Genesis Energy LP (GEL) 2016 Q2 法說會逐字稿

Welcome to the 2016 second-quarter conference call for Genesis Energy. Genesis has five business segments. 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 onshore pipeline transportation division is principally engaged in the pipeline transportation of crude oil. 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 energy 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, L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer, and Karen Pape, Chief Accounting Officer.

Good afternoon, and welcome to everyone. Our diversified yet increasingly integrated businesses continue to perform in the second quarter within an acceptable range, in spite of the ongoing dislocations in the energy sector, uncertainties in capital markets in the midstream space, and specific challenges at the margin, on certain of our operations.

Even if this challenging backdrop continues in future quarters, we would expect to see sequentially higher net income and available cash before reserves, due to a variety of factors, including increasing volumes out of the deepwater Gulf of Mexico, the end of certain refinery turnarounds, and the initiation of service, and the anticipated ramp up of volumes between now and the end of 2017, from some of our recent organic projects. In the aggregate, we believe our commercial operations are relatively stable in this challenging environment, and we believe we have a reasonably clear line of sight, of volume growth over the next four to six quarters. As a result, we feel comfortable that our financial results, and condition will continue to strengthen in future periods.

Our primary objective has always been to deliver the best value to our unitholders, while never wavering from our commitment to safe and responsible operations. Obviously, a lot has changed, we recognize, and how the market apparently values unit prices for MLPs, or other midstream entities over the last 1.5 year to 2 years. Although the move to eliminate our IDRs almost six years ago, and continued to deliver double-digit growth in distributions on a year-over-year basis were rewarded historically, we believe the metrics demanded by the markets have changed during these recent tumultuous times.

We now believe the best way to promote unit price appreciation under current conditions is to exercise strong financial discipline, designed primarily to maintain and enhance our financial flexibility across the business cycle. Although we believe we would otherwise naturally restore our financial flexibility with cash flows from operations, we felt we could accelerate that process, by issuing additional equity, lowering the future growth rate of the quarterly distributions, or pursuing a combination of the two.

Consequently, on July 27, we closed a public offering of 8 million common units, generating net proceeds to the Partnership of approximately $298 million. As a practical matter, we would have issued such additional equity a year ago at the time of closing the Enterprise acquisition, had markets been stronger at that point. This 2016 equity raise instantly improved our liquidity and credit metrics.

We believe our increased liquidity, and even stronger balance sheet resulting from such actions, should combine to give us the flexibility to continue to pursue acquisitions, and/or organic projects that we feel are consistent with delivering long-term value to all our stakeholders. We also believe that our improved credit profile will significantly lower the future costs of refinancing our public debt, when such issued tranches become due, beginning in 2021, are callable beginning in 2017.

With that, I'll turn it over to Bob to discuss our operating results in more detail.

Thank you, Grant. In the second quarter of 2016, we generated total available cash before reserves of $96 million, representing an increase of $27.2 million or 40% over the second quarter of 2015. Adjusted EBITDA increased $46.2 million over the prior-year quarter to $133.5 million, representing a 53% year-over-year growth. Net income attributable to Genesis for the quarter was $23.7 million or $0.22 per unit, compared to $11.7 million or $0.12 per unit for the same period in 2015.

Segment margin from our offshore pipeline transportation segment increased $59.2 million or 236% between the second-quarter periods. This increase is primarily due to our acquisition of the offshore pipeline business of Enterprise which closed in July 2015. As a result of our Enterprise 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, and six offshore hub platforms. The operating results of that business continue to exceed our expectations, with sequential increases in volumes compared to the first quarter of 2016, in the most significant offshore crude oil pipelines in which we acquired, as well as those in which we previously owned in interest.

Onshore pipeline transportation segment margin decreased $2.3 million or 16% between the second-quarter periods. Volumes decreased on our Texas pipeline system, particularly delivery volumes to the Texas City refining market. Such lower volumes on our Texas system to historical customers will likely continue in future periods, as we complete the repurposing of our Houston area crude oil pipeline and terminal infrastructure.

