Genesis Energy LP (GEL) 2011 Q1 法說會逐字稿

Welcome to the 2011 First Quarter Conference Call for Genesis Energy. Genesis has three 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, lending, storage and supply of energy products including crude oil, refined products and CO2. Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida and the Gulf of Mexico.

During the 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 Exchange Commission. We also encourage you to visit our website at GenesisEnergy.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 measure.

At this time I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Steven Nathanson, President and COO, Bob Deere, Chief Financial Officer, and Karen Pape, Chief Accounting Officer.

Thank you and welcome to everyone. As I mentioned in the release we generated a record amount of available cash in the first quarter of 2011. Our results reflect the benefits of acquisitions during 2010 as well as the increased demand for our products and services as our customers work to meet the needs of the global economy. The demand in countries outside the US and Europe for base metals such as copper, molybdenum and aluminum, as well as for paper products and packaging materials continues to positively impact the demand for our mining customers and pulp and paper customers for NaHS.

Increased refinery activity is positively impacting our supply logistics segment as demand for crude oil is increased, more heavy-end products are available for us to acquire, blend, transport and market. And we continue to integrate and optimize the use of our trucks, barges and terminals.

In our pipeline segment, volumes on Cameron Highway are slightly below our expectations. However virtually all of the reduced volumes are associated with scheduled and unscheduled maintenance work on our dedicated deepwater production facility. One of the largest facilities, Mad Dog, is currently completely shut-in to change out its drilling module. This shut-in will affect the second and third quarters but longer term we will benefit by the resumption of development drilling on what we believe could prove to be one of the largest fields ever developed in the Gulf of Mexico.

In April we announced two projects to increase the services we provide to producers and refiners. One, to expand our crude oil infrastructure in Texas and one to install a new sour gas processing facility in Tulsa, Oklahoma.

As you can see, the value of our Texas pipeline assets has been dramatically affected by the developments in the Eagle Ford shale play in Texas. Included in the Texas project is the acquisition of three storage tanks in Texas City with barge dock access located approximately 1.5 miles from our existing Texas pipeline system.

Once the tank refurbishment tie-in and interconnecting pipe is in place, estimated to be in the fourth quarter of this year, we will be able to handle approximately 40,000 barrels per day of crude oil to the new Texas City terminal. We are also adding storage at our West Columbia facilities to provide incremental transportation service for Eagle Ford and other Texas production. And we are constructing interconnecting pipeline in other facilities to transport crude oil production from the Hastings Field which is in the early stages of carbon dioxide tertiary recovery program.

The second project includes the installation of the sour gas processing facility at Holly Refining's Tulsa complex. This project ,expected to be completed in late 2012, will add approximately 24,000 dry short tons per year of additional NaHS capacity.

We expect to spend less than $30 million on these two projects with most of the costs incurred in the third and fourth quarters of 2011. When fully operational we believe those two projects under reasonable assumptions could potentially add some $10 million to $15 million in annual run rate EBITDA to the partnership.

Before I turn it over to Bob to discuss in greater detail some of the non-recurring items affecting reported results, I would like to thank the hard work and dedication of all of our employees for once again delivering solid operational results.

Thank you, Grant. I will discuss the key differences in our first quarter results for 2011 as compared to the first quarter of 2010. My discussion will focus on our segment margin as fluctuations in our revenues resulting from changes in the commodity price levels of crude oil, petroleum products, our chemicals like caustic soda do not have a corresponding impact on our earnings or available cash flow.

I will also discuss our results in terms of our three reporting segments -- pipeline transportation services, refinery services and supply and logistics. Effective with the first quarter of 2011, we now include what was formerly our industrial gasses segment in supply and logistics.

For the 2011 first quarter we reported record available cash of $31.9 million. Each of our segments contributed to this increase in available cash through a combination of improved results from existing operations and acquisitions in the latter half of 2010. This reported level of available cash was $13.8 million greater than the available cash reported in the first quarter of 2010 of $18.1 million. After adjusting for the $5.4 million of non-recurring items that negatively impacted the first quarter of 2010, cash available for this quarter increased $8.4 million or 36% from the year earlier period.

Net income attributable to the partnership for the first quarter of 2011 was $7 million, or $0.11 per unit, as compared to net income attributable to the partnership of $6.9 million or $0.06 per unit for the first quarter of 2010.

Turning to our operating segments, results from our pipeline transportation segment improved $7.3 million to $17.7 million when compared to $10.4 million for the first quarter of 2010. The acquisition of a 50% interest in the Cameron Highway Joint Venture last November contributed $6 million to this increase. The remainder of the increase in pipeline transportation segment margin is attributable primarily to a combination of an increase in throughput on our onshore crude oil pipelines of 25,341 barrels per day.

