Genesis Energy LP (GEL) 2011 Q2 法說會逐字稿

Welcome to the 2011 Second 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, blending, 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 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 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 measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Steve 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, once again we generated solid financial results from our expanding service capabilities and increasingly integrated assets. As we previously announced, we expect to close the transaction in the coming weeks to acquire the black oil barge business of Florida Marine Transporters. This transaction includes 30 barges, seven of which will be subleased under similar terms of an existing lease, and 14 pushboats. The barges ship heavy refined petroleum products, such as asphalt, to refineries and storage terminals along the Gulf Coast, Intracoastal Canal and western U.S. rivers, including the Mississippi.

With minor modifications to some of the barges in our expanded fleet, half of our barges can also be put into crude oil service. We believe that this acquisition, when combined with the expansion of our Texas crude oil infrastructure with additional tankage, access to existing dock facilities in Texas City and additional pipeline connections, will help us further realize the integration of our activities and provide a potential additional outlet for crude oil in our region, which has been significantly impacted by the activities of producers in the Eagle Ford shale area.

Although labor relations in some of the export mining areas have created a slight slowdown in copper and molybdenum mining activities over the last quarter, mining activity in the domestic North American markets remains very strong as demand for the base metals has remained high. Our paper and pulp customers also continue to need NaHS in their activities as they meet the needs for their products in the domestic and export markets.

Increased refinery activity is positively impacting our Supply and Logistics segment as demand for crude oil has 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, one of the largest facilities connected to Cameron Highway, the Mad Dog field, has been completely shut-in since early May to change out its drilling module. This shut-in had had a negative impact on the second quarter and is expected to impact the third quarter. However, 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. When Mad Dog comes back and if development drilling at Atlantis were allowed to resume later this year, the incremental production in 2012 from just these two fields would be greater than the 30 million barrels recently released from the Strategic Petroleum Reserve.

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

Thank you, Grant. I will discuss the key differences in our second quarter results for 2011 as compared to the second quarter of 2010 and then discuss the year-to-date results. 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 or chemicals like caustic soda did 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. Effectively the first quarter of 2011, we now include what was formally our Industrial Gases segment in Supply and Logistics.

For the 2011 second 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. 2011 second quarter available cash was $5.8 million greater than the second quarter 2010 available cash of $26.1 million. Net income attributable to the partnership for the second quarter of 2011 was $17.4 million or $0.27 per unit as compared to net income attributable to the partnership of $14.2 million or $0.29 per unit for the second quarter of 2010.

Turning to our operating segments, results from our Pipeline Transportation segment improved $5.5 million to $16.9 million as compared to $11.4 million for the second quarter of 2010. The acquisition of a 50% interest in the Cameron Highway joint venture last November contributed $5 million to this increase. The remainder of the increase in Pipeline Transportation segment margin is attributable primarily to an increase in throughput volumes on our onshore crude oil pipelines of 19,084 barrels per day.

Volumes on our Texas pipeline system increased by 19,189 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 2,360 barrels per days as a result of declines in tertiary recovery production, our producers in the area.

Operating costs of our pipelines increased $1.1 million primarily due to increased insurance costs related to our investment in Cameron Highway and planned increased maintenance expenditures to ensure our ongoing pursuit of the highest safety standards in environmental stewardship.

Refinery Services segment margin for the second quarter of 2011 was $18.9 million, an increase of $2.8 million from the comparative period in 2010.

Revenues related to our NaHS activities increased over the prior quarter as a function of an increase in the average index price for caustic soda. NaHS sales volumes decreased by 5.8% as gains made in sales to specialty chemical and plastic customers were more than offset by the impact of difficulties in mining companies, negotiations with our workforces in the export market.

These difficulties led to a decline in mine activity and decreased sales volumes to these companies. The average index price for caustic soda rose $155 per dry short ton. However, the pricing in our sales contracts for NaHS include adjustments for fluctuations in commodity benchmarks, freight, labor, energy cost, and government indexes. The frequency at which these adjustments are applied varies by contract, geographic region and supply point.

Our raw material cost related to NaHS increased correspondingly to the rise in the average index price for caustic soda. Although operating efficiencies at several of our sour gas processing facilities, as well as favorable management of the acquisition and utilization of caustic soda in our operations and our logistics management helped offset these costs. Caustic soda sales volumes improved by 9.3% over the second quarter of 2010. Our economies of scale and logistics capabilities allow us to effectively market caustic soda to third parties, including many of the same parties who acquired NaHS from us.

