Genesis Energy LP (GEL) 2014 Q1 法說會逐字稿

Welcome to the 2014 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. 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, Wyoming, 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 and 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 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 $53.4 million, providing 1.1 times coverage of the distribution we will pay May 15 of this year. That distribution of $0.55 per unit represents the 35th consecutive increase in the quarterly distribution, 30 of which have been greater than 10% over the prior year's quarter and none of which have been less than 8.7%.

From an operational point of view, we are pleased with our overall performance. We have continued to see increased activity in the Gulf of Mexico, which benefits our offshore pipelines and our NaHS sales volumes exceeded 40,000 dry standard tons. While a negative for the third quarter in a row, we believe based upon our most recent performance we have transitioned our operations in our heavy fuel oil business in terms of cost structure, size, and scope to operate profitably in future periods regardless of then-current market conditions.

In March, we completed and commissioned our pipeline connecting our Port Hudson terminal on the Mississippi River to the Exxon Mobil Baton Rouge refinery. We continued construction on related facilities at Scenic Station, a unit train crude oil unloading facility which will be connected to that pipeline, should become operational late June or early July.

We also continued to move forward on our other projects in South Louisiana. Our unit train unloading facility at Raceland, scheduled for completion in early 2015, and our new crude oil intermediates and refined products import-export terminal that will be pipeline connected to existing deepwater docks at the Port of Greater Baton Rouge, scheduled for completion in mid-2015.

The SEKCO pipeline in the deepwater Gulf of Mexico, a joint venture with Enterprise Products, should be mechanically complete by July 1 and contribute financially in the third quarter. Going into the second quarter of 2014, we know we will have to deal with a couple of one-time negatives. Two of our inland Marine barges recently were grounded on a sandbar in the Mississippi River about 100 miles south of St. Louis. There were no injuries and absolutely no spill or other environmental impact.

However, our cost, insurance deductibles, and lost revenue opportunities will negatively impact our second-quarter margin by upwards of $750,000. We also will incur tank repair expenses at a cost of approximately $500,000 to repair a sodium hydrosulfite tank at one of our facilities that was damaged during operations. Again, there were no injuries nor environmental impact associated with this event.

Additionally, one of the major fields dedicated to our Cameron highway pipeline has just gone into a 45- to 60-day turnaround. While we believe this is the last turnaround of such deepwater production facility before resumption of development drilling, we would expect it to negatively impact our second-quarter by up to $500,000.

The expected ramp in volumes from our other growth initiatives in Texas, Wyoming, Mississippi, and Florida, which are in various stages of startup, should be increasingly recognized in our financial performance in the second half of 2014, and cumulatively accelerate our performance into 2015. As a result, we believe we are well positioned to continue to achieve our goals of delivering low double-digit growth in distributions, maintaining a better than investment grade leverage ratio, and delivering on increasing coverage ratio, all without ever losing focus on our absolute commitment to safe, responsible, and reliable operations.

With that, I will turn it over to Bob.

Thank you, Grant. In the first quarter of 2014, we generated total available cash before reserves of $53.4 million, representing an increase of $4.7 million or 9.7% over the first quarter of 2013. Adjusted EBITDA increased $5.8 million over the prior year quarter to $66.6 million.

Net income for the quarter was $29.8 million or $0.34 per unit compared to $22.8 million or $0.28 per unit for the same period in 2013. Reported results from our pipeline transportation segment increased $2.9 million or 11% between the first quarter periods. The increase was primarily the result of higher volumes transported in our offshore pipelines as a result of additional wells being connected to the pipeline in the existing fields that they serve.

In first quarter of 2014, crude oil tariff revenues of onshore crude oil pipelines increased primarily due to upward tariff indexing of approximately 4.6% for our FERC-regulated pipelines, effective in July 2013. In addition, our Louisiana pipeline system, which consists of our new 18-mile, 24-inch diameter crude oil pipeline connecting Port Hudson to the Baton Rouge Scenic Station, and continuing downstream to the Anchorage tank farm, began operations in the latter part of the first quarter of 2014. Those increases were somewhat offset by a decrease in volumes on our Texas pipeline system.

Refinery services segment margin increased $2.9 million or 16% between the first quarter periods as a result of a 12% increase in NaHS sales volumes to a total of 40,900 dry short tons for the quarter. NaHS sales revenues increased primarily as a result of the increase in the NaHS sales volumes. Such increase was partially offset by a decrease in the average index price for caustic soda, which is a component of our sales price.

