Genesis Energy LP (GEL) 2014 Q4 法說會逐字稿

Genesis, you may begin.

Welcome to the 2014 fourth-quarter conference call for Genesis Energy. Beginning with this quarter, Genesis will report its results in five business segments. The Onshore Pipeline Transportation Division is principally engaged in the pipeline transportation of crude oil. The Offshore Pipeline Transportation Division is engaged in providing the critical infrastructure to move oil produced from the long-lived world-class reservoirs in the deepwater Gulf of Mexico to onshore refining centers. The Refinery Services Division primarily processes sour gas streams to remove sulfur at refining operations. The Marine Transportation Division is engaged in the maritime transportation of primarily refined petroleum products. The Supply and Logistics Division is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. 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 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 $62.9 million, providing 1.11 times coverage of the distribution we paid on February 13. That distribution of $0.595 per unit represents the 38th consecutive increase in our quarterly distribution, 33 of which have been greater than 10% over the prior year's quarter and none of which has been less than 8.7%.

Our fourth quarter of 2014 results included nonrecurring charges related to our decision to exit certain third-party terminal facilities historically leased by us to support our heavy fuel oil business, including nonrecurring costs of approximately $5 million. Our results also include the effects of the change in our unit price on our equity-based compensation plan expense included in available cash before reserves, which had a positive impact of approximately $3.5 million.

Pro forma available cash before reserves, excluding the effects of these items, would have been $64.4 million. Excluding the effects of these items, as well as the effects of the approximately $1.75 million class 4 waiver units that were converted to common units during the fourth quarter of 2014, our pro forma coverage ratio would have been 1.16 for the fourth quarter of 2014.

Oil prices have obviously declined. They can potentially go lower and are likely to remain low, relative to recent memory, for some time. In general, our operations are not directly sensitive to the price of oil. We are much less merchantty, if there is such a word, than we think most people believe. In certain instances, the demand for some our services we can provide can be affected by certain location spreads, but the overall performance of our business is not significantly -- much less materially -- affected by absolute price levels nor geographic spreads.

Going through our now-expanded segments, as we said in the press release, refineries -- not producers -- are the shipper of more than 85% of the volumes moved on our onshore crude-oil pipeline systems. We also have two CO2 pipelines that are used to support the operations of a particular producer customer. We have no reason to believe these CO2 pipelines will not continue to financially perform consistent with past experience.

Moving to the offshore, as we pointed out, we have seen no decline in activity in the deepwater Gulf of Mexico. To the extent the mobile offshore drilling units, or MODUs, under contract in the Gulf are engaged in drilling development wells to be produced through existing or soon-to-be installed production facilities, we can think of no reason why the pace of development drilling would slow down.

To the extent the MODUs are drilling exploratory or delineation wells, whatever is found today and sanctioned for development, we would not expect to see first oil before 2019, no matter what. Therefore, the low price environment, which could last awhile and to which service companies will undoubtedly have to adapt, we believe should have no significant effect on our expectations for increasing throughputs on our offshore pipelines over a four- to five-year horizon.

Regarding our refinery services segment -- even with the decline in copper prices from $3 to $3.10 a pound several months ago to around $2.60 a pound today -- we anticipate no significant change in behavior of our NaHS customers, as evidenced, for example, by Freeport-McMoRan's discussion when they announced their 2014 results a couple of weeks ago that their average production cost is running around $1.60 a pound and their forecast is to actually increase total copper production by 8% in 2015 over 2014.

We would expect 2015 demand for our NaHS will be consistent with 2014, and possibly higher, even though we have identified approximately 6,000 dry standard tons of market that might not be there in 2015 -- one as a result of the bankruptcy of an independent copper mine in Arizona, which, by the way, we would expect to be restructured and reopened sometime in 2015, as well as a decision to shut down a molybdenum circuit at one of our large customers' facilities, also in Arizona. In one sense, given lower oil prices in essence being good for the consumer, one could argue that it would actually benefit overall economic activity and, therefore, copper demand, ultimately and consequently, NaHS demand.

As we said in the press release, over 90% of our inland barges are contracted directly with refineries, with the others generally contracted with marketers and/or traders. Only 4 of our 62 inland barges move crude oil -- not for us as merchant, but for third parties under contract through 2015. We use, from time to time, maybe four barges to support our fuel oil business, which we'll discuss in greater detail.

