Genesis Energy LP (GEL) 2023 Q1 法說會逐字稿

Greetings, and welcome to the Genesis Energy First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to your host, Dwayne Morley, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to the 2023 First Quarter Conference Call for Genesis Energy. Genesis has 4 business segments. The Offshore Pipeline Transportation 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. The Soda 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 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.

The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures. At this time, I'd like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Kristin Jesulitis, Chief Financial Officer and Chief Legal Officer; Ryan Sims, President and Chief Commercial Officer; and Louis Nickel, Chief Accounting Officer.

Good morning to everyone. Thanks for listening in. As we mentioned in our earnings release this morning, our financial results for the first quarter were generally in line and consistent with our annual guidance, they did end up below our internal expectations for reasons well beyond our control. Most notably, our soda ash business was negatively impacted by the coldest first quarter in the last 23 years in Southwest Wyoming, which challenged our operations and significantly impacted rail service, which in turn reduced our production and sales volumes during the quarter.

We only have storage on site for about 5 days' worth of production. When loaded railcars aren't pulled and empty cars aren't returned on a timely basis, we have no choice but to curtail production. As a result, we estimate that we suffered a reduction in realized segment margin and adjusted EBITDA of approximately $15 million for the first quarter and fiscal year. Unfortunately, these weather and third-party service related headwinds in our soda ash operations masked the overperformance in our offshore and our Marine segments during the quarter.

Despite these challenges, we are reaffirming our previously announced guidance range for adjusted EBITDA of $780 million to $810 million for the full year and still expect to exit the year with a leverage ratio as calculated by our banks below 4x. So here we are, having delivered on our targeted leverage ratio. It should now hopefully be clear that the actions we have taken over the last several years, along with the underlying resilience of our market-leading businesses has positioned us with ample liquidity and significant financial flexibility going forward.

As we look ahead to the remainder of 2023, the fundamentals and macro conditions across our business segments continue to appear strong. The Central Gulf of Mexico is really hitting its stride with tremendous oil and gas producer activity around our existing and soon-to-be expanded midstream footprint. We continue to see robust volumes from King's Key, Spruance and other developments throughout our network of offshore infrastructure. Additionally, we can confirm we have, in fact, started to receive new volumes from BP's Argos production facility, which supports their Mad Dog 2 field development.

The soda-ash market feels like it's settling down some, moving from an extremely tight to perhaps a more balanced global market. We believe the pace of China's reopening and the lost tonnage from natural producers in Wyoming during the first quarter has not yet quite filtered its way through the global system and could and really should help support prices in the back half of the year. To be conservative, we have taken into account in our annual guidance, the possibility of some potential softening for soda ash prices to the extent demand weakens more than we anticipate as we move throughout the remainder of the year.

In our Marine Transportation segment, we are continuing to see full utilization as a practical matter for all classes of our Jones Act vessels, which is affording us the opportunity to drive day rates for spot and contract charges to their highest levels in the last decade. Regardless of any potential impacts of a slowing economy, we continue to believe that Genesis is well positioned now and in the future for increasing amounts of free cash flow, financial flexibility and opportunities to continue to build long-term value for all of our stakeholders.

Now I'll touch briefly on our individual business segments. Our Offshore Pipeline Transportation segment performed in line with, if not slightly ahead of our internal expectations and importantly, demonstrated a more normalized level of activity and earnings capability. While we do expect some regular scheduled maintenance and downtime at one of our major host fields in the second quarter, which will impact volumes and margins. It is clear that volumes from our existing fields, combined with steady volumes for Murphy Oil's operated King's key development, logs operated Spruance development and the number of subsea tieback and development wells from last year continued to drive strong and steady performance in our offshore segment.

