NuStar Energy LP (NS) 2012 Q1 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings LLC first-quarter 2012 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). I would now like to turn the conference over to Mr. Chris Russell.

Good morning, everyone. And welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC first-quarter 2012 earnings results. With me today is Curt Anastasio, CEO and President 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 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 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 press release or on our website. Now let me turn the call over to Curt.

Good morning and thanks for joining us on the call this morning. During the first quarter, NuStar storage and transportation segment results continue to benefit from the capital we invested in internal growth products over the last couple of years, while our asphalt and fuels marketing segment was impacted negatively and ongoing weak asphalt demand, high crude oil costs and hedging losses. For the quarter, NuStar Energy generated $97 million of EBITDA which was higher than the $93 million earned in the first quarter of 2011. Our storage segment earned a record $79 million of EBITDA, $10 million higher than the first quarter of 2011. The third quarter 2011 completion of the 3.2 million barrel storage expansion project at our St. James, Louisiana terminal, as well as higher storage rates on new and existing storage contracts, all had positive impact on the segments EBITDA.

Pipeline transportation segment EBITDA of $50 million was higher than the $47 million earned in the first quarter of 2011. Higher pipeline revenues as a result of the 6.9% July 1, 2011 tariff adjustment and additionally EBITDA generated by the Eagle Ford shale projects completed for coke pipeline and Valero Energy in the second and third quarters of 2011, were the main drivers for the increase in EBITDA. Throughputs on our pipelines were down about 2% compared to the first quarter of 2011, compared to the supply economics and reduced charge rates at some of our customers refineries, as a result of lower revenue margins and gasoline demand about where the main reasons for the reduced throughput. However, crude oil movements on a reactivated idle pipeline that was placed in service in late June of 2011 are being shipped by coke under a capacity lease agreement. Those volumes are not included in our reported throughput volumes. If those volumes had been included, total throughput volume for the quarter would have been higher than last year's.

The asphalt and fuels marketing segment generated a loss of $9 million of EBITDA during the quarter, $14 million lower than the $5 million EBITDA earned in the first quarter of last year. The asphalt portion of that segment lost $16 million in EBITDA during the quarter, compared to a $9 million loss last year. The first quarter is seasonally a weak quarter for asphalt, but continued weak demand for asphalt cost of first-quarter sales volumes to be lower than last year, putting additional downward pressure on results. Fuels marketing operations EBITDA increased to $16 million, $2 million higher than the $14 million generated in the same quarter of last year. Increased EBITDA in our crude oil trading operations, more than offset reduced EBITDA in our bunkering and heavy fuels businesses. Our crude trading operations benefited from the wide LLS to WTI spreads that existed during the quarter, while our bunkering and heavy fuel oil business margins were negatively impacted by hedging losses due to product location differentials.

Our San Antonio refinery, approached in April of last year, lost $9 million of EBITDA during the quarter, largely as a result of hedging losses and increased crude cost during the quarter. Excluding the hedging losses, the refinery made $2.5 million of EBITDA during the quarter. Increased industry demand for low-cost Eagle Ford crude has driven up the cost of crude for the San Antonio refinery, causing our refining margins to be lower than anticipated. In addition, increasing crack spreads since we entered into some gasoline hedges in the second quarter of 2011, cost us to incur $11.8 million in losses on the hedges during the first quarter.

Taking a look at our corporate expenses, G&A expenses were $27 million, $1 million higher than last year, mainly due to higher stock-based compensation expense. Interest expense for the quarter was $22 million, up $2 million from last year. Increased debt levels required to fun internal growth programs and reduced benefits from fixed deploying interest rate swaps were the main reasons of the increase. With regard to our first quarter distribution, NuStar Energy's Board of Directors declared the distribution of $1.095 per unit. The distribution will be paid on May 11, 2012. Distributable cash flow available to limited partners covers the distribution to the limiteds by 0.55 times. The Board of Directors of NuStar GP Holdings declared a third quarter distribution of $0.51 per unit. The GP Holdings distribution will be paid on May 15, 2012.

As we move into the second quarter, the storage segment should begin to benefit from the recently completed unit train offloading facility project at our St. James terminal. That facility, constructed jointly with EOG Resources, offloaded the first 70,000 barrels per day unit train about 10 days ago. Second-quarter results in storage should be higher than the second-quarter of 2011, though lower than the first quarter of 2012. Seasonally high maintenance expense should temper the positive impact from the railcar offloading operations.

