Genesis Energy LP (GEL) 2014 Q3 法說會逐字稿

Greetings and welcome to the Genesis Energy third-quarter 2014 earnings conference call. (Operator Instructions.) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Karen Pape. Thank you. You may begin.

Welcome to the 2014 third-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 $60.8 million, providing 1.12 times coverage of the distribution we will pay November 14. That distribution of $0.58 per unit represents the 37th consecutive increase in our quarterly distribution, 32 of which have been greater than 10% over the prior year's quarter, and none of which has been less than 8.7%.

These quarterly results reflect certain minimum fees associated with our SEKCO Pipeline, a joint venture with Enterprise Products in the Gulf of Mexico which is mechanically complete, as well as certain minimum fees from our 28%-owned Poseidon Pipeline. While we expect initial startup operations at the dedicated field late in this quarter, we would not expect meaningful throughput through SEKCO and downstream on Poseidon until the first quarter of next year. However, we do continue to expect a rapid ramp-up in throughput that should contribute some $3 million to $4 million a quarter in additional margin net to our interest beyond the minimum fees we are currently collecting.

Earlier this month we entered into definitive agreements to acquire the M/T American Phoenix for $157 million. This vessel, which is contracted with high-quality counterparties through August of 2020, fits squarely within our focus of providing our customers with the logistical capabilities of getting the right barrel to the right location. We would hope to receive the necessary consents and approvals to close this transaction in the very near future.

Upon closing and through August of 2015, we would expect our investment to have a cash-on-cash multiple of approximately 10.8 times. Subsequent to late August of next year and continuing for the next 5 years thereafter, we would expect the run rate multiple to be approximately 8.25 times.

We continue to progress our projects in Louisiana, stretching from Fort Hudson through Baton Rouge and south to Raceland. While certain parts of the overall infrastructure are in limited operational service, we would not expect, and never have expected, to see meaningful volumes until the second quarter of 2015, with an acceleration throughout the second half of next year.

Obviously, crude oil prices have declined recently. Given our substantial focus on providing services to refineries, who are the only consumers of crude oil, a more relevant metric from our point of view is crack spreads, which have been relatively flat, if not in certain instances widening.

I thought I would also offer a few comments regarding our views of activity in the Gulf of Mexico. As a starting point, we do not believe that plus or minus $7 billion, 15- to 30-year live projects are sanctioned based upon a December Nimex contract for oil in Cushing, Oklahoma, nor do we believe they are sanctioned on oil being $100 per barrel forever and always, nor even on average for the next 20 to 30 years.

Lucius is coming on in a matter of weeks. Projects that have installed production handling facilities in the deep water, like Caesar/Tonga, Mad Dog, and Atlantis, will continue to see development drilling. Projects that are in various stages of development, like Heidelberg, will still come on in 2016. Stampede, a $6 billion project operated by Hess, was sanctioned just this week, with first production scheduled for 2018. We believe the economics of finding and developing the world-class reservoirs in the deep-water Gulf are superior to virtually any unconventional opportunities onshore across virtually any long-term expected range of crude oil prices.

With that, I will turn it back over to Bob to discuss the third-quarter results in greater detail.

Thank you, Grant. In the third quarter of 2014, we generated total available cash before reserves of $60.8 million, representing an increase of $17.5 million, or 40.4%, over the third quarter of 2013. Adjusted EBITDA increased $25.3 million over the prior-year quarter to $81.8 million, representing 44.7% year-over-year growth. Net income for the quarter was $29.1 million, or $0.33 per unit compared to $18.5 million, or $0.22 per unit, for the same period in 2013.

Segment margin from our pipeline transportation segment increased $7.2 million, or 24%, between the third-quarter periods. The increase was primarily the result of the financial contribution of the SEKCO Pipeline, which has been declared mechanically complete. As a result, we are now earning certain minimum fees despite no crude oil throughput to date, as well as related minimum fees from Poseidon.

