Genesis Energy LP (GEL) 2013 Q1 法說會逐字稿

Welcome to the 2013 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 locations. 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. he press release also presents a reconciliation of 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 LP. Mr. Sims will be joined by Steve Nathanson, President and COO, Bob Deere, Chief Financial Officer, and Karen Pape, Chief Accounting Officer.

Good morning, and welcome to everyone. Genesis Energy delivered strong first quarter results, reporting available cash before reserves of $48.7 million, a 23% increase over the prior year quarter and providing a coverage ratio of 1.21.

Our growth has allowed us to increase distributions to our unitholders for the 31st consecutive quarter, 26 of which have been 10% or greater over the prior year quarter, and [none] were less than 8.7%.

As a result of a 35% increase in our unit price during the quarter, our equity based compensation expense increased by $2.6 million. Without such significant increase in our unit price, are available cash before reserves would have been $51.3 million, providing a coverage ratio of 1.27 times, and our adjusted EBITDA would have been $63.4 million.

Our results reflect the continuing impacts of our efforts to secure new opportunities for our partners to participate in the growing demand for our integrated services and capabilities. These new opportunities have created volume growth. This growth, in combination with an extremely low exposure to volatile commodity price levels, has resulted in consistently increase in available cash before reserves.

With that, I'll turn it over to Steve.

Thanks, Grant. The first quarter of 2013, was a very busy one for Genesis, as we initiated full commercial operations at several of our crude oil rail facilities and made significant construction progress on other previously announced projects to ensure on-time startups.

With the completion of 100,000-barrel storage tank at our Walnut Hill, Florida crude oil rail facility, we became fully integrated with our Jay Pipeline System following the planned turnaround in March of one of our major refining customers.

Our terminal at Natchez, Mississippi, as reported to you last quarter, was commissioned with the first cars of bitumen dilbit originating in Alberta, Canada, being unloaded in January. Barge shipments from our integrated docks to our refinery customers along the Mississippi River are now operational as well.

By the end of May, we will be capable of efficiently handling 40 cars a day. Plans, as well as discussions with potential customers are underway to possibly expand Natchez to handle full unit trains.

The Wink, Texas Rail Facility, which serves the Permian Basis, as of February, is now shipping unit trains. It is the Genesis model to commission our facilities in multiple phases. Wink is in phase one. Construction of tank storage and truck racks is well underway as phase two. The second phase will both expand our capacity and enhance the quality and the safety of our service in the Permian shale play.

In the first quarter, we shipped our first crude barges from our newly commissioned terminal and barge dock in Texas City, Texas. Like Wink, this operation is in phase one. Phase two is the completion of our 18-inch pipeline from Webster to Texas City. Upon completion of this line in July, we expect to see increasing levels of throughput as we are able to access increasing volumes of the Eagle Ford shale production and other light sweet crude's coming into the Houston area. With our dock facilities, the crude can be transported to refiners in need of such crude.

We are solidly on track to complete the connection of our Wyoming pipeline with a local refinery that further integrates our investment in a suite of midstream assets in the Niobrara shale development in Wyoming.

In Louisiana, our previous announcement to improve existing assets and develop new infrastructure connecting to ExxonMobile Corporation's Baton Rouge refinery is on schedule. Key components have been purchased and critical path environmental permits have been granted. These assets have a planned startup by the end of 2013, for the barge terminal and pipeline operation, and mid-2014 for the rail terminal commissioning.

Ongoing investment in trucks, railcars and barges support the aforementioned activities, not only in new volume, but higher levels of service to our ever-expanding portfolio of customers. We will take delivery on 400 crude railcars by the end of the third quarter and 4 new asphalt and crude-capable barges by the end of 2013. These assets will be integrated into our ongoing operations.

Turning to offshore operations, SEKCO pipeline construction remains on schedule with all of the 149-mile, 18-inch pipeline lay-down complete. The pipeline will receive oil in mid-2014.

