Genesis Energy LP (GEL) 2006 Q2 法說會逐字稿

Welcome to the 2006 second quarter earnings conference call for Genesis Energy. Genesis Energy LP operates crude oil common carrier pipelines and is an independent gatherer and marketer of crude oil in North America, with operations concentrated in Texas, Louisiana, Mississippi, Alabama and Florida. Genesis Energy LP also operates an industrial gases business.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions, and directs you to its most recently filed and future filings with the Securities and Exchange Commission.

We also encourage you to visit our website at genesiscrudeoil.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of such non-GAAP financial measures to the most comparable GAAP financial measures.

At this time I would like to introduce Mark Gorman, President and CEO of Genesis Energy LP. Mr. Gorman will be joined by Ross Benavides, Genesis' Chief Financial Officer, and Karen Pape, Genesis' Vice President and Controller.

Thank you and welcome to everyone. I would like to start with the highlights of the second quarter of 2006.

This morning we reported net income for the second quarter of 2006 of $3.444 million or $0.24 per unit. For the 2005 second quarter Genesis had net income of $743,000 or $0.08 per unit. Results for the quarter were very solid.

In the second quarter of 2006, we generated available cash before reserves of $6.087 million, or $0.43 per unit. And later this month we will pay a distribution of $2.672 million or $0.19 per unit, attributable to the second quarter of 2006. That distribution represented an increase of $0.01 per unit or 5.6% over the first quarter of 2006 distribution, and an increase of $0.04 per unit or 27% over the second quarter of 2005 distribution. Cash flow coverage during the second quarter was 2.3 times.

With the comparable 2005 period, we generated available cash before reserves of $2.697 million or $0.28 per unit, which exceeded our distribution of $1.427 million or $0.15 per unit for the 2005 quarter. For the second quarter of 2005, our cash flow coverage was 1.9 times. We believe that this growth in our distribution, available cash before reserves, and cash flow coverage should be viewed as an indication of our potential to grow the distribution going forward.

We are very pleased with our operational results for the second quarter of 2006. All of our business segments showed improved results compared to the second quarter of 2005. These improvements related either to obtaining the benefits of acquisitions made during 2005, or to improved operational execution.

Offsetting the improved segment margin performance were general and administrative expense increases related to compensation and benefits, and accruals related to our stock appreciation rights plan. Most of the stock appreciation rights plan accruals between periods were non-cash items that did not affect our available cash before reserves.

For the second quarter of 2006, we completed the acquisition of a 50% interest in Sandhill Group LLC, which owns a carbon dioxide processing facility. Sandhill produces food grade CO2 from CO2 supplied by us under a long-term supply contract we have with Sandhill. We paid $5 million for our interest in Sandhill.

We will now review the details of the results of operations for the second quarter. For the 2006 second quarter we generated net income of $3.444 million or $0.24 per unit. In the comparable period of 2005, we generated net income of $743,000 or $0.08 per unit, including income of $752,000 or $0.08 per unit attributable to continuing operations, and a loss of $9,000 attributable to discontinued operations.

Pipeline transportation segment margin was $3.602 for the second quarter of 2006, as compared to $2.808 million for the 2005 period. The period-to-period increase of $794,000 was primarily attributable to an increase in revenues attributable to the sale of volumetric gains, most of which resulted from higher crude oil prices. Variations in volumes between our systems and higher tariffs on our Jay system than in the prior period also contributed to improvement in segment margins. Operating costs in the 2006 period were $178,000 more than in the prior period, primarily due to maintenance costs on tanks and other equipment.

Segment margin from industrial gas activities in the 2006 second quarter was $3.026 million as compared to $2.009 million for the three-month period in 2005. The acquisition of two long-term CO2 sales contracts with industrial customers, along with the 80 billion cubic feet of CO2 in the form of volumetric production payments from Denbury in the fourth quarter of 2005, provided $939,000 of this margin increase. Volumes of CO2 sold were 44% greater in the 2006 period, and sales prices were 5% higher due to inflation adjustments in the contracts and variations of the volumes sold under each contract.

Segment margin from crude oil gathering and marketing activities was $2.347 million for the 2006 second quarter, an increase of $1.897 million from the 2005 period. The primary factors increasing segment margin between the two periods was decreased field operating costs and increased margins between purchase and sales of crude oil.

General and administrative expenses increased by $781,000 when comparing the 2006 period to the 2005 period. This increase is attributable to increased compensation costs, including benefits and bonus accruals, and an increase in the accrual for our stock appreciation rights plan.

Under the accounting method used in 2005 for our plan, we determined the accrual needed based on the unit price at the end of the period. Since our stock price changed very little from the beginning to the end of the 2005 quarter, the expense we recorded for the quarter was only $43,000. In 2006 we adopted a new accounting pronouncement related to accounting for our plan, which resulted in an expense for the second quarter of $320,000.

