NuStar Energy LP (NS) 2011 Q4 法說會逐字稿

Good morning. My name is David and I will be conference operator today. At this time I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings LLC fourth 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. I would now like to turn the call over to Mr. Chris Russell. Sir, you may begin your conference.

Thank you, David. Good morning, everyone. And welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC fourth quarter 2011 earnings results. With me today is Curt Anastasio, President and CEO of NuStar Energy LP and NuStar GP Holdings LLC, Steve Blank, our CFO, and other members of our management 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. 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 revised expectations.

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

Good morning and thanks for joining us today. Although the US and global economic conditions continue to be very challenging this past year, the oil and gas volatility remains high. NuStar was able to generate more distributable cash flow, more EBITDA and operating income in 2011 compared to 2010. In addition, we continue to grow our asset-base through internal gross capital projects and acquisitions, improve the condition of our balance sheet, continue to realize outstanding safety results and were named the 15th best company in America to work for by Fortune Magazine.

During the year NuStar completed 16 internal growth projects with a total project cost of about $200 million. We expect these projects to generate EBITDA at a 5 to 6 times multiple and contribute to the results of all three of our business segments during 2012. The St. James, Louisiana Phase I terminal expansion and the reactivation of two pipelines in the Eagle Ford shale were the major internal growth projects completed during the past year. The St. James terminal expansion project increased the storage capacity of the terminal by 3.2 million barrels to 8.2 million barrels. Making that facility NuStar's second-largest storage terminal asset, second only to our St. Eustatius terminal located in the Caribbean.

Our two reactivated pipeline products are currently transporting about 60,000 barrels a day of Eagle Ford shale crude. Both of those projects should contribute to increased pipeline transportation segment EBITDA in 2012. We spent about $100 million for two acquisitions which, combined, generated EBITDA close to a 6 times multiple during 2011. We are implementing profit improvement initiatives at both acquisition locations that should allow us to improve performance of those assets in 2012 and in future years.

Taking a look at NuStar's 2011 financial performance, EBITDA of $490 million was higher than the $483 million earned in 2010, driven primarily by the record performance of our storage segment. Storage EBITDA of $281 million was $25 million higher than the $256 million earned in 2010. Increased storage rates on existing contracts, increased customer demand for storage services, a full year of EBITDA from the fourth quarter 2010 completion of our St. Eustatius terminal reconfiguration project, as well as the completion of the St. James terminal expansion in the third quarter of this year, all contributed to the segments increased EBITDA.

Pipeline transportation segment EBITDA of $197 million nearly matched the $199 million earned in 2010. Higher pipeline tariffs and additional revenue generated by the Eagle Ford shale project substantially offset a 9% reduction in pipeline throughputs. Refined products pipeline throughputs were down about 3% for the year when compared to 2010. Turnaround activity at some of our customer's refineries, as well as market conditions that made it more favorable for some of our customers to export refined products especially diesel than to transfer them to Houston on our Corpus Christi to Houston pipeline, adversely affected throughput. However, toward the end of the year, volume on some of our refined product pipelines increased as we were able to obtain new volume throughput commitments.

Crude oil pipeline throughputs where down almost 18% in 2011. Turnarounds and operating issues at some customers' refineries and the impact of competitive supply economics negatively impacted throughputs on the crude system. But, while crude throughputs where down compared to last year, they are on the upswing. Crude throughputs increased in both the third and fourth quarters of 2011. They were higher in the fourth quarter of 2011 than any other quarter during the year and were only 2% lower than fourth quarter 2010. Incremental throughputs from the completion of our Eagle Ford shale pipeline projects contributed to the increased throughput in the last half of this year.

Our asphalt and fuels marketing segment EBITDA for 2011 was $108 million, slightly lower than the $111 million earned in 2010. Fuels marketing operations 2011 EBITDA within that segment increased to $65 million, $28 million higher than the $37 million earned last year. Increased margins and sales volumes in our crude oil trading, heavy fuels and bunkering businesses contributed to the higher results. Our crude oil trading and heavy fuels marketing businesses benefited from the wide WTI-Brent spread that existed for the majority of 2011, while our bunkering business benefited from the growth into new markets during 2011.