Volumes on our Texas pipeline system increased by 27,494 barrels per day as the refiners connected to the pipeline increased demand for throughput. Volumes on our Jay System also increased slightly while volumes on our Mississippi System declined by 2,995 barrels per day as a result of declines in tertiary recovery production of producers in the area. Additionally operating and maintenance costs of our pipelines decreased by $300,000.

Refinery services segment margin for the first quarter of 2011 was $17.9 million, an increase of $4.7 million from the comparable period in 2010. NaHS sales volumes increased by 12.5% as copper and molybdenum miners and our customers involved in industrial activity such as paper and pulp and tanning industries responded to increased demand for less developed counties of these products they supply. Caustic soda sales volumes also improved by 15.3% over the first quarter of 2010. Our economies of scale and logistics capabilities allow us to effectively market caustic soda to third parties to many of the same parties who acquire NaHS from us.

Supply and the logistics segment margin was $13.5 million in the first quarter of 2011 compared to $7 million in the first quarter of 2010. As mentioned above, supply and logistics now includes what we formerly reported as our industrial gasses segment. And we have adjusted our 2010 reported segment results to reflect this change.

Increased refinery activity in our operating area and the related demand for crude oil by those refiners increased the volumes we handled in the first quarter of 2011 as compared to the same period in 2010 by 17%. Greater demand for fuel oil and other heavy-end petroleum products in countries outside the United States has helped to sustain the price environment for the products that we sell. The increase in demand for heavy-end products has also created higher demand for our inland marine transportation services to move the products resulting in an increase in our average daily charter rates for our fleet.

Lastly, as Grant mentioned, we continue to recognize the benefits of our efforts to more efficiently deploy and operate our truck, barge and terminal assets.

Interest cost, corporate general and administrative expenses, maintenance capital expenditures and income taxes to be paid in cash affect available cash before reserves. The interest cost increased for the first quarter of 2011 by $6.6 million primarily as a result of the issuance of unsecured notes in November of 2010 and an increase in the interest rate on our credit facility.

In June of 2010 we amended and extended our credit facility to provide availability through June 2015. And that amendment reflects changes in the market rates for our credit. Corporate cash, general and administrative expenses and maintenance capital expenditures were generally consistent with the prior year quarter.

In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Depreciation and amortization expense totaled $13.9 million for the first quarter, an increase of $500,000 between the quarterly periods. Additionally net income also includes the effects of unrealized gains or losses on derivative contracts that are not included in available cash until they are realized. In 2011 the unrealized losses of $6.7 million were included in net income that were not in available cash.

Lastly, 2011 net income included the effects of approximately $1.1 million of costs of activities related to the acquisition of assets of growth opportunities. Grant will now provide some concluding remarks on our prepared comments.

Thanks, Bob. As you can see we are benefiting from an ongoing improvement in our business environment that allows us to take advantage of the business opportunities presented to us by our integrated operations. All of us here are very proud to continue to provide customer-focused services safely and reliably and to have earned and paid an increased distribution for the 23rd consecutive quarter in which we have increased the distribution at greater than a 10% annual rate. With that I will turn it back to the moderator for any questions. Thanks.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Gabe Moreen with Bank of America Merrill Lynch.

Good morning everyone. Question on the Texas pipelines and the nice upticks in crude oil volumes there. Just wondering is that a question of refinery utilization driving that? Again, some more color there and whether that is sustainable going forward.

It is primarily driven by the -- we are currently the only pipeline connected to Marathon's Texas City refinery which is basically one of the only sweet refiners in the Upper Texas Gulf Coast and as a result of the pricing dynamics with TI and as well as dynamics caused by the Eagle Ford production coming on, their appetite for taking volumes off of the pipeline as opposed to importing off of the water has increased substantially. So we believe that it is a long-term sustainable increase.

Thanks Grant. And is that something where they are maxed out in terms of what they can run in terms of those barrels they are looking to get onshore now as opposed to the water and is there room for even more going through your pipeline at this point?

That is all part and parcel of our Texas pipeline expansion capability not only to have the ability to deliver additional barrels to the local refiners but also through our Texas City terminals to allow the barrels to have access to export, if you will, by a barge to the higher value markets outside of the Houston area.

Okay, and then speaking of barges, I was just wondering how DG Marine did first quarter and also near term whether there were any impacts from the flooding on the Mississippi?

We don't break out DG on a standalone basis as consolidated in our supply and logistics. The utilization of the barges, both the ones that we contract out to third parties as well as the capacity that we use internally to move our barrels through our integrated terminal systems remains in the high 90%. We have some effect, if you will, due to the flooding on the Mississippi River but generally that is a force majeure type event and we don't go off the clock associated with that.