Depreciation and amortization expense increased $461,000 between the 2005 and 2006 second quarters. Amortization related to the CO2 assets increased in 2006 as a result of the third volumetric production payment.

Interest costs were $243,000 less in the 2006 quarter due to lower debt. In the second quarter of 2005, we had a higher debt balance due to acquisitions and capital expenditures related to our existing assets. We used proceeds from our December 2005 equity offering to temporarily retire indebtedness under our revolving credit facility. Our borrowings since the equity offering have been substantially less than in the prior year period. Market interest rates increased slightly during the quarter as compared to the prior year quarter.

This improved performance in the second quarter, combined with our results for the first quarter of 2006, has resulted in a $2.522 million or 72% improvement in net income for the six months of 2006 as compared to the 2005 period. Net income for the 2006 six-month period was $6.035 million, or $0.43 per unit, including $6.005 million or $0.43 per unit attributable to continuing operations, and income of $30,000 from the accumulative effect of a new accounting change adoption. In 2005, net income was $3.513 million or $0.37 per unit. The improvements over the 2005 first half are attributable to many of the same factors as improved the quarter.

As in the second quarter, our improvement in pipeline transportation operations segment margin of $1.153 million is primarily attributable to an increase in revenues attributed to the sale of volumetric gains, most of which resulted from higher crude oil prices. A slight increase in pipeline operating costs was offset by increased margin from our natural gas pipeline activities.

For 2006 we expect pipeline segment margin to improve as a result from reduced expenditures, from pipeline integrity testing and repairs, as well as increased throughput on the Mississippi pipeline system. We believe these improvements will more than offset any reduced throughput from production declines that may occur on the Texas or Jay pipeline systems.

For the six-month period, our industrial gas activities reported an improved segment margin of $2.2 million. Sales of CO2 were the primary source of the improvement, with sales under the contracts acquired in 2005 providing $1.8 million of the improvement. Our equity and earnings of joint venture investments almost increased segment margin by $400,000, with the majority of that amount relating to owning our investment in [TMP Sin Gas] for six months of 2006 and only three months in 2005.

We expect improved performance from our industrial gas segment for 2006 from the TMP Sin Gas investment since we will obtain a full year of performance, and do not expect to perform at turnaround as we did in the third quarter of 2005. Further, we will have the benefit of the third volumetric production payment for a full year in 2006.

Crude oil gathering and marketing operations showed the most dramatic improvement. with an increase between the six month periods of $2.737 million, or 205%. A reduction in field operating costs of $950,000 was a big contributor to the improvement. A focus on eliminating less profitable volumes and increasing profitabilities on the volumes retained provided the remaining improvement.

We are particularly pleased with improvements in the performance of the crude oil gathering and marketing segment over recent quarters. In the past, this segment has been subject to a great deal of volatility caused by market conditions and escalating costs such as diesel fuel and labor costs. If we are able to sustain recent improvements in performance of this segment, it will contribute greatly toward our ability to increase our distribution over time.

General and administrative expenses increased $2.583 million. However, $1.728 million of that increase related to a non-cash accrual for our stock appreciation rights plan. The change in accounting for this plan from the method used in 2005 and prior periods to the method required, or the new accounting pronouncement for employee awards based on company stock, should result in less volatility in the expense we record each period for our plan. The remaining increase in general and administrative expenses was due to employee-related costs.

Interest costs were $476,000 lower in the 2006 period than in 2005. As in the quarterly comparison, lower debt balances through much of the 2006 period was the reason for this decline. Interest rates have increased in 2006 over 2005, and may increase more in 2006. Debt obligations under our credit facility bear interest at variable rates based on market interest rates.

In the first half of 2005, we disposed of idle assets, generating $671,000 of gain. The assets sold included pipelines that were idled in 2002 and 2003. $273,000 of this gain is reflected as discontinued operations in 2005.

In discussing our key investment considerations over the last year, we have emphasized our demonstrated ability to grow by acquiring and developing assets, our relationship with Denbury, the strategic advantage of our size and current status of the general partners' IDRs, our financial flexibility to fund growth, and our strong total unit cash distribution coverage.

Since Denbury became our general partner, our growth strategy has expanded from our historic business segments of crude oil gathering and marketing and crude oil pipeline operations. Our operations now include a separate pipeline segment that includes crude oil, natural gas, and CO2 pipelines, as well as an industrial gas segment which includes a CO2 business, an investment in a sin gas joint venture, and an investment in a CO2 processing joint venture. This diversification of our business operations, and growth by acquisitions and development projects, has contributed much to increasing the value of our common units during the past three years.