And the other components as follows. The pricing in our sales contracts for NaHS includes 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. The mix of NaHS sales volumes to which these adjustments applied reduce NaHS revenues in the first quarter of 2014.

Supply and logistics segment margin increased by $500,000, or 2%, between the first quarter periods. In the first quarter of 2014, we continue to experience negative impacts as we work through the dislocations in the prices and margins for the underlying commodities in our refined product business. We have transitioned our operations to a level and structure designed to operate within current market conditions in terms of cost, size, and type of activity.

Interest cost, corporate, general, and administrative expenses, maintenance, capital reserve, and income taxes to be paid in cash affect available cash before reserves.

Interest costs for the first quarter of 2014 increased by $1.4 million from the first quarter of 2013, primarily as a result of increased borrowings for acquisitions and other growth projects, a portion of which were financed with our issuance of the first quarter of 2013 of $350 million of senior unsecured notes, bearing interest at 5.75% per annum. This increase was net of capitalized interest cost attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate, general, and administrative expenses were comparable between the two quarters, decreasing by $200,000.

In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense, which increased $4.2 million between the quarterly periods, primarily as a result of our acquisition of our offshore marine transportation assets and recently completed internal growth projects. In the 2014 quarter our derivative positions resulted in a $3.9 million non-cash unrealized gain compared to a $100,000 non-cash unrealized gain in the 2013 quarter.

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

Thanks, Bob. Our underlying business fundamentals remain solid, although not without a few challenges here and there. Going forward, we would expect to realize an increasing contribution from our organic projects (technical difficulty) fully operational and experience increasing volumes.

Our two largest projects scheduled for completion in 2014, our SEKCO joint venture with Enterprise Products and our project around Exxon Mobil'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 benefit in the latter part of this decade from the dramatically increasing level of development activity in the deepwater Gulf of Mexico.

And, finally, we believe that there are still opportunities arising from the changing fundamentals in North American crude oil production and refining. As a result, we are well-positioned to continue to achieve our goals of, one, delivering low double-digit growth in distributions, which we have increased for 35 consecutive quarters, 30 of which have been 10% or greater over the prior year period of and none less than 8.7%; two, maintaining a better than investment grade leverage ratio; and, three, delivering an increasing coverage ratio, all without ever losing sight of our absolute commitment to safe, reliable, and responsible operations.

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

(Operator Instructions) Gabe Moreen, Bank of America.

A couple questions. One is on Pronghorn. I was wondering if you could talk a little bit more about that announcement in terms of what the next steps are there. If there is sort of an open season and do you have a date by which you think you'll be making a decision or not? And then, I know that CapEx lightly depends on what customers come back with, but are there any ballpark CapEx members you can talk about for that project, potentially?

We filed what we call the Casper Express open season, which is from the express tank farm outside of Casper to our facility at Pronghorn. As I recall, the open season expires on May 30. Based upon the feedback from the customers, we will kind of size things, if you will, associated with that, assuming it is as successfully accepted by the marketplace.

Order of magnitude is approximately plus or minus 60 miles of pipeline. So it could be in the order of magnitude of plus or minus $75 million to $100 million, again, depending upon a number of different factors. But we would anticipate wrapping that up, again, assuming adequate customer demand responding to the open season, hopefully by the end of this quarter.

Great. Thanks, Grant. And then, on the SEKCO financial contribution for the third quarter, is the expectation that is really just going to be demand fees at that point, you actually expecting a volume metric component to kick in, in the third quarter, as well?

Obviously, it is a function of when the operator and working interest owners initiate production. We would anticipate, as we know it right now, that we would see actual volumes flow in the third quarter, but because of the nature of the contractual arrangements and the fact that, in essence, what we count when we reconcile to, in essence, our non-GAAP measures of EBITDA and available cash, it is a distribution out of the joint venture.

So, any throughput that would occur as of, for instance, in September, we would not have the cash at either the SEKCO level or the Poseidon level to distribute out by September 30.

Got it. And then last question for me is just on the heavy fuel oil business. I'm just wondering, in terms of the improvement you are expecting there, does that less show up on the margin line being less of a drag, or is that something that is really going to show up in OPEX or both?

We addressed our cost structure as we said. But basically we would anticipate -- and we reference it for three quarters in a row, it was actually a negative margin contributor. So, and, again, based upon recent performance, we believe that it will flip over to [no horse] and a breakeven in a historically a positive contributor.

Ethan Bellamy, Robert W. Baird.

