Genesis Energy LP (GEL) 2015 Q3 法說會逐字稿

Welcome to the 2015 third 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 in 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 direct 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 will 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 $96.3 million, providing 1.37 times coverage of the total distribution we will pay on November 13. That distribution of $0.64 per unit represents the 41st consecutive increase in our quarterly distribution, $0.36 of which have been greater than 10% over the prior year's quarter, and none of which have been less than 8.7%.

We thought this morning rather than summarizing what was in our release, and about which Bob will provide some additional comments later, it might be useful for me to spend some time providing some additional color around our recent transformational transaction. In doing so, I would like to point out that we have no intention of overselling our story. We've never been promoters, and we've avoided pressure from the buy side to hyperbolize our businesses and results. To the contrary we always have and will continue to focus on delivering consistent and improving financial results. That's all that is within our control, and we cannot change nor presumably effect the market's reaction to or perception of those results.

On July 24, we closed the $1.5 billion acquisition of the Gulf of Mexico assets and services from Enterprise. Enterprise has addressed their rationale and reasoning behind their decision to exit the Gulf of Mexico, and I would encourage everyone to analyze and understand what they are said. They are,after all credible, having increased their quarterly distribution 45 consecutive quarters, just printing a 1.3 coverage ratio, and maintaining the internal flexibility to execute on their growth plans in a challenging downcycle, which given the law of big numbers is from my personal perspective, nothing short of Herculean. The question then might be, why was Genesis a natural buyer?

I can think of at least three reasons. Firstly we were already joint venturers in three of the pipeline systems, and for anyone familiar with LLCs or other types of joint venture arrangements, it would not be unusual that existing joint venturers might arguably have certain participation rights and other rights regarding the transfer of interest in the joint venture. Second, because of my personal knowledge and our Company's knowledge of certain of the assets, we were able to move relatively quickly, and be more confident in the soft value issues underlying typical M&A negotiations. Finally, Genesis could do the deal. With that I mean we had access to conventional capital markets. As someone pointed out, as recently as October 9, our units were up 4%, while the AMZ was down 25% year-to-date in 2015. That's a long-winded explanation of why we did it.

So let's focus on how we look at it. In the press release, I made the comment we remain confident in the resiliency of the Deepwater Gulf of Mexico, as a world class basin for the economic and efficient exploitation of known and to be discovered hydrocarbons. Implicit in that statement is we believe in the deepwater, even in the current and lower for longer price environment. Where one should understand the not-so-subtle difference between expensive and capital intensive. We're under confidentiality agreements with virtually every operator and working interest owner in the Deepwater Gulf, and we happen to respect and honor such confidentiality. However we believe it would be reasonable to rely upon the public disclosures of their views derived from their analysis, after all they are the experts in making the decisions of where to deploy their capital.

For example, one might go to an Anadarko's website. Based upon presentations posted October 27, just last week, one might focus on pages 10 through 15 of the Appendix first. Then one might focus on pages 11 through 13 of the operations report. Finally, one might focus on pages 10 and 11 of the investor book, especially page 10 that seems to conclude that the forecasted aggregate production from their operated Lucius, Heidelberg and Caesar/Tonga fields is higher in 2016 than 2015, higher in 2017 than 2016, higher in 2018 than 2017, higher in 2019 than 2018, higher in 2020 than 2019, and finally, 2021 is also higher than 2020.

Additionally wine might consider viewing the earnings and investor protections of BP, Chevron, Shell, BHP, and Hess, amongst others to glean how they view the near intermediate and long-term resiliency of the Deepwater Gulf of Mexico. Especially in terms of how their opportunities in the Deepwater Gulf stack up relative to their other opportunities. As I said earlier, it is not our practice to hyperbolize our views, but rather encourage market participants to formulate their own opinions, based upon their analysis of the best relevant data available in the public domain. Relative to the operational and financial performance of our other segments, we have provided a lot of information in the release regarding their quarterly performance, and Bob will elaborate further in a few minutes. As we mentioned in the press release, we're pleased to announce we have executed long-term agreements with ExxonMobil, supporting the construction of new crude oil infrastructure in the greater Houston area, to support ExxonMobil's Refinery complex in Baytown, the second largest Refinery in North America. We continue to progress to final completion of the infrastructure in and around ExxonMobil's baton Rouge Refinery, the fourth largest refinery in North America, which will facilitate the efficient handling, local consumption, and/or redelivery of crude by rail and crude by pipe, as well as cat cracker and coker feedstocks. We have also entered into agreements with an investment grade producer to support the construction of crude oil infrastructure in and around our existing facilities in Wyoming, a confirmed early stage resource play, where we would rather be the first or second mover rather than the 19th or 20th. The total cost of these new endeavors is approximately $350 million. Some of which has already been expended in the quarter end. We have more than sufficient committed liquidity under our recently upsized revolver to fully execute these projects. The excess coverage currently being generated by our existing operations represents our equity to underpin these new projects.

