Global Partners LP (GLP) 2011 Q3 法說會逐字稿

Good day everyone, and welcome to the Global Partners' Third Quarter 2011 Financial Results Conference Call. Today's call is being recorded. There will be opportunity for questions at the end of the call.

With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister, Executive Vice President, Chief Accounting Officer and Co-Director of Mergers and Acquisitions, Mr. Charles Rudinsky, and Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, I'd like to turn the call over to Mr. Faneuil, for opening remarks. Please go ahead, sir.

Good morning everyone. Thank you for joining us. Let me remind everyone that during today's call, we will make forward-looking statements within the meaning of federal securities laws. These statements may include, but are not limited to, projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners LP.

Estimates for Global Partners future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, weather, credit markets, and the forward product pricing curve.

Therefore, Global Partners can give no assurance that our future EBITDA in profits or losses will be as estimated. Forward-looking statements are not guarantees of performance. The actual performance for Global Partners may differ material from those expressed or implied by any such forward-looking statements.

In addition, such performance is subject to risk factors, including but not limited to, those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statement that may be made during today's conference call.

With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases. Publicly announced conference calls, are other means that would constitute public disclosure for purposes of Regulation FD.

Now, let me turn the call over to our President and Chief Executive Officer, Mr. Eric Slifka.

Thank you, Edward, and good morning everyone. The strong performance of our Mobil assets helped to produce better than expected earnings in the third quarter and contributed to record Q3 gross profit and product volume. We generated $1.9 million in net income despite a less favorable futures market that continues to affect hedging costs. Shortly, Tom, will explain some of our approaches to managing in this environment.

Our third quarter results underscore our success in broadening and diversifying our business. When we went public six years ago, we were primarily a heating oil and residual fuel company. And those products continue to be an important component of our business.

But today, transportation fuels, gasoline and blend stocks represent more than half of our volumes. In addition we are investing in a small, but emerging natural gas business. And we are expanding in another promising area, the purchase, supply, storage, and sale of crude oil.

Let me touch on some of the key drivers behind our improved results, beginning with total product volumes, which reached a Q3 record of 1.3 billion gallons. Wholesale product volume rose 64% over the same period in 2010, while commercial product volume grew 93%. These increases reflected the addition of our new Mobil assets, as well as increased gasoline and ethanol activity throughout the Northeast.

To put the performance of our Mobil assets in perspective, on a combined basis, annualized EBITDA from this business -- and by EBITDA, I mean earnings before interest, taxes, depreciation and amortization -- was well above our expected case results for the third quarter.

In addition to the stations and supply rights that we acquired as part of the 2010 transaction, we have also contracted to supply other distributors in New England with more than 150 million gallons of branded and unbranded fuel annually.

Our Mobil assets and supply activities were catalysts behind the 63% rise in our wholesale gasoline net product margin which increased to $26.8 million in Q3 of this year, from $16.4 million for the same period in 2010.

Our commercial business segment also enjoyed strong results, posting a net product margin of $9.3 million, up 300% from the third quarter of 2010. While we don't disclose results for each business in this segment for competitive reasons, our bid and bunkering businesses, both enjoyed record quarterly gross margin results. In addition, our commercial business segment includes the year-over-year increases from the sale of Mobil branded gasoline to customers at our directly operated stations.

Now let me turn to our recent announcement regarding crude oil shipments. In the last week of October, we received two unit trains of approximately 90,000 barrels in the aggregate of Bakken crude from North Dakota at our terminal in Albany, New York. As many of you know, energy exploration and production in the Bakken region is booming. Based on statistics from the North Dakota Industrial Commission, the Bakken formation yielded 85.5 million barrels of oil and more than 64 billion cubic feet of natural gas in 2010.

A 2008 assessment from the US Geological Survey, estimates that 3.65 billion barrels of oil and 1.85 trillion cubic feet of natural gas, are as yet undiscovered in the region. These numbers may well increase when the USGS completes its assessment in the coming months. August 2010 production for crude in North Dakota alone, reached approximately 450,000 barrels a day according to the Industrial Commission.

