CorEnergy Infrastructure Trust Inc (CORR) 2017 Q1 法說會逐字稿

Greetings, and welcome to the CorEnergy First Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Lesley Schorgl, Manager of Investor Relations. Thank you. You may begin.

Thank you, and welcome to CorEnergy Infrastructure Trust's First Quarter 2017 Earnings Call.

I'm joined today by David Schulte, CEO and President; Rick Green, Executive Chairman; and Nate Poundstone, Chief Accounting Officer.

The presentation materials for this call as well as information included in our press release issued Wednesday and an audio replay of this conference call will be available on CorEnergy's website. We would like to remind you that the statements made during the course of this presentation that are not purely historical may be forward-looking statements and are subject to the safe harbor protection available under applicable securities laws. 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. Reconciliations between GAAP and non-GAAP results, which we discuss on this call, can be found in our related earnings release.

And now I'd like to turn the call over to President and CEO, Dave Schulte.

Thank you, Lesley. The past month has been particularly busy for CorEnergy. Last week, we declared our seventh consecutive $0.75 dividend or $3 annualized for our common stock. We are conducting a nonbinding open season on the MoGas Pipeline through June 30, after which we will set interest and determine whether to proceed with the extension of the pipeline.

Ultra Petroleum, the tenant of the Pinedale Liquids Gathering System, announced the completion of its restructuring process for which they raised nearly $3 billion in financing.

Energy XXI, tenant of the Grand Isle Gathering System, recently announced several new initiatives, including new members of senior management, the development of a third-party reserve report and a revised drilling plan. Both those companies have resumed trading of common stock on the NASDAQ.

Lastly, we closed on the offering of the $70 million follow-on of additional Series A preferred stock. We utilized approximately $44 million of those proceeds to pay down our credit facility.

On Slide 4, we try to capture in one chart the benefits of our business model. So let's see how we did.

The line chart shows the volatility of oil and gas prices over the last 9 quarters. The CORR common stock price mirrored the activity of energy prices over that time. Investors perceived that CorEnergy's future was tied to the volatility in the energy markets. Now certainly, it affected our tenants, but we believed that would not affect us. The bar chart represents revenues in gold and adjusted funds from operations in blue. You will see that since the acquisition of GIGS, there has been 7 quarters of consistently delivered cash flow performance in both revenue and AFFO.

Now how do we obtain that performance with the perception of risk and commodity price activity that was actually going out in the market? Well, it's a combination of the underwriting criteria we use and our business model. So both, at the top of the slide illustrates we own mission-critical assets to our tenants. Our assets are necessary for tenants to produce economic value for their debt and equity holders, and now it's demonstrated despite the bankruptcy of those tenants.

Our lease payments are operating expenses. They are not financing expenses for those companies. Operating leases have priority in payment and bankruptcy.

The CORR revenue stream, therefore, is resilient and protected even during bankruptcies. Therefore, our stock price moved with commodity prices in this cycle, our revenues and AFFO did not, demonstrating the benefit of our business model for investors seeking infrastructure assets in their portfolios.

I'll now turn it over to Nate Poundstone to discuss our quarterly results and recent preferred stock offering. Nate?

Thank you, Dave. Slides 5 presents bar charts that reflect our sequential financial performance metrics over the last 4 quarters, which have all been very consistent.

Our AFFO for the first quarter of 2017 was $1 per common diluted share. CorEnergy uses AFFO as a measure of long-term sustainable operational performance. AFFO in excess of dividends is reserved and used for debt repayment, capital reinvestment activities, funding our ARO liability and other commitments deemed necessary to sustain our business model and dividend over the long term.

With our current asset mix, including a significant proportion of our assets with long-term decline, we target a coverage ratio of 1.5x AFFO to dividends. We believe that amount of excess coverage is a prudent level enabling us to reinvest for dividend stability and growth over the long term.

Our AFFO to dividend coverage ratio for the first quarter was 1.49x. And in the seventh quarter since the Grand Isle acquisition on June 30, 2015, our coverage ratio has ranged from 1.43x to 1.53x.

