Genesis Energy LP (GEL) 2016 Q4 法說會逐字稿

Welcome to the 2016 fourth-quarter conference call for Genesis Energy. Genesis has four 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 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. They 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.

Thanks, Karen. Good morning and welcome to everyone. Given the continuing challenging operating environment in the energy midstream space, we continue to be pleased with the financial performance of our diversified yet increasingly integrated businesses. Our significant infrastructure projects in the Baton Rouge area were substantially completed in the fourth quarter and we would expect to see contributions from those projects to continue to ramp throughout this year and into next.

We now anticipate completing our repurposing project in Texas in the second quarter of 2017 and again we would expect to see contributions ramping throughout this year and into 2018. At Raceland, we would expect to see volumes start to ramp in mid-2017 as we will be fully capable of receiving medium sour crudes via pipeline and terminaling heavy crudes via rail.

While we are a bit behind schedule and might arguably have a slightly lower ramp from these major investments, we are very excited and have many reasons to believe that we will ultimately exceed our average base case economics across the projects. The momentum for the rest of this and into next year positions us to do reasonably well, even if things don't get better in late 2017 or 2018, as some predict or continue to hope for. Given our recent and continuing actions to increase liquidity and strengthen our balance sheet, we believe we are well positioned to continue to deliver long-term value to all of our stakeholders without ever losing our absolute commitment to safe, reliable, and responsible operations.

With that I will turn it over to Bob to discuss this standalone quarters results in more detail.

Thank you, Grant. In the fourth quarter of 2016, we generated total available cash before reserves of $95.4 million, representing a decrease of $6.9 million, or 7% over the fourth quarter of 2015.

Adjusted EBITDA decreased $4.5 million over the prior year quarter, to $133.1 million representing a 3% decrease. Net income attributable to Genesis for the quarter was $22.1 million or $0.19 per unit, compared to $27.4 million, or $0.25 per unit for the same period in 2015.

As we discussed earlier today in our earnings release, we have combined our onshore pipeline segment with our supply and logistics segment. This reporting is consistent with way Management is evaluating our business on an ongoing basis, and is reflective of the increasingly integrated nature of many of our operations, such as our recently completed infrastructure near Baton Rouge.

Segment margin from our offshore pipeline transportation segment increased $10.7 million, or 14% between the fourth quarter periods. Overall our offshore pipeline operations benefited from the general increase in the Gulf of Mexico production. The increase was the result of 2016 drilling activity; which predominantly occurred near existing infrastructure due to the attractive economics in current pricing conditions.

Our extensive pipeline network benefited ratably from this activity. In addition, the 2016 quarter benefited from the temporary diversion natural gas volumes from third-party gas pipelines onto our gas pipeline assets, due to disruptions at onshore processing facilities where such volumes typically flow. Refinery services segment margin for the 2016 quarter decreased $2.3 million or 11%.

This is primarily due to a 6% decrease in NaHS sales volumes relative to the 2015 quarter. This decrease is principally related to lower sales volumes to our South American mining customers during the 2016 quarter. Sales volumes between quarters to customers in South America can fluctuate due to the timing of third-party vessels available to transport bulk deliveries.

The pricing in our sales contracts for NaHS typically includes adjustments of fluctuations and commodity benchmarks, primarily caustic soda, 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 we are able to apply such adjustments, vary due to timing or other factors such as competitive pressures; which had a negative effect on margin for NaHS sales for the 2016 quarter. We expect those other factors to continue. Segment margin from our Marine Transportation Segment, decreased $7.3 million or 31% between the fourth quarter periods.

The decrease in segment margin is primarily due to a combination of lower utilization and lower day rates across our various marine asset classes, excepting the American Phoenix, which is under long term contract through September 2020. In our offshore barge fleet, the number of our units have come off of longer term contracts.

We have chosen to primarily place them in spot service or short-term service, i.e. less than a year. We believe the day rates currently being offered by the market are at or approaching cyclical lows. In our inland fleet, we saw somewhat of a strengthening in utilization and stabilization in spot day rates toward the end of the year especially in the black oil or heavy intermediate refined products trade; the trade to which we have almost exclusively committed our inland barges.

Supply and Logistics Segment Margin decreased by $3.4 million or 15% between the fourth quarter periods. This was primarily the result of a reduction in pipeline volumes to the Texas City refining market on our Texas pipeline system. Our historical customers in Texas City have made indefinite alternative arrangements to receive crude oil as a result of our endeavors to expand, extend, and repurpose our facilities into longer-life, higher-value service.