Transportation segment results to be negatively impacted by 45 day second quarter turnaround at one of our customers refineries. Reduced throughput as a result of the turnaround should cause the EBITDA for that segment to be lower than the same quarter of last year. Results in our asphalt and fuels marketing segment are expected to be lower than the second quarter of 2011, but higher than that just completed first quarter. Asphalt should begin to generate positive results in the quarter as we move further into this paving season. The operation should also start to benefit from around 20,000 barrels per day of lower-cost Brazilian and Canadian crude oils that we plan to run during the quarter. While EBITDA should be positive for the quarter, results are expected to be lower than the second quarter last year.

The recent completion of a new 12 mile 8-inch pipeline that was constructed from our crude oil storage tanks in Elmendorf, Texas, located southeast of San Antonio, to our San Antonio refinery, should reduce refinery unplanned outages and increase refinery runs by improving the consistency of the crude oil quality supply to the refinery. However, continuing high crude oil costs and projected hedging losses should more than offset any savings realized by the new pipeline, causing second quarter results to be lower than same quarter of last year. EBITDA in the fuels marketing portion of the asphalt and fuels marketing segment should be comparable to last year's second quarter.

Second-quarter 2012 G&A expenses are expected to be the range of $28 million to $29 million. Depreciation and amortization expense around $44 million to $45 million. Interest expense of $23 million to $24 million. In the last half of the year, we expect the results in all three of our segments to be higher than the first half of the year. Storage should continue to benefit from the railcar offloading project and the storage expansion project as our St. James, Louisiana terminal. In addition, the fourth-quarter completion of a 1 million barrel storage expansion project at our St. Eustatius terminal should benefit that segment. Our pipeline transportation segment should benefit from an 8% to 9% July 1, 2012 tariff adjustment, as well as additional EBITDA generated by our Eagle Ford shale projects with TexStar Midstream and Valero that are expected to be completed in the third and fourth quarters of this year.

Improved margins, as a result of running additional lower-cost Brazilian and Canadian crude and increased sales volumes, should lead to higher second-half results in asphalt. Improved crack spreads and higher margins should also lead to better results in our San Antonio refinery and fuels marketing operation. We have been evaluating our existing hedging strategy for the asphalt and fuels marketing segment. We have begun to implement strategies that should maximize the value of the remaining hedges.

For the full year 2012, we expect NuStar's EBITDA to be higher than it was in 2011. Storage segment EBITDA should increase by $30 million to $40 million. Our transportation segment is projected to be the $15 million to $25 million higher. EBITDA in asphalt and fuels marketing is projected to be higher than the $108 million earned in 2011. Reliability capital spending for 2012 should be $50 million to $55 million, while our strategic capital should be the range of $400 million to $450 million.

We continue to pursue and identify new strategic growth projects that are not included in our current strategic capital spending guidance, as well as acquisition opportunities as they arise On the pipeline transportation side of our business, what we are pursuing is additional strategic growth in the Eagle Ford shale and other shale areas where our pipelines are located. In the storage segments we are pursuing growth opportunities in the Caribbean and in our St. James, Louisiana terminal. These projects could add an incremental 400,000 barrels per day of throughput to our pipeline transportation segment over the next three to four years. We're going to provide you with more details of these projects in the near future as they develop.

Based on our current slate of strategic growth projects and the new projects we are pursuing, I am more excited than ever about the EBITDA and distribution growth opportunities for NuStar over the next few years. At this time, let me turn it over to the operator so we can open up this call to Q&A.

(Operator Instructions). Brian Zarahn, Barclays Capital

Curt, can you give us an update on the potential pretty large expansion project you are considering at St. Eustatius and preliminary discussions with customers?

There is a lot of customer interest. We're still evaluating what the proper project is for us. As that customer interest gets more and more sharply defined, we will figure out more precisely what exactly we can do in St. Eustatius and elsewhere in the Caribbean. We are still actively looking at what exactly we can do, but the interest level is high.

I think we have talked about it before. The Brazilian crude production coming online here over the next couple of years is driving that interest. As Curt mentioned, we are looking for the most efficient way to solve those customers needs. It may be at St. Eustatius or elsewhere in the Caribbean.

Do you think the decision on St. Eustatius would take place this year?

Yes.

What was total CapEx in the first quarter?

It was $100 million.

Finally on distribution, the second-half results were beginning to look better. Is your thought process still indicating potentially higher growth rate in 2012 versus 2011?

Well we will say the same thing that we said on the call for the annual results, which is we've budgeted one. What we will do will largely depend upon the performance of the business, specifically in the asphalt and fuels marketing segment in the second half of the year.

Darren Horowitz, Raymond James.

I was wondering if you could spend a little bit more time talking to us about how you plan to maximize the value of those hedges within the fuels marketing business. Any additional color there would be hopeful.

