the CorSite Energy first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, the conference is being recorded. I'd now like to turn the conference over to your host, Ms. Lesley Robertshaw, Investor Relations. Thank you, you may begin.

Thank you and welcome to CorEnergy Infrastructure Trust's first-quarter 2016 earnings call. I'm joined today by Rick Green, CorEnergy's Executive Chairman; Dave 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 Tuesday, and an audio replay of this conference call, will be made 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 first-quarter dividend in April of $0.75. We believe this level of distribution is sustainable, as we continue to receive the contracted lease payments from all of our tenants. We have begun utilizing our share repurchase program, today, having used just under $0.5 million.

Based on our need to use our line of credit to refinance our asset-level term debt during the quarter, we felt that maintaining availability was more important than an extensive use of our stock repurchase program. Nonetheless, we may reinstitute it in the future.

More importantly, as many of you know, the parent companies of two of our largest tenants, Energy XXI and Ultra Petroleum, recently filed for bankruptcy. In the case of Energy XXI, our tenant was not included in the bankruptcy filing, and therefore, it must continue to fulfill all obligations under the Grand Isle Gathering lease. The more recent filing from UPL, however, did include both the parent and the subsidiary tenant in the bankruptcy process.

While we are not allowed to take certain actions against the tenant pending affirmation of the lease, the tenant is expected to fulfill certain obligations of its own, including the timely payment of full rent during bankruptcy. These recent events are testing the remodel for infrastructure ownership. Let's spend time reviewing the key elements of the remodel we are implementing.

On slide 4, we outline our strategy as it relates to the operating characteristics of the physical assets which we seek to own, which will provide the desirable investment characteristics for infrastructure investors. Let's review how our assets fit inside those criteria.

By owning assets close to the wellhead, we have established very high barriers to entry. Long reserve lives of the fields we serve provide long-duration cash flow potential. Our contract terms with rent provide certainty on revenue without direct commodity price or volume sensitivity.

We believe our real-estate ownership provides a higher level of priority and bankruptcy than other contracts, offering a utility-like risk profile. While demand and utilization of our assets will decline over a very long time, we planned for that in our dividend coverage ratio, so that our dividend payout is sustainable.

By trusting these operating characteristics, we believe we've created a vehicle which satisfies the investment characteristics desired by infrastructure investors. Now none of our structural success matters, however, if we miss on the economic criticality of the assets we own. So, let's review the key data points around GIGS and Pinedale, supporting our belief that we got it right.

On slide 5, we refer to data provided by Energy XXI in their recent filings. In the first chart, we estimate that 40% of the Company's overall reserves, or approximately $1.7 billion of value at recent strip prices, is dependent on our pipeline. Access to this asset is critical to the long-term commercial viability of Energy XXI at any point in the commodity price cycle, low or high. Exploitation of these reserves is part of the core foundation of the Company.

Regarding the viability of the field, itself, you can see Energy XXI's success in cost reduction for its operating expenses and its expectation of continuation of this trend. With this cost structure and these reserve values, we expect this field to produce long beyond our two initial lease terms of 20 years.

As demonstrated in the cost chart, the CorEnergy lease expense, which we estimate at $1.60 per Boe, is not a large part of the cost breakdown, despite how integral access to our system is in turning those reserves into revenues. Furthermore, Energy XXI noted that interest expense, not depicted in this chart, of roughly $14 per barrel, could be eliminated in the bankruptcy process.

On slide 6, let's look at similar characteristics for Ultra Petroleum. We estimate that over $3.5 billion of total reserves are serviced by the Pinedale liquids gathering system, which is located in a field that we believe will remain productive for 35 to 40 years. This company has continued to drive down operating costs for its wells, which also reduce the price point at which continued drilling is economic.

The chart at the bottom right shows that the Pinedale field, here represented by UPL's cost, is actually one of the lowest-cost fields in North America. Similar to Energy XXI, the CorEnergy lease expense is very small at $0.07 per Mcf, given its high level of importance, as it serves the vast majority of the company's reserve base.

On slide 7, despite the value of the reserves and the low cost profile of these operators, both are currently in a bankruptcy situation and the headline risk of that has put pressure on CorEnergy share price. Therefore, we wanted to outline the process we expect, going forward, for each company. As you can see, there are a number of events which will need to occur before both companies can emerge from bankruptcy.

Energy XXI and Ultra Petroleum, including its subsidiary, have now filed Chapter 11, two events which were largely expected by the market and marked the beginning of the bankruptcy process. The Energy XXI subsidiary, which is our tenant, currently remains outside the bankruptcy, as we mentioned.

In Ultra Petroleum's case, we do expect to continue to receive timely rents until our lease is ultimately accepted or rejected by the tenant. Our team will remain active in monitoring these proceedings and disclose any developments as they relate to CorEnergy's leases, as appropriate.

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

Thank you, Dave. This week we filed our 10-Q for the quarter ended March 31, 2016. Today, we would like to highlight key metrics we believe reflect CorEnergy's performance.