Refinery services segment margin increased $2.7 million, or 14%, between the third-quarter periods. The increase was primarily attributable to a slight increase in NaHS sales volumes to a total of 36,431 dry short tons for the quarter. NaHS sales revenues increased primarily as a function of the increase in NaHS sales volumes, a positive change in the mix of NaHS sales volumes, and increased operational efficiencies.

During the quarter, the average index prices for caustic soda, which is a component of our sales price, decreased. 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 spot point. The mix of NaHS sales volumes to which these adjustments apply varies between periods.

Our raw material costs related to NaHS decreased, corresponding to the decrease in the average index price for caustic soda. We were able to realize benefits from operational efficiencies at several of our sour gas processing facilities and our favorable management of the acquisition, including economies of scale and utilization of caustic soda in our and our customers' operations and our logistics management capabilities.

The supply and logistics segment margin increased by $20.1 million, or 127%, between the third-quarter periods. In the 2014 quarter, the increase in our segment margin was a result of contributions from our marine transportation business, including our offshore marine transportation business, which we acquired in August 2013.

Additionally, segment margin increased as a result of increased crude oil marketing and gathering activities and improvement in our refined products business. These improvements included a reduction in volumes in our refined products business as we worked through the dislocations in the prices and margins for the underlying commodities.

We continue to transition our refined products operations to a level and structure designed to operate within current market conditions in terms of cost, size, and type of activity.

Interest costs, corporate, general and administrative expenses, maintenance capital utilized, and income taxes to be paid in cash affect available cash before reserves. Interest costs for the second quarter of 2014 increased by $7.9 million from the second quarter of 2013, primarily as the result of an increase in our average outstanding indebtedness. This increase was net of capitalized interest costs attributable to our growth capital expenditures.

Corporate, general and administrative expenses included in the calculation of available cash before reserves increased $4.7 million, primarily due to higher employee compensation expenses. In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense, which increased $9 million between the quarterly periods, primarily as a result of newly acquired and constructed assets placed in service.

Also in the 2014 quarter, our derivative positions resulted in a $3.5 million non-cash unrealized gain compared to an $800,000 non-cash unrealized gain in the 2013 quarter. The increase in segment margin, as partially offset by the items discussed above, resulted in an increase in net income per common unit of $0.11 between the quarterly periods.

In September 2014, we issued 4,600,000 new common units, resulting in 93,290,985 units outstanding as of September 30, 2014. All of these units are eligible for distributions related to third-quarter operations. Given that our Class 4 waiver units will become convertible into Class A common units on November 14, 2014, we will potentially have 95,028,985 common units outstanding at the end of 2014, assuming all such units are converted and there is no further issuance by the partnership.

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

Thanks, Bob. Our underlying business fundamentals remain solid, and we would expect to realize an increasing contribution from our organic projects as they are brought into service, as well as a full run rate contribution from our recent acquisition. While we continue to address certain challenges in our fuel oil business, our limited exposure to commodity price fluctuation benefits us in this time of market volatility.

And finally, we believe that there are still substantial opportunities arising from the changing fundamentals in North American crude oil production and refining. As a result, we believe we are well positioned to continue to achieve our goals of delivering low double-digit growth in distributions, delivering an increasing coverage ratio, and achieving a better-than-investment-grade leverage ratio, all without ever losing sight of our absolute commitment to safe, responsible, and reliable operations.

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

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

Hey, so I don't know how you would evaluate your own performance reading the script the second time through, but I thought you did a great job reading a second time through.

So glad I was able to listen to this version. So a couple questions. One is on the newly acquired vessel that you did. Just talking about that multiple differential, is that just based on the locked in contract and day rate you've got stepping up in the future, basically?

Yes. There are two existing contracts. One is fixed through its existing term, which should be late August of 2015. And then it goes onto a five-year contract at a substantially higher day rate, which explains the contracted day rate for five years, which explains the change in the run rate multiple.

Got it. Thanks, Grant. And then a follow-up question is on supply and logistics. Just trying to triangulate, I think, everything going on between the marine contributions and the incremental acquisitions, but also the base business on the crude oil refined product side. Grant, in your closing remarks you still said challenges in fuel oil marketing, which I assume is still weighing on refined products a bit.

