Genesis Energy LP (GEL) 2018 Q1 法說會逐字稿

Welcome to the 2018 first quarter conference call for Genesis Energy. Genesis has 4 business segments. The Offshore Pipeline Transportation Division is engaged in providing critical infrastructure to move oil produced from the [long-lived] world-class reservoirs from the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services division includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities as well as the processing of sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation division is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation division is engaged in the maritime transportation of primarily refined petroleum products.

Genesis' operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

During this 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 and 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. 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 morning, and welcome to all. We are pleased to announce that we remain on track with our previously announced guidance for visible, achievable, long-term distribution growth and a clear path forward to deleveraging. In spite of the 90-day quarter and certain operational hurdles, which we expect to be resolved in coming quarters, our businesses delivered financial results that provided 1.6x coverage of our sequentially increased quarterly distribution at the high end of our guided range of 1.4x to 1.6x.

During the quarter, we spent a disproportionate amount of our announced growth capital for 2018. We successfully commissioned our expansion at the Port of Baton Rouge and completed additional gathering infrastructure in the Powder River Basin. This front-end loading of capital expenditures puts us in a position to use excess cash flow in the back half of 2018, to begin repaying borrowings under our revolving credit facility at the same time that we expect to see increasing levels of EBITDA working together to begin reducing our calculated leverage ratio.

In keeping with our precedent, we won't spend a lot of time on this quarter's results compared to the year earlier period. Rather, we will attempt to provide a little color around each individual segment, their quarterly results and how we view the short, intermediate and longer-term financial performances of the business.

Our Offshore results were essentially flat to slightly up sequentially when adjusting for the number of days in the respective quarters. Turnarounds and certain delays beyond our control in achieving producer-provided forecasts were the main drivers in slightly underperforming even our internal expectations. Although we have been told to expect certain other extended producer turnarounds in the second quarter, we continue to believe the overwhelming majority of physical underperformance in any particular 90-day period is mechanically driven and not related to reservoir reserves in place issues. In fact, we remain encouraged by the amount of continuing investment and producer activity in the deepwater Gulf of Mexico. We agree with the [EIAs] forecast of increasing production from an already record year in 2017, and we are very pleased with the current and future potential of our critical and strategic asset base in the deepwater, where breakeven development prices have been driven to $35 to $45 a barrel.

We continue to expect to move excess volumes from third-party owned and operated pipelines that are anticipated to have insufficient capacity to move volumes dedicated to their systems starting later this year and possibly continued all the way into the 2021 timeframe.

In addition, we have executed agreements for 2 third-party operated subsea developments being tied back to existing dedicated and connected hubs, one with first delivery anticipated in late 2018 and then another in late 2019 with 0 of our capital required.

Finally, there continues to be infill development drilling in and around a number of our dedicated hubs. As previously discussed, we continue to have active discussions with several of the third-party and/or host-operated subsea tiebacks to existing dedicated and connected hubs.

Additionally, we are responding to RFPs for several new plus or minus 75,000 barrel a day standalone new hub type developments anticipated to be sanctioned in 2018 or 2019, with first deliveries expected in the 2022 to 2024 timeframe. These are all in addition to the plus or minus 140,000 barrels a day expected from Mad Dog 2 in late 2020 or 2021. It is already dedicated to us for downstream transportation and requires 0 of our capital.

Our recently acquired [soda ash] operations have continued to exceed expectations and remain on track to meet or exceed previously discussed guidance. The first quarter was positively impacted by higher than expected ANSAC export pricing, a trend we are increasingly confident could continue in future periods. This in part is being driven by a robust demand growth worldwide.

In addition, there are, by our estimation, a number of factors negatively weighing on global supply. Exports out of China are turning lower year-over-year as a result of extremely high input prices for China's synthetic [soda] producers and operating restraints placed on certain other producers to address environmental or pollution issues within China.

Additionally, we believe the new Turkish supply is not ramping up as fast as originally expected, and due to certain lagging logistics investments, full production might be delayed into mid to late 2019 which, everything else the same, would allow the global market demand to continue to grow and more orderly absorb the incremental cost advantage, natural supply being developed in Kazan.