We expect to complete this repurposing in the second quarter of 2017. This decrease in segment margin is partially offset by the improved performance of our now right-sized, heavy fuel oil business. The performance improvement resulted from reducing volumes and related infrastructure to match new market realities resulting from the general lightening of refineries crude slates; which has resulted in a better supply-demand balance between heavy refined bottoms and domestic coker and asphalt requirements.

The decrease in segment margin was also partially offset by increase in volumes on our Louisiana infrastructure, as our new port of Baton Rouge terminal and related crude oil and refined products pipeline commenced operations during the fourth quarter of 2016. Our results also reflected an increase in rail volumes at our scenic rail terminal in the 2016 quarter, due to demand from one major refinery customer.

In addition to the overall net decrease in segment margin, available cash before reserves declined as a result of increased interest expense and general and administrative costs. The increase in interest expense was primarily due to an increase in our average outstanding indebtedness from acquired and constructed assets.

Interest costs on an ongoing basis are net of capitalized interest costs attributable to our growth capital expenditures. General and administrative costs included an available cash increase on a comparative basis due to a one time reduction in compensation expense in the prior year. The decrease in net income results from a non-cash valuation allowance of $6 million recorded in the 2016 quarter related to the collectibility of certain disputed receivables and claims.

Additionally, other non-cash expenses, including depreciation and amortization and accretion, increased $6.3 million in the 2016 quarter. The increase in such non-cash expenses was primarily the result of the effect of acquiring assets and placing constructed assets in service during calendar 2016. These decreases, as well as the previously discussed decrease in segment margin, were somewhat offset by the increased contribution of equity earnings and our unconsolidated joint venture.

The 2015 quarter included negative non-cash basis adjustments related to certain of our historical and acquired equity investments as a result of our acquisition of the offshore pipelines and services business at Enterprise. Grant will now provide some concluding remarks to our prepared comments.

Thanks, Bob. As discussed, our businesses were performing reasonably well and we would expect them to continue to do so in spite of the challenging environment which we continue to operate.

While we are unable to predict with any certainty whether things will get better in late 2017 or 2018, we are confident that our diversified yet increasingly integrated businesses will continue to perform with relative stability and resiliency in the tumultuous midstream environment in which we operate. While they completion and ramp up in volumes of our most significant ongoing projects may be a bit behind, we also have confidence that they will contribute to this resiliency and stability as we progress through 2017 and into 2018.

Even though we are quite bullish for our particular business prospects for the remainder of the year and into next year, the first quarter is not without its unique challenges. Not least of which is there are only 90 days to do our thing. In addition, we've experienced more unanticipated downtime than normal for a variety of reasons at some of our major fields that we gather in the Gulf of Mexico.

Additionally, what I would characterize as our last legacy contract on one of ocean-going barges expired and has been repriced into the spot market. Additionally, we have two blue water unit regulatory dry-dockings in the first quarter which will negatively impact the quarter. Because of, one, 90 days doesn't a trend make, and, two, our overall confidence in our business prospects in the current environment, we continue to believe we're well positioned to deliver long-term value to all of our stakeholders without ever losing our absolute commitment to safe, reliable, and responsible, operations.

As always we would like to recognize the efforts and commitment for all of those with whom we are fortunate enough to work. With that, I will turn it back to the moderator for any questions.

(Operator Instructions)

Gabe Moreen, BofA Merrill Lynch.

Can you talk about little bit about the $6 million disputed receivable and what that related to and whether that's a one-time item that's behind you or is that part of an ongoing customer dispute there that might be more (inaudible) to?

Gabe, it is a one-time non-cash valuation adjustment that we put in there. We don't see that extending past what we have put in the valuation at this point in time.

Thanks, Bob. In terms of the pass through within the refinery services segment of some of the component pricing, can you talk about first-quarter expectations whether pricing has caught up given the rise we've seen in caustic soda pricing whether the expectation should be that maybe Q1 looks a little bit better there?

I think that we would expect the first quarter to be reasonably consistent with Q4. We've had and you will see we have renegotiated a substantial or a significant refinery host contractual relationship; which will have a little bit of value degradation, if you will, on a prospective basis and return for an 11-year extension of the terms. Our view is refinery services absent at this point for 2017, absent relatively or volume growth that we would expect it to be closer to an $18 million a quarter run rate is what we're internally looking at in 2017.

Last one for me, where the state of the balance sheet is, can you talk about whether you'd issued anything on the ATM in Q4 and the expectations for capital markets activity in 2017?

We issued nothing under the ATM. We will continue to evaluate. I think that we are absolutely confident that we do not need or will not access the equity markets for purposes of what I would characterize as tail capital expenditures associated with our major growth projects that are occurring and that have rolled over into 2017.