Thanks to new drilling and production techniques, companies are finding more oil and natural gas in this region than was thought possible just a few years ago. But the infrastructure required to transport and store this energy is not in abundant supply nationwide. Billions of dollars in infrastructure is needed to bring all this product to market. We plan to play a role in this energy infrastructure renaissance through the development of logistics and assets that capitalize on these inefficiencies.

Our Albany Marine Terminal is one example of such an asset. Located along the Hudson River, the facility is also linked to being a single line haul rail, on Canadian Pacific, making it a gateway for the receipt, storage, and delivery of energy products by barge, rail, truck, or ship.

Global's expansion in Albany, highlights a key element of the partnership's organic growth strategy -- to further enhance our earnings power by increasing the storage capacity, capability and flexibility of our assets.

In summary, while we continued to experience a less favorable futures market, we posted net income of $1.9 million for the third quarter. We were efficiently managing our inventories. Collectively, our assets are performing well. The breadth and diversity of our assets is enabling Global Partners to take advantage of the energy products, and related services being developed within North America.

The purchase, transportation, storage, and supply of Bakken crude oil, is just one example of what we believe is a promising area for organic growth. We continue to explore a variety of other organic growth projects and acquisition opportunities.

With that, let me turn the call over to Tom, for his financial review.

Thank you, Eric, and good morning, everyone. This was, as you've heard from Eric, a solid quarter for Global. Our gross profit increased by more than $14 million or 40% to $49.3 million. And our earnings benefited from the strong performance of our Mobil assets.

Let me point out that our third quarter results did not factor in the recently awarded, two one-year contracts to store at our Revere, Massachusetts terminal facility a combined 500,000 barrels of ultra-low-sulfur distillate for the US Department of Energy's Northeast Home Heating Oil Reserve.

The contracts, which commenced in the fourth quarter of 2011, are expected to generate a total of $4.2 million in storage revenue for the partnership in the first contract year. The DOE has extension options for up to an additional three years.

We have completed the expense reduction initiatives we announced in late July. And we expect the annualized range of savings generated by these initiatives to be $10 million to $12 million beginning in 2012. These reductions will be primarily in SG&A expenses.

Headcount at the end of the third quarter was 264 people, down 29 people from 293 at the end of the second quarter and consistent with our previously announced 10% workforce reduction. We took a one-time $1.7 million charge in the third quarter, to cover severance and other related costs.

SG&A expenses were flat at $17.2 million in the third quarter, compared to a year ago. Last year, however, we did not own the Mobil assets until the month of September. Consequently, on an apples to apples basis, apart from running the Mobil assets, this year's SG&A expenses were effectively about $700,000 less than last year.

Operating expenses increased $9 million to $19.4 million in the third quarter of this year, primarily as a result of additional costs related to the operation of the Mobil assets.

Our distributable cash flow of $8.6 million is up $3.2 million from last year's third quarter result of $5.4 million. Our Q3 EBITDA of $18.7 million is up 49% from last year's high of $12.5 million.

As a follow-on to Eric's comment, we continue to efficiently manage our business in a backward gasoline market. As you remember, contango markets tend to offer improved margin opportunities. Flat markets are generally neutral to margins, and backward markets tend to squeeze margins.

When the market is in a backward direction, our inventories are losing value, because we are locking in lower futures prices, as part of our hedging activities, making our hedging costs more expensive and negatively impacting margins.

Keep in mind that we are a critical player in the supply and marketing business within the Northeast energy structure. Therefore, we always maintain sufficient inventory to satisfy our customer's needs.

We continue to work to minimize the impact of an unfavorable gasoline forward curve on our business. Our approach includes proactively managing and minimizing our working barrels of inventory, which utilizes our logistical expertise. We are always attentive to the pricing of inventory purchases and sales in order to minimize risk. And we execute our initial hedges and the subsequent rolling of hedges to minimize hedging costs.

In the distillates market, wholesale net product margin was down 45%, year-over-year in the third quarter to $10.2 million despite a more than 30% increase in volume from the prior-year period. This decrease reflected less favorable buying opportunities and less favorable market conditions, including the forward product pricing curve.

