Genesis Energy LP (GEL) 2019 Q4 法說會逐字稿

Welcome to the 2019 Fourth Quarter Conference Call for Genesis Energy. Genesis has 4 business segments. The Offshore Pipeline Transportation services segment 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.

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Okay. The Sodium Minerals and Sulfur Services segment 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 segment is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products. Genesis operations are primarily located in Wyoming, the Gulf Coast states 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 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. This 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 Ryan Sims, Senior Vice President, Finance and Corporate Development.

Good morning. For the quarter, our diversified businesses in total performed slightly better than our expectations, and we ended the year towards the high end of our revised annual guidance for adjusted EBITDA. In our Offshore Pipeline Transportation segment, we saw strong volumes across our platforms and pipelines as newer projects continued to ramp and subsea tiebacks and infill drilling more than offset any natural decline from our dedicated fields.

During the quarter, we announced new contracts with Murphy Exploration & Production Company U.S.A., subsidiary of Murphy Oil, to support their operated Khaleesi/Mormont and Samurai field developments through the new King's Quay floating production system. The King's Quay FPS will have the capacity to produce up to 80,000 barrels per day of oil and up to 100 million cubic feet of gas per day from the field development starting in mid-2022.

The King's Quay FPS will tie in subsea to our 100%-owned Shenzi lateral and the crude oil production will then be delivered 50% to our 100%-owned Cameron Highway system and 50% to our 64%-owned Poseidon crude oil system for delivery all the way to shore.

The associated gas production will tie in subsea and be gathered on our 100%-owned Anaconda system, which ties into our 25.7%-owned Nautilus gas system for transportation to shore.

Given the multiple opportunities for Genesis to handle both the oil and gas production from the King's Quay FPS, and if the producers are able to achieve their anticipated volumes, we would reasonably expect to see a benefit of approximately $50 million to $60 million of annual incremental EBITDA associated with the King's Quay FPS.

During the quarter, the producing community also made a couple of significant announcements in the Gulf of Mexico. Chevron announced their Final Investment Decision or FID to sanction their $5.7 billion anchor project in Green Canyon. Talos Energy announced they were acquiring a broad portfolio of Gulf of Mexico-producing assets, exploration prospects and acreage from a variety of smaller companies for approximately $640 million.

We believe all of these announcements are indicative of the near-, medium- and long-term opportunity sets in the Gulf of Mexico and that the economics and production profiles of these projects are competing favorably against other opportunity sets in the company's portfolio.

Additionally, significant upstream players are seemingly dismissing any political uncertainty around the future of the Gulf of Mexico in 2021 and for decades to come.

Our team continues to finalize agreements to move a total of what is anticipated to be an incremental 20,000 to 25,000 barrels per day of new production on Poseidon. These volumes are expected to come online in mid-2020 and will be life-of-lease dedications from several new tieback developments that will flow through one of our wholly-owned laterals that connects subsea into Poseidon.

In addition, we expect to see volumes from BP's Atlantis Phase 3 development in the second half of 2020 and will benefit from a full year of production from LLOG's Buckskin development this year. No capital will be required by us to provide these incremental movements in 2020. As a result, we remain on track with our third quarter comments of reasonably expecting segment margin in our Offshore Pipeline Transportation segment to be up approximately $20 million to $30 million year-over-year in 2020.

As a reminder, these incremental volumes in 2020 are in advance of BP's Argos production facility, which is scheduled to come online in mid- to late 2021 and Murphy's King's Quay FPS, which we just talked about, which is scheduled to come online in mid-2022, both of which will have a meaningful positive impact to our Offshore Pipeline Transportation segment margin going forward. Looking out longer term, we remain in active discussions with multiple producers regarding potential new developments that could come online in the 2023-2025 time frame. These opportunities would be similar in size and scale as other recently announced projects and could represent meaningful midterm opportunities for us, including discretionary extensions and expansion of our existing assets. We would reasonably expect these producers to come to an FID on these new developments sometime over the next 12 to 24 months. However, unless and until the parties enter into a definitive agreement, there is no guarantee that we will be successful in capturing some or any of these volumes.

In our Onshore Facilities and Transportation segment, we experienced a ramp in crude-by-rail volumes throughout the quarter as a result of curtailment relief granted in Alberta, and we exited the year averaging approximately 1 train a day.

We have experienced a continued ramp above that in January and February and have received nominations for March, consistent with the first several months of this year. We have seen and expect no significant slowdown or changes to volumes as a result of operating conditions on either the Canadian Pacific or the Canadian national railroads. Furthermore, we have not seen any impacts from a fire at Exxon's Baton Rouge refinery last week. We continue to monitor all these situations to see if they might potentially impact volumes in the first half of 2020. But at this point, we expect none.