In mid-April, we started to receive first oil from BP's operated Argos floating production facility, which is supporting the 14 wells predrilled and completed at BP's operated by Dog 2 field. Based on BP's recent public disclosures, we would expect volumes from Argos to ramp over the remainder of 2023 with 100% of the volumes flowing through our 64% owned and operated CHOPS pipeline for ultimate delivery to shore. As many of you know, Argos is the second major new production facility come online is connected to our system in as many years. It is important to remember that these types of projects are years and sometimes decades in the making. And we currently have contracts in place for 2 more of these deepwater production facilities at the Shenandoah and Salamanca developments, which are expected to come online in late '24 and early '25, respectively.

To provide some additional context, the combination of these 4 new production facilities, King's Key Argos, Shenandoah and Salamanca represents roughly 400,000 barrels per day of incremental production handling to be connected to our integrated pipeline infrastructure. Based on the latest data from the EIA at full utilization, this incremental 400,000 barrels a day would be roughly the equivalent of approximately 7% of the Permian Basin's total current production or approximately 35% of the Bakken's total or even approximately 35% of the Eagle Ford total current production. The volumes from these 4 new facilities are 100% dedicated to our system for the life of the fields and useful life of the production platform, which in most cases is 30 to 40-plus years or longer.

The initial reservoirs to be exploited represents hundreds of millions of barrels of already identified recoverable reserves and perhaps multiples of that to be discovered, developed and ultimately handled across these deepwater production facilities and transported through our pipelines for decades to come. The sheer size and scale of the deepwater is underappreciated, I think, especially when compared to the onshore shale plays. Let really repeat. Notwithstanding the 500,000 to 600,000 barrels of oil, we currently touch every day. At full utilization, these 4 new production facilities alone represent new business opportunities for Genesis equal to approximately 7% of the total production coming out of the Permian today, 35% of the total coming out of the Bakken and around 35% of the total production coming out of the Eagle Ford shale today.

I might also point out that our fees per barrel transport are going up, not down as has been experienced in a number of onshore basins. As we look out past 2025, we would be remiss to not mention the results of the bones recent lease sale number 259, which was held on March 29, consistent with the requirements laid out at the inflation Reduction Act. The results of the leasehold would indicate there is still significant long-term interest in the geographies in the Central Gulf of Mexico, where our existing pipeline infrastructure seems to be the most competitive alternative to get new production to shore. The lease sale raised approximately $264 million in high bids for 313 tracks, covering roughly 1.6 million acres in federal waters in the Gulf of Mexico.

If you dig into the results a little further, you will see that approximately 715,000 acres or approximately 40% of the total ESO was located in the Central Gulf of Mexico with most of that activity being in the vicinity of our SEKCO pipeline, which is the only existing pipeline in Keathley Canyon as well as our new SYNC pipeline, which extends from our CHOPS pipeline through Garden Banks across the Southwest portion of Green Canyon and into the Walker Ridge area in the Gulf of Mexico.

Finally, the list of companies who participated in the lease sell was a who's who, in investment-grade integrated and independent operators, along with other private and well-capitalized independents that have a long track record of success in the Gulf of Mexico. Most of these operators have opportunities onshore but are continuing to spend billions of dollars in the Gulf of Mexico. While the deepwater is more capital intensive and a longer cycle investment when compared to onshore shale plays, we believe this continuing allocation of significant capital confirms that the ultimate returns on investment are at least equal, if not better, than onshore shale plays and has the added benefit of being significantly less carbon intensive.

For those of us who are well positioned, the current and expected future activity in the Gulf of Mexico represents decades and decades of future segment margin and EBITDA. Turning now to our Soda and Sulfur Services segment. The near-term macro story for soda has softened somewhat since last quarter and seems to be moving from an extremely tight market to a more well-balanced global market, which I would characterize as a more normal and healthier environment from a longer-term perspective.

As we mentioned in the release, we have started to hear from some of our distributors and direct customers, primarily in our export markets that they are starting to see some slowdown in demand downstream and thus are managing their supply chains and inventory levels accordingly. Nonetheless, we did, in fact, see prices for uncontracted export volumes increased in the second quarter when compared to the first quarter. As a result, we have now contractually agreed under pricing for approximately 90% of our anticipated sales volumes of soda ash and related products in 2023, including our new soda ash volumes from Grainger.

