NuStar Energy LP (NS) 2011 Q2 法說會逐字稿

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings LLC second-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you. Mr. Russell, you may begin your conference.

Good morning, everyone, and welcome to our conference call for NuStar Energy L.P. and NuStar GP Holdings LLC's second-quarter 2011 earnings results. With me today is Curt Anastasio, CEO and President of NuStar Energy L.P. and NuStar GP holdings LLC, Steve Blank, our CFO, and other members of our team.

Before we get started, we would like to remind you that during the course of this call NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements within the meaning of the federal securities laws. These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission, and will not be updated to conform to actual results or expectations.

During the course of this call, we also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliation of these non-GAAP financial measures to US GAAP may be found either in our earnings press release or on our website. Now let me turn the call over to Curt.

Good morning and thanks for joining us. NuStar just completed a very busy and profitable second quarter. We successfully integrated our April 2011 San Antonio refinery acquisition, completed an Eagle Ford shale crude oil pipeline for project for a [Coke] pipeline, and set a second-quarter record in terms of EBIDTA.

Starting with our second quarter 2011 financial results, NuStar Energy's distributable cash flow applicable to limited partners and EBIDTA were both higher than the second quarter of 2010. NuStar energy generated $160 million of EBIDTA in the second quarter, higher than the $157 million earned in the second quarter of last year.

It should be noted that our second quarter 2010 results included about $14 million of gains related to property insurance proceeds received due to damage costs to our Texas City terminal by Hurricane Ike in the third quarter of 2008. We did not realize any similar type gains in 2011.

Our storage segment earned $65 million of EBIDTA; $3 million higher than the second quarter of 2010. Higher storage rates on our existing storage contracts increased demand for storage services by new and existing customers, and the fourth-quarter 2010 completion of the Saint Eustatius terminal reconfiguration project each had a positive effect on this segment's EBIDTA. These items were partially offset by about $4 million of 1-time non-cash write-off.

Transportation segment EBIDTA of $43 million was, as expected, lower than the $47 million earned in the second quarter of last year. Lower pipeline revenues as a result of the July 1, 2010 negative adjustment and reduced throughputs contributed to the decrease. Turnaround and unplanned maintenance activity at some of our customers' refineries and the impact of competitive supply economics negatively impacted throughputs in our crude oil pipeline system.

Late in June we completed the work associated with the pipeline connection and capacity lease agreement we entered into with Koch in October of 2010. Under that agreement, NuStar reactivated a previously idle pipeline in South Texas that is now being used to transport Eagle Ford shale crude oil production to Corpus Christi, Texas refineries and terminals. We expect our crude oil pipeline system throughputs to increase about 30,000 barrels a day as a result of this project.

On our refined product pipeline system, market conditions continue to make it more favorable for some of our customers to export refined products, especially diesel, than to transport them to Houston on our Corpus to Houston pipeline. The asphalt and fuels marketing segment generated $78 million of EBIDTA during the quarter, about $25 million higher than the $53 million of EBIDTA earned in the second quarter of last year.

The asphalt operations portion of the asphalt and fuels marketing segment earned $55 million in EBIDTA during the quarter. These results are the highest ever second-quarter EBIDTA for the asphalt portion of this segment, and $15 million higher than last year.

Strong winter fuel economics, our ability to pass along price increases, and a tight asphalt supply early in the quarter more than offset lower wholesale asphalt sales volume. Our San Antonio refinery contributed $400 million of EBIDTA during the quarter, within the $3 million to $5 million range we anticipated. Crude run rate at the refinery averaged around 11,200 barrels a day, slightly lower than the 11,500 barrels we had anticipated.

Minor operating issues required us to reduce charge rates for a few days during the quarter. However, higher than expected crack spreads on our unhedged products partially offset the lower charge rate.

Fuels marketing operations EBIDTA increased to $19 million, $6 million higher than in the same quarter of last year. Higher margins and sales volumes in our bunkering and heavy fuels businesses resulted in the higher results.

Taking a look at our second-quarter 2011 corporate expenses, G&A expenses were $26 million, $4 million higher than last year. Administrative costs associated with our 2011 acquisition activity and increased compensation expense accounted for the large portion of this increase.