Asphalt operations EBITDA of $28 million was lower than the $74 million earned in 2010. Continued weak US demand for asphalt and reduced margins caused by lower cost asphalt supply entering the East Coast markets from Midwest refiners, who also benefited from the WTI-Brent spread, were the main reasons of the reduced EBITDA. Our San Antonio refinery acquired in April of 2011 generated $15 million of EBITDA. Our decision at the time of the acquisition to hedge most of the margin proved beneficial as we booked a hedging gain of $16.4 million in the fourth quarter. Corporate G&A expenses where down around $7 million in 2011, mainly due to reduced stock-based compensation expense. The reduced G&A expenses helped partially offset the fact that 2011 did not benefit from a $13.5 million insurance settlement that was recognized as other income in 2010 relating to Hurricane Ike damage at our Texas City terminal in the third quarter of 2008.

During 2011 we entered into a couple of financing transactions to secure financing for future internal growth opportunities and to improve the condition of our balance sheet. In August, NuStar received $75 million of low interest rate, tax-exempt, Gulf opportunity zone, or Go zone financing, from the St. James Parish in the state of Louisiana. To date, we have issued $365 million of bonds under the Go zone program. These bonds were issued to fun the estimated construction costs associated with two stores tank expansion projects and two unit train offloading projects at our St. James terminal. As of December 31, 2011, around $170 million of these bond proceeds had not yet been spent or were being held in escrow with a trustee. The escrowed funds should be spent by the middle of 2013. In December we received $311 million in proceeds by issuing about 6 million common units of NuStar Energy. The proceeds were used to reduce outstanding borrowings under our revolving credit facility. Our debt to EBITDA ratio as of December 31, 2011, was 4.1 times.

Once again, 2011 was an outstanding year for NuStar's operations as we maintained our status as a leader in safety and environmental performance. We finished the year with zero employee loss time injuries, reduced our employee recordable injuries by 43% from 14 to 8, and reduced our total recordable incident rate by 50% from 0.69 to 0.35. We also reduced the number of recordable releases for the seventh consecutive year, as well as reduced the volume of material released. Last week we learned that Fortune Magazine ranked NuStar 15th in their listing of the 100 best companies to work for in America. That was the fourth consecutive year we've been so recognized by Fortune Magazine. This years ranking is our highest yet, 15 spots higher than last year's ranking and makes us the highest ranking energy company in the country.

Turning to our fourth quarter 2011 results. EBITDA for the quarter was $99 million, less than the $114 million earned in the fourth quarter of 2010. However, storage and transportation segment results were both higher than the fourth quarter of 2010. Storage segment 2011 EBITDA increased $9 million when compared to last year's fourth quarter. Increased storage rates on existing contracts, continued increase customer demand for our storage services and incremental EBITDA generated by the third quarter 2011 completion of the Phase 1 storage expansion project at St. James contributed to the increased EBITDA.

Transportation segment fourth quarter 2011 EBITDA increased by about $1 million. Higher pipeline revenues as result of the 6.9% July 1, 2011, tariff adjustment and additional revenue generated by the completed Eagle Ford shale project, more than offset the impact of a slight 1% quarter over quarter reduction in throughput. The asphalt and fuels marketing segment generated negative EBITDA of $6 million in the fourth quarter. That was $27 million lower than the $21 million of EBITDA generated in last year's fourth quarter, and more than offset the improved results generated by storage and transportation. Mainly because of weak asphalt margins caused by higher crude cost and continued soft demand, our asphalt operations generated negative EBITDA of $27 million during the quarter. That compares to positive $6 million earned in the fourth quarter of 2010.

Per barrel gross margins decreased to $1.28 in the fourth quarter, compared to fourth quarter 2010 gross margins of $6.70 per barrel. The $14 million of fourth-quarter EBITDA in the fuels marketing operations was comparable to the $14 million earned in the fourth quarter 2010. The San Antonio refinery generated $7 million of EBITDA in the fourth quarter. Taking a look at fourth quarter 2011 corporate expenses, G&A expenses where $34 million, flat with last year. Interest expense for the quarter was $21 million, up $1 million from last year, mainly due to increased borrowings under our revolver.

With regard to our fourth quarter distribution, NuStar Energy's Board of Directors declared a fourth quarter distribution of $1.095 per unit. The distribution will be paid on February 10 to holders of record as of February 7. Distributable cash flow available to limited partners covered the distribution to the limiteds by 0.87 times for the fourth quarter of 2011, and 1.09 times for the year ended December 31, 2011. The board of NuStar GP Holdings declared a fourth quarter distribution of $0.51 per unit, which is 0.015 per unit, or 3% higher than the third quarter of 2011 distribution. Increased cash flows as result of NuStar Energy issuing equity during the fourth quarter allowed NuStar GP Holdings to increase the fourth quarter distribution. The NuStar GP Holdings distribution will be paid on February 14.