Finally, a not insignificant synthetic production facility in Eastern Europe has been recently shut for an undetermined period of time due to an unfortunate spill and resultant pollution of a neighboring river and adjacent farmland. While of no direct effect to our operations given we don't compete in that particular geography, it could nonetheless have an effect on worldwide supply and what otherwise appears to be a reasonably balanced market.

Our refinery service business continues to benefit from many of the macro factors and worldwide GDP growth positively affecting soda ash as well. Volumes are quite strong, especially the downstream demand for copper and pulp.

Interestingly, a bauxite [alumina] facility in the Caribbean, which shuttered in early 2009 at the depths of the Great Recession, restarted commercial operations late last year and represents a potential 4,000 to 5,000 tons annually of market demand that we haven't supplied in almost 10 years.

Volumes on our Onshore Pipelines, while up from the year-earlier quarter, were down sequentially, primarily as a result of upstream or downstream operations beyond our control. A downstream pipeline in Texas, owned and operated by our primary customer, is operating at significantly reduced rates while certain integrity enhancement operations are undertaken by them. We'd expect those to be completed or resolved by sometime in the third quarter and accordingly would expect to see volumes to resume ramping thereafter.

Volumes in Louisiana on a sequential basis were negatively affected by certain turnaround activities at the host refinery and challenging operating conditions on railroads on which our customer ships.

We have long maintained that we expect a ramp in volumes throughout 2018 and it was our belief that it could take until the fourth quarter of this year and perhaps even a bit longer to see the full contribution from a number of our organic opportunities. We still believe that to be the case.

Volumes in Wyoming increased on a sequential basis, reflecting ramping activity by producers in the Powder River Basin. We continue to be very encouraged by the upstream activity and recent well results in and around our existing footprint in significant dedicated acreage. We are well positioned to capture increasing volumes as producers continue to add rigs and move from delineation to full-scale development drilling.

Our historic crude lease purchasing or gathering by truck business remains challenging, losing $1.4 million in the quarter versus contributing an average of $1.2 million per quarter in 2017. The lease business is not and never really has been a large contributor of focus for us and that goes for any other merchant or trading activity, by the way, or what others have dubbed supply and logistics activities. As we have talked about for some time, we can no longer economically compete for barrels gathered via truck in geographies where others either own pipelines or have take-or-pay and/or volume commitments on owned or third-party pipelines. As a result, we are in the process of winding down operations in South and West Texas and focusing our efforts in Louisiana, Mississippi, Alabama, Florida and Wyoming, where we have the opportunity to touch the barrel again, so to speak.

We've expect to reflect that onetime charge of potentially $2 million or so in the second quarter, reflecting the cost of these unfolding actions.

Turning to Marine Transportation. Segment margin actually increased slightly on a sequential basis, even with the short quarter and even after taking into account the repricing to current spot rates for one of our blue-water barges, given our last legacy term contract rolled off, amounting to an approximately $1.2 million negative, sequentially. While we are reasonably hopeful we have now put in a bottom, we have no grandiose expectations of the fundamentals for Marine Transportation, [sowing] any significant improvement through potentially at least the next several years. However, given the quality of our mariners and our equipment, we believe we are positively levered to financially benefit from improvements in marine fundamentals whenever they indeed do occur and without question, they ultimately will.

In summary, given our recent and continuing actions to increase liquidity and strengthen our balance sheet, the integration and financial contribution of the soda ash business, and the continued expected ramp of volumes and contribution from our recent organic capital program, along with the expected performance from our legacy business, we believe we are well positioned to continue to deliver long-term value to all of our stakeholders without ever losing our commitment to safe, reliable and responsible operations. As always, we would like to recognize the efforts and commitment of all of those with whom we are fortunate enough to work. And with that, I'll turn it back to the moderator for any questions.

(Operator Instructions) And your first question comes from the line of Theresa Chen with Barclays.

Grant, my first question is related to your comments about the crude lease purchasing business having never been a significant contributor. So it was [$1.2 million] per quarter in 2017. Can you tell us how much it was? What's the number in 2013, '14 and the peak?

I don't have it directly at my fingertips, but I think in 2014, it was around $30 million at most.