As crude oil spreads seemed somewhat tighter in the quarter, I know that's not a huge driver for the business, but can you just talk about, I guess, going forward this quarter what the run rate was, what we should be thinking about for future quarters as drivers? And just any one-time items you want to kind of call out that maybe contributed to the improved performance. It's an open-ended question, but a little bit more color.

Yes. I mean I think that while it's not a significant portion, there was, in the third quarter we benefited from kind of a widening of spreads in crude oil. But specifically on the refined product side, as we have said repeatedly, part of the-- we're fundamentally structured to handle a certain volume of bottom ends of the refined barrels. And given what I would call the overall lightening of the typical barrel that there's a better demand-supply balance between the bottoms of soaker feeds or asphalt uses.

And so we don't have the opportunity until the end of this year to access some of our leased storage position at third-party operated terminals. And those costs will continue to weigh on us as we get through the end of this year.

Okay. Great. Thanks, Grant. So it sounds like further improvement potentially to come hopefully.

In 2015 and beyond, yes.

Great. Thanks, guys.

TJ Schultz, RBC

Hey guys, good morning. Grant, I appreciate the comments around kind of the crude price right now. But if you could just expand on how the potential for lower kind of overall US crude production growth would impact potentially your growth trajectory. I mean as you stressed, I agree the Gulf of Mexico production still grows in most scenarios, given the committed projects. And then marine transport does have some demand pull levers. But just if you could specifically talk about crude gathering and kind of your growth in the lower crude production scenario.

Yes, I mean I don't think that, as we've tried to emphasize, we are what I would call, substantially refinery-centric in our logistical capabilities. So we try to, by and large, clip a coupon and provide a logistical service associated with getting the barrel into the refinery. And it doesn't really matter to us whether or not the barrel comes from Canada or West Texas or wherever.

So we think that we are positioned substantially further downstream in the midstream space, a lot closer to the consumers or the crude oil, and not nearly as dependent upon whether or not we test the resiliency of, is $80 Cushing price good to continue the rapid develop of certain shale plays in various parts of the country.

So I think that regardless of what happens to price, that the crack spreads, as we said, is a more relevant factor, because that indicates-- is indicative of what the demand for crude oil, regardless of its source, that refineries want to run and be able to export products.

Okay. Thank you. Just in Louisiana, I understand the volumes ramp through next year. But if you could just frame the picture there a little more, given that some of the assets are in operational service. But what do you have left to do operationally, I guess, to begin that ramp that you pointed out in the second quarter of next year?

A fair amount of it is associated with other facilities, primarily in Canada, that are being constructed that we don't have anything to do with. But they are running a little behind schedule, as they say in Canada. And we anticipate that they will become operational in the first quarter. But our T&D arrangements, if you will, with our anchor shipper don't really kick in until the third quarter of 2015.

Although we have constructed everything, debugged things, so we're still in the middle of constructing. But we want to be fully operational when the volumes that are associated with substantial investments in Canada come on stream later in 2015.

Okay. Just lastly, do have a number in-- I don't know if this is something you've given or if I missed it-- for 2015 growth CapEx?

I don't think that we've put that out.

We have not.

Okay. Thanks, guys.

(Operator Instructions) John Edwards, Credit Suisse

Yes, Hi. Good morning, everybody. And echoing Gabe's comment. I thought your second read-through was excellent.

But anyway--

It was a dress rehearsal, unfortunately.

Yes. But I just wanted to follow up his question. At the end, you were answering about how some of the things that are weighing on your fuel oils business. And just in terms of the magnitude of improvement that you would be expecting I guess when you're exiting some of these agreements that you're referencing, just if you can give us sort of an idea?

John, we really haven't divulged that too much. But we probably have order of magnitude 500,000 barrels of leased storage capacity that is, as a practical matter given our footprint and given our historical relationships and other logistical capabilities, that we're long probably that much third-party storage. Which we can start getting out of at the end of the year. And it, call it $0.50 to $0.60 a shale barrel just on the cost side alone.