None of our nine ocean-going barges are used by us for any type of merchant activity -- three are in clean service in the northeast working for refiners; one is in clean service in the Caribbean; three are used in crude service in the Gulf of Mexico -- all under contracts with third parties. Interestingly, two are used by a major producer to support its deepwater Gulf of Mexico well-testing program. The M/T American Phoenix is currently in clean service in the Gulf of Mexico and under contract through August of 2020.

In supply and logistics, we have been and are continuing to address the challenges in our fuel oil business. We continue to expand our crude volumes in which we market back to back and do not, quote unquote, trade. We would anticipate rail volumes to increase as our major projects in Louisiana are completed in the third quarter of this year.

As we are now about halfway through the first quarter of 2015, we know we have some headwinds that we would like to make everyone aware of. First, there's only 90 days instead of 92 days, which will negatively affect our first quarter by about $2.5 million. Second, we have two OGBs, or ocean-going barges, that have mandatory dry dockings this quarter, versus none in 4Q, which will negatively affect our first quarter by $1.6 million to $1.8 million, partially offset by having the M/T American Phoenix for a full quarter.

As we pointed out in the press release, for every dollar our unit price is greater than $42.50 at the end of the quarter, we will accrue an additional $375,000 of compensation expense. Finally, we believe the charge we took to rightsize our fuel oil business is sufficient to not have it be a drag on earnings in prospective periods. There can be no assurances, but we are working hard to adjust to new market realities.

Before I turn it over to Bob to discuss our reported financial results in greater detail, I would just summarize that, in spite of the lower commodity price environment, in spite of the headwinds discussed above for the first quarter, our businesses are performing well. We are being well served by our business strategies, including being primarily refinery centric and supporting long-lived world-class oil developments of integrated and large independent energy companies operating in the deep waters of the Gulf of Mexico.

Our business strategies, coupled with our complementary acquisitions and growth projects that we'll be ramping up later this year, should position us well to continue achieving our goals of delivering low double-digit growth and distributions, and increasing coverage ratio and a conservative leverage ratio, all without ever losing our cultural focus on providing safe, responsible, and reliable services.

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

Thank you, Grant. In the fourth quarter of 2014, we generated total available cash before reserves of $62.9 million, representing an increase of $14.5 million, or 30% over the fourth quarter of 2013. Adjusted EBITDA increased $20.5 million over the prior-year quarter to $82.5 million, representing 33.1% year-over-year growth.

Income from continuing operations for the quarter was $26.2 million, or $0.28 per unit, compared to $16.7 million, or $0.19 per unit, for the same period in 2013. Beginning with the fourth quarter of 2014, we will be reporting our results on a comparative basis in five business segments. Our previously reported pipeline segment will be reported in two segments, one containing the results of our onshore pipelines and the other containing the results of our offshore pipelines. Additionally, due to the growth of our marine business, we will report those results separately from the remaining businesses in our supply and logistics segment.

Segment margin from our onshore pipeline transportation segment increased $300,000, or 2% between the fourth-quarter periods. The increase was primarily the result of the addition of the Louisiana pipeline system during 2014. Offshore pipeline transportation segment margin increased $12.1 million, or 92%, between the fourth-quarter periods. The increase was primarily the result of the financial contribution of the minimum throughput requirements on our SEKCO pipeline, which was completed in July 2014. Upon completion of the SEKCO pipeline, we began earning certain minimum fees, despite no crude-oil throughput until the first quarter of 2015. All of the throughput volumes will benefit our Poseidon pipeline, but not additional contribution from SEKCO unless and until -- but will not add additional contribution from SEKCO unless and until throughput exceeds the minimums in our contracts.

Refinery services segment margin increased $1 million, or 5%, between the fourth-quarter periods, despite a decrease in NaHS sales volumes. The average index prices for caustic soda, which is a component of our sales price, increased between the fourth-quarter periods. 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. The mix of NaHS sales volumes to which these adjustments apply varies between periods. Our raw material costs related to NaHS decreased as we were able to realize benefits from: operating efficiencies at several of our sour-gas processing facilities; our favorable management of the acquisition, including economies of scale and utilization of caustic soda in our operations; and our logistics management capabilities.

Segment margin from our marine transportation segment increased $6.9 million, or 39%, between the fourth-quarter periods. The increase was primarily attributable to the operations of our now fully integrated offshore marine transportation business and the addition of the M/T American Phoenix to our marine fleet during the fourth quarter of 2014.