Interested expense for the quarter was $20.6 million dollars, up $1.7 million from last year, mainly due to our issuance of $450 million of 4.8% senior notes in August of 2010.

Our June 30, 2011 debt balance was $2.4 billion. That includes about $140 million of unspent [those ozone] financial proceeds being held in escrow by the trustee. On June 30, our debt to EBIDTA ratio was 4.3 times. We expect the ratio to be closer to 4.0 by the end of the year.

NuStar Energy's distributable cash flow available to the limited partners of $119 million of in the second quarter was $12 million higher than second-quarter 2010. Increased EBIDTA, lower mark-to-market adjustments related to hedging, and a $5 million non-cash adjustment more than offset higher interest expense, income tax expense, and reliability capital spending.

Given our strong results, NuStar Energy's Board of Directors declared a distribution increase to $1.095 per unit, which is $0.03 or about 3% higher than the second quarter 2010 distribution of $1.065 per unit and $0.02 per unit or about 2% higher than the first quarter this year, which distribution was $1.075 per unit. The distribution will be paid on August 12. Distributable cash flow available to limited covered the distribution to the limited partners by 1.69 times for the second quarter of 2011.

The Board of Directors of NuStar GP holdings declared a second-quarter distribution of $0.495 per unit, which is $0.35 or about 7.6% higher than the second-quarter 2010 distribution of $0.46, and $0.015 per unit or 3.1% higher than the first-quarter 2011 distribution of $0.48. The NuStar GP holdings distribution will be paid on August 16.

As we move into the last half of this year, we are pleased to announce that NuStar and its subsidiaries of EOG resources have just signed definitive agreements for the construction of a 70,000-barrel per day unit trade-off loading facility at our Saint James, Louisiana, terminal. Approximately 360,000 barrels of tankage will also be constructed in conjunction with this project.

The project will give our customers access to production from the Bakken, Eagle Ford, and other developing shale plays, the opportunity to blend additional crude in order to supply the [LLS] market.

NuStar's estimated share of the construction costs in the range of $30 million to $40 million, and we expect the project to be in operation in the second quarter of 2012. Next we are also pleased to announce that NuStar and Valero Energy have entered into 2 throughput and proficiency agreements related to Eagle Ford crude oil shale in South Texas.

This deal involves several of our existing pipeline assets and the construction of a new pipeline. And we expect a portion of that project should come online as early as the fourth quarter of this year. Further details will be provided in a mutually agreed press release with Valero Energy, which we expect to issue sometime next week.

In addition to the EOG resources project and the Valero project, we are actively in discussion with other companies regarding projects relating to Eagle Ford shale, Barnett shale, and [Granite wash type sands formations]. We are confident will be able to identify additional projects that will allow us to more fully utilize some of our existing pipeline and terminal assets.

With regard to earnings in the last half of 2011, third-quarter EBIDTA should be in the range of $105 million to $115 million while our earnings per unit applicable to limited partners should be in the range of $0.50 to $0.70 per unit. For the full year 2011 we expect NuStar EBIDTA to be higher than it was in 2010.

Storm\age segment 2011 EBIDTA should increase by $15 million to $25 million due to the Saint Eustatius terminal growth project completed last year and the 3.2 million barrel tank expansion project at our Saint James terminal, which is expected to be completed in this very quarter. EBIDTA in our transportation segment is projected to be $10 million to $20 million lower for this year.

The July 1, 2011, [per] tariff increase of 6.88% will be more than offset by lower throughput volumes. Even though throughput on our pipeline segments should increase in the second half of 2011 as a result of the previously mentioned project for Koch, full-year segment throughputs are projected to be lower than last year.

Higher customer refinery turnaround activity and the changing market conditions we've referred to, should contribute to the reduced throughput. We believe we could see some upside to the guidance range for both our storage and our pipeline transportation segments through the remainder of this year. A couple of our customers may be deferring fourth-quarter turnarounds into 2012, and we are currently exploring some income enhancement measures in both of those segments.

2011 EBIDTA in our asphalt and fuels marking segment should be higher than the $111 million earned last year. Asphalt operations 2011 EBIDTA should be lower than 2010. Our asphalt sales prices currently are not keeping pace with rising feed stock costs, putting downward pressure on our gross margins.