And even if prices somewhat softened in the back half of the year, we still expect our weighted average price to exceed weighted average price we received in 2022. Near term, we continue to monitor the reopening of China and its economy with early indications suggesting their economy recently grew at its fastest pace since first quarter 2022 and certainly more than it did during their Covid lockdown periods, which would be constructive to a worldwide supply demand balances and soda ash prices as we move through the rest of the year. Current projected soda ash demand growth within China bolstered by their tremendous solar glass production expansion would likely absorb most of China's existing synthetic soda ash production and any new natural production within the region when and if it comes online later this year.

Additionally, we were not alone in having to curtail production out of Southwestern Wyoming in the first quarter. We estimate that approximately 300,000 tons, if not more, of soda ash did not and will not make its way into the supply chain or ultimate end use market for soda ash. This will without question result in tighter supplies worldwide over the next several quarters. Everything else is same. In the intermediate and longer term, soda ash demand has tracked well with industrial production over longer periods with annual growth rates of approximately 2% to 3% per year over time.

On top of industrial production-driven demand growth, the recent demand for soda ash associated with the green transition and specifically lithium batteries and solar panels is expected to accelerate overall demand. In response to the estimated demand growth globally over the next decade, the market has seen a few smaller natural brownfield expansions announced, including our Grainger expansion that will help fill the expected supply-demand gap in the short term. Even with these expansions, the supply-demand forecast for soda ash would suggest there needs to be much larger natural greenfield expansions to help fill the gap towards the end of the decade.

The cost to build these large greenfield expansions is very high, both on an absolute dollar and a per ton basis, and the implications for existing soda ash producers should be positive over time. Based on public meetings and industry data, a new natural greenfield development in Green River, Wyoming, in today's world, is estimated to cost anywhere between $1,000 to $1,200 per ton of capacity installed. In order to justify and finance these capital expenditures, we believe one would have to be convinced they would comfortably make at least $100 to $120 per ton net margins over a cycle to simply make a minimally adequate return.

If these margins were, in fact, achievable and necessary to balance the market in future periods our roughly 4.8 million tons of production capacity per year, pro forma for the Grainger expansion would be capable of generating upwards of $500 million of segment margin annually. Whether future incremental demand is supplied by new natural greenfield soda ash production or higher-cost synthetic production, we believe soda ash prices and margins over the long term will trend higher to help justify these capital and operating costs.

Regardless of how the remainder of 2023 looks or whether there is a broader economic slowdown next year, we believe we are well positioned to benefit from this broader trend over time. And as a result, the value of our existing operations should continue to rise over the years and decades ahead. Our legacy Refinery Services business continues to be a steady contributor for Genesis. We continue to utilize our proprietary technology to provide the most environmentally benign services to remove sulfur at our host refineries.

The largest end market for our sulfur-based product remains copper mining. Given what seems to be the globe's insatiable appetite for copper over the coming decades, given it's important since a fundamental building block of the global economy and importantly, its vital role in the green energy revolution and the electrification of our economies in the low-carbon world, we continue to believe we are well positioned to see steady earnings from this business for many, many years to come.

Our Marine Transportation segment continues to exceed our expectations. As market conditions and demand fundamentals continue to support activity levels at or near 100% utilization for all classes of our vessels. While there continues to be reasonably robust refinery utilization rates, the increasing demand for marine equipment to move renewable diesel to the West Coast has effectively reduced the practical supply of marine equipment on the Gulf Coast and the East Coast.

This practical reduction in supply, combined with the continuing retirement of older tonnage, the increased maintenance cycle that is a result of all of the new equipment that was built 5 or 10 years ago and practically zero construction of new equipment over the last couple of years has resulted in an effective structural shortage of Jones Act vessels. This market dynamic has driven spot day rates and longer-term contract rates across our various asset classes to their highest levels in the last decade. Given the increased cost of steel and long lead time to build new equipment, which in some cases is up to 3 to 4 years for the larger vessels, we believe that day rates today still do not support the construction of new equipment.

