Genesis Energy LP (GEL) 2015 Q2 法說會逐字稿

Welcome to the 2015 second-quarter conference call for Genesis Energy.

Genesis has 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 from 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 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 $68.8 million, providing 1.0 times coverage of the distribution we will pay on August 14th.

Excluding the effects from our 10 million or so common units issued in July of 2015 to fund a portion of our acquisition of the Enterprise offshore pipeline and services business, which will be available for that quarterly distribution. Available cash before reserves would have provided 1.1 times coverage for the quarterly distribution.

That distribution of $0.625 cents per unit represents the 40th consecutive increase in our quarterly distribution, 35 of which have been greater than 10% over the prior year's quarter and none of which have been less than 8.7%.

Last Friday we closed our acquisition of Enterprise's offshore pipeline and services business. These offshore assets substantially enlarge our portfolio strategic infrastructure in the Gulf of Mexico, allowing us to further enhance our support of the world-class oil developments of integrated and large independent energy companies operating in the Deepwater Gulf of Mexico.

We believe the acquisition will be immediately accretive to our cash available for distribution per common unit and will improve our credit metrics over time which should accelerate an increase in our credit ratings in the future.

In addition, we look forward to welcoming to Genesis the world-class team that has been assembled by Enterprise to operate and manage these assets. Since acquiring ownership interest in each of Cameron Highway, Poseidon, and SEKCO, we've been impressed with this group and look forward to a seamless transition for them and the customers we serve.

To finance that acquisition, two weeks ago we sold 10.35 million common units in a public offering that generated net proceeds of approximately $437 million and $750 million aggregate principal amount of 6.75% notes due 2022 that generated net proceeds of approximately $729 million.

We funded the remainder of the purchase price of the offshore acquisition under our senior secured credit facility, which we recently amended to provide for a total of one $1.5 billion or an increase of $500 million of committed borrowing capacity to allow for further funding of working capital requirements, growth, and general partnership needs.

With regards to our other growth initiatives, our second quarter results reflect the continuing contributions from our newest assets, our interest in the SEKCO pipeline and the M/T American Phoenix.

Volume flow in the SEKCO pipeline increased throughout the quarter, though this throughput only had a direct financial benefit to our then existing interest in Poseidon and limited benefit to SEKCO once minimum volumes were achieved and exceeded. And in both cases only through May as a practical matter, because of our treatment of them as equity in earnings.

We anticipate the financial effect of these volumes to positively impact our results in the second half of 2015 to our now 100%-owned SEKCO pipeline, which will be consolidated, and our increased economic interest in Poseidon which we anticipate to continue to be reported as a non-consolidated joint venture.

The M/T American Phoenix which we acquired in November 2014, is now fully integrated into our offshore marine fleet and we are pleased with the results achieved to date from the operations of this vessel. When coupled with the additional inland barges we have added to our marine fleet, we anticipate continued favorable comparisons of operating results from our Marine Transportation segment in the second half of 2015.

We continue to progress on our refinery-centric projects in Louisiana, stretching from Port Hudson through Baton Rouge and south to Raceland, all designed to provide services for multiple refining complexes in Louisiana.

Although a small portion of that infrastructure is in operation, we would not expect to see meaningful volumes until those facilities are completed in the second half of 2015.

Our business strategies that we've previously outlined, coupled with our complementary acquisitions and growth projects that will be ramping up throughout 2015 and into 2016, as well as our recent material acquisition should position us well to continue to achieve our goals of delivering low double-digit growth in distributions and increasing coverage ratio and improving 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 second quarter of 2015, we generated total available cash before reserves of $68.6 (sic - see press release $68.8) million, representing an increase of $13.3 million or 24% over the second quarter of 2014.

Adjusted EBITDA increased $17.1 million over the prior year quarter to $87.3 million, representing 24% year-over-year growth.

Net income for the quarter was $11.7 million or $0.12 per unit, compared to $21.1 million or $0.24 per unit for the same period in 2014.

We recognized a $19.2 million loss in the second quarter in relation to the early retirement of our $350 million, 7.875% senior unsecured notes which we refinanced with a new eight-year tranche at a 6% coupon.

Segment margin from our Onshore Pipeline Transportation segment decreased $2.2 million or 13% during the second-quarter periods. The decrease was primarily the result of a decrease in revenue from pipeline loss allowance volumes, collected and sold, due to the change in the market price of crude oil between the respective periods.