To date, PADD 1 asphalt demand is a bit lower than 2010 weak demand level. We expect demand to continue to be relatively tepid for the remainder of the year, putting additional pressure on asphalt margins. EBIDTA from the San Antonio refinery and higher 2011 EBIDTA in our fuels marketing operations should more than offset the reduced earnings in our asphalt operations.

Our fuels marking operation should benefit from the wide spread between WTI and Brent, as well as a full year's worth of EBIDTA from the new US heavy fuels and bunker fuels markets we entered in 2010. Reliability CapEx for 2011 should total $55 million to $60 million, while 2011's strategic CapEx should fall in the range of $365 million to $375 million.

Our strategic capital projections continue to increase as we identify more transportation segment opportunities around the various shale and tight sands place. After concluding our 2 acquisitions from earlier this year, total 2011 capital spending related to strategic capital and acquisitions should be around $475 million.

With our current strategic capital program and our recent acquisitions, the future continues to look bright for NuStar Energy L.P. and NuStar GP holdings LLC. So at this time, let me turn it over to the operator so we can open up the call to Q&A.

(Operator Instructions)

Good morning, guys. Curt, you couple of quick questions. As it relates to the asphalt and fuels marketing you had mentioned that you expect EBITDA to be higher on a year-over-year basis.

But, in this release it doesn't look like you quantify the rate of change relative to what you had quantified previously, like in the first quarter call. So, I'm curious. Is the expectation for is still to be roughly $35 million to $40 million higher? And secondly, as it relates just to asphalt, and quantify the pressure that your experiencing on the market due to rising feed stock costs?

Asphalt -- in that segment, asphalt is going to be lower and the fuels marketing pieces is going to be higher. And asphalt will be lower than we previously guided. The reason we didn't make it specific for that segment is this, is really is a rapidly evolving situation.

And anything we tell you is going to be wrong a week from now. So, what we intend to do -- and it really does relate to the run up in the crude costs, and I'm not going to be able to maintain the margin at a current pricing levels given the relatively [hectic] demand that is out there in our market.

So what we intend to do is update it during the 3rd quarter; as we get there further into the 3rd quarter, and get a much better view -- not just the third, but the full-year outlook. Because when we were in this situation last year, we put out a number that turned out to be way off from where we ended up, much lower than where we ended up.

Having learned from experience, and rather than give you something that's bound to be off in this very volatile market, I mean what's going on. Just look at the crude oil market everyday, and the US economy and all the turmoil going on, there's just so much volatility and so much uncertainty, we wanted to get a little further into the 3rd quarter to give you reliable guidance. But as I said, we still see that segment being up year over year.

Digging a little bit deeper, as it relates to Savannah and Paulsboro, have there been any changes to capacity utilization or yields by specific product?

Changes since -- capacity utilization is still running relatively low. And it's been pretty constant during the quarter. But, it's lower than we had planned at the outset of the year, for sure. Product yield is about the same in terms of proportion of asphalt versus intermediate products.

We did well on intermediate in the first half of the year That was part of the segment having a record second quarter, had a very good first half of the year. But, we're still running at low utilization rates because that's what the market calls for. Paul, do you want to comment?

What we did this year is we moved our turnaround from the December, January time into April when prices are typically higher. That's why second quarter is considerably down versus last year on utilization rate.

But, it does work out well for us because we backed out some higher-priced crude prices -- or production during that second quarter. So, it helped us, but it looks like its down. But it is still -- we are down on just a comparative basis slightly, but it looks more exaggerated because of the turnaround.

Sure. And Curt, last question for me, as it relates to the Valero announcement, can you give us a little bit more color on that projects scale and scope quickly?

It's a significant deal for NuStar. And you know, it does a lot for Valero too, in lowering their crude costs. But I'll let them comment on that aspect of it. My only hesitancy is -- am actually giving back a little bit of positive news on this 1. My only the hesitancy is, we agreed with them, we have a mutually agreed press release which would spelled out all the details. And their management and ours hasn't signed off on exactly what that press releases going to say.

But it's a big project. It involves -- for us it is, it involves several of our existing South Texas pipelines; it involves construction of a new pipeline to serve them, primarily them. And I think that -- I do expect you to see that relates 1 day next week. It shouldn't take that long to put this together. But I think you'll be pleased when you see the details. We certainly are.