We have Paul here, Paul Brattlof is responsible for the hedging program. Good topic

Yes, some of the hedges, what we are looking at is some of the outer months or outer year hedges we're looking at looking at trying to (Inaudible - technical difficulty). What we are looking at is what is really not working on these hedges is the crude side of the business. What is happening is a lot of the Eagle Ford crude is actually getting waterborne pricing. We're looking at how we are going to reset some of those hedges down the road.

It's not going to be a situation where you would be looking to take increased or incremental commodity price risk. It is just a situation where you'd be looking at -- am I correct in assuming the structure of how the hedges are set up?

That's correct. There might be some incremental timing there as we're getting out of some and getting in others. As a whole, I think you are probably correct.

I'm trying to get a sense as to the benefit that you guys will experience on the asphalt side of the business running the lower-cost Brazilian and Canadian crudes relative to the headwind that you are facing as it relates to physical paving demand. I understand that you're coming right down the sweet spot of what should be paving season, through September. I'm trying to get a sense as to how much of a lower cost benefit it will actually materialize and offset incrementally lower demand. Is it a situation where you guys are tracking to do around $70 million or $80 million in EBITDA in the upcoming second quarter? Or is it a situation where you are tracking more of where you were in 2010?

We have not put out a specific guidance for asphalt alone. We expect it to be better than last year. I would not say it is the same as if we were tracking, say, in 2011. The benefit on the crude side is primarily in the Western Canadian. This is the heavy bitumen that we have begun railing into Paulsboro. We've even begun doing a little bit of it into Savannah. That is trading at very steep discounts compared to our Venezuelan alternative. The Brazilian is a discount, but a much smaller discount. That is the part of the profit optimism.

What we are trying to do in the asphalt is profit optimize by lowering our crude costs, by getting more flexible at our terminals so that we can buy more finished asphalt in more places where it is more economic to do so, and have greater ability to blend into fuel oil or switch to fuel oil when that is more economic. We are switching from the system where CITGO is buying Venezuelan crude and running it and making asphalt, to one where we have a lot more flexibility in the system. Paul, do want to comment a bit more on the benefit of the Canadian and the Brazilian crude?

We are seeing strong incentives to bring Canadian barrels to our refineries on East Coast. Just like Curt said, what that does is gives us flexibility to take that asphalt when asphalt premiums are strong, and if they are weak we can then take it to some of our other markets. It gives us flexibility to optimize around the best price.

I would also add last year in the second quarter we made $40 million of EBITDA on asphalt and Curt in his comments just had said we aren't expecting to make as much of that in this year's second quarter. But for the year, we expect to make more than the $28 million were made, which was our worst year ever in asphalt last year at $28 million. We are expecting a pretty decent recovery starting in the second, but in the third and fourth as we bring more of these crudes into the plant, we're actually forecasting profits even in the fourth quarter in our current forecast. Where last year we had a pretty sizable loss in the fourth quarter in asphalt.

Mark Reichman, Simmons.

It looked like maintenance CapEx and your strategic CapEx edged up a little bit versus last quarter's guidance. Not significantly, but what do you attribute that to?

Our maintenance CapEx, I don't think there is anything in particular, just the timing of when things are getting done. On strategic, we have come up with a few more investment projects.

Yes, overall our strategic --

Are those in the Eagle Ford? Eagle Ford projects?

Storage and pipelines.

St. James.

Just because you are asking about strategic capital. The strategic focus of this Company is Eagle Ford and other shale plays and pipelines. St. James and Caribbean is our leading storage opportunities. We have some others, but those are the ones that we really see the biggest bang for our buck. Trying to profit optimize the rest of what we have, including asphalt. The strategic growth is in the pipelines and the terminals. It is very significant, especially with these oil shale plays. That is what you're going to see from us over the next few months. More announcements on this. And over the next few years. It is a big, big opportunity for the Company. I just wanted to take that opportunity about strategic capital to emphasize that point.

Versus the budget, which is probably what we were using when we spoke on the January, late January or early February earnings conference call for the year, we are up against budget by about $55 million on strategic. It is again, the things that Curt is just talking about. It could go up further, depending -- as we sign additional contracts, again on the storage of the pipeline side.

On the asphalt side, it sounds like the benefit of the lower cost crudes will really have an impact on the third quarter. The demand was exceptionally weak this quarter, even though the first and the fourth quarters are typically seasonally weak to begin with. What do you expect in terms of pick up in demand? Could you provide a little more detail around those lower cost Canadian crudes? What type of contract you might have entered into or how long lived that benefit will be or what the impact might have been on gross margin?

On the demand, I don't know if Mike Stone, head of asphalt marketing, wants to address -- we had exceptionally weak demand in the first quarter. What do you see, what is happening there and how it's going to evolve?

