Genesis Energy LP (GEL) 2013 Q2 法說會逐字稿

Welcome to the 2013 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. 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 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. This morning we reported available cash before reserves of $45.7 million, a 6% increase over the prior-year quarter and providing a coverage ratio of 1.08 times.

In the second quarter of 2013 a number of items which Bob will discuss in greater detail negatively impacted available cash before reserves. Pro forma available cash before reserves excluding the effects of these items for the second quarter of 2013 would have been $52.2 million, a 21% increase over the prior-year quarter providing 1.23 times coverage for our second quarter distribution, which is inclusive of the increase in our outstanding common units due to the conversion of our class 3 waiver units.

Our growth has allowed us to increase distributions to our unit holders for the 32nd consecutive quarter, 27 of which have been 10% or greater over the year-earlier quarter and nine were less than 8.7%.

In July we agreed to acquire substantially all of the assets for the Downstream Transportation business of Hornbeck Offshore Transportation LLC for approximately $230 million. That business is primarily comprised of nine barges and nine tugboats which transport crude oil and refined petroleum products principally serving refineries and storage terminals along the Gulf Coast, Eastern Seaboard, Great Lakes, and Caribbean. Those ocean-going vessels will allow us to expand our marine transportation capabilities, complimenting our inland waterway operations as well as our other crude oil and heavy refined product assets.

We have available and committed liquidity under our $1 billion revolving credit facility to effect that acquisition in addition to funding all of our organic growth capital requirements, and we expect that transaction to close by the end of the third quarter of 2013.

While our results were negatively impacted by a number of items this quarter, our underlying operations continue to perform solidly and consistent with our expectation. We're beginning to realize the 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 initiatives have created volume growth. This growth in combination with extremely low exposure to volatile commodity price levels has resulted in consistently growing our recurring operational cash flows.

With that I'll turn it over to Steve.

Thanks, Grant. From an operational point of view, the second quarter was quite good. Throughputs on our on-shore crude systems were up over 20% relative to last year driven in large part by increased volumes on our Jay System, which delivers volumes from our Walnut Hill Rail Facility. We're adding a second tank at Walnut Hill expected to be operational in Q4 to increase our capabilities to handle more volumes as well as different grades at that location and through our pipe.

Our line into Texas City previously targeted to be in service in July has slipped into September. This has been a difficult project given its routing and complex connections into the local refineries. In combination with some newly acquired tanks at Webster and the commissioning of our crude handling terminal in Texas City, we remain confident that our investment in and around the Webster to Texas City corridor will contribute increasing margin into the end of this year and 2014.

Our volumes on our offshore crude pipelines also increased over 20% on a year-over-year basis in spite the downtime we experienced at certain connected fields and the shut-in of one of our pipelines because of issues on a downstream pipeline.

Total volumes sold in our crude and refined product businesses increased almost 30% relative to a year ago driven in large part by our increase in our crude oil trucking capabilities. Demand for our inland barges continues to be strong resulting in high utilization and at attractive rates.

We look forward to closing on the Hornbeck assets and integrating those assets and employees who, like us, are dedicated to safe and responsible operations into our marine operations. Five of the nine vessels to be acquired are contracted with existing customers for whom we already provide inland barge services.

Relative to Refinery Services, we continue to see annualized volumes increasing some 10% to 15% by mid to end of next year as demand remains strong from our existing customers and as we meet the future contracted requirements mainly around new and expanded mining operations.

I'll now provide a quick update on our other organic projects. At Natchez, we began handling cars for a second customer in July and are on track to be able to efficiently handle 100 cars per day by the end of this year.

At Wink, we continue construction and are in discussions to interconnect that facility with one or more pipelines in the immediate vicinity.

In Wyoming, we have just placed into service our pipeline extension into Casper and continue construction on our rail loading facility. When fully complete in Q4 of this year, we will be the only midstream company in the Powder River Basin providing integrated crude handling services from the wellhead, delivering to local refineries by pipeline, and providing outbound rail service on both the Union Pacific and Burlington Northern Railroads to both Gulf Coast and West Coast refineries.

Our two largest projects in and around Baton Rouge and offshore in the Keathley Canyon remain on budget and on schedule for in-service in mid 2014 with financial results accelerating into 2015.