While our calculated leverage ratio will creep above 5 times over the next three or four quarters, we would expect growth in available cash before reserves to exceed growth and distributions, the difference in which will be used to paid down debt, delever our capital structure, and contribute to achieving our goal of a long-term leverage ratio of plus or minus 3.75 turns.

Our business strategies that we have put together coupled with our complementary acquisitions and growth projects that will be ramping up, confirms the financial contribution throughout the next several years should position us well to continue to achieve our goals, which by the way haven't changed in ten years, of delivering low double-digit growth and distribution and increasing coverage ratio, and ultimately an investment grade 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 third quarter of 2015 we generated total available cash before reserves of $96.3 million, representing an increase of $35.5 million, or 58% over the third quarter of 2014. Adjusted EBITDA increased $45.1 million over the prior year quarter to $126.9 million, representing 55% year-over-year growth. Net income attributable to Genesis for the quarter was $363.2 million, or $3.38 per unit, compared to $29.1 million, or $0.33 per unit for the same period in 2014. We recognized a $335.3 million non-cash gain in the third quarter, resulting from the adjustment to fair value of our historical interest in certain pipelines in the acquisition of the Offshore pipeline and services business of Enterprise Products.

Segment margin from our Onshore Pipeline Transportation segment decreased $400,000, or 2% between the third quarter periods. The decrease was primarily the result of an almost $1.2 million 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. As well as an approximate $800,000 charge relating to a measurement imbalance. These items were partially offset by an increase in tariff revenues mainly on our Texas and Louisiana Pipeline Systems. Offshore Pipeline Transportation segment margin increased $49.3 million, or 227% between the third quarter periods. The increase was primarily the result of the Enterprise acquisition. As a result of this acquisition, we obtained approximately 2,350 miles of additional offshore natural gas and crude oil pipelines, including increasing our ownership interest in each of the Poseidon, SEKCO and CHOPS Pipelines.

Refinery services segment margin decreased $1.2 million, or 5% between the third quarter periods. That decrease primarily resulted from lower total volumes than the 2014 quarter. The decline was attributable to the bankruptcy of one mining customer and reduced sales to a major customer, as they worked through an atypical ore scene as a result of the landslide, coupled with increased prior year volumes generated from heavy turnaround schedules at certain customers. We were able to realize benefits from our favorable management of the purchasing, including economies of scale and utilization of caustic soda, and our logistics management capabilities, which somewhat offset the effects on segment margin of decreased NaHS sales volumes.

Segment margin from our Marine Transportation segment increased $4.5 million, or 20% between the third quarter periods. The increase was primarily attributable to a full quarter of operating results of the MT American Phoenix, which we acquired in November 2014. The American Phoenix transitioned to a five-year contract with Phillips66 at the end of the quarter. Our fleet of inland barges, all but four of which employ internal heaters, is among the largest and youngest fleets of that particular type of tank barge on the inland waterways. These barges continue to experience a high utilization rate, as they work almost exclusively, directly for refiners, moving hot intermediate refined products from one refinery location to another. The results also benefit from higher realized contract rates on several of our ocean-going barges. We expect, however, to experience a drag of perhaps as much as $2 million of margin in the fourth quarter, because two units will undergo scheduled regulatory dry dockings, and perhaps as much as $3 million of margin in the first quarter of 2016 because three other unit also undergo scheduled regulatory dry dockings during the quarter. After this relatively bunched schedule, we're working to prospectively smooth the required out of service times for our fleet of nine offshore units.

Supplying our logistics segment margin decreased by $6.3 million, or 46% between the third quarter periods, primarily due to lower crude oil volumes. These lower volumes represented the biggest challenge that we faced as a result of the current operating environment. In our historical back-to-back or buy-sell crude oil marketing business, associated with aggregating and trucking crude oil from producers, leases to local or regional resale points, we find it difficult to compete with certain persons in the market who are willing to lose money on such local gathering, because they're attempting to minimize their losses from minimum volume or take or pay commitments that they previously made, in anticipation of new production that has not yet come online. These conditions could last for some time. We will closely monitor developments and seek to redeploy our trucking assets and endeavors to areas not operating under such distorted conditions. We also incurred a $600,000 charge to exit certain third party tanks, which we no longer needed to support our right-sized heavy fuel oil business. These decreases were somewhat offset by an increase in rail volumes at our Scenic Station rail terminal. Interest costs for the third quarter of 2015 increased by $9.2 million from the third quarter of 2014, primarily due to an increase in our average outstanding indebtedness from newly acquired and constructed assets. Principally related to additional debt outstanding, as a result of financing our offshore pipeline acquisition.