Supply and Logistics segment margin was $11.8 million in the second quarter of 2011, compared to $10.2 million in the second quarter of 2010. As mentioned above, Supply and Logistics now includes what we formally reported as our Industrial Gases segment and we have adjusted our 2010 reported segment results to reflect this change.

Increased refinery activity in our operating area and the related increased demand for crude oil by those refiners increased the volumes we handled in the second quarter of 2011, as compared to the same period in 2010 by 34%.

The increase in segment margin in the second quarter was partially offset by the effects of the Mississippi river flooding, which impaired our petroleum products marketing and marine transportation activities, and resulted in some increased costs for idle time.

Interest costs, corporate general and administrative expenses, maintenance capital expenditures and income taxes to be paid in cash affect available cash before reserve. Interest cost increased for the second quarter of 2011 as compared to the second quarter of 2010 by $6.8 million primarily as a result of the issuance of unsecured notes in November 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 credit. Corporate cash, general and administrative expenses increased by $1.2 million. $600,000 of that increase was related to employee exercises of Stock Appreciation Rights. 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 $14.3 million for the second quarter, an increase of $600,000 between quarterly periods. Additionally, net income also includes the effects of unrealized gains or losses on derivative contracts that are not available in available cash until they are realized. In 2011, unrealized gains of $7 million were included in net income and excluded from available cash, as compared to $1.6 million in 2010. Lastly, 2011 net income included the effects of approximately $1.5 million of costs for activities related to the acquisition of assets or growth opportunities.

I will now discuss the principal differences between the first six months of 2011 and 2010. For the first six months of 2011, we reported net income attributable to the partnership of $24.4 million or $0.38 per unit, as compared to net income attributable to the partnership of $21.1 million or $0.36 per unit for the first six months of 2010.

Available cash before reserves generated during the first half of 2011 was $63.8 million, compared with $44.2 million for the same period in 2010, an increase of 44.5%. Segment margin for the first half of 2011 was $96.8 million, an increase of $28.3 million when compared to the same period in 2010.

Results from our Pipeline Transportation segment improved $12.8 million to $34.6 million, when compared to $21.8 million for the first six months of 2010. Our share of the available cash generated by Cameron Highway contributed $11 million to this increase.

Volumes on our Texas Pipeline System increased by 23,369 barrels per day as demand by the refiners connected to the pipeline increased. Volumes on our Jay System also increased slightly, while volumes on our Mississippi System declined by 2,906 barrels per day as a result of fluctuations in tertiary recovery activities by producers.

Refinery Services margin for the first half of 2011 was $36.9 million, an increase of $7.4 million from the comparative period in 2010. NaHS sales volumes increased by 2.7% as copper and molybdenum miners and our customers involved in industrial activities such as the pulp and paper and tanning industries responded to increased demand from less developed countries for the products they supply.

Caustic soda sales volumes also improved by 12.2% over the first half of 2010. Again revenues were higher due to the increase in the index prices for caustic soda, however, that increase generally does not impact our operations significantly.

Supply and Logistics segment margin increased $8.1 million to $25.3 million when compared to $17.2 million for the first six months of 2010. Similar to the quarter-to-quarter comparison the increase in segment margin resulted primarily from increased opportunities to handle additional volumes of heavy and petroleum products due to increased refinery utilization in our operating area.

The volumes we handled during the first half of 2011 increased approximately 25% as compared to the first half of 2010 as higher demand for fuel oil and other heavy-end petroleum products helped to sustain the price environment for the products that we sell. Fluctuations in crude oil market differentials, primarily the differential between West Texas Intermediate and Light Louisiana Sweet also provided additional opportunities to realize additional segment margin.

As indicated above, the Mississippi River flooding impaired our petroleum products marketing and marine transportation activities and increased some of our costs during the second quarter of 2011.

Also affecting available cash before reserves, interest cost increased for the first half of 2011 by $13.4 million, primarily as a result of the issuance of unsecured notes in November 2010 and an increase in the interest rate on our credit facility.

Corporate cash, general and administrative expenses increased by $1.5 million. $1.3 million was related to the employee exercises of stock appreciation rights. Maintenance capital expenditures were generally consistent with the first half of 2010. 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 was $28.1 million for the first half of 2011, an increase of $1.1 million from the same period in 2010. Unrealized gains on derivative transactions totaled $300,000 for the first six months of 2011, compared to $2.1 million for the first six months of 2010. Lastly, 2011 net income included the effects of approximately $2.5 million of cost for activities related to the acquisition of assets or growth opportunities.

Grant will now provide some concluding remarks to our prepared comments.