Thanks, Curt.

Yes.

Yves Seigel, Credit Suisse.

Good morning, everybody. Curt, if I could, could you just -- not trying to take the thunder away from Valero on the project, but could you sort of breakdown again the growth CapEx spending for 2011? I think you said $365 million to $375 million. Perhaps, you could say how much has been sent already and maybe give us a look into what you're thinking for 2012?

Just to repeat what I said, because I might have gone fast, what I said was strategic capital for 2011, would be in the range of $365 million to $375 million. If you can just layer in, we did about $100 million of acquisition, so that's what gets us to a $475 million total for 2011. And Chris and Steve have a table in front of them.

Year-to-date, Yves, reliability is $26 million, and strategic was $136 million, add $100 million for acquisitions to that $136 million gets you to $236 million strategic through June. Okay? And then the total, given that range on strategic and our estimate for reliability plus the acquisitions, total CapEx strategic and reliability would be about $530 million for the year.

And then how should I think about the revenue generating capacity now -- let me start again. When will that growth CapEx start generating cash flow? In other words, how much of the projects have been completed? How much of those projects are running into next year and, when you think about EOG and Valero, when will the bulk of that spending take place?

The guidance were given like on EBITDA is reflective of what we expect to happen this year. But to give further granularity into the spread of spending and income, we could get that to you.

Just call me, and we can talk about it afterwards.

The Valero deal is pretty big, and these other things, literally just happened in the last day or 2. The OG, being in the position to actually say something because we now have agreements inked up. So, I think we've got a couple of upcoming conferences, NLP conferences, around that, we will file an 8-K with the presentation. And by then, we should be able to give a spread of CapEx and the revenue or EBITDA generated from -- most of it is going to be in 2012 -- next year.

The Eagle Ford stuff and EBITDA.

Okay. I'll leave it with the favorite question is, what kind of returns would you be expecting; and when you think about these projects, how long of the contractual commitments typically, going to be when you enter into these agreements?

It's typically 5 years. And we also, as you know, I mean we try to evaluate whether these assets have longer term value, too, before we invest in them. But these are all very good projects. We typically told you that we do organic growth at around 7 times EBITDA, and these are going to be that or better.

Okay.

Not worse than that. Bet that or better.

So,7 the key takeaway is, stay tuned?

(Laughter) Well, you already know about the coke, EBITDA and oil is flowing. And we told you what it's going to do for us this year. That's the first little step. We signed these next 2 deals. Valero you're going to get a full accounting of it next week, I expect, in a press release unless there's some management delay on clearing this press release. That 1 we'll have all of the chapter and verse on in the press release that I expect to be issued next week.

And really, the same thing with EOG. I mean, EOG, I think we can get into a bit more detail. Danny, you want to talk a little bit more about -- Danny-- we do have that 1 inked. It's kind of the same as what was Curt was alluding to with Valero though.

Management on both sides wants to issue a joint press release with the details. This agreement was signed just this morning. So, we don't have that out. But all those details will be forthcoming, I'm sure, next week.

But this is all part of our overall Eagle Ford strategy and supports other deals that we have previously announced on LOIs with TexStar and Velocity. So, it's all part of that same strategy.

All right. Good luck, guys. Thank you very much.

You'll have a lot more on this next week.

John Tysseland, Citigroup.

I think you just touched on the last point, but I was quite to ask if the Valero Project supersede the TexStar and Velocity Projects that you already announced. Is it part of these projects? Is it additive to that? How should we think about that?

It doesn't superseded it. The TexStar and Velocity will stand alone once we get to the finish line on those. So, it's additive.

So, are those still moving forward at this point?

Yes. Yes.

Okay. And then the last question just on the -- and you might have touched on this, I might have missed it since I'm late. But, the San Antonio refinery, how is the performing in line with your previous projections? Are you still looking for 2011 EBITDA of $18 million to $22 million?

It's doing exactly what we thought. I mean, we came in at $4 million, is what I just -- $4 million was within the guidance of $3 million to $5 million. So, it's performing to exactly as we thought. We are not changing the guidance as we give in on that. As of now.

End of the hedges acting about, how you thought they would act in terms of protecting your cash flows in your margins? Those are kind of in line with what you are expecting?

Yes. It's working exactly as we expected.