As we move into 2012, we continue to work on previously announced Eagle Ford shale projects, plus several new potential projects in the Eagle Ford and other shale areas. A few of these projects should be completed and begin to generate EBITDA this year in 2012. In addition, work continues on the crude oil offloading facility being constructed with EOG Resources at our St. James, Louisiana terminal. The 70,000-barrel per day offloading facility should be in operation early next quarter. Work on a 1 million-barrel distillate storage expansion project also continues at our St. Eustatius terminal. The expansion project should be completed and placed into service in the fourth quarter of this year.

With regard to earnings guidance for the first quarter of 2012, storage segments first-quarter results should be higher than last year, due mainly to the third quarter 2011 completion of the St. James Phase 1 storage expansion project. Our pipeline transportation segment results are expected to be comparable to last year's first quarter. And we expect the asphalt and fuels marketing segment first quarter results to be lower than the same quarter last year and slightly negative. Even though our San Antonio refinery and our fuels marketing operation should contribute positively, projected losses in asphalt should cause the total segment results to be slightly negative in the first quarter of the year.

First-quarter 2012 G&A expenses are expected to be in the range of $27 million to $28 million. Depreciation and amortization around $44 million to $45 million, and interest expense $22 million to $23 million. For the full year 2012, we expect NuStar's EBITDA to be higher than in 2011. EBITDA in all three of our business segments is also expected to be higher than 2011. Reliability capital spending for 2012 should be in the range of $40 million to $50 million, while strategic capital spending should be in the range of $350 million to $400 million. However, we fill additional strategic projects could well be identified during 2012.

In closing, I'm pleased with many of our 2011 accomplishments and the fact that we were able to increase earnings in a tough economic climate. As NuStar completes additional internal projects, implements profit improvement initiatives, and as the economy continues to improve, we fully expect NuStar's earnings to continue to grow. But, this time allow me to turn it over to our operator so we can begin to open up the call to the Q&A session. Operator?

(Operator Instructions). Your first question comes from the line of Brian Zarahn of Barclays Capital.

On 2012 guidance, can you give any additional color as to what you think the year-over-year bump will be?

It is only January and whatever we are going to tell you on asphalt is likely to be wrong, very honestly. So, we are going to wait until a little later in the year until we get more specific about it.

We said all three Business segments should be up and with regard to the pipeline and storage, we've got some major projects that are either going to be go or no go. Really different changers for us within the next couple of months. So, within a month or two we are going to know much more about those, and rather than put out numbers that could be -- could substantially vary from what we expect to announce and hope to announce in the near future, we decided this time around to wait until we get resolution on those.

On maintenance CapEx, 2011 number was down year-over-year and then 2012 is going to go down from that, can you let us know what's behind those declines?

Reliability, most of that is in the cycle time of our tank and integrity program where we are doing most of our maintenance and repairs on smaller diameter tanks. But, our integrity program on the pipeline remains the same, pretty much unchanged from year-to-year.

Okay.

Big difference.

Just in general, most of the industry is seeing rises year-over-year, but okay. Last question for me, any additional thoughts on the Savannah refinery? In terms of utilization in 2012, or options for different crude slates?

With regard to the second one first on crude slates, part of our profit of optimization for the asphalt refining system, which of course includes the Savannah refinery, is to diversify our crude slate. We signed a term deal with Statoil to run more resilient crude, Peregrino, relatively heavy crude.

And we're going to run more Canadian asphaltic crude as well in our plants. Starting with Paulsboro, we are currently averaging probably about 7,000 barrels a day already of Canadian crude, and we hope to ramp that up over the next year or so to 30,000 barrels a day. Of course, we're still running a base load of Venezuelan crude and we are adding in the Peregrino. I think first at Paulsboro, we will be in a position to run more of those, and then second, we're looking at projects at Savannah to diversify that crude slate as well.

As you can tell from my comments about some of the adverse developments in asphalt refining and marketing this year, part of what we ran into because of this WTI-Brent spread was relatively cheaper crude being available to mid-continent refiners who were able to access East Coast competitive landed cost on asphalt.