With that I'll turn it back to Grant.

Thanks, Steve. The continuing solid performance of our business, the significant organic opportunities we're capturing, and our ability to execute on attractive bolt-on acquisitions we believe combines to provide us with the opportunity to continue to create long-term value for our unit holders.

Before I turn it over to Bob to discuss our reported 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 unit holders.

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

Thank you, Grant. In the second quarter of 2013 we generated total available cash before reserves of $45.7 million representing an increase of $2.5 million or 6% over the second quarter of 2012. Adjusted EBITDA increased $4.7 million to $59 million, a 9% increase over the prior-year quarter. Net income for the quarter was $26.9 million or $0.33 per unit compared to $18.6 million or $0.23 per unit for the same period in 2012.

As Grant previously mentioned, in the second quarter of 2013 a number of items negatively impacted our results. In our Pipeline Transportation segment, our operating results from our offshore crude oil pipelines were adversely affected by approximately $2.5 million due to production variations at connected fields and the unplanned downtime on the Eugene Island System.

In our Supply and Logistics segment, our operating results were negatively impacted by approximately $2.9 million for several items which I will discuss further in addressing the Supply and Logistics segment performance.

Our adjusted EBITDA and available cash before reserves in the 2013 quarter was also negatively affected by approximately $1.1 million of equity-based compensation costs related to the increase in the market price of our common units. The market price of our common units at June 30, 2013, increased approximately 7% from March 31, 2013.

Excluding these events, pro forma total segment margin would have been $75.8 million, pro forma adjusted EBITDA would have been $65.5 million, and pro forma available cash before reserves would have been $52.2 million. Each of these pro forma performance measures represent a 21% increase over the as-reported results of the prior-year quarter.

Reported results from our Pipeline Transportation segment increased $5.7 million or 27% between the second quarter periods. As discussed earlier, operating results from our offshore crude oil pipelines were adversely affected by approximately $2.5 million due to production variation at connected fields and unplanned downtime on the Eugene Island System.

Pipeline Transportation segment margin increased overall on a quarter-over-quarter basis due to higher onshore crude oil tariffs and increased contribution from CHOPS and an increase in revenues from onshore pipeline loss allowance volumes. Onshore crude oil tariff revenue increased primarily due to increases in total throughput volumes primarily on our Jay Pipeline system as a result of additional barrels received at our crude by rail unloading terminal at Walnut Hill, Florida, and an upward tariff indexing on our FERC-regulated pipelines.

The contribution from CHOPS increased as ongoing improvements by producers at the connected production fields resulted in lower volumes transported on CHOPS in the 2012 quarter. Pipeline loss allowance revenues increased as a result of an increase in barrels sold in the 2013 quarter as compared to the 2012 quarter. These increases were partially offset by increased onshore pipeline operating costs excluding non-cash charges due to increased employee compensation and related benefit cost and general increases in operating costs inclusive of increased safety program cost.

Supply and Logistics segment margin as reported increased by $500,000 or 2% between the second quarter periods. As discussed earlier, our operating results were negatively impacted by approximately $2.9 million for several items including one, expenses for repairs to one of our marine vessels as well as foregone segment margin attributable to that vessel's downtime.

Two, demurrage costs incurred due to damage to a river lock caused by a third-party operator that idled certain of our barge activities during a shipment of petroleum products.

Three, downtime as a result of a turnaround at our crude processing facility in Wyoming. Four, ineffectiveness of hedging certain crude oil volumes. And five, volumetric measurement losses associated with our crude oil gathering and marketing activities.

Supply and Logistic segment margin increased overall primarily from a 33% increase in crude and petroleum products. However, the overall composition of our Supply and Logistics revenue streams limited the relative impact on the segment margin.

Segment margin also increased due to the contribution from our crude oil rail loading and unloading operations completed in the second half of 2012. These increases were partially offset by a 14% increase in operating cost excluding non-cash charges between the two second quarters primarily due to employee compensation and related benefit cost. Increases in those costs are the result of higher employee counts from our expanded trucking fleet and the recent growth in our crude oil rail loading and unloading operations.