During the quarter, we also saw increased volumes on our Texas pipeline as a result of increased offshore volumes that feed our Texas City terminal. We remain encouraged with the additional activity in and around the Texas City and Houston markets and believe there will be opportunities to further optimize our onshore pipelines and terminals with the increasing volumes from our offshore pipelines.

Our Marine Transportation segment continue to perform as expected and reported increased segment margin for the eighth consecutive quarter. We experienced strong utilization and improving fundamentals and day rates across our inland and offshore fleets. IMO 2020 appears to be having a positive impact on our inland black oil barges as refiners need to get the intermediate refined barrel to the right location. Upwards of 90% of our barges are typically contracted to provide services to refiners moving their intermediate products from one location to another.

The Corps of Engineers is undertaking significant repair and maintenance of blocks on the Mississippi River and its major tributaries this summer. As a result, we anticipate a near-term reduction in "practical supply" as movements in and out of such region take longer and are less efficient than normal. As a result, demand in day rates in our brown water fleet should improve.

We are also seeing increased demand for our blue water vessels. Our offshore fleet is benefiting from certain competitive dynamics on the East Coast as well as more required product movements because of the closure of refining capacity in Philadelphia.

Our larger offshore vessels are benefiting from increased movements of crude oil as more and more barrels reach the Gulf Coast, where the Gulf Coast refineries basically have limited incremental demand for those types of barrels.

Turning to our Sodium Minerals and Sulfur Services segment. Our legacy Refinery Services business performed as expected in the quarter and importantly, it appears most of the production and market interruptions it faced in the second half of '19 are largely behind us as we move into 2020.

As we mentioned on our third quarter call, we were then seeing signs of slowdown in demand for soda ash globally, particularly in Asia. We believe this was tied mainly to the ongoing uncertainty around the U.S.-China trade war but also to decelerating GDP resulting from tightening monetary policies by most central banks in early 2019, which policies appears to have been reversed in the second half of last year.

Nonetheless, this demand trend accelerated into the end of the quarter as customers continued to be long their respective finished goods, like flat glass and soda ash inventories. At the same time, it appears that Genesis and the other U.S. producers made and marketed more soda ash in the last quarter compared to the year's earlier quarters. As a result, price fell in the export markets to clear this demand/supply imbalance, and we experienced our lowest quarter of financial contribution from our soda ash operations, of just over $38 million, since we acquired the business in 2017.

Unfortunately, most prices for the subsequent year negotiated in the preceding December and January time frame. Even though most domestic prices are set on a multiyear basis, many subject to caps and collars, our export contracts and negotiated prices are much shorter in duration. Given the dynamics going into the price negotiations described above, we expect export prices, which represent approximately half of our total annual sales to be significantly lower in 2020 than they have been in the prior 2.5 years since we acquired the operations. Experience has shown, because of the nature of the mix of contracts, it can take anywhere from 4 to 8 quarters for the underlying fundamentals to get back on historical trends.

During the first quarter of 2020, we have continued to monitor the impacts from the coronavirus in China and the potential impact it may have on synthetic production and soda ash demand in the region. China, like the U.S., is a net exporter of soda ash, and synthetic production out of China competes head-to-head with exports of natural production from the U.S. It is too early to tell -- to determine the net effects of reduced supply from and reduced demand in China and potentially reduced demand from other economies throughout Asia.

Having said that, we continue to believe in the long-term fundamentals of the business and the cost competitive advantage natural soda ash enjoys over synthetically produced product. We remain confident that the market will need, and we can easily and profitably place, the incremental tons coming from our Granger expansion beginning in mid-2022.

According to third-party reports, soda ash demand outside of China is estimated to increase approximately 4 million tons between 2019 and 2023 and approximately 9 million tons between 2019 and 2028. To put it in perspective, our Granger expansion of an incremental 700,000-or-so tons per year represents less than 20% of the estimated demand increase between now and 2023 and only some 8% of the estimated demand increase through 2028. Furthermore, some of our competitors, including but not limited to Solvay and Ciner Resources, are also seeing these global demand forecast and thus have announced their own respective natural production expansions that would add incremental natural production to the market over the next few years.

Even with all of these proposed expansions, natural gas production is expected to represent somewhere between 25% and 30% of overall supply to the global market, thus requiring higher-cost synthetic production to be produced to satisfy the increasing future demand. Therefore, we're confident that prices will rise over the period of 2019 to 2028. While our soda ash business will no doubt be significantly weaker this year, our belief in the longer-term fundamentals reinforce our view we will work through these broader economic uncertainties and get back to the historical trend line for demand growth and pricing.