Interest costs on an ongoing basis or 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 a $335.3 million non-cash gain in relation to the effects of the remeasurement to fair value of our preacquisition historical interest in certain pipelines involved in our offshore acquisition, based upon accounting guidance involving step acquisitions. Depreciation and amortization expense increased $16 million between the quarterly periods, primarily as a result of newly acquired and constructed assets placed into service. Also in the 2015 quarter, our derivative positions resulted in a $1.2 million non-cash unrealized gain compared to a $3.5 million non-cash unrealized gain in the 2014 quarter. Grant will now provide some concluding remarks to our prepared comments.

Thanks Bob. As discussed, our businesses are performing well, and we would expect them to continue to do so in spite of challenges or headwinds that always seem to pop up. We expect to continue to be well-served by our business strategies, including being primarily refinery-centric. After all the only consumer of crude oil is a refinery, and supporting long lived world class oil developments of integrated and large independent predominantly investment grade 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 to the moderator for any questions.

(Operator Instructions).

Your first question comes from the line of T.J. Schultz from RBC Capital. Your line is open.

Hey Grant, I guess just first when you announced the Gulf of Mexico acquisition, you provided disclosure to get to I think $140 million in EBITDA for the fourth quarter of this year, so that implies some ramps sequentially. My question is just really how much benefit did we see in the third quarter from the south Louisiana footprint?I think in the past you've said that you will have invested up to $500 million in this area, and I know those assets are currently ramping, so just looking for any color you can provide on return expectations for those assets in this market, as you support Baton Rouge, and how we should be thinking about utilization ramping?

Well, first of all, the $500 million in south Louisiana is a combination of both what we're doing in and around Baton Rouge, as well as Raceland. We're not fully operational. We have nothing going, we're not anywhere close to operations at Raceland at this point. That's going to be a first quarter event. We are seeing ramping volumes in Baton Rouge as we said, and in the introduction or the prepared comments from our perspective, in the aggregate, we continue to believe and you would characterize the question even in this market, that we would achieve an at least a high single-digit return on those, sorry, multiple realized on those investments, and we believe that we can drive the efficiencies to turn it into mid single digit.

Okay. But safe to say then, that a little of that is currently reflected in what's been reported in the third quarter, so the ramp should still be expected over the next couple of quarters as some of these things come online, is that right?

That is correct. And I would also point out that we only recognize I think 69 days of the ownership of the Enterprise assets in the third quarter.

Okay. Understood. I guess just moving over to some of the new projects that I announced, if you could provide a little bit more color on the process to get that business supporting Exxon Baytown. What role did your role in Baton Rouge have translating over into the Houston market, and if you could just provide any more granularity on the infrastructure needs in the Houston area that you will be focused on, and if there's more to do potentially than what you've announced here today?

I think that we have established a very good working relationship with ExxonMobil, based upon our performance and commitment to providing safe and responsible operations, and reliable operations and infrastructure in and around the Baton Rouge complex. What we're doing is facilitating the opportunity for Baytown to have more direct access to some medium sour crudes, predominantly coming from the off-shore Gulf of Mexico which are ideal in terms of their crude slate to run there, so it's a combination of interconnecting with a couple of offshore Pipeline Systems, including Cameron Highway and HOOPS to directly access, path those volumes into the infrastructure at Webster, utilizing some of our existing facilities, and repurposing some of our existing facilities to make them bidirectional in the Texas City area, as well as the construction of up to 1.2 million barrels of additional storage, above ground storage to facilitate that business.

Okay, great. Just last question. I guess really focused on debt leverage. You talk about naturally deleveraging over time which makes sense. You've grown distributions, 10% to 11% for some time. Do you still expect to maintain this growth rate while you're in deleveraging mode, or is there any more focus on coverage and debt leverage, given some of the current market dynamics?

Well, it's not our practice to give a whole lot of forward guidance, but I would say that we prepared our remarks to reflect that the increase in available cash before reserves will outpace the increase in the distribution rate, and that our financial goals which haven't changed in ten years would stay the same.