Refinery Services segment margin increased $1.4 million or 8% between the second quarter periods primarily due to higher NaHS revenues resulting from increases in the average index prices for caustic soda, partially offset by decreased sales volumes primarily attributable to our South American customers. Sales volumes between quarters to customers in South America can fluctuate due to timing of ships making bulk deliveries. The pricing in our sales contracts for NaHS includes 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. Although caustic soda sales are not a significant portion of our Refinery Services activities, increased sales volumes did have a positive impact on our segment margin.

Interest costs, corporation 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 second quarter of 2013 as compared to the second quarter of 2012 by $2 million primarily as a result of increased borrowings for acquisitions and other growth projects, a portion of which were financed with our issuance in the first quarter of 2013 of $350 million of senior unsecured noted bearing interest at 5.75% per annum. This increase was net of increased capitalized interest costs attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate cash, general and administrative expenses increased by $2 million 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 effects of unrealized gains or losses on derivative contracts that are not included in available cash until they are realized. In the second quarter of 2013, non-cash unrealized gains totaled $2 million compared to non-cash unrealized losses of $800,000 in the 2012 second quarter.

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

Thanks, Bob. While our financial results were negatively impacted by a number of items that we experienced in this quarter, our underlying business fundamentals remain solid. We saw increasing volumes across virtually all of our assets and operations and began to realize the benefits from some of our recently completed initiatives such as our unloading facility at Walnut Hill.

We continue to expect to realize an increasing contribution in 2013 and '14 from our announced organic project. Our two largest growth projects announced to date are SEKCO joint venture with Enterprise Products and our project around ExxonMobil's Baton Rouge refinery complex will contribute in the latter half of 2014 and accelerate into 2015.

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

We continue to evaluate and pursue opportunities that we have identified that are core competencies. Our recently announced acquisition of additional marine assets will benefit us immediately upon closing of the transaction. As a result we believe we are very well positioned to continue to achieve our goal of delivering low double-digit growth and distributions, having a strong coverage ratio, and maintaining a better than investment grade leverage ration, all without ever losing sight of our absolute commitment to safe, reliable, and responsible operations.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions.) Our first question comes from Jeff Birnbaum with UBS. Please proceed.

Good morning everyone. So Grant, on the Hornbeck acquisition, is there any color you can provide on an expected maybe run rate EBITDA from those assets, and is there going to be any cutbacks necessary for any work to go to on those ships?

I think Hornbeck announced their earnings after the market closed yesterday and had their earnings call this morning, so we haven't had time to totally scrub it, but I think they reported adjusted EBITDA for the quarter of about $8.6 million for their downstream division.

Obviously we don't -- since that's kind of a non-GAAP measure we don't know if that's exactly how we would do it. On the other hand, we do view it at current market rates and anticipated cost during the transition period that it is slightly less than an 8 times multiple we believe based upon our knowledge of some of the contracts which are being entered into that once we get through a transition period that we think that we can drive that down to around a 6 or a 7 type multiple.

Obviously critical to that is the employee base at Hornbeck, which is, as we mentioned, has the same commitment to safe, responsible, reliable operations that we hope a large percentage of them will come in to Genesis, but they obviously have continuing opportunities at Hornbeck. But importantly everybody's going to be offered a job, and we look forward to efficiently, after a period of transition, of efficiently melding those into our great marine operations currently.

All right. Great. That's really helpful. Thanks. And then one more from me. Is there anything you can add in terms of the ineffectiveness of some of the crude hedges in the Supply and Logistics business, just kind of what drove that?

We had some barrels that were purchased on an LL basis that we believe were sold on a back-to-back basis on an LL basis. Convenient for our refinery customer and inconveniently for us, they did not load two barges going out of Port Hudson and one out of Texas City. As a result we were forced under our internal hedging policies to roll that product into a severely backward-dated market, and as a result the hedge -- the margin that we made on the cash barrel did not accurately reflect the amount that we lost on the hedge.

Okay. Great. Thanks so much.

Thank you. Our next question comes from T.J. Schultz with RBC Capital Markets.

Hey, Grant. I guess just first a big picture kind of question. You have several growth projects focused obviously on rail loading and unloading. Given lower differentials here obviously, how does this impact your view on potential volume ramps through some of those facilities or generally your view for ongoing demand to rail?