In fact, we believe day rates would need to increase significantly from today's rates, and we maintained over a cycle to justify the construction of new equipment. This general sentiment has recently been echoed by our peers, and we believe this should continue to drive our realized average day rates higher as each of our existing spot and term charter contracts come up for renewal. Like our soda ash business, if day rates were in fact to continue to rise to support new construction, -- we would undoubtedly be the beneficiary of such a rise in the value of our existing fleet on the water, should continue to increase over time. In our estimation, this macro environment should support strong financial performance from our Marine segment for the foreseeable future and certainly over the next few years.

Touching briefly on our balance sheet. We continue to expect to spend between $400 million and $450 million net to Genesis and growth capital expenditures this year to complete our Grainger soda ash expansion project and make meaningful progress on our offshore growth projects. We remain extremely focused on finalizing these projects at the same time, not losing focus on our leverage ratio. We remain well positioned to complete our capital program in the next 12 to 18 months, and then we'll be able to begin harvesting the increasing amounts of free cash flow, continuing -- continued simplifying our capital structure and create increasing value for everyone in our capital structure, all while maintaining and strengthening our financial flexibility.

I would like to make a few comments on the senior management changes we recently announced. The reality is it will be business as usual at Genesis, and these promotions reflect the contributions Kristen Ryan and Louis have been making over the past several years. They, along with their respective teams, have been running the corporate functions on a day-to-day basis and have been intimately involved in addition to our business unit leaders and all our hard-working and dedicated employees in achieving the results we are starting to see. The Board and I are confident they are the right people in the right positions at the right time and representing a new generation of leaders to continue building long-term value for all of our stakeholders in the years to come.

I'm also today pleased to say that we have published our inaugural ESG report and posted on our website. This report should provide some additional disclosures and information that is often requested by our stakeholders. We will endeavor to provide additional disclosures as we move forward and would expect to release our 2022 report in the third or fourth quarter later this year. We have also posted a new earnings supplement presentation to our website that details the key takeaways and highlights from our first quarter earnings, and I would encourage everyone listening to the call to read to the extent that you have time.

Finally, I would like to say the management team and Board of Directors remain steadfast in our commitment to building long-term value for all of our stakeholders, and we believe the decisions we are making reflect this commitment and our confidence in Genesis moving forward. I'd once again like to recognize our entire workforce for their individual efforts and unwavering commitment to safe and responsible operations. I'm extremely proud to be associated with each and every one of you. With that, I'll turn it back to the moderator for questions.

Thank you. And ladies and gentlemen, at this time, we will be conducting a Question-and-Answer Session. (Operator Instructions) If you would like to ask a question, please press #, 1 on your telephone keypad. A confirmation tone will indicate that Your line is in the question queue. You may perhaps #, 2 to if you would like to remove your question from the queue. For participants and speaker phones, it may be necessary to pick up your handset before pressing authorities.

Our first question comes from Michael Blum with Wells Fargo.

Just wanted to start with the first quarter, the railroad issues. I'm just wondering, is there any -- do you have any recourse with the railroads? And is there anything you can do to mitigate this going forward? I don't know if that means adding storage or just anything you could need to mitigate this going forward?

No. I mean I think, unfortunately, there's nothing that we can do for the operating conditions, which existed in the first quarter, and quite frankly, it has continued a little bit to an extent in April, we are day-working with the railroad on a commercial basis as well as having discussion with the regulatory agencies, the Surface Transportation Board to work together collaboratively to increase the level of commercial service that we have for a very important product that is made in the U.S. and supports a lot of jobs and supports a lot of export activities. So unfortunately, it is what it is at this point. We've never experienced this type of thing given the, in essence, empty cars can serve as storage if we can get them in, but we weren't able to get them and pull the pull cars on a timely basis. So I think that we'll try to resolve it and work with the railroads. I mean, we've been in this location for 75 years now. This is the first time in our most the most serious operating issues that are caused by a third-party service provider, but we think that we have a path to get it fixed at this point.

