Genesis Energy LP (GEL) 2009 Q1 法說會逐字稿

Greetings and welcome to the Genesis Energy First Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Karen Pape. Thank you, Ms. Pape. You may begin.

Welcome to the 2009 first quarter conference call for Genesis Energy.

Genesis has four business segments. The pipeline transportation division is engaged in the pipeline transportation of crude oil and carbon dioxide. The Refinery Services division primarily processes sour gas streams to remove sulfur at refining operations principally located in Texas, Louisiana and Arkansas.

The Supply and Logistics division is engaged in the transportation, blending, storage, and supply of energy products, including crude oil and refined products. The Industrial Gases division produces and supplies industrial gases such as carbon dioxide and syngas. Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama and Florida.

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 genesisenergylp.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 Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Joe Blount, President and Chief Operating Officer, Bob Deere, Chief Financial Officer, Ross Benavides, General Counsel, and Karen Pape, Controller.

Thank you and welcome to everyone. This morning we reported financial results for the first quarter of 2009. We're extremely pleased with our quarterly results, especially in the context of the challenging macroeconomic operating environment.

As we discuss in greater detail later, the partnership's assets and especially its employees have responded to the challenge. We worked hard to manage our costs and looked for incremental opportunities across all of our business segments.

As we commented three months ago, we believe we're as well positioned as any one to weather the current environment both financially and through operation and commercial diversification.

We don't know exactly when times will return to normal or if normal has been redefined. We do know that our goal is unchanged and has to work hard to deliver long-term value for all of our stakeholders.

In the first quarter of 2009, we generated total available cash before reserves of $21.3 million. On May 15th, we will pay a total quarterly distribution of $14.7 million including $0.3375 per limited partner unit, resulting in a coverage ratio for a total distribution of approximately 1.5 times.

This is the 15th consecutive quarter with an increase in the per unit distribution. This distribution represents a 12.5% increase relative to the distribution we guide with respect to the first quarter of 2008, when our coverage ratio was approximately 1.3 times.

Unlike some other companies in our space, we've been able to increase our distribution while maintaining a healthy coverage ratio. Our quarterly results reflect the ability of our increasingly integrated businesses to deliver solid financial results in a macroeconomic environment that certainly has presented us with volume challenges.

However, as we hope we have demonstrated, our assets are flexible, our employees dedicated and none of our businesses are materially directly impacted by commodity price fluctuations.

With that, I would like to turn it over to Bob Deere, our CFO, to review the specifics for the first quarter of 2009.

Thank you, Grant. So the 2009 first quarter, we generated net income of $5.3 million or $0.16 per unit. In the comparable period in 2008, we recorded net income of $1.6 million or $0.03 per unit. The increase in net income is due to the positive impacts of the second quarter 2008 pipeline dropdown transactions more than offsetting the macroeconomic pressures on our other businesses.

Results from our pipeline transportation segment increased $5.6 million to $10.2 million or by 119%. This was primarily due to the previously mentioned Denbury dropdown transactions completed in May 2008. These transactions added $7.5 million to the segment margin for the quarter. Sales of pipeline loss allowance volumes declined $1.7 million as a result of lower crude oil prices and lower loss allowance volumes.

During the first quarter of 2009, the Refinery Services segment contributed $12.8 million, an increase of $400,000 or 3% between periods. Volumes of NaHS decreased by 15,513 dry short tons as compared to first quarter 2008. This decrease was due to current macroeconomic conditions negatively affecting the short-term demands of NaHS, primarily in the areas of mining and industrial activity.

However, in response to the decline in NaHS demand, we were successful in using our existing assets and customer relations to sell caustic soda not needed in our operations and buying and selling sulfur. These additional activities contributed $2.1 million more to segment margin than in the first quarter of 2008. Additionally, cost management and logistics optimization lessen the impact of the reduction in NaHS sales volumes.

Supply and Logistics segment margins increased from $4.1 million in the 2008 first quarter to $6 million in the 2009 first quarter, an increase of 46%. The barge operations acquired in July 2008 contributed $3.1 million to segment margin for the quarter. Crude oil marketing activity increased segment margin by $1.2 million due to the effect of favorable pricing differentials between current prices and future prices during the quarter.