Offshore Pipeline Transportation segment margin increased $13.7 million or 120% during the second-quarter periods. The increase was primarily the result of financial contribution realized from the minimum throughput requirements on our SEKCO pipeline.

Upon completion of the SEKCO pipeline in July 2014, we begin earning certain minimum fees with actual crude deliveries beginning in January 2015.

While throughput has commenced on the SEKCO pipeline, throughput volumes did not exceed a level at which throughput revenues would exceed the monthly minimum payments until May 2014. Until that point, all such throughput benefited our Poseidon pipeline, but did not add additional contribution from SEKCO.

Refinery Services segment margin decreased $1.4 million or 7% between the second quarter periods. NaHS revenues decreased due to a reduction in volumes. The reduction was attributable to the bankruptcy of one mining customer, reduced sales to a major customer as they work through an atypical ore seam as a result of a landslide, and certain sales forgone as a result of supply interruptions at one of our major processing facilities.

We were able to realize benefits from our favorable management of the acquisition and utilization of caustic soda in our operations and from our logistics management capabilities, which somewhat offset the effects own segment margin of the decreased NaHS sales volumes.

Segment margin from our Marine Transportation segment increased $8.2 million or 43% between the second-quarter periods. The increase was primarily attributable to a full quarter of operating results from the M/T American Phoenix which we acquired in November 2014.

The results also benefit from the addition of two additional barges to our inland fleet and higher realized contract rates on several of our oceangoing barges.

Supply and Logistics segment margin decreased by $2.5 million or 17% between the second-quarter periods, primarily due to lower crude oil volumes unloaded at our Natchez terminal and our Port Hudson terminal relative to the 2014 quarter, as we prepare for the increased utilization of different phases of our Baton Rouge facilities.

Interest cost for the second quarter of 2015 increased by $3.8 million from the second quarter of 2014, primarily due to an increase in our average outstanding indebtedness from newly acquired and constructed assets.

Interest cost on an ongoing basis are net of capitalized interest costs attributable to our growth capital expenditures.

In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense which increased $7.7 million between the quarterly periods, primarily as a result of newly acquired and constructed assets placed in service.

Also in the 2015 quarter, our derivative positions resulted in a $200,000 non-cash unrealized gain compared to a $2.7 million non-cash unrealized loss in million dollars non-cash unrealized loss in the 2014 quarter.

As previously discussed, we also recognized a $19.2 million loss in relation to the early retirement of our $350 million 7.875% senior unsecured notes.

The items discussed above, as partially offset by an increase in segment margin, resulted in a decrease in net income per common unit of $0.12 between the quarterly periods.

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

Thanks, Bob. As discussed, our businesses are performing well and we expect them to continue to do so in spite of certain challenges or headwinds that always seem to pop up.

We expect to continue to be well served by our business strategies and being primarily refinery centric in supporting long-lived world-class oil developments of integrated and large independent energy companies.

As always, we would like to recognize the efforts and commitment of all of those with whom we are fortunate enough to work, including our commitment to providing safe, responsible, and reliable services.

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

(Operator Instructions) Brian Zarahn from Barclays.

I guess on the Gulf of Mexico acquisition, you acquired it at a pretty attractive multiple. But we are seeing some lower CapEx budgets even from the majors.

Can you talk a little bit about the downside protection that you have from the acquisition if we do see lower production?

Well, we don't actually anticipate relative to at least the next several years any substantial diminution in any kind of anticipated throughputs through the acquired assets based upon the drilling activity, the development activity that is occurring at both contracted and existing facilities.

So we don't have any concerns from our perspective of seeing any kind of dramatic decrease in volumes over the next three to five years.

I guess looking at the other side of things, if volumes in your base case grow, do you see any opportunities for growth projects or is it more just higher volumes on the base assets?

We see significant opportunities. I think Anadarko mentioned earlier this week that Lucius, which goes into SEKCO, has ramped up and stabilized at design capacity of 80,000 barrels a day, that Heidelberg is on track for first production in second quarter of 2016, which is already contracted about 60% to go to Poseidon and about 40% to go to Cameron Highway.

There's continued activity. They're drilling delineation wells by both Shenandoah and [Yeti], just using them as the most recent because they announced earlier this week.

So the point is is that, similar to SEKCO, the preponderance of new Deepwater developments to access back to the infrastructure to get to shore, which is represented by Poseidon and Cameron Highway, we belief will generate incremental opportunities for us on SEKCO type lateral opportunities on a go-forward basis.