Supply and logistic segment margin decreased by $800,000, or 10%, between the fourth-quarter periods, primarily due to the $5 million in charges related to our planned exit of certain terminal facilities and including nonrecurring excess storage and tank-cleaning cost. 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 fourth quarter of 2014 increased by $7 million from the fourth quarter of 2013, primarily due to an increase in our average outstanding indebtedness from newly acquired and constructed assets. Interest costs on an ongoing basis are 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 decreased by $1.1 million, primarily due to a decrease in our equity-based compensation expense resulting from a decrease in our unit price. In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense, which increased $8 million between the quarterly periods, primarily as a result of newly acquired and constructed assets placed into service.

Also in the 2014 quarter, our derivative positions resulted in a $16.4-million non-cash unrealized gain compared to a $4 million non-cash unrealized loss in the 2013 quarter. The increase in segment margin is partially offset by the items discussed above, resulted in an increase in income from continuing operations per common unit of $0.09 between the quarterly periods.

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

Thanks, Bob. As discussed, even in the lower pricing environment and in spite of the headwinds which are limited to the first quarter, our businesses are performing well, and we expect them to continue to do so. We expect to continue to be well served by our business strategies, including being primarily refinery centric in supporting long-lived world-class oil developments of integrated and large independent energy companies.

I recall our fourth quarter of 2008 conference call. Those were scary times. The world was on the brink of financial collapse and going through a physical de-inventory. No one knew if the sun was going to come up tomorrow. We were all talking about the new normal. Our unit price then was $9.50. Since then, we have paid over $10.50 in cumulative distributions, increasing our quarterly distribution before, during, and after that real crisis each and every quarter, never pausing.

These are not scary times like then. We continue to believe our businesses, coupled with our complementary acquisitions and expected volume ramp from our ongoing suite of organic projects to become operational this year, should position us well to continue to achieve our financial goals. As always, we would like to recognize the efforts and commitment of all of those with whom we are fortunate enough to work, including their commitment to providing safe, responsible, and reliable services.

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

(Operator Instructions)

Cory Garcia with Raymond James.

Thanks, good morning, fellows. I appreciate all the commentary around the misperception, if you will, around sort of the merchant business. One quick question, I guess drilling down a little bit on your Walnut Hill facility, that one seems to be a little bit more unique, where you guys are positioned, not necessarily competing with pipes, where I think a lot of people are fearing that, but have you guys seen much of an impact, given what we've seen in today's crude environment on shipments into that facility? And how should we view that under a new, call it $50, $60 oil price environment?

We have seen, at Walnut Hill in particular, lower year-over-year volumes than we experienced a year ago, obviously. It's not material by any stretch, but it is, again, designed to accept rail barrels going into a refinery, which currently the primarily customer currently gets over three-quarters of its total crude off of water-borne imports.

Right.

And we have subsequently, also through some interconnectivity with a third party, now have the ability to offer the same rail unloading facilities to another larger 300,000 plus barrel a day refinery. And we are working to work out the logistical and contractual arrangements to hopefully increase the throughput through that facility.

Okay. So, it sounds like the optional is actually even improving in that facility right now?

Correct.

Okay, that's helpful. Kind of switching focus onto the offshore marine market, clearly a very nice acquisition with American Phoenix. Should we view -- or I guess how do you guys view the growth opportunity set in that market? Is it more of an opportunistic one-off transaction? Or is there more push that we should see from you guys over the next, call it, several quarter?

We felt that the M/T American Phoenix was, in essence, a one-off opportunity for us. We were very familiar with the contract, the counter parties providing both the inland marine services for them previously. And so we felt very comfortable with it. We do think that the name of the game continues to be of getting the right barrel to the right location. And while we would evaluate expanding that asset class, it's not something that we're necessarily singularly focused on. But to the extent that we believe that we can acquire other assets similar to it, at the right price and with the right contracted value proposition, it's something that we would consider.

That makes sense. Thanks for the color, guys.

(Operator instructions).

There are no further questions at this time. I will turn the call back over to Mr. Sims for closing remarks.

Thank you very much. Hopefully we didn't have any technical difficulties on this one, as we did on the last quarter call. But we'll talk to you in another three months or so, if not sooner. Thank you.

This concludes today's conference call. You may now disconnect.