I think that we believe markets clear is item one. Item two, we anticipate and we've seen in July and August and would anticipate in September if not for a planned turnaround in one of the crude units at one of our refinery customers served by Walnut Hill, that we've seen no decline in anticipated volumes associated with the quote-unquote collapse of the differentials.

The right barrel has to get to the right refinery, which can't always be served by pipelines to go from Point A to Point B unless there's a whole lot of refineries at Point B, so we think that rail will continue to provide a long-term solution of getting the right barrels to the right refinery locations.

Okay. And then more specifically I guess, at Walnut Hill last time we talked you indicated plans under the current expectations for maybe ten trains per month through that facility, so it sounds like you still see that type of throughput. And then secondly, what does the second tank that you're putting in there mean for potential volumes through Walnut Hill?

I think we actually handled 13 trains in July and our anticipate in August is equivalent to that. And I mentioned that we are aware of a planned turnaround at one of the crude units, so September will be somewhat lower than that anticipated because of that.

But we're putting in the second tank to give us the flexibility to A, either handle more volumes or B, handle a different grade of -- potentially by a rail at that same location because as you're aware, we have reactivated our interconnect with the facilities of Plains All American at the Ten Mile Station. They are building a new pipeline down to the Chevron Pascagoula refinery in Mississippi from that location to be in service at the end of this year that would allow us the flexibility to handle two separate types of crude oil for the two refineries that we'll be probably connected to by the end of this year.

Okay. Helpful. I guess last thing from me just on the offshore, maybe on the volumes, I think it was a $2.5 million impact you discussed on the segment this quarter. Just so I understand, was this related to some of the downtime that we had talked about in March from some of the connected fields that lagged into the payment for the second quarter?

And then maybe if you could discuss how some of those production variations have trended back up or your outlook for CHOPS volumes to get back to levels we've seen in the past.

We mentioned this on the first quarter call which I guess occurred in early May that there was some extended maintenance going on at a couple of the fields attached to the CHOPS. And as we've also kind of pointed out that we in terms of our presentation of cash available for distribution, we back out the equity and earnings from the joint ventures and replace it with the actual cash distributed, which as a practical matter occurs on a one-month lag.

So even though I think for CHOPS for the three calendar months ending June 30th, we reported to the 100% interest 126.8 thousand or KBD of throughput. The cash distribution actually was driven by March, April, May activity, which averaged right at 100,000 barrels a day.

The component of the $2.5 million that Bob has mentioned and that we mentioned in the press release is reflective of what we would have expected as a distribution out of CHOPS given the flow rates that we saw in June, which was really the first month in which they came out of the turnaround. So we think that that will be reflected, which was in excess of 150,000 barrels a day, so we think that that will be more reflective of the distribution we would anticipate for the third quarter.

Okay. Thanks.

Thank you. Our next question comes from Darren Horowitz with Raymond James. Please proceed.

Good morning, Grant. I've got two questions for you with regard to the Supply and Logistics segment. The first at Natchez with the expected ramp of backhauling, a lot of that Gulf Coast dealing with backup to Canada. How do you think about expanding beyond that 60 rail car slot that you guys have outlined and possibly also the ability to handle condensate?

We have 40 slots currently available, and we are expanding that to an additional 60 slots for a total of 100 rail car slots to handle. We're doing some work at our existing heated tanks to convert them over from BGO/caustic service into crude service. Primarily what's required is the installation of internal floaters to appropriately safely handle the vapors associated with handling crude oil.

All of that work should be done by the end of the year, the conversion of those tanks and the installation and in-service of the additional rail facilities, unloading facilities.

We have the ability -- we have built in the ability to and are potentially anticipating, although we haven't done any yet, being able to use the flexibility of our tanks and the loading capability of loading the empty drill bit/bitumen cars with diluent to go back round trip to Canada.

Okay. And also at that facility, any opportunities to expand the barge capacity there, maybe through barrels up the Mississippi River or possible additional movements to refiners?

Well it all is loaded on barge at that facility for distribution. Primarily at this point it's just been to refiners downstream at that point on the lower Mississippi River. In fact the new customer that we reference has started bringing cars in in July. We have in essence a bundled service. We unload the cars, move it through tanks, and they have contracted with us to provide -- use our barges to load at Natchez and take it to their refinery.

So as Steve likes to call it, the Genesis Mall of integrated service capabilities to get these barrels to the right location. We have the logistical assets in place to do that.