This includes making the necessary upgrades on our existing 18-inch Webster-to-Texas City pipeline, to allow for northerly flow of crude oil. We anticipate this repurposing, as well as the other components of our Houston area crude oil pipeline and terminal infrastructure project to be completed prior to the end of 2016.

Additionally, margin was negatively affected by lowered levels of tertiary crude oil activities in Mississippi.

Volumes on our Louisiana system were sequentially down, primarily as a result of a protracted turnaround at our primary customer's refining complex. We anticipate volumes on our Louisiana system to ramp back up starting in the third quarter, upon the completion of this turnaround.

Refinery services segment margin for the 2016 quarter decreased $400,000 or 2%. This decrease was primarily the result of a decrease in NaHS sales volumes, due to lower demand from pulp-and-paper customers, during the scheduled downtime these customers typically exhibit in the spring, compared to the 2015 quarter. We were able to realize benefits from our favorable management of the purchasing, including the economies of scale, and utilization of caustic soda in our operations, 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 decreased $9.1 million or 34% between the second-quarter periods. This decrease in segment margin in the 2016 quarter is primarily due to [present] rates and utilization of our blue water offshore barges. The impacts of the negative factors and pressures on our offshore barge performance which we have previously discussed, have been consistent with our expectations with regards to both timing and scale. Additionally, we face certain challenges on utilization and rates for our inland barges, in large part attributable to fewer long voyages from the Midwest to the Gulf Coast than we have historically experienced. We believe these conditions may be reflective of certain aspects of the changing dynamics in refining operations, which we must continue to monitor in future periods.

Supply and logistic segment margin decreased by $3.5 million or 30% between the second-quarter periods. In the 2016 quarter as compared to the 2015 quarter, the decrease in our segment margin is primarily due to lower demand for our services, in our historical back-to-back or buy/sell crude oil marketing business associating with aggregating and trucking crude oil from producer's leases to local or regional re-sale points.

We have found it difficult to compete with certain persons in the market who are willing to lose money on such local gathering, because they are attempting to minimize their losses from minimum volume or take-or-pay commitments they previously made in anticipation of new production that has not yet, and is unlikely to come online. In addition, a portion of this decrease can be attributable to decreased rail volumes, as a major refinery customer supported by our Louisiana facilities was experiencing a refinery turnaround during the 2016 quarter. We anticipate such rail volumes related to our Louisiana facilities to begin ramping back up, starting in the third quarter upon the completion of this turnaround.

In addition to the overall net increase in segment margin, as impacting both net income and available cash before reserves, depreciation and amortization expense increased $27.7 million between the quarterly periods, primarily as a result of the effect of placing recently acquired and constructed assets in service, including the offshore pipeline assets acquired as a result of our Enterprise acquisition.

Other income also increased $19.2 million between the quarterly periods, due to the loss of debt extinguishment recognized in the second quarter in 2015, relating to the early retirement of our $350 million 7.875% senior unsecured notes due 2018. Interest costs for the 2016 quarter increased by $17.6 million from the 2015 quarter, primarily due to an increase in our average outstanding indebtedness from recently acquired and constructed assets, principally from additional debt outstanding as a result of financing our Enterprise acquisition.

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 net income decreased by $3.5 million. This decrease is primarily related to a decrease in expense related to our annual bonus program relative to the 2015 quarter.

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

Thanks, Bob. As discussed, our businesses are performing reasonably well, and we would expect them to continue to do so, in spite of the challenges we have laid out. Our primary objective continues to be to deliver the best value to our unitholders, while never wavering from our commitment to safe and responsible operations. 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 energy companies that have been around for decades, and gone through and survived many commodity cycles.

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

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

(Operator Instructions)

Gabe Moreen, BofA Merrill Lynch.

Good afternoon, guys. Just in terms of the change of approach here, potentially on distribution growth. Can you talk about, I guess, more how you're thinking about what level of targeting now? And are you targeting any specific, I guess, distribution coverage going forward?