Okay, last question Bob. And I don't know if I am making you repeat some of this, but did you talk about what total first quarter CapEx was and what do you have for CapEx budget in total for 2011 at this point?

Did not take about that, Gabe. We have reported in our earnings and in our...and we will report in our 10-Q today -- we had total capital expenditures in this quarter, maintenance capital of about $800,000 and we had growth capital expenditures of about $2.8 million that give us not quite $3.6 million of total capital expenditures for the quarter.

For 2011 we expect to spend approximately between $3 million to $4 million for maintenance capital projects and we believe that to be pretty consistent from quarter-to-quarter.

For maintenance and then as well as approximately $30 million for the two growth projects that we discussed earlier.

Got it. And I assume that $2.8 million in growth capital for the first quarter didn't include the storage acquisition?

It did not.

Great. Well thanks guys.

Thank you. Our next question comes from Ron Londe with Wells Fargo.

Thanks. Can you give us some insight into, you know the fuel oil business, you said demand in foreign countries is up. Is that a function of what happened in Libya or is it generally just higher global demand? Or where is the demand coming from?

Generally, typically what we are doing is we are using our logistical footprint to purchase the bottom end of the refined barrels from a number of sources and typically we are blending back up to, for lack of a better description, a high sulfur residual fuel, No. 6 high sulfur, which is then exported via out of our terminal from the lower Mississippi River to international markets which are used as oil or fuel or for power generation purposes. So it is really kind of a global electric demand and indirectly driving the demands for high sulfur resid.

Is it more European-oriented or Asia or Africa or?

It is Caribbean, South American and Asia is really kind of where the majority of the market demand is.

Ron Londe; Okay, also you spoke briefly about the Mad Dog going offline and affecting second and third quarter. Can you be a little bit more specific about what that might entail?

We haven't given anything on that but, yes, I think it is going to, and depending upon how long the outage is, it can potentially affect throughput on the CHOPS System in the neighborhood of plus or minus 70,000 barrels a day. Again, that is kind of the bad news. The good news is that the reason that it is down is to change out the drilling modules so that once completed additional development drilling can go forward off of the initial spar which is the initial surface location at Mad Dog.

Also note that the producers at Mad Dog let the front-end engineering and design contract with a large international construction company for the design and ultimate fabrication and installation of Mad Dog South which is another surface facility, and it will be installed at Mad Dog to further develop the reservoirs there.

What would be the timing of that?

That is probably a 2013, '14 type timeframe. But we have anticipated the change out of the drilling module at the existing Mad Dog facility for our internal purposes, we had anticipated in the first quarter 2012, but for a variety of reasons they changed the timing and have started to do the work now.

From the standpoint of the NaHS business we have seen a lot of volatility in copper and some other minerals. Have you seen any trends change for NaHS just recently in the last couple of weeks or last month?

No. I think that none of NaHS sales are tied directly to the price of copper so the volatility associated there with doesn't affect the demand. If you look at the, from a very large, probably the world's largest copper producer, given the credits at $13.50 an ounce for gold and is currently still over $1,500 an ounce and $15 for moly, which is currently $16.75 to $17.00, so the cash cost of their mine operations is about $1.10 per pound of copper. So, short-term fluctuations don't affect the mining operations. They are kind of like battleships, if you will. You just don't turn them on a dime and I think that talking to most of our mining customers that the long-term real supply in demand fundamentals of copper got all of them looking at expansions of their existing operations and opening as many new mines as soon as possible.

Okay, thank you.

Thank you. Our next question comes from Scott Fogleman with Morgan Keegan.

Hi, good morning guys. I just wanted to comment, I think you just touched on it briefly, I just wanted additional color on the NaHS volumes were actually down Q over Q. Is that more of a timing issue? You guys have kind of a bottleneck or what is really behind that?

Scott, one of the, there are only 90 days in the first quarter versus 92 days in the fourth quarter. A little bit of that. But it is basically some timing issues as well as one of our locations, production locations, pulp removal facilities in Corpus Christi was down for basically the entire month of January. And during that period as we announced back in April we did a little expansion of our facility down another 8,000 tons annual run rates. So when it came back up and as a result we were a little bit supply-constrained in the first quarter relative to what we would anticipate to be the normal deliveries t our customers for them to maintain their operating inventories at their various locations.

So, yes, sequentially it was down a little bit but we see nothing, it is really the timing of the sales and absolutely nothing but increasing demands from our customer base.

Okay, great. Thank you very much.

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to management.

Okay, well thank you very much and if we don't talk to you sooner we will talk to you in about 90 days or so. Thanks.

This completes today's teleconference. You may disconnect your lines at this day. Thank you for your participation.