And they had that advantage. Some of them could also access cheaper Canadian crude, and so we need to have a more flexible system. As a result, we are doing both at Paulsboro and then understudy at Savannah, what I just mentioned. You want to comment any further, Paul?

I think flexibility is the key, and that's what we are creating in our system.

Utilization rates, I'd say they probably will be comparable to this year at this point. That could change. If the market improves, we have the flexibility to ramp it up. We have got a lot of spare capacity. So, based on the current outlook though, I would say you could use utilization rates comparable to this year.

Thanks for the color, Curt.

Your next question comes from the line of Paul Jacob of Raymond James.

Good morning guys. I guess the first question is on the performance initiative for the two acquisitions that you mentioned at the beginning of the call. I'm assuming that, that's going to reduce the six times acquisition cost that you outlined. Is some of that related to the crude slates, and then for the remainder -- if so, then for the remainder can you quantify the breakdown? And the possible timing on those benefits?

Yes, they are both for -- what we're talking about there, of course, is the San Antonio refinery and the Turkey acquisition. The San Antonio refinery is off to a pretty good start with $50 million of EBITDA this year.

But now that we're into the plant, we see a lot of areas for improvement on every aspect. More reliable operations, lower crude transportation costs into the plant. On that point, we are building a new pipeline from a terminal we acquired about 12 miles from the plant, so we could pipeline crude into the plant, get more reliable operations, and also lower our transportation costs, which our trucking related into that plant today.

That's an example of that. And we're also taking some steps to improve the yield quality on the products and I've got guys here, Paul and Rick maybe can comment further. Some of the nature of the things we're doing on the profit improvement for the San Antonio refinery.

I think it is, you said it, we are reducing the transportation cost and finding markets that we can access more efficiently.

And fine-tuning the operations and getting better cuts in yields, higher quality, higher value yields out of the refinery.

With regard to Turkey, it will be -- we're going to enhance our ability to blend products at the terminal, such as gasoline blend stock. That will make the terminal more attractive to a wider range of customers and traders who could then use it for that purpose.

We also have the NATO pipeline. As you know, Turkey is part of NATO, running right at the periphery of our property. Our plan is to connect to that pipeline so that customers can access NATO jet supply, military supply for the NATO Air Force Bases that are in Turkey already. Then there are other things we can do there to improve the operations, which is an ongoing thing.

I think these are all things that if we can -- we are not unhappy with the 6X multiple on acquisitions when you look at what acquisitions are going for in the MLP sector right now. But, I think we can take steps to improve that further, maybe get it to 5X over the next year or two.

Okay. Thank you for that color. Can you talk a bit deeper into the hedging gain, that $16.4 million that you realized? And what's the scale of the gain likely to be over the next few quarters if there is any?

First we will explain to you what we did with regard to the hedging and, as you know, we put on hedges when we bought the acquisition. Go ahead, Paul.

We sold a little bit more gasoline hedges then we actually produced, so what we did is we removed those hedges and accounting rules require us to bring that forward.

That point that Paul just made relates to the production out of the plant was actually a little different from the hedges we had put on, so he made that adjustment to reflect the physical production at the plant.

And for that it is a one-time gain.

That's a one-time thing. That's not as if he's going to be able to do that this quarter or next quarter. That was a one-time thing.

Okay. Thanks, guys.

We will just look at it going forward and see what we need to do next.

Okay. Thank you.

Your next question comes from the line of Kathleen King of Bank of America Merrill Lynch.

First question just on the crude oil trading at your fuels marketing segment, I know you talked about that being a source of upside in 2011. And also being able to, for example, rail crude from the Bakken to your St. James facility and capture some of those differentials. With WTI-Brent differential and other differentials having compressed, does your strategy there change and do you expect to see less upside there in 2012?

The first question is no, the strategy doesn't change. The spread is still healthy enough to support a very profitable arbitrage on that trade, so we will continue to make money doing that. It may not be $26 anymore which is -- or $27, which is kind of a blowout level, but it still is very, very healthy by historic terms, that 11 or so that it is at currently.

We do expect to make a little less in the crude oil trading in 2012, at least at this point, than we did in 2011, but the reason -- part of the reason that was so was because of the very wide spread in 2011. And that spread coming in actually helps us in our asphalt refining and marketing operation. Because as I mentioned, the relative cost advantage of big time refiners decreases, as well.