Got it. And in terms of the onshore business as a whole, looking past the noise, what's a good run rate for this business currently? And how much EBITDA contribution from the $700 million of CapEx spent over the past few years has already been phased in? And how much EBITDA do you expect will phase in going forward?

I don't know that we've really kind of broken it out that way at this point. I would say that we are currently hitting on basically the minimum volume levels. As a for instance, we're talking about the downstream issue on the Texas system, which is kind of beyond our control. Early in the fourth quarter, we were actually ramping and exceeding minimum volumes by order of magnitude almost 25%. And yet -- and then this downstream top line development occurred. So -- and so we're back to collecting, if you will, the MVC amounts until it's resolved. So long story short, we continue to -- little of it or call it at most MVC or take-or-pay levels are kind of currently being reflected. But we certainly expect the actual commercial usage to significantly exceed those levels and to ramp throughout the rest -- remaining part of [the 2018].

Got it. Turning to the soda ash business. Can you -- so the synthetic production facility in Eastern Europe that you mentioned, can you give us any color on how much product that produces every year? And when do you think it will be open?

The notional annual capacity of the facility is 350,000 metric tons. And so we do not have any firsthand knowledge of how long it will be off as a result of the incident. But again, as we kind of pointed out and tried to frame it within the discussion, our perception is that we're in much better supply-demand and balance as we see the market today than kind of what we anticipated even 9 months ago or 10 months ago, when we acquired the operation.

Understood. And lastly, just out of curiosity, the certain transaction cost at $1.7 million in the buildup for total select items? Is this mainly related to like integration costs for soda ash? Because in the footnote it also says it includes money spent in advance of other acquisitions. Just to call that out specifically, quarter-over-quarter, are you planning to buy something else?

[Bob can give us] specific. But it's virtually all associated with the ongoing integration of the soda ash operation. [It's right.] That covers it, Theresa.

Your next question comes from the line of Shneur Gershuni with UBS.

Just wanted to continue the discussion on the soda ash business. First off, can you remind us of the multiyear domestic contracts with price collar mechanisms that you have in place for the soda ash business? Wondering if you can talk about duration, percentage hedged as well as kind of what the upside and downside is on the pricing mechanisms?

Most domestic contracts are in the, let's call it the 1 to 3 year and probably weighted towards the 2-plus years, almost 3 years, and have particular [collars] that often are plus or minus 2% or so, kind of at the light end of how we do things. So it provides a certain amount of stability -- price stability both from our perspective as well as for the consumer's perspective of having because it's obviously it's -- in general it's an important input cost into their operations. So the international or ANSAC prices -- or contracts are typically of a shorter duration, I would say, in certain areas in which ANSAC markets, primarily other parts in the Americas, are probably in the 1-year timeframe with either fixed prices or even quarterly redeterminations within the collars. The contract structure in Asia, ex-China, is probably a shorter duration, in some cases 1-month price redeterminations but typically I would say, probably quarterly.

Okay. And just sort of following up on your comments about the overall global soda ash market. I was wondering if you could sort of talk about the impact of rising oil prices? My understanding is that some of the higher-cost producers are very sensitive to the price of oil in their cost structures. Can you sort of talk about the impact on your business relative to global businesses? And could we view rising oil prices as positive -- as a positive price pressure for soda ash in general as to how it impacts the higher-cost producers?

I think it's not necessarily oil prices but rather power prices. It's -- the synthetic production is a very power-intensive process. So yes, as a proxy for power prices going up to the extent crude oil or LNG prices or however you want to characterize it is rising, that is undoubtedly affecting the cost structure of synthetic [productors] along with ammonium and sodium chloride and the other kind of chemical inputs into the synthetic processes. So -- and given that we're already has been the largest producer of natural soda ash in the world and having one of the -- because of the natural production, one of the lowest cost structures, that improves our relative competitive position in synthetic, competing with synthetic production on a worldwide basis.

Okay. Fair enough. Sort of continuing on, you talked about how CapEx is front-end loaded this year and you have the twin benefit of lower spend and rising EBITDA improving your leverage metrics towards the end of the year. Any thoughts about using some of the excess retained cash to not only pay down debt but also to potentially buy back shares -- or units rather?