If we identify and determine that it's in the best interest for the partnership to pursue some other additional growth capital expenditures in 2017 under those circumstances, I would imagine that we would have some component of equity financing associated with that and depending upon the size maybe it comes out of the ATM, maybe it is a discrete known sale. We don't have any things on our radar screen at this point but growth capital beyond the tail end of the growth projects are out there in the public domain. I think we would anticipate raising some equity, some way.

Got it. I guess following up on that Grant. Sorry if I missed it, did you talk about what your expectations are for 2017 growth CapEx and some of the things you just alluded to in terms of valuing other growth? What you had in mind there, whether you see the anything coming to fruition?

We don't typically do that. I don't think there's anything significant, but we are evaluating a number of things. We're also evaluating, which is kind of goes part and partial and also may be responsive to whether or not there's any kind of capital markets transactions and that is, is that we are evaluating the potential of and we've been approached on a number of our individual discrete assets, that may or may not be more valuable to another party than they are to us and so we're also evaluating that. So to the extent that those come to fruition and from the cash proceeds from that we would have -- it would have to be mixed into our consideration of how we manage the capital structure.

Understood. Thanks very much.

T.J. Schultz, RBC Capital Markets.

To follow-up on Gabe's question on the balance sheet. If I think about the ramp on some of the projects a little slower than planned, do you still have a similar target timeframe to hit delevering goals?

So if you consider other levers they're on the balance sheet besides the ATM sound like asset sales are on the table. But I'm thinking about the distribution and growth there and any consideration on keeping discretions flat to help offset the slower ramp?

No. I don't think so. I think we are absolutely comfortable continuing at this point in the mid-single digits for the foreseeable future, and I think that our targets for getting to where we have always desired to be from an overall leverage point of view is still in the mid to late 2019 timeframe, which is absolutely consistent with what we've been talking about for well over a year.

Okay. The repurposing project in Texas. Can you give us a little color what pushed that out a little bit into Q2 and then the expectation on returns on capital for that project once it is repurposed.

Some weather delays and some contracting delays primarily associated with getting the requisite power into the -- which is not totally within our control; it's the power providers, is the lead to the delay. And in response to the second part of your question, I think when we intimated or discussed it in the prepared remarks and that is, is that across the three major projects, I think that we would -- we believe that we will exceed our targeted return thresholds which were to get them into the what I characterize as the high-single digits. I think that we are pretty confident that in the 2018 and beyond timeframe, given what we know now versus when we initiated or started the spend, that we could drive that into the mid-single digits on a multiple (inaudible) basis.

Thanks, Grant.

Ethan Bellamy, Baird.

Gentlemen, good morning. Are you connected to the Renaissance platform and is that fire in early January likely to create any volume hiccup in the first quarter?

No.

Okay. How much did Baton Rouge contribute to the fourth quarter and are those investments panning out well for 2017?

I don't think we break it out individually, but and this ties back a little bit to T.J.'s question earlier. I will say that it's not material on a standalone basis but on the first quarter volumes are in excess of fourth-quarter volumes and well in excess of any NBC or take-or-pay commitments so that in part is what is giving our comfort in discussing at the end of the day, we think across these major organic opportunities that are aggregate average return is going to be greater than what was anticipated when we first made the investment decisions.

Okay. Thanks, Grant.

(Operator Instructions)

John Edwards, Credit Suisse.

Hi, Grant. I was following on last couple of questions. On the ramping of the projects that are coming online here that gives you confidence that the returns will do better, or better than originally anticipated, are there any data points you can share with us that would point that could help us understand that?

And then is there anything that could go awry that -- is there any risk associated with this -- things could go awry that might not have you achieve the higher return that you think that you will. Just so that we can have a boundary here on the ramp versus the risk, that kind of thing.

It's a little bit -- I think in one sense what you can look at and this is primarily applicable in the probably what I will call the lower Mississippi River corridor; which would include both Baton Rouge as well as Raceland, but you can look to public documentation that the growing material imbalance as an engineer would characterize it between ramping heavy Canadian production versus takeaway capacity.

Just because ultimately pipelines gets permitted or they are indicated that there's going to be permits subject to 92 conditions or whatever, we're not as confident that those ultimately get built even in a 2020 to 2022 timeframe as perhaps other are. That is one data point to get somewhat comfortable. The other is a little bit and primarily in Texas, a little bit more unique and commercially sensitive. And I'm not sure that from a -- that there's any kind of public parameters that I could point you to, to give you the same confidence that we have by being directly involved in it but I'm not sure I can help on that one.