Thanks, excuse me, thanks, Bob. As you can see, in spite of the non-recurring challenges we faced in the second quarter, we continue to be able to take advantage of the business opportunities presented to us by our increasingly integrated operations.

While some folks are seemingly approaching the doomsday mentality of October 2008, things don't feel bad at all in our world here at Genesis. As long as people get in their cars, turn on their lights, package products to transport via land, air or sea, use copper in new buildings or electronic devices, whether or not in Indiana or India, the world's economies need what we provide. Sure, there can be bumps along the way or what seem to be unfathomable headwinds, but out of challenges come opportunities.

We've increased our distribution 24 consecutive quarters, including each and every quarter during the last great recession, and we intend on doing whatever we can to keep that streak alive. We're three or four times bigger than we were three years ago. We're substantially more integrated and yet more geographically dispersed than we were back then. We have direct and indirect exposure to the world's economies, not just whatever is the new normal here in the US.

Pro forma for the recent equity raise and run rate EBITDA from the FMT acquisition, our total adjusted debt to EBITDA is right about 3.1 turns. Credit markets are functioning, even though we don't need to go to them. We don't really care if oil prices are $60 a barrel instead of $100, or copper is $2.50 or $3 a pound instead of $4.50.

The short and long-term fundamentals at Genesis are intact and you have our commitment to work as hard as we can to continue to deliver safe, responsible and reliable products and services while creating long-term value for all of our stakeholders.

With that, I'll turn it back to the moderator for any questions.

(Operator Instructions). Gabe Moreen, Bank of America.

Good morning everyone. Question on the marine transportation side of things, I'm just curious in terms of when you convert those barges potentially to crude oil service, is that an association with getting contracts with customers in order to support that conversion or is that something just in terms of mark-to-market dynamics that you're doing?

And then just generally I'm curious, if you can talk or even quantify directionally where rates have gone given demand you're seeing out there or whether you're seeing charters potentially opt for longer-term charters than you've seen historically?

Okay. Couple of things on the conversion. Several of the barges that we are acquiring are already crude oil capable i.e. they have installed vapor recovery units. Our primary focus is based upon market dynamics as well as the pricing and service for our expanded facilities in Texas City, which we believe is going to be towards the end of the year, or the early part of 2012. So, it's a very minor modifications retrofitting, if you will, the barges with vapor recovery units. What's the second part of the question?

Barges.

[Terming out] barges. Day rates on barges have increased dramatically for a variety of market dynamics, there is an increasing supply of black oil if you will that needs to be moved around from not only around in the Gulf Coast, but from Midwest refineries down to the Gulf Coast. So, we've seen basically fairly substantial increases in the demand for black oil transportation capability and we see that continuing on.

Great. Another question I had just was on -- I think in terms of your NaHS service units, have you seen any of your customers I guess still like to sweeten up their slates and go to lighter crude feedstocks given the discounts out there and is that having any impacts at all on that business in terms of how much NaHS you are able to produce or is that [not really occurring]?

Steve you want to --

No, you know the change of our crude slate into refinery is difficult. They plan out way far in advance, they will bring in spot parcels, but the crude slate that we work in are typically at heavy crude locations. And so our production -- because of their throughput to us as well as our operational efficiencies that we put in late last year, our production is actually up at those locations.

Okay, great. And the last question from me, Grant, just, I missed it, but just in terms of the maintenance side of Mad Dog, just the timing in terms of when you expect that to be done at this point?

At this point, we are anticipating that it will continue through most if not all of the third quarter.

Okay, okay. So, really not finished up until kind of third quarter. Okay, great. Thank you.

Ethan Bellamy, Robert W. Baird.

Gentlemen, with respect to Exxon's Keithley Canyon discovery, have you had any discussions with them and can you give us any idea if that's perspective for CHOP's volumes?

Well, we don't really comment on commercial discussions, but obviously with capacity represented by CHOPs as well as the competitive capacity on other pipelines to provide service, needless to say, we believe that and hope that ultimately some of the barrels can come into the CHOP system.

Okay. With respect to the Florida transaction, when is that going to close in the third quarter and should we expect a contribution in the third quarter?

Yes, we anticipated closing over the coming weeks and so we will get a partial contribution to our results in the third quarter. I mean, obviously as a practical matter, we -- because of the timing of the sale of equity, we'll have the outstanding units basically almost for the entire third quarter and only a partial contribution. So, in terms of kind of calculated coverage ratio in the third quarter because of that it's going to be distorted to the downside, but pro forma for the acquisition at current market rates and utilization rates we view that acquisition is about a 7.5 to 8 times deal.