As we look beyond 2020, we have a very good line of sight on significantly improving financial performance. First, we would reasonably expect our existing soda ash operations to return to trend and add some $40 million or $50 million a year by 2022 at the latest. Argos is scheduled to come on in the second half of 2021, which represents potentially $30 million to $40 million of incremental annualized EBITDA. King's Quay is scheduled to come on in the first half of 2022, which represents potentially $50 million to $60 million of incremental annualized EBITDA. Finally, assuming a return to trend on soda ash pricing, the Granger expansion is expected to add potentially $60 million of incremental annualized EBITDA beginning in mid-2022.

Therefore, given a starting point of being very close to cash flow neutral this year, as we described in the earnings release and taking into account the meaningful new EBITDA discussed above, we believe we will be able to delever our balance sheet and restore and maintain our financial flexibility to capitalize on future discretionary opportunities.

As always, we intend to be prudent, diligent and intelligent in achieving and maintaining the financial flexibility to allow the partnership to opportunistically build long-term value for all our stakeholders without ever losing our commitment to safe, reliable and responsible operations. As always, we'd like to recognize the efforts and commitment of all those with whom we are fortunate enough to work. With that, I'll turn it back to the moderator for any questions.

(Operator Instructions)

Your first question comes from the line of Shneur Gershuni.

Maybe we can start off with the soda ash guidance for this year. And I do appreciate all the color that you gave. I was trying to understand how you're accounting for the coronavirus. Is it -- are you saying from where you are right now, you're basically accounting for the worst of the inventory build right now and that in theory, China's position as a net exporter could -- and if it recovers faster or there would be recovery of some form, that, that could make things better or worse from where you are? I'm just trying to understand how we should be thinking about the impact, given that China is a net exporter?

At this point, our implied guidance on soda ash is independent of any effects of the coronavirus. We just don't know export data out of China is due -- generally speaking, we're good at the 20th to the 24th after preceding month and so we just haven't seen it yet. So we do know that there are several large synthetic soda ash production facilities in Wuhan province, which we would anticipate or completely shut down. But again, we don't know the net effect within the dynamics within the Chinese economy. So as you've stated or asked in the question, yes, the kind of the U.S. domestic exporters coming out of typically the Pacific Northwest, the marginal competition is with synthetic production coming out of China into the non-China Asian markets.

Okay. So effectively, the way to think about it is as long as their -- the net exporting position stays roughly the same, even if their imports are down a lot, but if their exports are down a lot as well too, the impact could be effectively muted and we should sort of be thinking of more of the global market? Is that sort of the right way to think about it?

We think that's sort of the right way to think about it at this point.

Okay, great. Just 2 follow-up questions. If I remember correctly from your prepared remarks, you sort of talked about $620 million of cash outflows for this year. I was wondering if you can sort of walk us through the assumptions. I'm trying to understand, is the Granger JV fully funded from a CapEx perspective for 2020 and that's why the outflows are that low?

That's correct. We believe that given the structure of the redeemable preferred that we put in place, that it doesn't stress the internal balance sheets. There's no cash payments associated with that during the construction period, and the sources of the funds are under -- draws under, if you will, or issuance of the redeemable preferred. So as we look at it and how we manage the business and how our banks think about it also is basically that our recurring obligations are in the zip code of $620 million, and that includes all of the cash taxes, senior secured interest expense, all of the run rate on the senior unsecured, on the bond complex, maintenance capital spent, the preferred distributions and common distribution.

So on top of that, we have around $25 million worth of, as we said, around $25 million worth of budgeted growth capital and around $20 million of AROs, which are really kind of nonrecurring and it's -- the majority of which is associated with an asset, which we think that we can sell either by the end of '21 or certainly -- I mean, '20 or certainly in 2021 at a multiple of those incurred. So kind of at the midpoint of our EBITDA guidance, that's where we think that we are cash flow neutral.

Okay. And 1 final question, if I may. If I recall, you did a big financing earlier this year. Have you reduced all of your upcoming maturities and reduced your credit facility balances to almost 0? Is that sort of a correct characterization that there's really no maturity or lingering type of issues that we need to be thinking about in the near term while you go through the soda ash issue?

The senior secured facility, as it currently exists, has a term going through, I think, May of 2022, and the first maturity of a bond is sometime in 2023. I'm not sure what month in 2023. So what we did with the refinancing was basically issue '28s and called the '22s and stuck them at the end of the maturity ladder.

And you took down your balance on your revolver as well?

No, it was basically equal to the issuance that we redeemed.

Your next question comes from the line of Kyle May.

I wanted to ask about your assumptions for crude-by-rail volumes coming out of Canada. Based on the information in the press release, it sounded kind of lumpy through the year. So just wondering if you could walk us through your assumptions. And then how we should think about this segment of the business beyond 2020?