Okay. Fair enough. I'm curious since you did indicate that things were a little bit behind as far as costs goes, if things are after things come in on budget and if you just talk about the cost aspects of things in that regard.

I would say that we probably have experienced some amount of project creep but we've also as we are going along, we somewhat intentionally changed the scope and the flexibility and the capabilities of doing things as we are doing this. All in all I think that we will have probably more so once in our, once we file the K and update our investor presentation, will have remaining tail capital expenditures associated with everything. But it's not significantly different than what we've put out there relative to the third quarter. It's been in our investor presentations.

Okay. That's helpful. On the onshore crude oil volumes and they continue to fall generally, although it looked like the Louisiana volumes did better, so it's been a little bit erratic, any thoughts there on that trajectory and how we should think about things?

The vast, vast, vast majority of it all occurred in Texas, right? Which is basically and as Bob referenced it and we have our historical customers who have made alternative arrangements to receive volumes that we have given them on a historical basis and as a result we are repurposing our facilities to provide a longer-life, higher-valued service, that's the majority of it. It's immaterial in the overall scheme of things. If Mississippi volumes go from 14 kPD to 13 kPD or whatever, it's not meaningful from our perspective.

Okay. Great. Thank you very much.

Shneur Gershuni, UBS.

Good morning. Just a couple of questions. People have talked about your ramps and your expectation of ramps for this year. You've got Baton Rouge via the repurposed asset Raceland and so forth.

When we think about the ramp that you're talking about, how much of that is MVC'd or contracted so that it's for sure that it's underwritten versus more of an expectation of how the markets going to move?

The ramp that we refer to is what we believe the market to be, in constant communication with our primary customers there. Again, we've tried to point out in the past, so I don't think we did the math this time, but it's not going to be significantly different.

And we think this is a good thing, which I don't understand why people think it's a good thing that people are collecting MVCs but we only collect less than 5% of our total segment margin has anything to do with MVCs, which means that our customers actually use, and want it and need it. I think people that scrape MVCs every 90 days, I think that when those MVCs run out then I would argue that maybe they have a problem. That's not how we think about it.

Maybe that's counter to what a lot of other people do and maybe we're wrong? Maybe we think about it the wrong way but I'm -- markets work and contracts don't is one way to think about it. I think it's a good thing that we have facilities that people want to use, need to use, when operating conditions are not the most robust.

Okay. Just as a couple of follow-ups here. Rail has generally speaking not been the greatest trending business for the last couple of years. Do you see anything changing in that respect?

Is Wink an opportunity just given the ramp-up in the Permian?

Again I don't think that -- our view of rail has always been or primarily been associated with ultimately getting the heavy Canadians down to the correct refinery locations that want it and need it.

Wink is in the middle of the Permian. It is much more than just a rail facility and it has been a trucking facility. It is bidirectionally tied to the Alpha Connector, which is the pipeline which Plains just spent $1.2 billion to purchase.

So there's a lot going on in Wink than meets the eye of whether or not it was ever a -- at times when the Midland basis differential was blown out to $13 to $15 it's made a whole lot of sense but there's a whole lot more going on at the facility than just being a rail facility.

Fair enough. When I think about all the pipelines that have been constructed and or being expanded or proposed out of the Permian, everything seems to be pointed toward Houston. Do you see a scenario where spreads blow out specifically in Houston and logistics providers will be needing to move crude away from Houston? Is that something that you would benefit from or would this be a negative based on your asset?

I think that the purpose of or the primary focus of repurposing our Texas facility is to get the medium-sour quality crude oils that are produced offshore in the Gulf of Mexico both off of Cameron Highway and other pipelines, which come into the Freeport Texas City area to the refineries that want that type of crude oil and the refineries don't want the type of crude oil that is being brought in by the pipelines that are being built from Midlands. So that's probably going to go other places including the potential for international exports, I would assume.

But that's not part of what we do so we don't see it as -- we see it net neutral if not actually a positive because everybody has rushed to bring all of this TI-type life sweet crude, that refineries are overly saturated with from a cracking point of view. We see that as an opportunity to fill a void and actually get the right barrel to the right refinery location; which is a longer-lived, higher-value proposition than competing with all the TI movements.

Okay. Just one final question. CapEx for 2018 directionally. How much would you expect it to be down from where we are today?

That's a long time from now. I'm not sure that we really -- we've never given that much of a forward guidance.

But again I think somewhat in response to an earlier question that we haven't identified anything of size. I'm confident, that even for 2017 I'm confident absent the tail expenditures associated with the major projects that we will find in $75 million or $100 million of what we perceive to be high-value, bolt-on extensions of stuff, but I don't know that we've really looked into 2018 at this point.