Recent announcements by Anadarko, citing success in the Phobos discovery, located 11 miles south of the Lucius facility, further enhances the economics of this development, and ultimately throughput in the SEKCO pipeline, as well as Poseidon and/or CHOPS.

Our new sulfur removal and NaHS production facility at the HollyFrontier Refining Complex in Tulsa, Oklahoma, is scheduled for Q3 startup. This production is welcomed in light of increased demand from our pulp customers and announced new mine project startups in 2014.

Thanks, Steve. We are pleased with the growth in our ongoing businesses, as well as with the contribution of our recently completed initiatives. We are also pleased with the synergies that the new initiatives are creating with our existing businesses, such as the Walnut Hill Rail Facility, which ties into our existing previously under-utilized Jay Pipeline System in Florida.

We continue to be excited about the new projects that we have identified and disclosed to capitalize on opportunities across our footprint.

Before I turn it over to Bob to discuss our quarter results in greater detail, I'd like to recognize the contribution of our folks here at Genesis. Because of their dedication to safe, responsible, and reliable operations, we continue to work together to deliver increasing long-term value to all of our unitholders.

With that, I'll now turn it over to Bob.

Thank you, Grant. In the first quarter of 2013, we generated total available cash before reserves of $48.7 million, representing a $9.1 million, or 23% increase over the first quarter of 2012.

Adjusted EBITDA increased $9.6 million, or 19%, to $60.8 million over the prior year quarter.

Net income for the quarter was $22.8 million, or $0.28 per unit, compared to $19.6 million, or $0.27 per unit for the same period in 2012.

Available cash before reserves, adjusted EBITDA, and net income were negatively impacted by a $2.6 million increase in equity based compensation cost, solely related to the increase in the market price of our common units. The market price of our common units increased 35% from the end of 2012, to the end of the first quarter 2013. Without such a significant increase in our unit price, our available cash before reserves would have been $51.3 million and our adjusted EBITDA would have been $63.4 million, both surpassing the record performance we set in the first quarter of 2012.

Total segment margin increased to $72.1 million, an increase of $11.8 million, or 20% over the prior year period, a 64% increase in segment margin from our supply and logistics segment, aided largely from a 28% increase in crude and petroleum product volumes, helped drive our overall solid performance for the quarter. The increase in volumes is principally due to increased crude oil gathering and marketing activities in west and south Texas. Our expanded trucking fleet helped facilitate that activity.

Segment margin also increased due to the contribution from our crude oil rail loading and unloading operations completed in the second half of 2012.

Supply and logistics operating costs, excluding certain non-cash charges, increased 24% between the periods due to our expanded trucking and barge fleets.

Refinery services segment margin increased $700,000, or 4%, between the first quarters of 2013, and 2012, due to higher NaHS sales volumes as a result of increased demand from our customers in the pulp and paper industry. The pricing in our sales contracts for NaHS include adjustments for fluctuations in commodity benchmarks, freight, labor, energy costs, and government indexes. The frequency at which these adjustments are applied, varies by contract, geographic region, and supply point.

Results from our pipeline transportation segment decreased $200,000, or 1% between the first quarter periods. Crude oil tariff revenues from our onshore pipeline systems improved due to increased total throughput volumes on our Texas and Jay Pipeline Systems and upward tariff indexing on our FERC-regulated pipelines.

The rise in our onshore crude oil tariff revenues was offset due to lower pipeline loss allowance revenue, both onshore and offshore, caused by decreases in barrels sold, and in period-to-period decreases in average crude oil prices.

Also, the decrease was due to an increase in onshore pipeline operating costs, due in part to a required 5-year integrity testing expenditures and general increases in operating costs inclusive of increased safety program cost.