Gabe, I think that we continue to evaluate it on a quarter by quarter basis, as well as our updated view of the operating environment that the Partnership has in front of it. I think that 10% to 11% is good. But given that we're trading at 7% or whatever, that's -- I'm not sure that it's adequately being reflected, and we're very serious about maintaining our flexibility.

As you know, that we have, in the aggregate about $1.8 [billion] of senior unsecured notes issued across four different tranches. And if we move our way up the ratings chain, having the ability in the future to refinance that, at a couple hundred basis points tighter than we otherwise would, we think creates a good long-term value for everybody in the capital structure.

So we'll evaluate it. And I'm not sure that we've ever had an official policy, but as I said, we'll evaluate it as time goes on.

Thanks, Grant. And then, I guess, as a follow up to that, have the agencies told you what it would take to move up that chain? Are you just targeting BB metrics at this point or?

I don't think that -- I can't speak for the rating agencies, other than I think I would point everybody to go look at the recent updates that we have had. And I think there's certainly some indications that of, there's a possibility of moving up. I think we set out a long time ago to, ultimately get to the [6B] or investment grade level, and that's certainly still a continuing goal, a financial goal for us.

Thanks. And then, last one for me, just on the marine segment, you mentioned monitoring, continuing changing conditions in that business. Anything you can do on the kind of cost savings front, until maybe things normalize a bit more, just how you're thinking about that segment going forward?

I don't think that we view -- we have any -- we attempt to run a very efficient and safe operation. So I don't think we have a lot of cost savings to wring out of it. We have a very young fleet, so retirements are not really, something that we would take a look at, as people that have older fleets might, which ultimately would help rationalize the overall capacity situation.

But I think that, we are -- it's challenging. There's a lot of -- it's an excess capacity situation, that probably isn't going to get solved, by oil prices going back to $60 or $70. It's going to take a little bit of time to -- as it does, to work through excess capacity situation.

Do you think your competitors with older tonnage, will be the first to blink in that market?

I mean, it's a -- we've recognized since we've entered marine transportation business, it's very cyclical. It's never been a substantial part of our business. But that's typically, I think -- I mean, it's significant, but it's great to be diversified. But having said that, I think that, or at least our perception is, is it does require a rationalization of capacity, which given that there's -- continues to be some new things coming in, that there needs to be net retirement to rationalize the capacity, given the realities that North American and specific, the US marine markets require.

Got it. Thanks, Grant.

Your next question comes from Eric Genco from Citi. Your line is open.

Hi, you guys talked in the past about the challenges in the supply and logistics business [in the back-to-back crude]. I was just interested in the press release, you added a line that said, for production that was anticipated to come online. But this time you said that, that may not come back online. So I was just curious, is there a change in your thinking there? And if we were to see pipeline capacity tighten up out of the Permian, is that a business that comes back in your view, or is there something different going on?

I think it -- I don't know that we really meant to intimate all that much to it, other than the fact based upon activity levels, we're not sure that we're ever going to see a return, much less a near-term return to activity levels, that would dry up the capacity out of a number of regions. Maybe the Permian might be the one exception to that rule, although I'm not comfortable with that either, that would change things.

Now I think the more interesting question is, whether or not, once the original terms of the take-or-pay or minimum volume commitments that people have made to certain infrastructure projects, once they expire, are they going to be willing to lose money in the gathering function, in order to manage that downstream liability? I don't know if that's the case. Then that would probably take a little pressure off those of us that have tried to do nothing more than provide a service, cover our trucking costs, and make a little bit of money at the end of the day.

Okay. Thank you.

Your next question comes from Jeff Birnbaum from Wunderlich. Your line is open.

Good afternoon, guys. Couple questions for me. First, there were a number of just sort of one-offs, that you kind of called out in the release, turnarounds, perhaps seasonal differences relative to what you'd normally expect. Can you kind of quantify roughly how much the impacts [of that cumulatively] was in the quarter?

I don't think that we've gotten, that specific. Really, that kind of a combination of refinery turnaround, and fires in Alberta affected sequential and probably year-over-year comparisons on most supply and logistics, from rail barrels handled, and as well as throughput on the Louisiana systems. So I don't think that we break it down much beyond that, but we try to provide, the public, the operating statistics, so that they can draw their own financial conclusions to it.