Petroleum products marketing segment contribution declined $2 million quarter-to-quarter, due to a reduction by refiners in their production levels. This reduction resulted in fewer opportunities to purchase heavy-end petroleum products at attractive prices. When gasoline (technical difficulty) sell heavy-end refined products at more attractive pricing in order to free up capacity to meet gasoline demand. With refineries reducing their production rates in the first quarter of 2009, this limited the volumes available for us to purchase.

Segment margin from Industrial Gas activities in the 2009 first quarter decreased a $176,000 from the prior year to $3 million. We sold on average 3,229 Mcf less per day to our CO2 industrial customers than in the 2008 quarter. We believe that this reduction was primarily due to our customers reducing their level of operations in the first quarter of 2009 to perform maintenance activities.

Depreciation, amortization and impairment expense decreased $1.4 million in the first quarter of 2009 as compared to the 2008 first quarter. The decrease is attributable to a decline in the amortization of intangible assets acquired in the Davison acquisition, more than offsetting the additional depreciation from DG Marine and the Free State pipeline, both acquired during 2008.

Corporate, general and administrative expenses increased by $2.3 million between the periods. This increase was primarily the result of the non-cash charge in the first quarter of 2009 related to the compensation arrangements between our executives and our general partner. Our general partner will bare the cash cost of this arrangement.

Net interest cost increased during the first quarter by $1.4 million, due to higher average outstanding debt levels as a result of the borrowings associated with the acquisitions in 2008. However, the impact of the higher average outstanding debt was substantially offset by a decrease of 4.1% in the interest market rates between periods.

Income tax expense in the first quarter of 2009 increased as non-qualified income increased in relation to the tax deductions attributable to that income. As the majority of our operations are non-taxable to us, income tax expense is not expected to be significant.

During the first quarter of 2009, we generated $21.3 million of available cash before reserves, which represented an increase of $5.5 million over the same period in the prior year. Consistent with our increase in net income, this increase reflected the accretive impact of the dropdown transactions and the solid performance of our businesses in these difficult times.

Current quarter available cash before reserves also benefited from the exclusion of the increased non-cash charges recognized in net income related to management compensation. Grant will now provide some concluding remarks to our prepared comments.

Thanks, Bob. All in all, while we'll not wish to be completely immune from current economic conditions, we're pleased with our financial performance in the quarter and very appreciative of our employees' efforts and enthusiasm. In response to these challenging times, we're identifying new ways to use our assets, expertise and customer relationships, as well as do everything we do more efficiently.

While we'd hope otherwise we anticipate the challenging environment will continue for the foreseeable future and have tried to position the partnership for such likelihood. With the 1.5 times coverage of our current distributions in our relatively conservative leverage ratio of net debt of approximately 2.9 times EBITDA, pro forma for a whole year of the dropdowns, we hope to able to advantage of both organic and or attractive acquisition opportunities that we believe we're likely to develop in the reminder of 2009.

Assuming the continuing performance of our businesses, we would expect to be able to continue growing our distributions, but would intend to balance such near-term rate of growth of distributions with our goal of creating the long-term value for all of our stakeholders.

That concludes our prepared remarks for the conference call. At this time, I will turn it back to the moderator to take questions.

(Operator Instructions) Our first question comes from David Fleischer from Chickasaw Capital. Please proceed with your question.

Hi, Grant. Couple specific questions and then maybe a bigger question, I was wondering if you could just put a little bit of color on the decline in volumes on the Jay System and what it would take. We've seen the oil prices come backs on them. What will it take to recover those volumes? And secondly, on the NaHS side, we'd thought you to be fairly immune, but immune maybe was too strong a word to -- the market changes there. You -- on the price side, it looked like you had to take some prices down there. And I guess the broad question there too is what -- give us a little color on which markets have weakened the most for you, copper, otherwise and what it takes in the broader economic scheme events for that business to get better for you?