You can see that we believe that we can drive some improvement in that business by exiting some of that cost and rightsizing our footprint to the new market realities.

Okay. That's helpful. And then-- and I appreciate your comments on the--in regard to the market volatility in crude, how you're relatively insulated from that, given your sort of more downstream focus. But I'm just wondering. You've done a number of acquisitions in recent years. Can you comment at all about how the price volatility is perhaps affecting the opportunity set on the acquisition side of things?

Well, I would characterize that basically the major acquisitions we've done starting in 2012, which was the Gulf of Mexico. That the rest were kind of on a marine focus basis. And again, I think we view that as-- we made those investments because consistent with our philosophy that everything is in the wrong place, and having the flexibility of getting the right barrel to the right location is a good place to be.

So we are not necessarily looking and active in the M&A space for other things which may become available, because this year is associated with price volatility, [or] begin to suffer as a result of a lower price deck, and therefore a reduction in activity and in announcing things. So those are not things that really interest us.

Okay. That's really helpful. And then just noticed the volumes your NaHS and caustic soda, perhaps a little bit less than what we were looking for. Were there some things that impacted those volumes this quarter? And would it be fair to say going forward, you still expect maybe to ramp up more toward the 40,000 tons range for NaHS. And maybe 24-ish for caustic soda? Maybe you can talk a little bit about kind of the volume dynamics there.

Yes. I think that's absolutely fair to say. And a lot of quarter-to-quarter noise, so to speak, is generally driven by the timing of recognition of sales, primarily to our mining customers in South America. We make large shipments, which are FOB shipments to Peru out of Gulf of Mexico, or out of Houston area loading facilities that may serve the mines, so to speak, for a month or so.

And so that depends, at least in Peru. And in Chile, we actually make-- title doesn't transfer until it's actually offloaded off the ship into tank in Chile, given the particular regulatory regimes in Chile. And then so inventory is in essence transferred over to the mining customers, and they use it for a while.

So I think that we feel that we are solidly at 150,000 to 160,000 ton annualized run rate of sales. It may not all come out in four equal installments. And that we believe, based upon our forward forecast and contracted book of business that we would continue to see growth in that, especially in 2017 and 2018, as additional mining projects come on.

And then what kind of magnitude of growth are you expecting in those volumes?

I think we have a pretty clear line of sight, although there's some risk of the timing of it. But we would think that by 2018, if everything comes together, that we could be closer to the 180,000 ton run rate.

Okay. That's really helpful. Thank you very much. That's all I had.

Cory Garcia, Raymond James

Good morning, fellas. I appreciate the follow-up call and the use of you guys' time. Just turning back to some of your more field-level projects and exposure, recognizing that the optionality that your Pronghorn rail terminal does bring to both the producer and obviously the refinery [gate].

I believe that the original crude oil pipeline you guys were evaluating is still on hold until we get some resolution out of Express. And I guess just first off, just any update there? And as a follow-on, any other potential opportunity that you guys are analyzing up in that base. And it looks to be a nice supply growth area. We've overheard a couple other competing projects in sort of that area. So any way for us to kind of get a little more color on how you aim to sort of better utilize your existing footprint already there?

Yes. Cory, good question. I mean we are obviously very aware of the tremendous drilling activity, which doesn't seem to be slowing down whatsoever up in the Powder River Basin, and specifically in Converse and Campbell Counties, where our existing footprint is.

We're in constant communication with producers as well as refiners of trying to make them (inaudible) with our existing footprint, and evaluating the opportunity for us to provide additional midstream services, whether or not it's additional interconnectivity or additional storage capability, as well as loading out on the Pronghorn system. Again, to get the producers and the refineries matched up to get the right barrels to the right location.

I guess nothing yet on a sort of resolution on the original pipeline plans?

Nothing yet.

Okay. Thanks for your time.

Thank you. At this time, we've reached the end of our question-and-answer session, and I would now like to turn the floor back to Mr. Grant Sims for additional comments.

Again, thanks, everybody, for participating at least once, if not twice, and we will talk to you in the future. Thanks again. Bye-bye.

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