Okay. We'll stay tuned on potential growth projects. Just turning to Marine Transportation, the business is obviously doing well. Can you comment on the re-contracting rates, where they stand relative to a year or so ago?

Kind of the American Phoenix is under, which is our Panamax-class vessel, is under contract which will go on and increased contract basis starting on or about September 1st, under a five-year contract with P66. So we'll have -- that contract rate is higher than what it's currently working for.

We've been re-contracting our oceangoing barges at rates consistent with, if not slightly higher than what they have been historically contracted for.

And on our inland side, again I want to emphasize that our focus is on black oil or heater barges exclusively. We don't move crude oil. We move intermediate refined products between refinery locations and contract with the refiners to provide that transportation service.

And we've seen no step back in pricing for that type of service in the inland barge business.

And last one for me looking at crude by rail. How do you -- what kind of impact are you seeing in terms of barrels reaching the west coast? There's been a lot of delays in unloading facilities. How is that impacting your crude by rail business?

I think it's probably -- we're obviously not involved in any kind of unloading facilities on the west coast. We anticipated it. But a couple of our loading facilities, ultimately the rational destination is the west coast. But the level of activity is consistent with our previous expectations.

But the trains that are getting loaded are not necessarily going to the west coast but going to other locations.

Thanks, Grant.

Schneuer Gershuni from UBS.

I was wondering if I can spend my first question just sort of talking about the transaction from a financing perspective with Enterprise. When I run through the numbers that you presented, it seems that you basically roughly financed the equity component, or rather you equity financed the project by about 30% versus the traditional 50/50.

And so when I sort of look at the deal, seeing that it's extremely accretive, I mean is the plan effectively to balance out the funding gap by using the excess distributable cash flow to effectively bring down the debt? Or is there potential equity overhang as well too, on a go-forward basis?

Our anticipation is that it is so loudly accretive on an EBITDA basis that our coverage ratio will generate significant excess cash while still being able to maintain our historical growth rate in distributions.

And yes, we'd anticipate using that excess cash to repay a portion of the debt and, predominantly, the draws under the revolver to manage our leverage ratios back down to the plus or minus four turns.

Okay. So once you've paid down that debt, kind of as a follow-on, when I think about your distribution growth outlook, you've kind of been pretty firm about where you'd like to be and so forth. But once leverage comes down, your coverage is still going to be relatively high.

If there isn't an organic growth project or an acquisition opportunity, I mean, would stepping up the payout of the distribution be of consideration or even a unit buyback? I mean, obviously this would be absent an organic growth project or acquisition opportunity.

We've been pretty firm in our distribution policy. In fact, we've done it for 10 years at this point. But you're exactly right. I mean, I think that it generates a lot of financial flexibility for us to the extent that, I guess in one sense we view that as providing the equity to do other organic opportunities and provided that we are capable of identifying organic opportunities and/or other acquisitions which makes sense to us. To be able to continue that track record, that's what we'll evaluate.

But, I mean, we feel very good about where we are certainly for the next three to five years in terms of being able to meet our financial goals.

Okay. And then one last final question about the results. I realize you gave Brian quite a bit of detail. But I was wondering if you can explicitly expand on the onshore volumes, kind of the performance year over year and kind of where you expect the trends to be over the next six to nine months and possibly longer if you have that kind of a crystal ball.

We would anticipate primarily growth in the onshore volumes to occur in Louisiana system as our integrated project continues to -- we bring certain parts of it in the full operations and integrated operations.

But as we said in the prepared remarks, kind of said for the last nine months, I guess, it's kind of a complex integrated project. And while parts of it are in startup-type operations, we won't see what we would call meaningful volume growth until everything is kind of completed towards the end of this year and early into -- and ramp up into 2016.

Great. Thank you very much, guys. Appreciate the color.

Justin Jenkins. Please state your company.

This is Justin Jenkins from Raymond James. I guess I just got a really quick follow-up from the previous question on comments on the Onshore Pipe segment and specifically the Louisiana system. And I know you said there's a lot of work going on with the organic project and the reasons.

And I guess I'm just wondering if that was the reason why we saw volumes dip on that system or if it was turnaround related? I guess just looking for a little more color there.