On slide 8, we show FFO as calculated by NAREIT, FFO adjusted to take out the effect of private equity, and adjusted FFO. A reconciliation of these measures to net income, is provided in slide 13 of these materials.

For the first quarter of 2016, AFFO is $1.07 per basic share. We believe this metric is a good measure of long-term sustainable operational performance for CorEnergy. In the first quarter, we established a provision for loan loss for our Four Wood financing note. This increased expenses by approximately $4 million net of taxes, or $0.34 per share. To calculate AFFO, we add back this expense, as it is not re-occurring in nature.

Investors in REITs often look at the coverage ratio of AFFO to the dividend payment to assess stability. For the first quarter, our coverage ratio was approximately 1.4 times. The margin between AFFO and dividends provides CorEnergy ample return of capital via debt repayment and capital reinvestments and allows us to maintain our current dividend.

As we look at slide 9, we have an overview of our capital structure, including a summary as of March 31, 2016. Once again, the two ratios that we pay attention to remain within our targeted ranges.

Our total debt to total capitalization ratio of 33.7% remained within our target of 25% to 50%. The second ratio is preferred to total equity at 13.7%, 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 refinanced our Pinedale credit facility on March 30, 2016. We drew $44 million on our revolver and used roughly $3 million of cash to refinance our portion of the outstanding balance. CorEnergy now has approximately $54.2 million of availability on its revolver and $12.8 million of unrestricted cash. This liquidity can be used for future acquisitions, share and debt repurchases, and repayment and general corporate needs.

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

Thanks, Becky. In this quarter's Overheard in the Corridor, we would like to compare the critical nature of our assets to the recent court ruling described in the Sabine Oil & Gas Chapter 11 process.

Sabine used Chapter 11 to reject their gathering agreements. The judge ruled that those agreements were services contract tied to personal property of Sabine and that there were no real property interests held by the gathering system to be protected. In contrast, our contracts are for occupancy of real property.

Now, both types of contracts can be rejected in Chapter 11, but real property owners may seek the remedy of terminating access to that real property. So, the next question is whether there is any economic alternative available to the producer.

Sabine believed that it had a lower-cost alternative that would save over $35 million over the life of their contract. Our tenants, by contrast, have acknowledged that their alternatives, effectively, would be higher cost.

Energy XXI chose to leave our lease out of the filing completely. UPL disclosed in their10-Q the same day as their filing, that while they did not need access to Rockies Express Pipeline, losing access to our pipeline would be materially adverse to them.

In conclusion, we believe these tough times in the energy market are revealing the benefits of the REIT model for energy infrastructure ownership developed and implemented by our team. We own commercially critical assets with a strong lease contract and a structure that can be owned by all investors.

Now, I'd like to open the line to questions. Operator?

(Operator Instructions)

Nick Brown, Zazove Associates.

Just a quick question about what's disclosed in the 10-Q for the amounts outstanding on the Regions credit facility. It looks like you only show the $42.3 million term loan. Why isn't the revolver balance shown there?

Becky, do you want to respond to or reclassify that?

Yes. So on the face of the balance sheet, you can see the $44 million that has been drawn from the line of credit. I believe, the net that is back in the financial statement notes for the credit facility. I believe that's what you are referencing.

Yes.

Am I thinking about the right spot? I just want to make sure I'm looking at the right thing.

Yes. I was looking at note 12, the credit facilities of the REIT, where you say the amount outstanding under the REIT, you show the amortization of the Regions credit facility but you don't seem to include the revolver. I thought that was part of that same facility.

Okay. So, the $42 million is directly related to the GIGS asset acquisition last year. The $44 million that we just drew is on the revolver itself. So, the GIGS pieces actually a term loan, and that's the $42 million that you were talking about. That has been amorting as we've disclosed previously.

The $44 million that I was showing on the front, that is the revolver being drawn and that has not amorted yet. That draw just happened when we refinanced Pinedale.

Okay. Thank you.

(Operator Instructions)

Michael Zuk from Oppenheimer.

On the balance sheet, you have a line item that says assets held for sale less cost to sell. What's the status on trying to get that asset sold? Do you think that the carry amount that you have there is realistic?

Mike, we are actively engaged in a process to try to find a suitable operator. Our strategy, really, is to look for contribution of those assets towards an operator that would enable us to earn out some portion of the total proceeds over time and have a better chance of recouping our capital than selling them off for cash today.

What you see in the balance sheet is basically the latter. It's what do we think would happen if we sold everything for cash today? But it's not our estimate of ultimate potential recovery from here.

I think that answers it. So you're taking the conservative approach and we'll see what unfolds in the next two, three quarters.

That's exactly right and the amounts on the balance sheet also drive down our management fee. So, from an alignment standpoint, we are calculating our fees off the lower number, not the cost of what we paid for it.

Very good. Thanks.

(Operator Instructions)

If there are no further questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you, everyone, for your continued attention. We look forward to commenting again next quarter, hopefully, with further constructive news around the status of our leases with our tenants. Thanks very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.