Interest costs, corporate, general and administrative expenses, maintenance capital expenditures, and income taxes to be paid in cash affect available cash before reserves. Interest costs increased in the first quarter of 2013, as compared to the first quarter of 2012, by $800,000, primarily as a result of increased borrowings for acquisitions and growth projects, a portion of which were financed with our issuance in the first quarter of 2013, of $350 million of senior unsecured notes bearing interest at 5.75% per annum.

The increase was net of increased capitalized interest cost attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate cash, general and administrative expenses increased by $2.2 million dollars, primarily due to an increase in equity based compensation cost related primarily to the rise in our unit price.

In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Net income also includes the effect of unrealized gains or losses on derivative contracts that are not included in available cash until they are realized.

In the first quarter of 2013, non-cash unrealized gains totaled $100,000, compared to non-cash unrealized gains of $2 million in the 2012 first quarter. Additionally, in the 2013 first quarter, we recorded a non-cash expense related to legacy SAR compensation plans of $4.6 million, compared to $1 million in the first quarter of 2012. Fluctuations in the market price of our common units were the reasons for the difference.

Grant will now provide some concluding remarks for our [prepared comments].

Thanks, Bob. Our existing businesses continue to perform as expected, benefiting from the successful integration of new truck, barge, and rail assets that has allowed us to increase volume.

We continue to expect to realize an increasing contribution in 2013, and 2014, from our announced organic projects. Our two largest growth projects announced to date, our SEKCO joint venture with Enterprise Products and our project around ExxonMobile's Baton Rouge refinery complex, will contribute in 2014, and accelerate into 2015.

We believe we are well positioned, given the current available capacity in our offshore oil pipelines to (inaudible) in the latter part of this decade from the dramatically increasing levels of development activity in the deep water Gulf of Mexico.

We continue to evaluate and pursue opportunities that we have identified that fit our core competencies. As a result, we believe we are very well positioned to continue to achieve our goals of delivering low double-digit growth in distribution, having a strong coverage ratio, and maintaining a better-than-investment-grade leverage ratio, all without ever losing sight of our absolute commitment to safe, reliable, and responsible operation.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) First question comes from the line of Paul Jacob with Raymond James. Please state your question.

Touching on the equity based compensation charges that you mentioned, if I just back into the rate, I'm getting about a $200,000 increase for every dollar increase in the stock. Is that a fair way to think about it?

No, that isn't. It's probably a little bit more than that. It's probably about $300,000.

Okay. And then could you talk a little bit about the Q-over-Q drop in pipeline transport volume? I mean, I recognize that you could see some volatility in those volumes. But did you see any effects from refinery turnaround or were there any significant issues that you could point to or was that just seasonal demand?

Hang on just a second. I'm getting those in front of me. Are you talking about on the linked quarter or the year-earlier quarter?

Yes, for the linked quarter.

Basically the Jay System was basically down because of the turnaround that we reference in our prepared remarks at one of our major refinery customers. Wasn't down a lot, but it was down relative to the fourth quarter.

Mississippi was basically flat. Texas was down slightly, primarily associated with hydro test of the Webster to Texas City line, which is basically the line that we referenced in our prepared remarks, which goes into the Marathon refinery in Texas City.

The presentation of the offshore volumes, there were approximately 3- to 4-week turnarounds at 2 major fields each, on the Cameron Highway System. The way that -- and so these are the actual January through March average numbers associated with that.

But given how we present them in terms of they're accounted for in equity method, that we back out the equity contribution and add the cash. The cash is a practical matter that we receive is really one a one-month lag. So the cash distributions out of those joint ventures is really associated with December, January, February activity throughputs, so that the effect of the turnarounds in March and continued into early part of April, will actually be felt [in], if you will, in terms of distributions out of those joint ventures in the second quarter.

Okay. That's helpful. Can you remind me what the maximum throughput capacity is on the Jay Pipeline System?

Somewhere north of 100,000 barrels a day.

Okay. All right. That's all I have. Thank you, guys.

Our next question comes from the line of T.J. Schultz with RBC Capital Markets. Please state your question.

