NuStar Energy LP (NS) 2014 Q2 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to our second-quarter earnings call. (Operator Instructions).

Chris Russell, Treasurer and Vice President of Investor Relations with NuStar Energy, you may begin your conference.

Thank you. Good morning, everyone, and welcome to today's call.

On the call today are NuStar Energy L.P. and NuStar GP Holdings LLC's President and CEO Brad Barron, Executive Vice President and CFO Tom Shoaf, and other members of our management team.

Before I get started, I 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 with the actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. These 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 Brad.

Thanks, Chris. Good morning and thanks for joining us today.

I'm happy to report that as a result of our ongoing strategic redirection, our second-quarter results were the strongest we reported in quite some time. For the first time since the third quarter of 2011, we have covered our quarterly distribution, and our coverage ratio for the quarter was 1.1 times. In addition, we fully covered the distribution for the six months ended June 30, 2014.

Higher-than-expected throughput volumes in our pipeline and storage segments, as well as some maintenance expenses and reliability capital spending that slipped to the back half of 2014, caused our earnings per unit and distributable cash flow from continuing operations to exceed our initial second-quarter expectations.

Throughputs were higher than we anticipated, primarily as a result of stronger-than-expected crude activity on our Eagle Ford system. Our newly constructed dock in Corpus Christi that became operational back in February, the completion of Phase 1 of our South Texas Crude Oil Pipeline expansion in May, and increased volumes on our Pawnee to Oakville line that we completed in the third quarter of last year all contributed to the increased throughputs during the quarter. These higher-than-expected throughputs obviously had a positive impact on the pipeline segment, but they also benefited our storage segment results via the increased volumes at our Corpus Christi North Beach Terminal.

As I've mentioned before, at the beginning of the year I made it clear to our employees that we have the opportunity and the ability to return to full distribution coverage in 2014, and I asked them to focus on that goal. And with these exceptional second-quarter results and year-to-date results, we are well positioned to cover our distribution for the full-year 2014.

While we are pleased with our results to date and the outlook for the remainder of the year, we continue to work diligently on identifying and developing the next set of internal growth projects that will allow us to continue to increase our earnings and cash flows into 2015 and beyond. We continue to explore additional growth opportunities in the Eagle Ford shale, as well as opportunities in other shale regions that could be synergistic with our existing assets.

In addition, we are currently working on developing projects at several of our terminal facilities. These projects include new tank construction and railcar offloading projects. Hopefully over the next couple of months, we will be able to share some additional details on these projects.

Now I am going to turn the call over to Tom Shoaf, NuStar's CFO. He can provide you with some additional details on the second-quarter results.

Thanks, Brad, and good morning, everyone.

This morning, we announced that EPU for the second quarter was $0.56 per unit, higher than the $0.28 per unit earned in the second quarter of 2013 and exceeding our guidance range of $0.35 to $0.45 per unit. In addition, DCF from continuing operations available to Limited Partners for this quarter was $1.20 per unit and, again, higher than the $0.73 per unit generated in the second quarter of 2013 and our guidance range of $0.85 to $0.95 per unit.

As Brad mentioned earlier, the main drivers for our improved results were strong throughput volumes in our pipeline and storage segments, as well as maintenance and expenses and reliability capital that slipped into the back half of 2014.

EBITDA in our pipeline segment increased to $80 million, $12 million higher than the second quarter of 2013. Overall, we experienced a 17% increase in our total throughput and a 21% increase in total revenues for the pipeline segment.

Throughputs on all of our crude oil pipeline system increased 22% to 427,000 barrels per day, as the segment continued to benefit from increased Eagle Ford throughput and decreased turnaround activity at one of our customer's refineries.

Throughputs on our Eagle Ford Crude Oil Pipeline systems increased 24% from about 175,000 barrels per day in the second quarter of 2013 to around 218,000 barrels per day in the second quarter of 2014, primarily due to the May completion of Phase 1 of our South Texas Crude Oil Pipeline expansion, which added approximately 35,000 barrels per day of capacity to the system, and also the third-quarter 2013 completion of our Pawnee to Oakville line.

Throughputs on our refined products pipeline increased 13% to 521,000 barrels per day, also due to increased turnaround activity at one of our customer's refineries and increased pipeline throughputs on our ammonia pipeline due to more favorable weather conditions.

For the second quarter, the storage segment generated 76 thousand -- $76 million of EBITDA, up $5 million from last year. Throughput volumes increased 10%, while throughput revenues were up 17%, due to increased activity at our Corpus Christi North Beach Terminal, which continues to benefit from the increased Eagle Ford crude volumes shipped on our pipeline system.

Storage lease revenues were down slightly compared to last year's second quarter, due to reduced demand for West Coast storage and the narrowing of the LLS to WTI spread, which impacted both our profit-sharing benefits and unit train demand at our St. James terminal.

Our fuel oils marketing segment earned $5 million of EBITDA during the quarter, slightly higher than the $3 million of EBITDA generated in last year's second quarter. Higher gross margins and lower operating expenses in our bunkering operations were the main drivers for this segment's improvement.

Equity in earnings and joint ventures were $3 million for the quarter versus the negative $10 million recognized in the second quarter of 2013. Equity in earnings and joint ventures now relate solely to our 50% interest in the Linden, New Jersey, storage terminal. If you recall, we divested our 50% share of the asphalt joint venture back in February 2014, which accounted for the majority of our negative equity in earnings and joint ventures in the second quarter of 2013.