Denbury has been a significant contributor to our growth since becoming our general partner in 2002. Since November of 2003, we have completed $65.6 million of acquisitions. Of those acquisitions, $43.6 million, or two-thirds of our acquisitions, were made directly from Denbury in the form of CO2 volumetric production payments.

These transactions with Denbury have performed as expected, and have provided Genesis with significant accretive available cash that has laid a solid foundation for our growth in recent years. While no assurance can be made that future transactions will occur between Denbury and Genesis, we continue to believe that there are many opportunities to acquire assets from Denbury as a consequence of our relationship and our mutual areas of operation.

However, we do expect Denbury to sell qualified assets to Genesis under terms and conditions that are fair to both Denbury shareholders and our unit holders, at the point that we have achieved growth through our acquisitions with unrelated parties so that the assets from Denbury would represent less than 50% of our total asset portfolio.

That concludes our prepared remarks for this conference call. At this time, I will turn to the moderator to take any questions from the audience. Donna?

Thank you. [OPERATOR INSTRUCTIONS.] Ron Londe of A.G. Edwards.

Thank you. Yes, you had some really big gain in margin in the crude oil gathering and marketing area. And maybe you can give us some insight into what caused that besides the cost savings, and the sustainability of where you are now, that $2.3 million in margin.

Sure, Ron. As we said, in both the quarter and the six-month period, a significant part of the improved performance is a result of reduction in operating costs.

I think the other thing, quite candidly, as we've talked before, is that our business, that segment of our business performs best when we get some stability in the market, whether it's a backwardated market or whether it's a contango market. Once that we're in one of those market conditions for an extended period, we can get our wellhead prices adjusted so that we can stabilize our margins fairly well. It's sort of the transition periods that we see a bit of volatility in there. And we've been in a fairly stable period, although it's been contango, it's been fairly stable here for a number of months.

The contango market does give us the ability to benefit from storage opportunities. And we have exploited those opportunities in both the first and second quarters of this year.

Okay. Also, can you run through some of the reasons for some of the volume changes, volume data changes that--.

In which segment?

Well, I'd kind of like to go through-- I don't want to belabor it, but go through some of the major ones, the crude oil pipeline, barrels per day. I assume the Mississippi system is mostly related to Denbury.

Yes. The increases on the Mississippi pipeline system are totally driven by increases in volumes from the Denbury CO2 floods. The Jay pipeline system, relative to last year, as you know some of those fields went down after the hurricanes last year. And some of the producers have had trouble getting those field back to pre-hurricane levels. We have seen improvement in the volumes from the first quarter to the second quarter. And also, expect to see continued increases in the third quarter as more of that production comes back online.

For the six-month period, our Texas pipeline systems were actually up slightly from the 2005 period. That is driven by a function, to some degree, of how much production off the Gulf Coast is moving to Gulf Coast refiners, in which case it does come into our systems, or when price differentials pull those barrels to the mid-continent.

On the CO2 sales side of the business, as we said, that's been primarily driven, the volume increase there, by the third volumetric production payment that we completed in the third quarter of last year.

I think those are the primary changes in volumes and just kind of a thumbnail sketch of the reasons behind it.

Now, the crude oil gathering and total gathering in marketing barrels, I mean they were down pretty significantly. Is that just a function of you moving out of that business?

Well, not so much moving out, but just a function f on an ongoing basis looking at-- you can break it into two categories. One is the wellhead volumes. And part of that, when we renewed our fleet at the end of last year, we did a really thorough examination of our volumes to see if we were satisfied with the margin that we were earning on all of our truck barrels. In those areas where we weren't satisfied with the margin and we weren't able to negotiate better pricing on it, then we went ahead and canceled those contracts and reduced the size of our truck fleet when we did the renewal.

And looking at the six-month cash flow statement, the investments and joint ventures and other investments, $5.5 million, is that mainly Sandhill?

Yes, it is.

Also, you had talked a lot about acquisitions potentially from Denbury. Is there anything new that you're doing with regard to looking for new acquisitions outside of the Denbury system?

Yes. We've been looking. You know, quite candidly, given our target of balancing our acquisitions from Denbury with our third-party acquisitions, we've been focusing quite a bit there. Quite candidly, I don't have anything that I can really discuss or announce at this stage. But, we are focusing our business development efforts more on the third-party side right now.

Okay. That's all I have for now.

Thanks a lot, Ron.

[OPERATOR INSTRUCTIONS.]

At this time, I would like to turn the call back over to management for any additional or closing comments.

Thank you, Donna. I'd just like to thanks, everybody, for joining us today and I look forward to talking to you next quarter. Goodbye.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.