I guess first, at Walnut Hill, with the tanks complete and the refinery turnaround complete, how many trains per week are you taking now? And how do you view market demand? I guess, if you can talk about how you would expect that to ramp through the year?

We are basically anticipating to average, call it 10 trains a month currently under current expectations. We have reinstituted an interconnect with another third-party pipeline, which towards the end of this year will have a new pipeline built down to another refinery. So we would anticipate that the potential market demand and, therefore, the use of Walnut Hill and the use of the Jay Pipeline System could go up from that, call it 10 a month, to greater volumes, once all of that is complete towards the end of the year.

Okay. Similar question at Wink. I guess phase one, you said is complete and your taking unit trains. So maybe a little bit more color with phase two. When will capacity be expanded? How many trains you're taking now with phase one? And when and what impact would phase two have on that?

Basically, we are unloading crude directly from truck into railcar, which is fairly inefficient, and shipping a couple of trains a month, if you will currently. Once our truck racks and tanks are all placed into service, which should be fourth quarter of this year, then we'll be able to be much more efficient. Again, based upon market demands, if you will, of the design capability of it is to move potentially a train a day, if the market justifies that, once we're fully operational with our phase two facility.

Thanks. I guess moving to SEKCO, given the Phobos news. Is that pipe expandable or does it need to be expanded? Maybe you can talk about how we should view utilization initially out of the gate in 2014.

The capacity of the 18-inch pipeline, given the viscosities and the pressure regimes, is approximately 115,000 barrels. There's not a whole lot that you can do, as opposed to onshore pipes, you really can't put intermediate pump stations in 6,000 feet of water. At least we haven't figured out how to do that yet.

The Lucius, which is the anchor tenant, [who's] in the public domain, is being designed to handle 80,000 barrels a day. I caution the long lead time associated with the development of anything in the Gulf of Mexico. I mean, I think that when the Lucius platform was first sanctioned, it was advertised, if you will, or discussed by the various working interest owners, including Anadarko, the operator, as a regional hub for other things in terms of subsea tiebacks over the next decade. And obviously, with the commercial success announcement of the Phobos discovery well, that is a likely candidate to, at some point, not in the near term, but at some point to be tied back on a subsea completion basis, back to the existing production facilities at Lucius.

Okay. Thanks. Last one for me, just on Texas City. I may have missed this. But the phase two, the 18-inch from Webster to Texas City that's in process, what's the timing on that?

We anticipate commissioning the pipeline and station work in July of this year.

Okay. Thanks, Grant. That's it.

Thank you. Our next question comes from the line of John Edwards with Credit Suisse. Please state your question.

Yes. Congrats on another nice quarter.

Thank you.

Just a quick question. With the recent falloff in copper prices, are you seeing any impact to volumes on demand for NaHS?

We are not. In fact, some of the previously announced mine construction projects and ones that we have shared with you, are starting to come online now and have been announced publicly. Others will be kind of late Q4 of this year and the first of next year. So we're not seeing a drop off there at all.

I think that I didn't review Freeport's earnings release, which I typically do because they're fairly open. But once they take into account the [tenants] back from the gold and [lifting that's] covered, and typically in their mining process, the cash cost to lifting copper's around $1.60 a pound. So that $3.10 a pound, current prices, $3.20, we haven't seen any reduction, as Steve said, in current demands from our mining customers or any significant changes in the developments and expansions that are currently underway.

You may have seen this week that Southern Copper, who have 4 mines, both in -- straight across North and South America, plans to double their output capacity by 2017, was their announcement. And again, their cost was combined inline with what Grant just shared with you. So the price has not affected the mine output production.

Okay. Great. And just if you could comment. I mean, obviously, you have a lot going on. Just if you could comment on any, say unannounced project, backlog, or inventory projects you might be evaluating. If you just give us an idea of perhaps what could be coming.