It looks like chops has been kicking butt up every quarter in the last year, but still it just looks like about 38% utilization. Is that trend of growth and volumes going to continue? And what should we be thinking about in terms of utilization on that asset?

Again, I think we referenced in our prepared remarks that we just recently are aware of a 45- to 60-day turnaround at one of the fields attached to it, but after that, we believe that that is the last significant turnaround and there would be a resumption of development drilling.

It is a fairly lumpy process in the offshore. I mean, you can -- if you have existing production facility installed in the deep water, then you bring on a development well, that can be 15,000 to 20,000 barrels all at once. But to have significant incremental 100,000 barrels throughput capabilities requires, in all likelihood, the installation and contracting of additional deepwater production facilities.

So we would think that, based upon what we know now, that we would see slight decrease in second quarter volumes. And then a reasonably steady ramp over the next couple of years is up to order of magnitude 250 KBD to 300 KBD the over the next six to eight quarters as the development activities just fill up the installed existing capacity.

And, just in terms of the second quarter impact on the turnaround, is that -- I mean, just in terms of modeling the quarter right, is that going to take out half the volumes for the pipe in the second quarter?

No. It wouldn't do that. It would probably order of magnitude perhaps is 20% or so.

TJ Schultz, RBC Capital Markets.

Just first on the Jay system down sequentially, I thought we may see some pick-up after the refinery turnaround in the fourth quarter. So maybe just color around activity into Walnut Hill and expectation per volumes into Jay system as we move through the year.

Really, the sequential year-over-year drop was -- and I think we talked about it a little bit on the fourth quarter call that we expected fewer trains to be unloaded at Walnut Hill and, therefore, moved on the Florida system. We would expect, as we go through the year, that we are hopeful that that would increase and not only have contribution to supply and logistics margin, but also throughput by virtue of that is where we report the rail unload as well as increase we put on the Jay system.

Okay. What are you seeing right now -- train activity into Walnut Hill?

At this point, it is generally consistent with the average activity in the first quarter.

Okay. South Louisiana, what is your exposure to the Tuscaloosa Marine Shale? I mean, we are seeing good producer wells. It seems like things are picking up quite a bit. I know you all handled some of the early TMS volumes into Port Hudson, but just thoughts around continuing to capture some of those volumes, whether trucking or into the terminal and pipe.

We are obviously keenly interested in the TMS. We have three logical facilities kind of equidistant from what I would call the fairway, which is both our truck station at Liberty in Mississippi, or our Mississippi pipeline system ties into the Capline system. Our activities at Natchez, which are basically associated with bringing in very heavy rail bit/bitumen products out of Canada that need a good blend material -- a crude oil blend material. And then, obviously, Port Hudson. So we are very keenly interested in it and keeping an eye on it, and being a very active in terms of commercial discussions and providing near-term services for the operators in that area.

Cory Garcia, Raymond James.

If we take into consideration the discounts we have seen out in Midland this last quarter, which I guess is really a blowout in late February, but would you guys be able to provide any color regarding the anticipated step up in volumes, if any, out of Wink, and I recognize that you have only just recently scaled up that facility to handle unit train capacity. But any color surrounding volumes out of that facility today would be helpful.

We have just, as you pointed out, Corey, we have just kind of lined out at least the full capability in terms of accepting truck volumes at this Wink station and putting those in tank and loading unit trains. You are correct that we are seeing, given the differentials and the need to get the growing production and especially in the kind of what I would call the western part of the Permian play out of the basin. So we are seeing increased activity in and around, and increased interest at Wink. But it will probably show up in the second quarter.

Any specifics or volumetric even on a percentage basis maybe?

Well, anything on a percentage basis from zero is a big group.

That's a fair point.

So, no, I think we will probably discuss it in the second quarter.

Okay. Great. And I guess if we switch over to Natchez, given the improved line of sight or rhetoric rather up in loading capacity, up in Canada, I was curious if you guys have seen any customers coming to you in terms of opportunities to backhaul diluent. Is it still little too early to really talk about how that process is going? We haven't heard about it much yet. I'm just wondering if the conversation is getting started.

The conversation is occurring, but to date we have not done anything -- any backhauls from Natchez.

Okay. Thank you for the time.

John Edwards, Credit Suisse.

I am just curious, Grant, you were talking about the transportation transitioning of the fuel oil business and you should be in position to make it at least break even or profitable. If you could just maybe mention about how much you have had to spend on that and maybe how much of that has shown up in the quarterly numbers?