Okay. On the Jay Systems, specifically we have a large field that it has been -- as we understand, it's temporarily shut in as a result of the low oil price scenario. And that sustained prices in excess of -- clearly in excess of $50 has been represented to us is the breakeven point in which they would come back up, so that accounts for virtually all of the decline in volumes that we see on a period-over-period basis at Jay.

On the NaHS side, clearly, I mean in the aggregate I think across -- the pressure has been on the mining side. And basically with -- we've seen a dramatic recovery in copper prices as a result of this kind of de-inventorying across the markets. Copper prices got as low as about $1.25 a pound in the mid-December, they're now up north of $2 a pound, so that's clearly a good sign for things to come.

But the molybdenum markets have been extremely soft and worldwide and we've really kind of need -- molybdenum is used primarily in steel processes, as well as in this as a catalyst in the refineries. And when we see a return of the molybdenum markets, we believe that we should see a return in our NaHS volumes.

The good thing from our perspective of having gone through this exercise is the ability for us to be able to use our logistical assets for -- to generate other margin capability primarily in the marketing and distribution of caustic soda. So that if we've developed that kind of niche business if you will, so that when we see the NaHS markets return, we think that we've learned something from the difficult pressures.

Can you say that you've already experienced the worst in pricing that price has bottomed or -- and they're looking up or have been up bottomed for NaHS?

Well again, it probably hasn't bottomed because in large parts the NaHS prices because of the indexing mechanism and major cost component being caustic soda that NaHS prices continue to fall, but margins are not affected. So while -- I think you will see aggregate revenues go down, cost of goods sold are going to go down too, and the margin is going to be maintained.

We do -- we kind of believe, think that the volumes have kind of bottomed out, but there is no guarantee that kind of that run rate that we saw in the first quarter is about as -- as low as it gets.

Okay. And then on the bigger question if I can, you are in a fairly unique position with your excellent coverage ratio, the distribution, your low at EBITDA ratio, and generating free cash on an ongoing basis here to make investments and acquisitions and that was kind of your closing comment saying, that you hope to take advantage of the market. I was wondering what beyond that you would be willing to tell us in terms of the size of acquisitions you are looking at, what the market looks like? How likely might it be that you can find something that would fit your assets and that could be completed at a nice accretive -- on a nice accretive basis this year?

Well, I think that -- I will comment this way that the total liquidity which remains availability under our committed credit facility as well as cash on hand is in the neighborhood of $175 million or $180 million. So at this point, without going accessing the capital markets, I mean theoretically we can do something within that size frame.

On the acquisition front, we are certainly seeing transaction multiples coming down from where they were this time last year. Obviously -- and we kind of anticipate that as 2009 progresses, that the opportunity to get quality assets and plus or minus 6 times range as most people understand that is going to increase over time.

Okay. Thank you.

Our next question comes from Jeff Margolin with Wachovia. Please proceed with your question.

Yes, thanks. You guys talked about some of the things you did during the quarter to kind of as you talked about the macro environment, how to deal with that. I was wondering if you could give us some ideas of what you guys are doing on a kind of look forward basis being that we -- looks like the macro environment isn't getting much better here in the near term?

Well, again, we are always looking for ways to do things better and to use our existing assets in a more efficient manner and to take advantage whatever market opportunities that we have. We're seeing -- as we specifically mentioned on the petroleum product side, we're seeing more volumes if you will available to us in the second quarter and anticipate that to increase over time as we get into the typical summer run rates for refineries and stuff or even less than typical would be better than the -- what we saw in the first quarter.

So I mean, I think we'll continue to try to position ourselves and see what we can do and continue to the integration process importantly of the Genesis legacy operations with the Davison operations which we acquired in the third quarter of 2007 and we continue to find ways to save money and make our operations more efficient.

Okay. Also I was wondering from a Refinery Services business, you mentioned you were caustic soda, how long -- is that -- can you continue to do throughout this quarter, in the next quarter, or is it some kind of an inventory issue or is it -- again, is it something you continue to do?