As Bob mentioned in the year-earlier period, we were taking a number of volumes into the same refinery complex, but they were coming in through Natchez and Port Hudson, both. And those [have] -- in this quarter, were less than they were in the year-ago quarter, but as we are transitioning to more ratable higher volumes coming from the integration and completion of everything.

So I wouldn't read anything into it other than we are transitioning and we would anticipate that the period-over-period comps will be favorable in the remaining quarters in 2015, and certainly into 2016.

That's perfect, thanks.

(Operator Instructions) T.J. Schultz from RBC Capital Markets.

Grant, just one thing from me. On the timing of the south Louisiana projects, you guys, when you did the offshore deal kind of indicated fourth quarter EBITDA at somewhere over $140 million.

So I'm just trying to figure out kind of from the south Louisiana footprint, as that ramps in, how much of that is in that fourth-quarter implied run rate. Maybe if you could give an update on the total CapEx that is being allocated to south Louisiana and then how that kind of ramps up over the next, call it six to nine months.

I wouldn't, under certain FD restrictions, I'm not sure that $140 million run rate was necessarily what we would consider to be our expectations for the fourth quarter.

But we are spending in the aggregate about $0.5 billion dollars between in the corridor from Port Hudson down through Raceland, as we have consistently maintained that we believe that once fully operational all the way through, that we are building things that on a base case basis, from our perspective, would generate kind of seven to eight time multiples. And in certain cases, we think that there's a possibility for exceeding that.

I would certainly anticipate that starting in or ramping up and getting into a run rate of that type of thing by the middle of 2016 would not be an unreasonable expectation.

Okay. Thank you.

Dan Schenk from MLV & Company.

Just a couple of quick questions. With the larger footprint with the Enterprise deal, curious about your CapEx. I know you had guided to about $290 million. I know it's a little early in the game to lock down a new number.

But are you guys going to, going forward are you going to be revising that number at all or how are you thinking about that?

Well, again, there's no significant material near-term organic growth identified off of the expanded footprint at this point. So I wouldn't anticipate, in and of itself, further 2015 and possibly even into 2016, although we're always working on stuff, that we would see any significant organic expenditures in the Gulf of Mexico.

Okay. Part of the deal you guys also required an offshore team from Enterprise. And I was kind of curious from a modeling perspective what that does to your G&A expense.

Do you think you kind of stay in that, I think $10 million to $15 million range or do you think that increases significantly?

The team that we're acquiring will, in essence, all be charged, if you will, from a financial reporting point of view, into the Offshore Pipeline segment.

There may be incrementally additional things that we actually account for in the corporate SG&A, whether or not it's incremental in-house legal expense or potentially some accounting things.

But typically, in the kind of the EBITDA guidance that we gave of how we view the acquisition, that is inclusive of the field operations and the management team that we are transitioning over that has historically been reflected in the historical financials of the acquired assets.

Great. Thank you.

Bernie Colson from Oppenheimer.

I was hoping that you could just talk a little bit about Refinery Services, that segment of the business and some about the declines in the quarter.

And then also, are you seeing any opportunities going forward to expand that segment? Or do we think that that's just going to continue to shrink as a percentage of the whole?

Well, it's a two-part question. First is, as Bob mentioned and I think we mentioned in the press release, we discussed that there was a bankruptcy of an independent copper mine in Arizona which represented about 1,500 tons per quarter run rate.

We also, one of our very large customers in the U.S., had a wall collapse at one of their mines. And as a result, they're in an atypical ore body, and their requirements for our products are going to be burdened on a quarter-over-quarter basis. That was close to 2,000 tons. That possibly could last into and to the end of 2016.

And, but otherwise, we haven't seen any significant behavioral modifications from any of our existing customers.

From a longer-term perspective, as we have consistently said, we really can't grow that business any more than the market. Primarily the market for NaHS or caustic soda, we also do in that margin. We can't grow it any faster than our ability to meet those incremental market demands.

So because we are spending money and growing on other things, whether or not it's the onshore pipelines or the offshore pipelines that kind of necessarily is just, arithmetic would say that that will become still a great business and growing to the extent that the markets allow us to grow it. But it will become a smaller percentage contributor to our overall segment margins.

So other than those couple blips in the quarter, there's no real -- no change in your outlook for I guess the demand for the end products, that's a good summary of what you believe?

That's correct.

Okay. Thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Well, thanks everybody very much for joining us this morning. And we will talk to everyone in 90 days or so. Thank you.

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