Let me make one point on capital expenditures. The capital expenditures involved in the receipt of crude oil at our Albany terminal are nominal. In 2011, we will spend approximately $1.4 million at our Albany facility to position it to maximize the receipt, storage and distribution of both ethanol and crude oil.

Turning to our outlook, the EBITDA guidance we gave last quarter for 2012, was $75 million to $85 million. We are very comfortable with that estimate.

With that, we would be happy to take your questions. Operator?

Thank you. We will now be conducting a question and answer session. (Operator Instructions).

Operator?

Yes sir?

It's Tom Hollister. I just realized inadvertently I said, "Our EBITDA guidance is for $75 million to $85 million" -- that was for 2011. Apparently I inadvertently said '12. Thank you.

Your welcome, sir. And our first question comes from the line of Gabe Moreen, with Bank of America/Merrill Lynch. Please proceed with your question. Your line is live.

Hi, good morning. Question on the crude oil logistics opportunity, just wondering I guess how that arose and also kind of what role you're taking here, whether you're working directly with the producers, clearly you're working with Canadian Pacific, and then also I guess how large you think the opportunity can be?

It looks like you can get two unit trains in in one week, and I guess also how you're hedging yourself on the other end considering that it looks like some of these deliveries went to PADD 1 but appears that you might want to take it elsewhere as well. I know that's a lot of questions but I just wondered if you would expand on that a little bit?

Sure, Gabe. Essentially, our facility as we stated is on Canadian Pacific. And Canadian Pacific has lines that go all along the Northern tier of the US They have specifically lined and loading facilities that exist in North Dakota.

And we're taking advantage of those lines to ship crude in a way that we think is very efficient to the East Coast. And then once it gets here we're supplying East Coast refiners. Now, we've just started to take in in volume so we won't know exactly where we come out here in terms of the volumes that we think we can handle, but we're very positive on the business.

We think that in terms of pricing and spread it really depends upon how you buy the crude. If you buy it on a Brent basis or if you were to buy it on a WTI basis, obviously the Brent basis is probably closer to the way the East Coast refiners are currently buying. If you're buying it on a WTI basis, you're going to try and lock in those values.

But the key is we think the facility is competitive with any other rail alternatives that are currently being used, particularly the ones down far away down south in the Gulf Coast. So we think on a cost basis we're competitive with them.

The spreads will move around for sure, but the crude is going to have to move along with it, and it's a little bit like the refining sector in that if refineries were to go away, gasoline, heating oil and diesel fuel are still going to have to come into the marketplace here on the East Coast. And crude's going to do the same, right, so I think the key is we're finding lots and lots of crude that is domestic.

I think we're finding more of it than people originally had thought, and that's going to put pressure on all of logistics systems to handle it and manage it and transport it and get it out. And I think that there's going to be opportunity.

One of the other keys is, if in fact some of this Bakken turns out to have much larger production rates than they had originally estimated, which so far it looks like it's heading in that direction, as a producer I can only tell you what I would like.

I would like to make sure that I have diversified markets that I'm supplying to and those diversified markets would be the East Coast, the Gulf Coast and West Coast, right? You want to make sure that if you end up producing couple million barrels a day that you are going to want to have your markets, in a way, your risks managed so that you're not exposed to any one part of the business.

Helpful color and then maybe as a follow-up to that, I mean can you give us any sense of how many unit trains you might be expecting in the fourth quarter or you'd like on a quarterly basis in 2012, in terms of out of the Bakken or other crude oil handling in Albany?

We're going to try and do as much as we can. I don't know exactly what that number's going to look like. I can tell you that the first loadings and discharges went very smoothly and we had very, very quick turnaround times.

But it's going to depend as CP builds out their system exactly what we can handle and how big the unit car facility is going to be, right? So at the end of the day how many unit trains can we actually take in and how many will Canadian Pacific allow to go in a single unit? So I know that's not an exact answer, but we're very positive on the business.

Got it, and then if I could ask one last question, also probably bigger picture just in terms of how you alluded, Eric, to the changing refining dynamic within PADD 1, just your take on that, what happens if Trainer and the Sonoco refineries shut down, I guess steps you're taking in your business?

Clearly you've taken a lot of steps here to try to thrive within a backward dated market but just if this other refining supply goes away, how you see things shaping up and what Global may try to do in that environment?