Okay, Grant. Thanks. And then, just one more follow up from me, just on the marine. Kind of following up on Gabe's question. You called out in the release the inland barges, which I don't think you've talked about as much the last couple of releases, and some of the pressure you've seen there on utilization and rates.

Just wondering, if there was a specific customer change in the quarter that sort of drove that commentary? You mentioned some of the changing dynamics in the market. Just wonder if that was something broader, or more sort of one or two relationships that were changing?

I don't know. I don't perceive that there's any relationships changing. I mean, we kind of globally addressed it by refinery dynamics. But I think is, our perception that -- and this may be hard to follow -- but it's our perception somewhat that the wildfires in Alberta, especially in the second quarter reduced the amount of heavy Canadian that was run in PADD II refineries.

And therefore the bottoms which typically we would transport -- and that's our reference to longhaul from the midwest down to the PADD III refineries -- to get those bottoms down to the -- either a cat cracker or coker capacity. And we saw a lot less of that. We're seeing some return to some of that. But there's certainly, I would say utilization and rate pressures that, as a result of some of those discreet things, as well as some changing dynamics that we're going to have to deal with. And we're dealing with them.

Okay. And just one last one for me. Bob, do you have the 2Q growth CapEx figure?

I do. In the 2Q, we will report that growth CapEx will be [$105 million] for the quarter.

Great. Thanks, guys.

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

Yes, good afternoon. Grant, could you just comment on the offshore volume ramp expectations there? I mean, the volumes were obviously quite strong, certainly beat our expectations. And so, I'm just wondering going forward, are you expecting sort of this continued trajectory? Or maybe a little better, maybe a little slower, any color on that would be great?

Okay. Well, I think, I mean, sequentially, at least how we report it, I think we were up about 5.3% from the first quarter -- or second quarter over first quarter, that's reasonably robust. But we have reason to believe that we should see -- and I think we referenced this in general. We believe that we will see sequentially increasing volumes in, at least the next four to six quarters coming out of the Gulf of Mexico, based upon our view of the continuing development activities.

Now not withstanding that, whether or not there are significant turnarounds, and we're aware of a couple, that kind of extended turnarounds, order of magnitude maybe 30 to 35 days in the third quarter, and any kind of temporary shut--ins associated with any kind of inclement weather in the Gulf of Mexico. But so, you have to take a little bit of that noise. But the net-net, we view quite positively, of continuing to see sequential growth coming out of the Gulf.

Okay. That's helpful. And then, obviously, you're -- I mean, you've got some comments in the release, and you made some comments in your remarks, regarding the onshore volumes were soft, relative to probably what you would like. But just in terms of reramping those, for some of these turnarounds and other activities, what's your expectation in that regard?

Well, I think that, again, we would see the growth, or the reramping coming out of Louisiana. I think that -- it's going to -- as we have repurposed our Texas system primarily, as Bob referenced to flow north, and not south into the Texas City refining areas, that historically those volumes are probably -- that we've moved south, are probably in large part going to go to zero.

And we're going to replace them with the -- hopefully increasing volumes at a better economic situation to the Partnership, of moving to the north. So but again, that's going to -- it's going require us to get fully up and operational, which in the case of Louisiana is really towards the end of the third quarter, if not early fourth quarter. And in the case of Texas, probably, realistically in the fourth quarter.

And by that, you're referencing the growth projects that are coming online?

Correct, to be fully kind of in service and operational. And yet we'll still have a period of ramping under all of that. That's why we referenced -- starting, we'll start to see some of it in the third quarter, but ramping up through the end of 2017.

Okay, that's helpful. Thanks. That's it for me.

Your next question comes from Michael Blum of Wells Fargo. Your line is open.

Thank you. Grant, I want to just go back to the distribution growth question that Gabe brought up before. So you've been at about10% to 11% for, at least through -- going back to 2010, I was just looking at our model. It sounds like you don't want to put out a point estimate, but if you can even give us a rough idea of what neighborhood you're thinking, high single-digit, mid single-digit, low single-digit? And then, what parameters you're going to use to guide that decision?