I think that we would intend on continuing it and that's the -- what we have found, that's we have between our dedicated trucks and 215 railcars and our multiple storage locations for caustic soda which we've put together that footprint primarily to support our Refinery Services operations are actual gas processing plants inside the fence, it's the refineries that are host refineries, but we have excess capacity not simply because of our internally reduced demand that we believe that that's kind of on ongoing opportunity for us. And so, certainly when we see a return in NaHS demand, hopefully we've learned how to make additional money on the margin with our existing asset.

Okay, great. Thanks a lot.

Our next question comes from John Edwards with Morgan Keegan. Please proceed with your question.

Yes, good morning.

Good morning.

What's -- for the rest of the year, what's your expectation for capital expenditures?

We have about $7.6 million of additional maintenance capital that we see between now and the end of the year. A large portion of that is associated with a work on our IT systems at our various locations to get more of a centralized IT function, so that would be kind of what probably upwards of $3 million of that number. And whilst that project will continue to have cost in the 2010 and possibly even beyond, that is kind of a one-time upgrade to our overall operating systems.

Well, okay, and then I was actually asking about growth capital.

We really don't have much budgeted. Currently, we are finishing up the Midrock pipeline Alabama extension which will have kind of the -- it should go into service this quarter, second quarter, so we will have some residual cost associated with that. But that's a good thing, because at that point, we can put the volumes which are currently gathering by truck on pipeline and we've already identified another 1,500 barrels to 2,000 barrels a day that we think we can use our trucks to go get and add incremental volume and throughput to the Jay System.

Okay. And then on your G&A expenses, you indicated, I think you have $3 million of non-cash comp in there. With a good run rate going forward would be backing out that number, kind of the 5-ish range or --?

Yes, I think that's probably a pretty good run rate number and I mean emphasizing those significant, it's non-cash.

Okay. And then what's the good D&A run rate number? I know you were 15.5, obviously conservatively below of what we're expecting. Is this a pretty good run rate now for a D&A expenses?

Yes, we think that that's a pretty good indicative run rate.

Okay. Okay. And then on the -- we noticed you published this time your crude oil and petroleum volumes. In the previous conference calls, you had commented on the call what those volumes would be. And I'm just wondering how comparable they are, because I think in the past you had indicated they would be in the 30s range and now you're showing, I think, 41.4 down from 46.9. So I was wondering if you could kind of help spell that out for us.

Crude oil is 30 in round terms and the rest is refined products.

Okay.

And you can -- as we've discussed specifically in the 46.9 down to 41.4, 41.5 is primarily all in refined products.

Okay. And then following up on David's question on NaHS, I mean obviously the volumes were below I think everybody's expectations and you're indicating -- you think it's bottoming out here. I mean, when do you expect -- what are the sign -- I mean your point of I guess the copper prices is the signs that you're expecting some kind of upturn, I guess when -- when do you think you will see a turn back up in volumes I guess?

I mean, I don't know that we can forecast that with a great amount of certainty. But we are seeing second quarter volumes consistent to maybe a little bit stronger than first quarter volumes and so directionally correct.

But are we going to get a return of in the neighborhood of 40,000 tons a quarter? I am not sure when we can with any kind of certainty forecast that. But as hopefully macroeconomic activity increases, both in terms of making steel and refinery runs and the like, that would certainly help that business.

Okay. And then your margin per ton was actually up from last quarter, is this related to the cost indexing on the caustic soda side you're talking about?

To an extent, but primarily because of our logistical savings have been able to do things more efficiently and our cost have -- our cost of operating our logistical systems associated both with the caustic as well as the results in NaHS have gone down.

And what's driving the caustic -- the caustic cost have been up so significantly in this environment?

Caustic prices are falling dramatically.

Okay. Because in the release -- okay, in the release, you said it was $400 to $500 per dry short ton in the first quarter compared to $580 to $750 this quarter.

Right.

Okay. So they are coming down off that --.

They're coming down off of that.

Okay, right. Okay. And then how -- do you expect to get some -- well I guess how will you expect that to impact your margins then on NaHS volumes per ton?