Perfect. Fair enough. Thanks Grant.

Your next question comes from the line of Gabe Moreen from Bank of America, your line is open.

Grant I appreciate the comments and some of the restraint you also exercised in making those comments. A couple of questions from me. One is in terms of the new projects that got announced, can you talk about the take or pay element associated with both projects?

I would say that in and around the greater Houston area, that is take or pay which is consistent with our experience in the Baton Rouge area, we would expect actual utilization to exceed the take or pay levels, in the Wyoming situation that's more of what I would characterize as a lease dedication, an acreage dedication for the largest operator working in Converse and Campbell counties in Wyoming.

Thanks Grant. And then follow-up question from me on Supply and Logistics. You talk about sequential intention improvement in that segment, and I think you also expanded a little bit more on your comments in the press release in terms of some of the take or pay commitments in the industry impacting that business. Is that just a question of production inclining again at some point and filling up that capacity, or is there anything else you see in that business which could improve the near to medium-term outlook?

We described it as it could last for quite some time. We're not the shipper of record on any of the take or pays. It's not necessarily irrational behavior for people that have take or pays to be doing what they're doing, but I would think that we would hope to as we said, we're evaluating redeploying assets where we're not in such a distorted market situation, so we would anticipate sequential growth, included larger realization from the ramping volumes in Baton Rouge, which a portion of which is also included in Supply and Logistics. I think relative to how things get solved, or market returns to normal or whatever, I'm not sure that, again we don't know how long it's going to last. We don't know whether or not it's just a matter of putting massive amounts of rigs back to work and certain things, but certain places where we have had historical operations, I think it's in terms of we've been doing had for years and years and years, of gathering, using our trucks and the conventional buy/sell for local gatherings, so to speak, and we think that they could be challenged for some period of time.

Thanks Grant.

Your next question comes from the line of John Edwards from Credit Suisse. Your line is open.

Yes, good morning and congratulations on another nice quarter. Grant, could you just, or maybe it's a question for Bob, but just in terms of the take or pay distortion this quarter, could you quantify approximately how much you think it's impacting you, and maybe how much when you say it could be for some time, how much you think it might be impacting you in terms of rough EBITDA?

I mean we don't, and have not historically reported sub segments, if you will, in Supply and Logistics. I would also say that given that we have a lease model on our trucking assets, and a lease model on our rail cars which we have, so we recognize the economic cost of that in the quarter in which it's incurred, that the volume degradation is kind of doubled. Not only are we not making any money, but we still have the cost associated with that infrastructure. In round terms, and I don't think it's material or significant, but I would say that in the third quarter, we probably experienced order of magnitude $3 million to $4 million degradation in what we would perceive to be our historical run rate, of our lease purchasing business.

Okay, thanks for that. And then you indicated that on your barge business it's running at a high utilization level. I was just wondering if you could maybe quantify that?I mean is it running at full capacitydo you think at this point?

I think we provided the operating statistics that our inland fleet for the quarter was 97.6%, and our coast-wise or offshore fleet was at 99.9%. We don't have any clean barges in our fleet, as we pointed out in the press release. Safely responsibly and legally, we could only move crude oil in 18 of our existing inland barges if we wanted to, and we don't understand why we would want to use a Ferrari for a Kia application.

Okay, thank you. And then just on the new project ramp up, you get the layout that I think the lot of these projects are going to go into service mid-2016, and then start to contribute late next year, accelerate in the 2017, and so if you can give us just a little bit more detail, on sort of that rate of contribution would be helpful? And then in terms of the rate of spend, should we be thinking about roughly equally over the next few quarters, or is there a little bit of a skewed timing on that?

I think probably the heaviest quarterly spends would be the first two quarters in 2016. Again we don't necessarily give forward guidance, although once ramped up and at kind of what we perceive to be fully operational run rates, we would expect to be in the high-single digits at a minimum-type of multiple.

And that would be at a minimum?

That is correct.

Okay. All right, fair enough. Thank you very much.

(Operator Instructions). Your next question comes from the line of Jeff Birnbaum from Wunderlich. Your line is open.

Morning, guys. Most of my questions have already been answered. Maybe just a couple of quick ones. It sounds like the producer at Halleberg has moved forward perhaps some of their expectations for first oil there. I know you've got some take or pays there. Should that have any kind of impact on cash flow for you in 2016 do you think?