Turning to Slide 6. Subsequent to quarter end, we capitalized on favorable preferred market conditions through the reopening of our existing Series A preferred stock.

On April 18, we closed on a $70 million offering through the issuance of an additional $2.8 million depository shares, which resulted in net proceeds of approximately $67.6 million. We immediately utilized $44 million of the proceeds to pay down the outstanding balance on our revolver as a near-term use.

These actions promote CorEnergy's conservative leverage profile, enhance our liquidity and position the company well as we look to move from a defensive position in 2016 to growth here in 2017 and beyond. The preferred stock in turn provides investors with what we believe to be a stable and safe dividend. The issuance of the additional depository shares brings a total outstanding Series A preferred to over $125 million, which provides enhanced liquidity in the market and promotes broader participation and ownership.

We have a policy of employing moderate leverage supplemented with equity issuances and believe that maintaining a conservative leverage policy serves the expectations of investors in the infrastructure asset class.

Slide 7 provides a snapshot of our capital structure at the end of the first quarter as well as an adjusted view following the Series A preferred issuance and pay down of outstanding borrowings under our revolver. You could see that these actions increased our total liquidity to approximately $132 million on a pro forma basis.

Our total debt to capitalization as adjusted is at the low end of our targeted range of 25% to 50%, and our preferred equity to total equity ratio of 27% as adjusted remains below our target ratio of 33%.

The increased liquidity and low leverage following these actions have significantly enhanced our ability to timely react to potential acquisition opportunities. Utilizing current capacity as well as potential leverage on assets acquired, we are well positioned to transact on one or more opportunities within our target size range without additional common equity.

With that, I will now turn the call back over to Dave.

Thanks, Nate. Next, we want to discuss trends we're seeing in the energy market that make us confident in potential new acquisition opportunities. The energy markets seem to be adjusting to a new normal of $50 crude. Bankruptcies have decreased in size and frequency and companies are emerging from restructuring processes, with renewed growth expectations, announcing increases in capital expenditure budgets and resumption of drilling plans.

As you can see from the Baker Hughes data on Slide 9, rigs are coming back online in the United States. However, energy companies are still weary of the downturn they just experienced as are their lenders and equity investors. This is where the opportunity lies for CorEnergy.

In a recent survey, energy companies said they're more likely to sell non-core assets if they are faced with borrowing-based deficiencies still in 2017.

Now CorEnergy can acquire what upstream companies might consider to be non-core but which are essential to their overall operations such as we did for Energy XXI and UPL. This sale of an asset to us provides an alternative to issuing new equity or increasing debt for companies where capital project opportunities exceed internally generated cash flow, particularly at these commodity price levels.

After our recent equity capital raise, we're positioned well to act quickly on these potential opportunities while minimizing the need for new common equity ourselves.

On Slide 10, we want to confirm our 2017 growth outlook that we set on our last conference call. We have strengthened our capacity to pursue our targeted 1 to 2 acquisitions in 2017 through increasing our liquidity. We're well positioned to deliver on our commitment to provide investors with a long-term, stable and growing dividend.

I'd now like to take any questions from those on the line.

(Operator Instructions) Our first question comes from the line of Selman Akyol with Stifel.

Can you give sort of give an indication or update, maybe number of candidates you're potentially talking to or sort of what the pool size is out there that you kind of see in terms of potential opportunities to invest?

Sure, Selman. Thanks for the question. We have, in the last quarter, been rebuilding our pipeline of opportunities as we're now able to provide much better clarity around our ability to finance those acquisitions, both from debt and equity standpoint. We believe we have today 8 to 10 actionable projects that we're in various stages of initial evaluation, further due diligence or negotiation. And as we've said, we believe we can get 1 to 2 of those across the finish line yet this year.

Awesome. And then, can you just give any color on how the open season is going on the pipeline?

We really can't yet. It's typical that the results of that would be more well understood near the end, and it's a June 30 date. And after that, we'll be evaluating what we hear and then announcing the results sometime later this summer.

Our next question comes from the line of Poe Fratt with D.A. Davidson.