And then going forward, we just think on the unit train that is going to add value to the terminal anyway, even if we weren't using it for the Bakken-related Gulf Coast trade. There are other uses for the trade, whether it be ethanol. And you know we are sitting there in the middle of the largest US refining complex. So, we think there's going to be a lot of activity at a hub location for a long time. Danny Oliver might want to add something.

I think the current spread of 10 or 11 is more than enough to incent those barrels to come down into St. James, so I think it may affect customer's profitability, but I don't think it will affect volumes at all.

Okay. Understood. And then going back to the San Antonio refinery, if you could just provide some color on where that refinery is running today as far as throughput, and is it where you'd like it to be post the fire and all of that? And also just an update on the hedge profile there for 2012 and 2013 and if you're looking to add additional hedges?

The throughput, Rick?

Currently, based on the latest numbers, we average about 11,000 barrels a day for the year and currently we are up to 13,500 to 14,000 barrels a day.

That's kind of where we'd like to keep it as we go forward in 2012, that 13,500 Rick mentioned. And the other thing was on the hedges?

Yes, that's right.

We don't have any plans to put any additional hedges on until we can increase the production substantially. So, right now we think we are where we need to be.

For 2012?

Yes.

Kind of like the way the crack is shaping up from here forward. We will see what happens.

All these refinery closures are starting to firm up the crack. You've had petro plus file. You've had (Inaudible, multiple speakers) --

And of course Sunoco, Conoco and the trainer facility, all of this changes the marketplace in a way that makes us a little more bullish on the crack. So, we are not eager to jump into a lot of new hedging at this time in the cycle.

Okay. And what percentage of estimated throughput are you hedged for '12 at this point?

About 70%.

Okay, thank you.

(Operator Instructions). Your next question is from the line of Michael Blum of Wells Fargo.

Good morning, everybody. Just two quick questions for me back on the WTI-Brent spread. Was that spread narrowing, as we think about how to relate to the asphalt business? Is it fair to assume that, that is affectively beneficial for you relative to what we've been experiencing in the last six months?

Yes, that narrow spread -- the wide spread is one of the big things that hurt us in 2011. As it narrows, that's a positive factor for asphalt.

Yes, and I think as that narrows, it makes the waterborne crudes more competitive and then as we build the flexibility as that spread changes to be able to pivot back and forth, is what our ultimate goal is.

Okay. And then you didn't mention anything in guidance about distribution growth for 2012. So, I was just curious if there's any even big picture thoughts you could share in terms of how you're thinking about that?

We've budgeted one. How about that?

That's a start.

That's a start. But, everything we are doing -- compared to history -- recent times compared to our longer-term history, we've had a lower distribution growth rate than we used to have. So, our whole plan is to restore a high-level of distribution, higher level of distribution growth. So, we have a plan that the Board approved in November to get us back there. Steve, did you want to comment?

Michael, we spent a lot of money this year on construction projects, nearly $300 million and we spent $100 million on acquisitions, and Curt mentioned in his notes that we are going to spend another $350 million to $400 million on strategic. It is all construction projects principally for pipelines and storage, Eagle Ford and St. Eustatius most notably.

That's going to come through. The good thing about those projects are they are at very low multiples. The bad thing about them is they take 18 months to 2 years to get the EBITDA in the door. We are confident that we are going to return to something more normal for us in terms of distribution growth.

They are all fee-based backed by long term contracts. And I think as we go through this year, you're going to get a lot more visibility in our Company as to what's coming along the lines of the projects Steve mentioned, and some new ones I alluded to earlier that we're going to know about in the next couple of months.

Okay, great. Thank you for that.

Your next question is from the line of Selman Akyol of Stifel Nicolaus.

Curt, I wanted to follow up on your comments to the major projects that you said you are going to have a little bit more information on in response to Brian's question earlier. You said major projects, and you will have a go or no go later in the year. When we think about major projects, typically I would think that would be something that would come on with more of a 2013, 2014 timeframe. Is there any chance they would be additive to 2012?

Yes, I think there could be pipeline projects that are additive shorter term than that, yes. But then we also have some bigger projects in both the pipeline and storage segments that would be more like 2013, 2014. But we are definitely working on things that make a difference in 2012. That's part of what I'm talking about in this know more in 2012.

We will see more benefit in 2012 from capital projects that were completed in 2011.

I talked about those.

All right, thank you.

Yes.

There are no additional questions in queue at this time.

Okay. Thanks, operator. We want to thank everyone for joining us on the call today. If anybody has the questions, please call NuStar Investor Relations. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.