We really didn't break it out, but, as we said, it was a drag in the third quarter of 2013 and the third quarter of 2013. Net, it probably was a little bigger drag in the first quarter, but that included just dealing with some stuff and some costs associated with rightsizing it, to put it into a position where, on a prospective basis, that we think it will be a positive contributor.

Okay. Well, I am just trying to get an idea for modeling what kind of potential margin improvement we might be looking at, just kind of the ballpark magnitude of the drag.

I don't think that we have ever really released it.

Okay. Fair enough. And I'm just curious, a lot of other companies have been talking about weather impacts. To what extent were you impacted by weather during the quarter?

We saw a little bit of reduced trucking activity out in West Texas, southeastern New Mexico, in Wyoming, in the late January, February timeframe. But, really over the quarter, it wasn't any kind of material impact whatsoever.

All right. And then, you mentioned in the disclosure on maintenance capital spent versus utilized and footnoted that. And how should we -- I mean, you didn't put the spend amount in the DCF calculation, but that -- I'm just a little confused on that.

Yes. John, beginning in this quarter, we have changed our method for including maintenance capital in calculating available cash. On a go forward basis, we will include maintenance capital as utilized.

And as we have disclosed in our press release and our 10-Q, we believe that the most useful kind of quarterly maintenance capital utilized amount is really that amount of previously incurred maintenance capital expenditures that we realize or utilize during relevant quarter, and that which would also be equal to the sum of the maintenance capital expenditures that we have incurred for each project or component in previous quarters, basically allocated ratably over the useful life of those projects or components.

Bob, I would give kind of a real world example as the rationale for it. And it really became evident to when we significantly expanded our Marine operations. If we spend $500,000 or $600,000, in essence completely repowering on inland push boat, if we do that, then basically you change the oil and the filters for 35,000 to 40,000 hours of run time, which is basically on average about a five-year result, that it made more sense for us to recognize that $500,000 or $600,000 over subsequent quarters in which we would realize the benefit of having expended that capital.

So that is kind of an example of the rationale. So, as Bob was saying, we will present it on the moral equivalent of the cash expense and the reconciliation of available cash, but over the useful life of the major capital expenditure.

Okay great. And then just following up Gabe's question on SEKCO, do you have a line of sight on what you think the volume ramp up will be after that goes into service, going forward into 2015?

It would be not atypical that as part of the development cycle that a number of development wells have been predrilled. So it would be reasonable to assume a fairly rapid -- once it comes on, a reasonably rapid, within a quarter or two, of getting up to close to design capacity of 80 KBD.

(Operator Instructions) Michael Blum, Wells Fargo.

I wondered if you could just comment or give us your thoughts on -- given all the announced regulation, coming regulation around crude by rail, how you are thinking about that; if you are seeing any direct impact to your business and how you think about prospective crude by rail terminal projects given what seems to be a slightly changing environment.

I think that we believe that rail is a long-term solution of getting the right barrel to the right location. We think it is incumbent upon all players to -- as we at least say two or three times in these deals, that we are committed absolutely to safe, responsible, operations that we will, as an industry, figure it out whether or not it is operating conditions on railroads or the design of tank cars that it is something that is going to be here for a long time. And that there is incentive for everyone to figure out how to do it safely and responsibly as possible.

From our perspective, we are typically not involved in the trade, if you will. We clip a coupon for loading railcars and unloading railcars, and that is kind of how we participate in it. And, similar to a pipeline operator, while the crude is in transit, it is a practical matter. It is in the possession of the transporter, i.e. the railroad, just like it would be in the pipeline, and the railroads to figure out how to do it safely.

Thanks. That's helpful. And then if you could just talk a little bit more about which trends that you are seeing in your onshore crude oil pipeline business and what is driving that, particularly Texas was up pretty meaningfully sequentially, but still down year-over-year. Mississippi is sort of down versus sequentially year-over-year. Could you just talk about what the dynamics are there right now?

Texas is -- we have been integrating some new facilities which have been constructed and with a turnaround, two of the refineries that turned around, that kind of contributed to the -- in the first quarter we were seeing, in the second quarter increased volumes as everything kind of gets lined out. So that one -- Texas should continue to sequentially and then prospectively see increased throughputs.

The Jay system we talked a little bit about. That is really driven on a period over period comp basis by activity of rail barrels. The local production is hanging in there. So that is really what is driving that.

And then Mississippi system is really just a gathering system. We are seeing slight declines in the total production at the dedicated fields there. It is not material in the overall scheme of things.

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Okay. Thanks, everybody, for joining and we will talk to you in another three months or so, if not sooner. Thanks.

Ladies gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.