Yes, I think most importantly, backwardation is not defined per se by any one or two refineries, right? Essentially supply is like a balloon, right? It gets squeezed from one area and it pushes out to another area. So I think the key here is the US is currently exporting more gasoline than it ever has in its history.

It's exporting somewhere on average of 400,000 to 450,000 barrels a day of gasoline. So there's plenty of supply available. But when you talk about what is going to affect the forward curve in products, I think it's more based on inventory, how much product is in inventory, how many days of forward cover in inventory there is, as well as demand and perceived demand. Right? And I think those play more into market curves than any one or two refineries closing.

Okay, so you're in essence saying the supply will be there even if it doesn't come necessarily from PADD 1 and it's just not -- we shouldn't focus on just necessarily one or two refinery closings?

Absolutely.

Okay, thanks very much.

Sure.

Thank you. Our next question comes from the line of Brian Zarahn with Barclays Capital. Please proceed with your question. Your line is live.

Good morning.

Hey, Brian.

Good morning, Brian.

Can you give us a little more color on the Bakken crude business. Do you have any contracts with specific refiners for that crude or other marketers?

Well, we don't comment on any specific deals, but obviously what we're bringing in is going to be moved out to East Coast refiners, right, and we're confident that those refiners are there to buy the crude, and essentially we're comfortable that we're going to be able to move it.

Okay. And then on the Northeast gas station assets, can you discuss a little bit some of the drivers for the out performance in the quarter?

Brian, thank you. Yes. I would say it's in the summer driving season makes a difference and in addition convenience sales are up. In that business margins at the pump will fluctuate from quarter to quarter. In our experience and judgment it's an awfully stable business annually but you'll have occasionally some quarters up and some quarters down. This was a particularly strong.

We've seen just internationally sort of gasoline demand the third quarter but your volumes are up significantly. Was it more -- what would you -- how would you analyze that, those dynamics?

Our year-over-year volumes are driven both by the Mobil assets but increasingly our wholesale presence in the Northeast with exchange sales and bulk sales to other parties. I think generally we think, Brian, that a shift in gasoline demand of 1% here, 2% there doesn't make too much difference in the effect on our margins and results.

Okay, thanks guys.

Thank you. Our next question comes from the line of Paul Jacob with Raymond James. Please proceed with your question. Your line is live.

Good morning. It looks like the commercial volumes for this quarter were up even accounting for seasonality. I just wanted to see if you could shed some light on that and how we should expect that going into the fourth quarter?

Sure, Paul. When you see our Q, it'll be clearer that that segment includes sales of gasoline to customers at our company owned retail sites. So when you look over year-to-year, a big chunk of that is the fact that we didn't have that a year ago. However, separately as Eric mentioned, within that segment we don't break it out for competitive reasons. But both our bunkering and bid businesses had record results this quarter.

Okay, thank you for that color. And then just a bookkeeping question, do you -- can you give the volume breakdown for the wholesale segment?

Yes, we can do that. For the quarter our volume was 1.170 billion versus 715 million a year ago.

Okay.

And it will be in the Q. And for nine months it was 3.428 billion, and for 2010 it was 2.3 billion.

Okay thank you. And then let me just see, I think I have one more here. Looking at the refinery shut downs, I know you touched on this a little bit but, I've read a couple of pieces that indicate that those shutdowns may not be as big of an impact based on the current utilization on the East Coast. Do you have any thoughts surrounding that? And then I'll jump back into the queue. Thank you.

I mean, I don't think it's going to have an effect per se on our business. I think refineries and utilization it's really interesting because I think they're going to be affected more by domestic production than anything else. And I think that's an important thing that everybody should be watching. I don't know if that answers your question but --

Yes, yes, I think that did. Actually I had one more if I could just throw that out? Is there any possibility for Canadian crude to enter your system in the future?

I believe that there is. Obviously we're on CP and obviously CP has rails based in Canada. And that is also single line haul to Albany, so I would argue that that is another potential source for us to take. It's really anything that is along that CP line.

To be most efficient in the long run, the fact of the matter is, if you're willing to ship it on two lines or more you could take crude from any other facilities as well. And the market is disjointed enough that that could work now, right. Once the market gets very efficient, I think that's a harder move to happen.