I think that based upon my understanding of the data which has been released by Anadarko, that first oil will be coincident or maybe slightly in front of, but no more than 30 days of when our take or pay would have started anyway. The distinction being that obviously Lucius take or pays started on July 1, 2014, even though first oil was not achieved until January of 2015.

Okay. So largely neutral?

Correct.

Thanks. And Bob, you mentioned a little earlier in response to T.J.'s question, can you give a little additional color on obviously it's nice in this market that you can use excess cash flow to fund growth projects without hitting the capital markets. I guess kind of how long would you be sort of comfortable at a 5 times leverage ratio?I know you said in the release you said it could be about a year that you could be around there, and then any sort of timeline that you think you can get leverage back down to about 3.75 or 4 times?

We would think that it's probably a two-year process of ramping up. I mean we don't have any GP support, we don't have any other balance sheet under which we can finance our growth, so we're doing it on our own. Our numerator is going up, if you will, in our leverage ratio because we're expending capital on what we perceive to be well analyzed organic opportunities, which will create value for everybody in the capital structure for many years to come. Given the little bit of the choppiness image, and especially for the retail investor in the MLP space, we think that it's a natural progression that we are a little old fashioned. We used the revolver and increased draws under the revolver during construction, and then we can put the long-term capital underneath it, but we really don't believe that we need any long-term capital, because we have the excess coverage which is the equity, and we'll pay down the outstandings under the revolver as we continue to generate an increasing amount of cash flow, or available cash before distributions in excess of increasing those distributions.

Okay, great. And last one for me. Just curious if you've seen broadly speaking any kind of changes in refiner behavior, or thinking about operating rates going forward, kind of starting to come out of turnaround season a bit, but product inventories are also starting to grow, just wondering if you guys are hearing anything from your customers there?

I would say that it's a fairly robust turnaround season, but we continue to believe that while we may not see the same refinery utilizations that we have seen in the several, last several quarters that US Refineries, and primarily the ones that we deal with in past three years are among the most efficient in the world, and we would anticipate that they would continue to operate at historically relatively high rates of utilization. If they quit that, then there's going to be additional pressure on the price of crude because as I said, they're the only consumer of crude oil. Crude oil has no value to anyone, until it is refined into products that have a multitude of consumers.

Right. Okay. Thanks so much for all of the color today, guys.

Thank you.

Your next question comes from the line of Nathan Judge from Janney. Your line is open.

Thank you. Just had a question on the timing of the capital expenditures. You say you've already spent some of it already. Could you just give us some idea of what the schedule would be, as far as outlines?

I don't know that we have all of that in front of us, or that we would normally course of business divulge it, although I did say earlier that the majority of the $350 million will likely be spent in the first and second quarters at 2016.

Okay. Can I get an idea of what it is in?

We haven't broken that out at this time.

okay. Just on a separate topic. I think there have been some comments by rails talked about lowering their rates in order to, I guess as far as a response to the increased competitive pressure, you're getting volumes. What are you seeing out there, and how does relate to any risk to barge rates, et cetera?

Barge rates?

Or the Supply and Logistics?

Nathan, I'm sorry, are you speaking to the marine business or which segment of our business?

Kind of the supply logistics as well as the marine business?

Okay. And I didn't hear the first part of the question, I'm sorry, Nathan.

So we're hearing that rails are in response to some of the trying to get access to volumes, are lowering their rates for shipping?

Did you say rails?

Yes.

Railroads?

That's right.

Okay. I'm sorry. Well, I think that there's somewhat of a misnomer of reading in the press that it costs $17 or something to move buyer rail from point A to point B. That might be what's being charged, but I don't know that that's necessarily a cost to the railroads. I do think that there's tremendous amount of flexibility, the marginal cost in my opinion would be extremely low, and to the extent that the railroads are interested in increasing business or maintaining business, I think in the markets they would logically have a fair amount of ability to respond to market conditions, subject to surface transportation board regulatory oversight, as well as kind of competitive dynamics with the other products which they move across their fixed assets.

But then your question then was, does that translate into the marine area, Nathan, and for our marine operations, we don't see that translating into that market.

And what is it that would cause you not to be concerned specifically?

Well, as we mentioned, we're transporting the hot intermediary products for refineries, and that's a fairly established marine-based business that we're participating in and require heated transportation for that.

And has no competitive dynamics with crude by rail.

Great. Thank you very much.

There are no further questions at this time. Mr. Grant Sims, I turn the call back over to you.

Okay. Well thank everybody very much for joining us, and we'll speak again in about 90 days or so. Thank you.

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