Well, they're unannounced for a reason. We're always working on stuff. As I said in the prepared remarks, I mean, we are pursuing and evaluating a number of opportunities that we have identified. But there can be no guarantee that we'll get to the appropriate commercial realization with the counterparties associated with it.

We do think that we have a reasonably wide array of choices for organic opportunities and potentially even kind of bolt-on acquisition opportunities that we are currently pursuing.

All right. Fair enough. Let it go at that. Thank you very much.

Our next question comes from the line of Michael Gaidin with Robert W. Baird. Please state your question.

Morning, gentleman. Can I please ask about the prospects for continued strong margins in the crude logistics business? Continue to be a real driver of profit strength there, and just want your perspective on how much of this could be potentially transitory market-related issues and how much actually should we think about sustaining over the intermediate to long-term. Thanks.

Basically, we really, we don't trade a lot, if you will. We're pretty -- we don't really trade. We're kind of blocking and tackling. We try to make money providing the logistical assets and moving stuff from point A to point B.

Obviously, there's been compression in at least some of the marker prices and stuff like that. But our base business is increasing our volumes and providing the service and covering our cost and clipping a coupon and let somebody else kind of internalize those wide margins.

Great. Thank you. That's very helpful. And lastly, can I ask about the prospects for offshore throughput growth in the second quarter and over the back half of the year?

The turnarounds at the 2 large fields that I mentioned are basically over. So, I mean, I would think that we would anticipate second quarter volumes to be above those in the first quarter. But I also hasten to remind you what I discussed earlier, that that production that occurred in March and the first part of April is really going to be felt in the second quarter. The increased volumes from a distribution out of the joint ventures will be reflected more in the third quarter and beyond.

Near-term in 2013, is basically anticipated [and] continued pace of development drilling in and around existing production facilities in the deepwater. And then obviously in 2014, with the commissioning of SEKCO and the commissioning of the Lucius [farm], which is the anchor tenant there, then that will kind of provide the growth in the offshore volumes over the next, call it 18 months.

Great. Thank you. That's it for me.

Thank you. Our next question comes from the line of Jeff Birnbaum with UBS. Please state your question.

So I apologize, I missed a part of the call upfront. But I was wondering if you had given any color on Wink and whether the majority of the trains using there today were headed east or west.

We haven't discussed that. I think that due to the lack of unloading currently, it's fair to assume that most of them are moving east. We think longer-term that that is a very logical western path, as unloading capability is further developed in, call it the West Coast refinery complexes.

Okay, great. Thanks. And then the other kind of broader question I wanted to ask was just, given your relationships with a lot of the refiners on the Gulf Coast, was curious just kind of how you think that Gulf Coast market resolves it's issues of eventually here being pretty [long] light sweet crude and essentially what, if any, opportunities Genesis sees for itself in that context.

Boy, Jeff, if anybody knew the exact answer to that, it is a perplexing problem. I mean, I think as we've stated conventional wisdom over the last 20, 30 years was that America was out of light sweet crude oil. A number of refiners, primarily in Texas, have reconfigured themselves to run a more medium sour-type barrel and can efficiently use all of the light sweet crude oil.

I do think that, though, the opportunities, as we are finding with the commercial interest in Natchez, being able to bring the heavy [oil-fan-type] product, whether or not it's straight bitumen or in the fuel bit form, substantially less dilutive than the pipeline quality, that the blend capabilities of bringing that heavy product down to blend with the light sweet crude oil, we believe that there's opportunities to make, if you will, the kind of 25 degree to 30 degree API barrel that fits the plumbing, if you will, in most of the -- and a large amount of complex refineries in the Gulf Coast.

Thanks a lot, everyone.

(Operator instructions) One moment, please, while we poll for any additional questions. It appears there are no further questions at this time. I will now turn the floor back over to management for closing remarks.

Okay. Well, thank you very much, and we'll visit with you in another 3 months or so, if not sooner. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.