Are you looking at a certain comp group? Are you targeting a certain coverage ratio? Just trying to get a little better sense of how that's -- what that's going to look like going forward? Thanks.

Well, the first point I would make is that the -- in excess of 10% started in 2005. So it's been 11 years that we've done that. We don't intend on cutting our distribution in an absolute sense, to increase our coverage ratio, which seems to be germane and acceptable today. I would think, that we would look into the -- something dialed back to the mid to high single-digits.

But again, I think -- we haven't necessarily lit on that, but I do think that and again, we haven't ever had an official policy, although we had 11 years and 44 consecutive quarters of delivering 10% to 11%, with a few exceptions, nevertheless an 8.7%. But we'll evaluate that as we go forward. So that's about all I can say at this point.

Thank you. That's helpful.

(Operator Instructions)

Your next question comes from Poe Fratt from D.A. Davidson. Your line is open.

Hi, Bob, can you give us the growth CapEx for the year?

For -- looking, Poe, looking at the remainder of the year, we think that we'll probably anticipate that we'll spend another $125 million.

And then, Grant, not to beat a dead horse, but why wasn't the second quarter distribution evaluated? You announced it, and then came out two weeks later, and said that you're talking about changing the potential growth target?

Because I think typically, we don't have the opportunity to have a public discussion around it, when we announce our distribution. We're typically fairly early announcer, because in some respects, we earn it in the first two quarters of -- I mean, in the first two months of the quarter proceeding, given our coverage ratio. So we're capable of announcing it very early.

But I think in the context of kind of evaluating the overall capital structure that we wanted to go ahead, and have the ability to discuss it, and discuss our thoughts around why we're doing it. And I think a lot of that came out in the 8-Ks, and [procepts] associated with the equity offering. And now today, having the ability to discuss it

And then, just your11-year track record, can we assume that you want to set the bar low enough to sustain a similar track record, at the new level, Grant?

Well, I think that it's our perception that there must be a -- some kind of premium built in, or risk premium associated with the risk of having the distribution cut, which has occurred. And I get that, but it hasn't occurred with us. And we never intend for it to occur.

So I mean, and don't take it totally out of context -- but it's easier to not grow, than it is to grow 10% to 11%, and you can do that for a lot longer. But again, I think that given that we believe -- we've always been in it for the long-term, and creating as much value, and having a clear runway of growth. And certainly, no risk or removing or attempting to remove that risk that anybody would have to be concerned about a cut in the absolutely level of the distribution, those are the types of things that we're trying to evaluate, and manage the overall capital structure. And as I've said, hopefully, that benefits everybody in the capital structure.

And then, looking at the marine transportation, can you remind us of your contract cover, how much tonnage you have rolling over the next two quarters, and then over next year?

I don't know that we get in to the specificity. I mean, I think that we have said that, obviously, the one MR that we have, the American Phoenix is under contract with an investment grade counterparty through September of 2020. And then, varying levels of either our coast-wise, or ocean going blue water vessels or whatever. I'd would say that, relative to the experience that we've had over the last, call it five to seven years, we have more -- and I don't think this is unusual, that we have more operating in spot business than any kind of term arrangements.

Great. Thanks for your time.

Your next question comes from Barrett Blaschke from MUFG Securities. Your line is open.

Hey, guys. One of the things that occurs to me, as you bring down the -- I guess, the long-term target for distribution growth, it does free you up, on your capital structure like you were talking about. Are you seeing a lot of opportunities now for projects or acquisitions? Or has that slowed down?

I mean, it's our perception that the opportunity set is going to grow over the next six to 18 months. And taking the affirmative steps to rebuild our financial flexibility at this moment is probably wise, and positions us to be able to take advantage of what we believe to be a larger opportunity set that will occur, given operating fundamentals over the next -- as I said, six to 18 months.

Okay. Thank you.

(Operator Instructions)

We do not have any questions at this time. I turn the call over to the presenters.

Thank you very much, and we'll talk in another three months or so. Thank you.

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