Okay. Great. And then I just want to clarify that your comments or just better understand your comments on the soda ash market. Are you seeing that supply has just kind of caught up with demand, so it's more balanced? Or are you actually seeing demand being impacted by like an economic slowdown or something like that?

We -- as we said, we're starting to hear from some of our distributor customers as well as direct customers, primarily in the export markets that they are seeing a slowdown in demand. So everything else the same. The demand side is bringing the market back into a balance where certainly over the last several periods has been a supply constrained that there wasn't enough supply to meet the demand. So it's the demand side slowing somewhat, again, primarily in export markets and not domestic markets, which are -- which is bringing the market back into balance near term.

Okay. Got it. And then if I could just squeeze one more in on the soda ash market. So you have 90% of your pricing locked in for this year. But if you continue to see a softening in that market on the demand side this year, would that mean come in kind of at the low end of guidance, you think? Or is that coming below that end? Or do you think it's pretty locked in?

Again, to come to that range of guidance, we built in into our reaffirmation of that guidance range, we built in the anticipation of some amount of softening at the midpoint over the remainder of the year, but if the softening occurs and is greater than whether we expected, we would tend towards the low end of the range. But if the softening doesn't occur, and then we'd probably get to the high end of the range, if not exceed the high end if it doesn't occur.

Thank you. (Operator Instructions) And just a reminder to the audience to ask a question, press #, 1 on your telephone keypad to remove yourself from the queue press #, 2.

Our next question comes from TJ Schultz with RBC.

Grant, just a follow-up on the soda ash. So the 300,000 tons that have come off that you cited, are volumes still being curtailed? I'm just trying to understand if that grows as we think about kind of to Mike's point, the balancing of the supply and demand going forward through this year?

Yes. I think it's basically, everything was resolved and back to operate -- normal operations in April. So we think that the cumulative effect of the -- out of the trona patch and Green River that the cumulative across all of ourselves as well as our 3 neighbors is a total of a little over 300,000 tons, which did not get produced and unfortunately, can't really be made up because it's not that it was stored on site. It just wasn't produced. So ultimately, that supply shock, I mean, that's the equivalent of force majeures occurring at Searles Valley Mineral or Solvay last year from production upsets, which probably cumulatively took 200,000 tons off of the market. This is actually a bigger event. And ultimately, we believe, given the travel times and to various markets that ultimately this missing $300,000 is going to be felt as a supply constraint in the market, which will tend to, in our opinion, offset any potential demand weakening that we talked about in the previous question.

Okay. Understood. Just second one for me. Just any outlook on potential asset sales that would accelerate your delevering plans, including, I suppose, even soda ash, just given the comps on greenfield newbuild cost? Or are you comfortable with the current mix of assets in your portfolio?

Well, I mean we don't -- we're comfortable with what we have. We think the fundamentals are very good. I mean, at the end of the day, almost anything is for sale at the right price. But I think that the fundamentals of our businesses, the macro fundamentals are very good. We like the position that we're in, and we like the intermediate and longer-term outlook for all the businesses. So we're pretty comfortable with where we're at. But not -- that's not to say that if the right opportunity came along to -- and we've demonstrated it over the last couple of years, being an opportunistic seller of assets to accelerate things. But I mean we're at 4x. So I don't -- are under 4x. I don't know that we have a lot more need to accelerate things. We have all the financial flexibility that we need to finish up our growth projects or start harvesting, as we like to say, the hundreds of millions of dollars of year of incremental cash that's going to come out of these projects as well as the strong fundamentals of our underlying business. So we're very comfortable about the position that we're currently in.

There are no further questions at this time.

I will hand the floor back to Grant Sims for closing remarks.

Okay. Well, again, thanks, everyone, for joining and are listening in on a delayed basis, but we appreciate your interest. And we look forward to visiting with you again in the near future. So thanks very much.

Thank you. And this concludes today's conference. All parties may disconnect. Have a great day.