Okay, great. Thank you for the color.

Thank you. (Operator Instructions). Our next question comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question. Your line is live.

Hi, good morning, question for you on the Mobil assets. I mean given the performance in the quarter and then just since you've had them, do you think that the returns on those assets could actually exceed those initial mid-to-high teens return expectations that you had indicated when you completed that acquisition?

I think Elvira, the best way to characterize it is the same way we said it last quarter, which is clearly performing at those expected levels.

Okay, and then just one follow-up question. Can you provide any color on some of the natural gas opportunities that you're currently looking at?

We have a small but growing natural gas business where we're a local marketer here up in the Northeast. We're not into obviously, the gathering or supply or piping of the business.

We typically buy it at the city gate back to back, and then sell it to small industrial and commercial customers. And it's we think a natural complement to our old residual fuel business. And again, it's pretty small but growing in a positive way.

Thank you.

Thank you. Our next question comes from the line of James Jampel with HITE Hedge Asset Management. Please proceed with your question. Your line is live.

Hi, guys.

Hi, James.

Thank you very much for giving again the detail on the headcount down from 293 to 264, but as an old consultant I have to ask, have there been any of these people been hired back as consultants or in any way their duties being performed by others that have been outsourced?

In no material way James.

Okay. On the DOE contract, that's $4.2 million for the year starting Q4?

Yes, yes. Slightly different times because it's two separate contracts but yes.

And in terms of the incremental expense to serve that contract, how would you estimate that?

De minimis.

De minimis. Sounds like good business. Now getting -- following up on one of Gabe's questions on the Bakken crude, now are you guys hedging that in the current backward market for crude?

It is such a disjointed market that it's hard to look at a screen and actually translate that into what you're paying and is it backward or is it contango. It's a -- it's logistically constrained. It's very inefficient.

But by disjointed what do you mean exactly?

I mean it's very hard to move barrels out of these areas where they have large increases in production occurring every month, right, so the logistics are constrained. Because the logistics are constrained, when you look at spreads or you look at what they have to sell at it is I would say less commoditized than fully developed logistics systems and products.

Okay. And then you mentioned that the Mobil station business might have some sort of quarter-to-quarter type of variance in it that is almost random or stochastic. Those are my words. You mentioned convenience sales are up.

So if that's correct, can we look at this quarter as sort of the Mobil assets sort of having a big out performance this quarter and helping mitigate some of the backwardation problems that were present last quarter but that the Mobil assets may go back to sort of their "normal performance" quote/unquote next quarter and therefore we might not see this quarter be a run rate.

James, there is clearly variability quarter to quarter. And it has to do with the lag and lead times of pricing at the pump. And as consumers, we watch prices on our street corners go up and down and depending on what competition is doing

If the underlying price of gasoline drops suddenly, everybody down the chain will make more money, or if prices run up you'll get squeezed a little bit. And that's always been the case in the gasoline business. Big picture to answer your question, yes, this quarter was unusually strong. And it should not be modeled as a 12-month run rate.

And the convenience sales? What would account for that?

Soda pop on the Cape in July and August. I mean, literally people are driving more summer vacations. It's hot. They're pulling in and buying things, more cigarettes, everything, not uncommon seasonally in the Northeast.

Seasonal, okay, all right, thanks guys.

Thanks.

Thank you. Our next question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Please proceed with your question. Your line is live.

Just another follow-up, thanks for taking it. On the M&A front, I just thought I'd go fishing in terms of what you're looking at? There's clearly been a lot of retail gas station transactions given how well the Exxon assets have performed. Just wondering what your take has been on some of the transactions as well as if what you're looking at tends to fall on the retail gas station side?

We continue to look at all assets that are available for sale. We really want to make sure we're not missing anything, and as we've done in the past, we try to see every transaction that's out there that is reasonable for us to do and at least that way we know what the market is, right? So we continue to look and search.

Okay.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Slifka for any closing comments you may have.

Thank you everybody for joining us today. We look forward to continuing to update you on our progress. Thanks.

Ladies and gentlemen this does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation. Good day.