Great. Thanks, guys.

The cracks were actually a bit better, so on the on hedged portion we made a bit more than otherwise.

Brian Zarahn, Barclay's Capital.

Good morning. Can you give us an update on the progress of your Turkey JV? Is a performing in line with your expectations? Any update on --

We just bought it in April, and I said at the time, this is really a project. The success of that joint venture is going to entirely dependent on an expansion project that is on the drawing boards that is not done yet. And I'm getting a completely different mix of business.

When we bought this thing, it was a relatively local small-local-operator supplying service stations. We didn't buy it what it done historically. We bought it on what we thought we could do with it over the next year or 2. So, it's still early days, and so that's going to be the whole story.

When we have the new book of business signed up, and we got the expansion rolling, then I'm going to talk to you about that. Now there's really nothing to say on it. That's new. So, just stay tuned. That is 1 where I say -- stay tuned.

Okay, and in terms of international storage, what are you seeing in terms of acquisition opportunities in the US markets, seems very crowded in terms of a lot of competition in terms of acquisitions. How are things looking outside the US?

Well, we are looking at both international and US deals. I mean, you're right. A lot of the US deals that come up, there's more crowding than ever. You got more MOPs than ever, and some of the deals have traded at very, I would say, lofty prices. But that doesn't mean there aren't deals to be done.

We have done a couple just this year, both internationally and in the US in the last year. So, I think that were going to continue working both places, but definitely, we have got -- we are in discussions on an international storage deal right now. We'll just see if that gets anywhere.

Thanks, Curt.

Okay.

Selman Akyol, Stifel Nicholas.

Good morning. Just as it relates to the operating expenses on the storage segment, those it seem to be up fairly strong compared to the first quarter of this year. Anything going on there?

We have some write-offs that impacted that segment. You guys want to comment further on it? Steve?

The majority of the write-offs that Curt described provided earlier in that the single segment, and the rest of it was just all over the place. It was several categories of things that were in that segment.

All right. And then also, on the transportation side, I heard your guidance going forward with the coke pipeline coming on, you're going to pick up 30,000 barrels a day and your volume is expected to go up in the second half of the year. But, if you are to exclude that, how would you describe your base business?

Volumes are down versus last year. For the reasons that we gave, so is the revenue, and so is the profit. We had -- I just mentioned the reasons why with -- we have lost some volume, too, but because of market conditions, we had refinery turnarounds hit us this time around.

But what we've been trying to tell you there, is you're really going to see a substantial uptick in our pipeline transportation segment as we move forward, we get out of 2011 and get into 2012, and you start seeing some of these oil shale plays fill up, pipelines that are underutilized now.

We also have some new construction going on in that segment. So, we're a little bit in a transition year on what has been really good, 10 years we've been a public company, are really, I'd say our most stable segment.

It had very little growth associated with the, but it's really been pretty darn stable for about 10 years. Now we are about to see some growth in it. And it's really all because of the oil shale development. This year we are kind of waiting for that to benefit us if you will, while we spend money to get those projects in place for next year.

Okay, great. And last question, in terms of just the storage market, can you talk about how rates are going and what you're seeing there on a go-forward basis as you would seek renewals?

We got some benefit from your renewals. And again I'm going to let Danny jump in, but I want to say my little thing I always say about this, is that it's just so location dependent.

And if you look at where we are putting money into growth, you know, St. Jean's, Louisiana, St. Eustacius and a few other places. These are ones where the strongest customer tend to be. And so Dan, you want to comment further on what were seeing on renewals?

Sure. We're still, in terms of demand, we're still basically over utilized. The $21 million increase in EBITDA from year-to-date 2011 versus 2010, about $6 million of that came from rate escalations on renewing contracts. About $7 million from new projects that have come online this year or at the end of last year in St. Eustacius and Texas City. About $6 million from our acquisitions in Mobile, Alabama and Turkey, and I think we've got a little bit of help from foreign exchange rates, too. But a small amount.

Thank you very much. Appreciate the clarity.

(Operator Instructions) We'll pause for just a moment to compile the Q &A roster. There are no further questions at this time.

Thank you, operator. I'd like to thank everybody again for joining us on the call today. If you have any additional questions, please feel free to call NuStar Investor Relations. Thank you.

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