I think that that's something that the board would consider on a prospective basis, but we're intent first and foremost getting our leverage ratio down to [5] or below. And we would -- and we believe that everything else the same, that that's the highest valued use of our excess cash. And as we said, we anticipate being close to there by the end of this year. And -- but I do think that, given where we are, that is certainly a possibility of unit repurchases at some point down the road, once we have addressed the leverage situation.

Okay. And just one final question. With respect to the Gulf of Mexico, lot of positive commentary out there. You talked about agreeing with EIA estimates, and I think Shell recently [FID'd] Vito. Can you give us some sort of sensitivity as to how you think this positive outlook for the Gulf of Mexico will impact your business? How much capacity do you have to be able to handle this rising production?

Again, I think that if you look at our operating statistics that are provided in the press release, and let me turn to them real quick, but Poseidon in the quarter was running at 239 kbd. I think it pretty comfortably can move 320 kbd. CHOPS was right around 200 kbd under current configuration. It can comfortably run 350 kbd and ultimately could be expanded to 500 kbd plus with additional pumps. So I think the message is that we have the existing capacity that is -- and then we kind of try to always emphasize that for no incremental capital required to us that we have significant leverage, EBITDA growth leverage out of the Gulf of Mexico as more infill development drilling is occurring, more [subsea tieback] is occurring and then more sanctioning of standalone projects. I mean, just to do the math around Mad Dog 2, I mean, that's basically spending no money, at least the design capacity in the facility, it's $50 million a year of incremental EBITDA to us.

So it's fair to say that there's plenty of operating leverage without having to spend any capital.

Correct.

Your next question comes from the line of Eric Genco with Citibank.

Just wanted to get you to expand if you could a little bit on the Louisiana. I think with all the challenges and uncertainty around some of the Canadian pipeline expansions and what's going on with WCS, what are some of the signposts and when do you think you'll actually really start to see more happen around Louisiana? And should those 2 be linked?

Yes. I mean, again, I think it's a little backloaded in the year. I mean, I read a headline yesterday that the Premier of Alberta is meeting with the 2 primary Class 1 railroads, the CN and CP, at some point to try to figure out what is required to increase the rail volumes coming out of Canada and trying to help debottleneck the overall situation. So our view is that certainly, hopefully starting in the third quarter and accelerating into the fourth quarter, based upon indications from -- and again I want to emphasize we're not involved in the trade, we just get paid a fee for unloading it. But we would anticipate the volumes to kind of meaningfully start ramping in -- sometime in the third quarter and hopefully accelerate into the end of the year.

Okay. So maybe just kind of -- I think you also mentioned that there was a refinery turnaround. Is this -- should we be watching more the rail side, refinery turnaround sort of being finished or both?

I think it's really going to -- the rail volumes are what is going to ultimately drive the increased margin contribution out of the investments in Louisiana, both from consumption at the refinery itself but then ultimately because of our development and expansion of our crude handling capability on behalf of Exxon Mobil. At the Port of Baton Rouge, we would anticipate ultimately seeing increasing -- potential increasing exports out of the Port of Baton Rouge.

Okay. And I just wanted to ask about leverage. I don't know if you [addressed us] on this. But it looks like you're sitting right near your covenant at this point in time. So if we kind of think 2Q is another sort of low quarter before you get to this point, are you likely to violate your bank covenants? And what happens in that scenario? I assume it's fairly straightforward in terms of addressing that, but would like to hear your comments.

It's not likely that we will violate our bank covenants. The covenant is 5.75x through the second quarter print. And it drops down to 5.5x in the third quarter and thereafter. So we have no concerns of getting into a violate situation. I think that -- if that ever becomes a concern that -- I think it's a simple majority vote of the banks representing the committed capacity of the revolver if we wanted to get an extra quarter turn for another quarter or 2 as we embark upon our natural deleveraging.

Okay. And I think, last one for me. As you are looking at it and you kind of talked about your deleveraging goals in the past, you were saying you wanted to approaching [4.75] by the end of this year. And that probably -- I would assume that, that probably is kind of off the table. So what sort of neighborhood do you think you can be by the end of this year on a trailing basis? And would it change? And do you get closer if you say, okay, well, fourth quarter, we annualized fourth quarter and not just look at trailing 12 months, are there more there? I mean, how do you think to those targets that you provided now?