I was -- assuming a positive outcome on the open season, can you give us an idea of the sort of scale, scope and timing of the expansion project there? When -- how much do you think you'd spend and when do you think you'd get it done?

I'll let Rick Green answer that as you're asking more specificity around what we might do and Rick's been overseeing that project. Rick?

There really isn't any more specificity. This is early days of all of our outreaches, the open season being one of those. There's a number of other conversations going on. So this is something that's going to evolve over this year and even into '18. This is not something that's just going to show up in the next week or even the next quarter. So this will be an ongoing process and conversation. And as we develop stuff, we certainly will talk about it.

And then my understanding is Spire is talking about building their own pipeline. In that context, is there room for both expansions or both your expansion and Spire's pipeline?

Well, we're really going to find that out. Spire's pipeline is supported almost totally by their affiliate Laclede Gas, the utility, the gas utility in St. Louis, and it's on that basis that they're building the pipeline. They'll have some excess capacity, but their pipeline is really mostly for that use as opposed to broader uses right now. But that's really what this will be about with our pipeline and theirs, is -- and the reversal of RECs as well as the stack region in Oklahoma producing and other dynamics going on in our marketplace is just to explore how this marketplace is going to develop over the next couple or 3 years.

Great. And Nate, can you talk about how the preferred -- how you came up with the size on the preferred and just whether we should read anything into sort of the 8 to 10 opportunities out there as far as whether this is going to be enough to cover the first couple or whether -- what kind of sort of financing needs you might have beyond the preferred?

Sure, Poe. We just -- the preferred market conditions were pretty strong in this kind of -- so we really just kind of took advantage because the preferred was trading well and we were able to go out with the $70 million issuance. So we really just were taking advantage of the conditions to set us up where, no we don't have financing contingencies here if we do a deal or 2. So it really just provided us with that additional liquidity.

And then any thoughts on redoing the credit revolver now that the bankruptcies have completely passed in both Energy XXI and Ultra route?

Yes, it's a possibility, Poe. It's something that we always look at to best position the balance sheet and our liquidity in where we sit.

(Operator Instructions) Our next question comes from the line of Michael Zuk with Oppenheimer.

Dave, can you give us any color on the types of projects that you're looking at besides our traditional gathering system pipelines? Are you looking for like terminals or storage or other types of facilities to diversify away from the gathering systems?

We actually are looking for additional assets maybe further away from the field. As you mentioned, gathering assets provide us more direct exposures to oil and gas production activity. Now we're very comfortable with critical assets in the field. And so to the extent that upstream companies that would prefer to continue to drill out their opportunity set or willing to do a financing transaction around their infrastructure in the field, we're still very pleased to do that. And that's, I think, a core expertise that we've developed over these last several years. We have always had a goal of having diversification though across the energy value chain. We've got some natural gas in interstate pipelines. We've got a terminal asset today that we don't operate, but we certainly like it as a market-based asset versus an upstream asset. And so we'll continue to look for diversification opportunities out there. And our backlog of opportunities includes both field-related assets as well as market -- further downstream assets.

As a follow-up, do you have any idea on the ideal size of a transaction? Would it be, say, $75 million to $100 million or $100 million to $125 million? Any feeling for that?

Yes, I would have said, Mike, that $100 million was a good size for us before this last offering because that would have enabled us to use our basically our line of credit plus borrowing availability on an asset we acquire, not have to go back to the common equity market to support an acquisition. Today, though, having tapped that preferred that Nate mentioned, we've got about $130 million in dry powder on our balance sheet. And if we could do some amount of leverage on an acquired asset, we could comfortably be in the $150 million to $200 million range without pinching ourselves even on availability post that size of an acquisition. So -- and that helps us be more meaningful to companies that are looking for this kind of financing. So we think that actually opens up more opportunities, the fact that we are able to point to liquidity and availability and execution without the need to go back to the market. So we are increasing our size expectation on our -- and our pipeline of opportunities reflects that today.

There are no further questions. That does conclude our question-and-answer session. At this time, I will now turn it back to your President and CEO, Mr. Dave Schulte, for closing comments.

Thanks, everybody, for your attention, and we look forward to speaking with you again next quarter.

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