In part, it is why we ranged the overall EBITDA here. I think as we said on the third quarter call, if we just averaged 1 train a day, which is approximately 70,000 barrels a day for the year of 2020, we would expect, everything else the same, that contribution margin from Onshore Facilities and Transportation would be $10 million higher than it was in 2019. So we are ranging it a little bit, as you look in the aggregate, from the $640 million to $680 million.

At this point, as I said, we -- and as we said in the prepared remarks and the press release, we have clear visibility through the first quarter but we've not yet received nominations for April. And given the -- just the dynamics of pipelining out of Canada, as we mentioned in the press releases, there's less diluent required, and therefore, there's more capacity in the second and third quarter typically. And so we don't know yet how that may or may not affect the economics. But suffice it to say, in the first quarter, we're averaging over the 70,000 BD i.e., over the 1 train a day, and we would expect that in the fourth quarter also. We're just a little bit uncertain on the second and third quarter.

Got it. That's helpful. And I appreciate the EBITDA contribution you provided for some of the long-dated projects. But just wondering if you can give us an update on your thinking around the leverage ratio projections or when you may hit some of the targets you have in mind.

Yes. What we didn't kind of expect was the -- what we consider to be a cyclical fall in the contribution from soda ash, which we'll recover. But so if -- again, if you kind of do the arithmetic of exiting '21 or '22 with the addition of the -- everything that we threw out there, with and everything else the same, then we would -- there's close to $200 million of incremental EBITDA. So if everything else is the same, you can kind of get your hands around the arithmetic of being -- paying down cash at the same time that the denominator of trailing EBITDA is increasing. So it's probably in the kind of the '21, '22-type time frame that we start getting down into the low 4s from our perspective of managing the leverage calculation or the leverage covenant.

Your next question comes from the line of TJ Schultz.

Just a follow-up on soda ash. You mentioned, I think, due to the mix of contracts that a recovery historically can take from 4 to 8 quarters. So with that, you point to a recovery in cash flow by 2022. So are you locked in now for the next 2 years? Or could you reset contracts at the end of this year and 2021 is kind of still to be determined?

Yes, it's a good question and I will put some more color around it. As I said in the -- as we said in the prepared remarks and in the press release, the domestic contracts are typically under, call it, 2- to 3-, sometimes 5-year contracts, most of which are subject to annual redeterminations, and most of those are subject to caps and collars around the pricing. So those are kind of fixed, if you will, within a band for a period of time.

As a general proposition, as I said, half of our sales go to export markets. And then this is very general, but half of it goes -- half of that so 1/4 of the total sales go into Latin America, which typically are 1-year contracts, not all but typically are 1-year contracts. And then the other half of the exports or 1/4 of the total sales go into Asia, and those are typically 3- to 6-month contracts. So in any given year -- contract year, the only thing that can really move or be redetermined are primarily -- and then this is very general, but are the Asian contracts, if you will. But then after 4 quarters and you can reset the Latin American contracts to the higher price. So I'll just give a little historical perspective, I'm not going to talk about the absolute price levels because I'm uncomfortable doing that, given that there are only 5 domestic suppliers and other -- we have other arrangements for exports through ANSAC.

But the last 2 occurrences where we saw export prices dipped this low within 12 months, prices had recovered 15% and within the subsequent 12 months, they had recovered an additional 12% to 15%. So I think that, that's why we said typically, we've seen historically that it takes -- it can take, because of the nature of the contracting and the terms, it can take 4 to 8 quarters before we can get back on trend.

Okay, great. Just 2 quick clarifications on some of the guidance you gave for 2020. First, what's the maintenance CapEx to be spent for 2020 that you include in the cash obligations? And then, what cash flow impact in 2020 is there from recontracting the Phoenix?

The maintenance capital spend as currently budgeted is around $60 million to be spent in 2020. The American Phoenix, I would say, in today's market probably, but it's directionally correct because 6 or 9 months ago, is probably $20,000 a day of recontracting risk. I would say today, it's somewhere in the order -- if it were to reprice in today's market, I think it's probably close to $5,000 a day. So not a large -- in the overall scheme of things, not a large amount of recontracting risk.

Your next question comes from the line of Sunil Sibal.

I just wanted to see if you could remind us, where does your covenant sit on the leverage metrics for the next few quarters?

It's at 5.5% for the remaining term of the senior secured credit facility.

Okay. And you're at low 5s at the end of '19, considering there may be some more variability with all that's going on in China and all that. Could you talk a little bit about the levels you may have available to kind of scale comfortably within 5.5%?

We see, even in stressed situations to the downside, that we don't perceive any issues with staying comfortably within the 5.5%.

There are no further questions at this time.

Okay. Thanks, everyone, and we'll talk to you soon.

This does conclude today's conference. You may now disconnect.