Okay, that's helpful. With respect to the Texas City terminal still on track for $20 million in year-end 2011 and will that have any contribution in the fourth quarter or just start in the first quarter of 2012?

No, we don't anticipate any contribution from the terminal itself in the -- until the first quarter of 2012. Some of the things that we're doing in terms of truck unloads and things on the portion of the Texas System from West Columbia to Webster, we think possibly could be in service in the fourth quarter and we will get some contribution from that. But we don't anticipate, we're still on budget referencing your $20 million, but we anticipate the contribution to start showing up in the first quarter of 2012.

Okay. And last question, what should we be thinking about in terms of the timing of the CapEx on the barge retrofits?

Again consistent with Gabe's earlier question, I mean I think it's going to be market dynamics. I'm not sure it will actually ultimately be accounted as maintenance capital because it's [converging] into a different type of service, so it may actually show up as growth capital. But to give you an idea, it's not a big number. In round terms, it would be about $125,000 per barge. The barges that we would convert when we -- when they're originally constructed were designed and [stepped out] so to speak to fit on top externally a [type of] recovery unit to allow us to do that and we can do that basically on the fly, if you will that we can, so we don't lose the revenue or the service capabilities of the barges while we're doing that.

Okay, thanks, Grant. Appreciate it.

You bet.

T J Schultz, RBC Capital Markets.

Hey, good morning. On Supply and Logistics, just trying to get a little bit more color on the flooding impact during 2Q, just if you're able to maybe quantify some of the idle time costs you had there?

Probably the, in terms of lost revenue and incremental operating expense associated with direct barge operations, we would put it in the neighborhood of around $0.5 million for the quarter. More importantly is the fact that we were not able to get our barges because of the flooding up to our terminals primarily in Shreveport, Louisiana to affect sales that on cargos if you will or partial cargos that we had blended or built at that location. Those, while there's nothing we can do about the incremental operating expense on the barges themselves, which are working either for us or for third parties, the unrealized sales if you will and margin from the not being able to affect those sales logistically by 6/30 will show up in the subsequent quarter.

Okay. And then still in Supply and Logistics, you mentioned in the press release some positive impact from changes in commercial agreements on crude oil and petroleum products. Can you just provide a little bit more color on that?

Yes, basically the differentials, which is one of the underlying thought process we're doing, what we're doing in Texas City is that because of the dislocations both bottlenecks at Cushing and as well as the development of the Eagle Ford production, which is a Light Sweet product, which is -- needs to find a home. And refineries that weren't Light Sweet product as opposed to the vast majority of the refining capacity in Texas, the differentials have widened out where we had the opportunity to move barrels from TI type markets, if you will, to LLS markets.

Additionally, our focus on handling heavy-ends of the refined barrels is ultimately in large part designed to blend up into a high sulfur resid for export into international markets for boiler fuel and power generation purposes. Oil prices are kind of including for resid, are more akin to a Brent type pricing as oppose to a TI pricing. So those differentials are giving us incremental margin opportunities to use our logistical capabilities to take advantage of them.

Okay, great. Thanks guys.

Ron Londe, Wells Fargo Securities.

Yes, thanks. The NaHS volume is down about 6% for the quarter, can you give us a feel how the third quarter is starting off and what your expectations are for the rest of the year from a standpoint of NaHS and maybe some insight into what's going on around the world that might affect NaHS near term?

Okay. Thanks, Ron, this is Steve. Our customers are forecasting an equal second half of the year as the first half and in fact some of those have new projects particularly when you look at the mining customers have new projects coming on stream that would increase our volumes. It's not going to be a huge ramp up, but it's a very stable, predictable business these days. And then when you look at particularly mining and pulp and paper operations, they're running at pretty much full capacity right now. They will slow down because they've been running hard for the last 12 to 18 months. They will slow down and we have both planned and unexpected outages and we flex with that. But overall customers and these are major players in the world economies are all telling us and asking if we're bringing and have stable production, which we do to supply their demand.

Okay. Also were there any dry docking expenses that you might have incurred while the flooding was going on in the inland waterways?

No. That we like everyone in that kind of situation, it's kind [of a cord in the storm] and companies are very cooperative with each other and we hold on banks and tied up in the stated docks at the refining complexes et cetera.

Okay. So, you didn't take advantage of downtime during the dry docking?

We didn't have any that were required under any of our certifications for any of our barges.

Okay, that's all. Thanks.

Thank you. There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

Okay. Well, thank you very much, and we'll talk to you in 90 days if not sooner. Thanks again.

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