Basically, the reduction in the caustic prices through the indexing mechanisms and or the negotiated prices will in large part be passed on to the consumer to our customers, but our margin should be -- the logistical [segments] both in the cost of operating trucks and the barges and rails and the railcar is coming down significantly and that's a cost that we assume and have little responsibility for, but that should continue to be able to maintain our margins.

Okay. And sorry to ask you so many questions here. I can jump off and get back in the queue. I will let somebody else ask, if you like. I have got a few more.

Okay, go ahead.

Okay, go ahead. Okay. On the Mississippi pipeline, David asked about the Jay pipeline and the Mississippi volume likely it was down quarter-over-quarter and is that for the same reason?

It's down from last quarter.

Yes, Q-over-Q was down.

Over fourth quarter.

Yes.

It's primarily due to we were trucking some Denbury volumes from a new field of theirs that was not pipe connected, we were trucking that to and making a delivery into our Mississippi system. They're taking that -- those volumes to starting to March 1st I think it was going to a different pipeline.

Okay. So this is -- so you're expecting the volumes to be lower going forward.

That's correct. Slightly.

Okay. And then on the Supply and Logistics segment, I mean, obviously the -- the Q-over-Q, the segment margin there was down quite a bit and revenues were down quite a bit. And I was wondering if you could give a little more color on that?

Well, revenues, primarily because we're dealing with $45 to $50 crude oil environment relative to $100 or whatever it was in the first quarter of last year. So the revenues were kind of --.

I mean Q-over-Q, they were down. Same reason I guess. Okay.

Yes, same reason. And then the plus the fact we just on a -- we handled less volume on the refined product side in the first quarter. Driven in large part, given the kind of the refined products business is associated with our activities in North Louisiana and East Texas and Southern Arkansas.

And one of the independent refiners Delek and Tyler had a fire in November and it was off the entire quarter and that is starting to -- it's coming back up now, here in the second quarter and that had its ripple effects of affecting the total quantity of products in our geographic area that we can use for our transportation storage and blending operations out there.

Okay. So you're expecting that this was an anomaly this quarter in that segment margin being so weak.

That's correct.

Okay. So was the fourth quarter '08 be more indicative if -- if what you would expect to get going forward? You're about $10 million, close to $11 million I think if exactly -- profit margin there.

Yes, it might take us a while to get back up there, I am not sure we are going to see it in the second quarter because of the Delek situation and I just described. And we think that's a doable run rate.

Okay. Okay. And then on the distribution, you're talking about balancing growth given that -- given the outlook. And do you -- are you expecting now to pause the growth rate a bit here. Obviously the coverage is good or continue to kind of 9% to 10% or I guess it was 12% year-over-year, I mean how you expected to go more of a little bit slower or hold here while things work their way back up?

Well, as we always say that we evaluate this with our Board on a constant basis. I think that we certainly have the capability to continue a very reasonable growth rate in the distribution and maintain our financial flexibility to take advantage of opportunities as they present themselves.

Okay. All right. Thank you very much.

(Operator Instructions) Our next question comes from Barrett Blaschke from RBC Capital Markets. Please proceed with your question.

Yes, just wanted to kind of look into a little more on pipeline transport. Are there -- is there any chance that there could be volume declines or refinery turnaround this year, is there anybody tied to your system that's telling you they're going to be doing any -- maybe they're going to have downtime?

Well the primary -- the Texas system basically is just a delivery mechanism into refineries, the largest being in Marathon, Texas City, which had its own issues at the end of last year and it's now back up and running also from a refinery fire. But we don't know the significance of any of their turnarounds. But of the volumes in Texas probably in round terms 20,000 barrels to 22,000 barrels a day is going to Marathon, Texas City and their tariff rate currently is on $0.31 or so. So even if they go down for a turn around that shouldn't be a significant hit to us.

Okay, thank you.

There are no further queue and question. At this time, I would like to turn the call back over to management for closing comments.

Well, thank you very much and we will talk to you in 90 days if not sooner. Thanks.

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