Right. Thank you very much. Appreciate it.

Barrett Blaschke, MUFG Securities.

Couple of quick ones. Where was growth capital in the fourth quarter versus the $65 million estimate that I think was out there?

In the fourth quarter it actually was at $65 million. We missed it by $441,000.

Great, thank you.

That's why I was double checking, Barrett, we were way too close there.

With two vessels going into dry-dock and lower spot rates can we focus on marine for just a minute and what's giving you confidence that this is a low ebb in the day rates and then what would the impact be of putting two vessels into dry-dock?

I think we need to -- if we're going to get into marine we need to peel it back a little bit further than that. The first thing is, is that our 1MR, the American Phoenix, is flat and under contract through September of 2020, that's not inconsequential in terms of the overall contribution in the marine segment but it's flat.

We are seeing increased utilization in the inland side; which generally speaking is a precursor to some amount of recovery in day rates associated there with. So utilization is the first thing, so it means that there's becoming -- getting to be a better supply-demand imbalance and again I want to emphasize that, of our current 74 inland barges, 70 of them are internal heater barges and so you need to make the distinction between that type of service and aggregate tank barges or clean barges. We think that the brown side or the inland side really feels like it's utilization is starting to creep up; which hopefully is a precursor to some improvement in day rates.

The blue water side continues to be a challenge for us. I think it's a systemic issue at this point that's going to take a while to fix and the reason I say it that way is that, at least in terms of the Jones Act vessels, that there were a number of vessels constructed under the assumption that the industry was going to move lots of oil out of Corpus Christie or other Gulf Coast ports to the East Coast and West Coast of the US due to a variety of reasons, which we don't have time to go into but macroeconomic fundamentals. None of that is occurring, so that excess capacity in large, new build vessels is pushing back against even smaller OGV ocean-going vessels of different sizes and that's going to continue to be a challenge from our overall financial reporting in marine, I think is the major challenge is going to be on the blue water side.

The dry-dockings, when they go out for 30 days or more even in this market, that can be $0.5 million to $0.75 million a piece associated with that. Marine continues to be challenging. Unfortunately, it's not a -- it is a small part of our business, an important part of our business, an important part of our service capabilities with a lot of our refinery partners, so we like the business, we think it fits very well with what we do, but its going to be a little bit of a challenge.

Thank you. One follow-up on the crude petroleum products sales side. The volumes seem to be in a bit of decline and can you walk us through a little bit of an outlook there?

I think that primarily it's being driven by crude volumes, right? And that is the manifestation of what we've described in earlier quarterly calls is volume cannibalization where people that either own a pipeline, a long haul pipeline out of a certain basin or have a take-or-pay agreement on a pipeline out of a certain basin, that they are willing to gather, which is what we do because we don't have a long-haul pipes, or we don't have any take-or-pay obligations to anybody.

They will lose money on the gathering in order to meet those obligations or get something by trying to fill up their pipes. That's the manifestation of it.

In certain areas we're starting to see a little bit of volume recovery, so to speak. To the extent, we're not going to do it at a loss because we are not managing a downstream asset or a downstream liability.

Okay. Thank you.

Akil Marsh, Janney.

Thanks for taking my question. I know you mentioned there is going to be some downtime, it's going to affect offshore pipes in Q1 2017, but could you talk about how we should think about the offshore pipeline segment in terms of volumes on a year-over-year basis for the full year?

We would anticipate full-year volumes in 2017 to be higher than 2016 and that may not be on each individual system by system but in the aggregate I don't think there's any doubt. It's a good question but I think that if we look at our universe of quote unquote the rigs that are interesting to us; which are the deepwater rigs working in the Gulf of Mexico, which aren't accurately reflected in any of the weekly BHI data points that come out. But at this red-hot moment as of this week, we would say that there are six rigs drilling development tieback wells to existing facilities; which are -- that's a very good thing because that costs no capital and it continues to add to the volume increase or certainly arrest any kind of declines from existing wells and that there four additional rigs that are doing, what I would call delineation drilling on projects that are yet to be sanctioned but that are quite logical to ultimately be sanctioned and quite illogically would not come to some of our existing infrastructure.

So short-term, medium-term, and longer-term and obviously you saw last week at BHP sanctioned their portion of Mad Dog 2; which BP had already done earlier and that's from a longer-term perspective of a extremely large deepwater facility that is already contracted to go into our facilities.

Thanks. That's all I had.

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

Thank you very much and we'll speak to you in 90 days if not sooner. Thanks.

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