Okay. And then last question for me just around the comments that you made in the Powder River Basin, specifically with regard to that Pronghorn Rail facility. How do you guys envision the scale of that facility increasing and more importantly, how much of a capital commitment do you think could be necessary in order to handle producer volumes as that Niobrara production increases over the next couple of years?

From a design point of view, we will be able to comfortably load one unit train a day based upon initial design, which could be expanded to up to two. I think that we've said previously that the order of magnitude investment in that facility in Converse County is around $75 million kind of all in. So we anticipate having the ability to handle up to 70,000 barrels a day comfortably with very easy expansion capabilities, which would really -- we're putting in enough track if you will in our loop design to handle two trains a day, but with the addition of additional tankage and trunk receiving and potentially pipe receiving barrels into that location, we could easily get it up to two trains a day.

Thank you.

Thank you. Our next question comes from Brian Zarahn with Barclays. Please proceed.

Good morning. On the Hornbeck acquisition, if you could talk a little bit about the contract structure?

The typical contracts that we are seeing range in initial terms approximately one year with potentially various options to extend that at the mutual agreement of the parties.

And then on the financing side of things, you do have flexibility with your revolver, but can you talk maybe about the sort of mix of that and equity that you anticipate?

We haven't really crossed that bridge, but based upon call it a 6 to 8 multiple that it's wildly accretive even at 100% equity financing. But we don't have to do anything. We have sufficient capacity at L-plus-200 under our committed facility to be opportunistic in terms of putting long-term capital underneath it associated with the acquisition.

And then do you anticipate continuing to expand your marine transportation business through acquisition?

I think that we would anticipate as we've already started in our inland barge business that at this point we believe that we can effectuate growth more efficiently by new build programs. We are taking delivery in third and fourth quarter of four additional inland barges. We anticipate taking another -- or we have placed an order for an additional four barges, and we will also build some new boats, but it comfortably given our infrastructure and our customers and our level of activity that we view that as an efficient way to continue to conservatively expand that capability for our refinery customers.

Finally from me, can you -- I'm not sure if I missed it, can you provide expansion CapEx in the second quarter and any updates to your expectation for the full year?

I think at this point there's no significant change to our expectations for the full year, which was approximately $400 million spend out of a total of $575 million of publically announced projects, some of which was spent in 2012 and some which will be spent in the latter stages of completion in 2014.

Total capital spent in the first six months was $180 million.

Thank you.

Thank you. Our next question comes from John Edwards with Credit Suisse. Please proceed.

Good morning everybody. Just a couple minor ones. Maybe I missed it, on the new Texas City, the Texas City line, you were talking about earlier it's a little bit delayed. Is there any budget overrun on that or is it still roughly on budget just a little bit later in installation?

It's roughly on budget. We've expanded it. We mentioned in the prepared remarks that we've acquired some existing tanks and the flexibility to build some additional tanks at Webster, so we've kind of expanded the scope but we believe that the commercial arrangements that we can derive from that additional investment are quite attractive.

Okay. And then just you were indicating that on the CHOPS lines they are running more recently I think you said 150,000 barrels a day and I'm just curious, which is well above what it came in average for the full quarter. If you can just give us an idea of kind of your expectations now and further ramping on that maybe this year or next?

We continue to anticipate that once all of this extended period of maintenance is behind that we anticipate that in certainly 2014 that we would anticipate continually increasing volumes as a result of resumption of development drilling that the two major fields where all of the extended maintenance has been going on. So we hope to see increasing volumes through 2014.

We've also recently entered into contracts both at the Poseidon level as well as the CHOPS level to provide transportation services to shore under perm basis for the Heidelberg producers, which has anticipated first oil in 2016. Operated by Anadarko and kind of based upon their public announcement, very much a twin to Lucius from our point of view.

So lots of activity going there, and as we continue to reference we think that it is a great thing to have available capacity in the two major joint ventures in which we participate and that provides the available capacity as we see the dramatically increasing levels of activity in the Gulf of Mexico.

Okay. Great. Thank you. That's helpful. That's all I had.

(Operator Instructions.) Gentlemen, there are no further questions at this time.

Okay. Well thank everyone very much for participating and we'll talk to you soon. Thank you.

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