Well, first of all, the target at the end of this year was [5], not [4.75] and then going to [4.5] at the end of '19 and (inaudible) at the end of '20. We think that -- and we talked a little bit about this in the fourth quarter call because of our decision to increase investment in Wyoming, that getting all the way to 5 by the end of this year maybe a little bit challenging. But we believe that we're still consistent with being able to get to the 4.5 at the end of '19, and the [4] or below by the end of 2020. So we don't think that there's any issue there. And then, yes, I agree that's on a trailing basis and the way we would calculate it presented in our filings as well as our bank compliance. But yes, I think if you -- we would certainly believe that annualizing the fourth quarter, on any kind of run-rate basis, that we would be under 5 .

Your next question comes from the line of Barrett Blaschke with MUFG Securities.

Just a couple of questions [that might] have been asked. Any increase in Marine volatility with the roll-off of the last -- of the legacy contract?

No, I think that, as I said that, that one, believe it or not, I mean when you reprice from $27,000 a day to $15,000 a day, which is the spot market for that type of vessel, then it had $1.2 million sequential negative. But kind of offsetting that, was actual bottoming of -- on the inland side, on the brown-water side, utilization continues to be very high. So -- and -- it -- everything else the same, it kind of appears that we're seeing, at least, for our particular type of internal [heater] barges, reasonable stability in the spot values for that. So as we tried to say in the prepared remarks, Barrett, I mean, I think it's -- we're hopeful that we've put in the bottom and -- but we're not being -- we're not going to be pollyannish and think that things are going to turn around very quickly. It's going to take a while for there to be an efficient rationalization of demand and supply in the Marine business.

Okay. And then any other turnarounds you're seeing on the horizon? Or things that could kind of be negative or detractors from the onshore lines?

Nothing that we're aware of at this point. Again, it's -- Texas volumes are going to be dependent upon when the downstream pipeline has resolved its operating conditions. And we talked about what we think is going to be the major contributor, drivers in Louisiana. So...

Okay. And then last one, this is really just a housekeeping to have it on record. Any impact from the FERC policy change?

As we put out intraday when the units were down 10% as a result of that, less than 5% of our total segment margin is generated by assets that are even under FERC jurisdiction. And even though we said less than 1%, it's really less than 0.1%. Our segment margin is generated by anything that is akin to the cost-of-service rate making. So it's kind of like bad policing, it's shoot first and ask questions later.

(Operator Instructions) Your next question comes from the line of Patrick Wang with Baird.

My first question is on the Marine business. Looks like barge utilization has settled into a stable to recovering range. And you mentioned in your prepared remarks that we likely mark the bottom there. Does that comment apply to both utilization and pricing? And specifically, do you see any further risk around spot rates from here?

I think the utilization is -- yes, it seems quite good and has continued into the second quarter. As I think I have mentioned on an earlier response, actually seeing a stabilization, a not extremely modest increase in spot rates. So the combination of that seemingly is a good thing. But again, we're not projecting any kind of rapid recovery.

Okay. Understood. And then just moving to the soda ash business. Looks like that delivered another solid quarter here and your outlook does sound positive. Can you talk through your outlook for the balance of the year and help us and investors better understand what the CapEx needs and the timing for those needs are on this business?

Yes, I think that we have previously guided that 2018, we would anticipate a range of $155 million to $165 million of segment margin contribution for the soda ash operations. I think we tried to intimate in our prepared remarks that, based upon how we feel today, that we would certainly be to the high end of that range. On a run-rate basis, combination of maintenance capital as well as growth capital, and growth capital we define at basic -- at the Alkali operations of primarily debottlenecking type capital spent to generate or give us the ability to produce more soda ash and therefore have an incremental revenue stream out of the same footprint. The combination of that on a run-rate basis is order of magnitude in the $40 million a year range. From any given year, sometimes that can be 60% growth capital and 40% maintenance or vice versa. So I think -- again we think that it's a tremendous business, long-life business, very stable. And given our kind of market position, both domestically as well as internationally, we think it's -- it was a very attractive opportunity for the partners.

And there are no other questions at this time.

Very good. Well, that's the end of our prepared remarks, and we'll talk in another 90 days or so. Thank you.

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