Were working from the customer base out in the field. Demand overall for the year will be flat to maybe down slightly 5%. What we are also seeing is an increase in demand on our export segment. There is a lot of activity happening in Brazil and in Chile, Central America and things seem to be opening up over in Western Europe as well. We're getting some positive notes on that.

Do want to talk about the crude? Just to clarify on the Canadian crude, we don't have term contracts. We do on the Brazilian and we do on the Venezuelan, but we are locking up more and more supply. Paul, do you want to comment on that?

Yes we are buying everything in effect spot. We have a couple of deals that are three or four months out, but it is all pricing relative to WCS. What we have made some commitments, we have gone out and we have increased our railcar fleet which shows that we are going to be in that business and we are ramping it up all year. It is gradually growing all year. It is going to materially affect our crude costs by the end of the year.

And then just lastly, in terms of what are you budgeting in terms of the tariff adjustment in July?

I had it in my remarks.

Mark, it's between 8% and 9%.

John Tysseland, Citigroup.

On St. Eustatius, is there capacity currently available for long term firm agreements there at that terminal?

No, none.

Can you update us on what the contract life is there? I know you have a $50 million project that is coming online I think in the fourth quarter. Does that help lengthen your contract life? What does that look like?

The million barrel expansion is backed by, I believe it's a five-year contract. I think our earliest contract coming up there is the end of 2013. Everything else is out beyond that.

How has demand been and for island terminal, what is island terminals and then what is your outlook? You obviously put St. James as more of a priority. Is that a shift in the fundamentals from island storage to more gulf coast storage? Or is that just because gulf coast storage is so booming right now?

Well St. James has become a hub for crude oil with the changes in all of these product [dips] from WTI to LLS and the way the crude is flowing. We have not turned our focus away from the island terminals. In fact, St. Eustatius is right in the middle of the fairway to catch some of this Brazilian crude coming out of those new fields offshore Brazil.

I would not think of it in terms of island storage versus onshore storage. It is more, as Danny said, we happen to be at a hub location in St. James. When we bought it, it was a little under 3 million barrels a few years ago and now it is 8 going to 9 and it is headed to 12. It is because it is in a great location with great connections. St. Eustatius is really an entirely different kettle of fish. The prime driver has been, as Danny said, this offshore Brazilian production which is ramping up over the next few years. We are in about the best possible location for trend shipment and storage for them to various markets. We really have a location differential there over other island alternatives. Separate things that are driving the growth at these two locations, I would say.

Michael Blum, Wells Fargo.

In terms of the hedging loss on the San Antonio refinery, are those non-cash mark-to-market losses you are talking about? Or are those actually realized losses?

Go ahead, Paul, do you think it is about half? Half-and-half?

Yes, it is half-and-half. Roughly.

Based on your current hedge book as it sits today, would you expect that to continue or you're going to redo that hedge book like you were talking about to avoid that?

I think we're still going to have some residual carryover in the second quarter.

But less.

But it is getting less and it will dwindle by the end of the year.

Second question, just in your DCF calculation, you have distributions from the joint venture was about $3 million first quarter 2011, it was zero in the first quarter of 2012. Could you talk about what changed there?

Yes, the Linden JV paid a double distribution in the fourth quarter of last year. One very late at the end of the year. That's why there was none in this first quarter. That is atypical.

Is that typically paid out ratably or is it lumpy like that?

Yes, ratably.

James Jampel.

On the Canadian crude moves to Paulsboro, is that an all rail move?

Yes.

Do you use your own rail cars?

Not owned, but leased. They are committed to our service, yes.

Second question, as you go forth with the strategic capital over the course of the year, do you see yourself maintaining the 50-50 debt/equity mix?

Yes.

What was debt to equity first quarter?

It was 47. In our lifetime it has been somewhere between 42 and 47.

The answer is yes.

Selman Akyol, Stifel Nicolaus

In terms of on the storage side, you guys also referenced higher storage rates and I was wondering if you could give any more color around that in terms of what kind of increases you are seeing?

Well just in general, we continue to see increases in our rates. We are fortunate to have some good locations that are like St. Eustatius and St. James that are growing. There is a fight for storage in those locations. The container market structure has disappeared. I think those that own terminals that have less of a fundamental reason to exist may not be experiencing that right now. As I said, we are short storage and both St. James and St. Eustatius. We're talking to customers about building more.

We should expect storage rates should continue to have an upward bias in those areas?

Yes.

(Operator Instructions). At this time there are no further questions.

Thank you, Operator. We would once again like to thank everybody for joining us on the call today. If anybody has any questions please call NuStar Investor Relations. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.