NuStar's G&A expenses were $23 million, or $3 million higher than the second quarter of 2013, primarily due to the accounting for compensation-related costs as a result of higher average unit performance. Our interest expense, net of interest income, was $33 million, up $4 million from last year's second quarter. This increase was mainly due to the higher borrowing costs associated with the August 2013 issuance of $300 million of senior notes. NuStar's year-end debt balance was $2.7 billion, while our debt to EBITDA ratio was at 4 times.

In regard to second-quarter 2014 distributions, NuStar Energy's Board of Directors declared a distribution of $1.095 per unit and the distribution will be paid on August 11. NuStar GP Holdings Board declared a second-quarter distribution of $0.545 per unit, which will be paid on August 14.

Now let me spend a few minutes talking about our projections for the third quarter of 2014. Our third-quarter EPU, EBITDA, and DCF results should exceed the results from the same quarters last year. At the segment level, third-quarter EBITDA results in the pipelines and storage segments are projected to be higher than last year's third quarter.

Continued increases and throughputs in the Eagle Ford Shale as a result of the May completion of Phase 1 of the South Texas Crude Oil Pipeline expansion should contribute to higher EBITDA on our pipeline segment, as well as increased storage segment throughput revenue as a result of Corpus Christi North Beach Terminal.

Results in our fuels marketing segment should be higher than the third quarter of last year, due to stronger performance from our bunkering operations.

During the third quarter, we expect G&A expenses to be in the range of $26 million to $27 million, depreciation and amortization expense around $46 million to $47 million, and interest expense in the range of $32 million to $33 million.

Based on these projections, third-quarter earnings per unit should be $0.55 to $0.65 per unit, while distributable cash flow from continuing operations per Limited Partner unit should be in the range of $1.05 to $1.15 per unit.

With regard to segment EBITDA guidance for the full-year 2014, we expect to continue -- our pipeline segment EBITDA to be around $40 million to $60 million higher than 2013 and our storage segment EBITDA to be comparable to 2013 storage segment adjusted EBITDA. 2014 EBITDA results in our fuels marketing segment are now expected to be in the range of $20 million to $30 million.

Our 2014 strategic capital spending has been updated to reflect the deferral of spending from some of our key growth projects into 2015 and is now expected to be in a range of $330 million to $350 million. Our 2014 reliability capital spending guidance is still projected to be in the range of $35 million to $45 million; although based on actual expenditures to date, we anticipate our full-year spending will be at the lower end of that range.

Our quarterly coverage ratios for the remainder of the year should be at lower levels than those reported in the second quarter. However, let me reiterate we remain on track to cover the distribution for the full-year 2014.

And now, I will turn it back over to Brad.

Thanks, Tom.

Let me just add, as most of you know, we have had a lot of great news over the past couple of quarters, and I am extremely pleased that the market has taken notice with both NS and NSH units recently closing at some of their highest levels in our history. Our employees have taken to heart the message from management that attaining a one-time cover is our number one priority. With their hard work and dedication, we as a Company are working to make that a reality.

I am going to turn it back over to Chris and the operator so we can open it up for Q&A.

(Operator Instructions). Steve Sherowski.

With all this talk about condensate exports and just given your strong position in the Eagle Ford, and also at least my view that you have the most condensate ready export facility at your Corpus Christi dock, would you just mind talking a little bit about potential opportunities going forward and how you could leverage this existing strong position that you have?

Sure, I will turn it over to Danny Oliver. He's our Senior Vice President of Business Development, and Danny, do you want to --

Sure. We are actually working a couple of specific opportunities in that regard. We are pleased that we decided from the very beginning to design a segregated system so that we can handle several different segregations of crude oil in our system.

The projects we are working through now are just to add basically another segregation for, let's call it, processed crude, and we are working some specific projects with customers to do that. It will take a little bit of time because we'll need to add some extra storage to keep all of that segregated, but it is moving forward as quick as we can.

Okay, thanks for that. And then, just jumping over to your storage segment, it looks like your OpEx came down, at least relative to previous quarters. How sustainable is that going forward and how should we be thinking about that over the next several quarters?

I think it will pick back up, Steve, as we go through the last half of the year. As Brad mentioned, some projects just got pushed back into the last half of the year, and I think it will probably -- I think the historical level is probably the more reasonable level going forward.

For your storage segment operating expenses?

Yes.

Okay. And final quick question, there has been increased chatter out there about the potential to re-examine the Niobrara project. Would you mind just talking about that and just what your plans are for that pipeline?

Sure, as you are aware, we were involved in an open season for a project around two years ago, about two years ago, and at the time, the Niobrara was just not far enough along in development to generate sufficient interest.

We have revived the project and we are working on that diligently. We hope -- that's one of the projects we hope at least by the next earnings call, we hope to have a lot more to talk about, but it's still in the development stage.

That's great. That's it for me. Thank you.

Jeremy Tonet.

Congratulations on the very strong quarter.

Thank you.

I was just wondering if you could remind us of any seasonality in the fuels business. It seems like you are tracking towards the top end of that guidance so far. So just wondering if there is anything you see in the back half of the year that would make you think it might not be as strong as the first half of the year?

The most seasonal piece of that business is our butane blending operations, which the majority of that occurs in the fourth quarter, but it's a pretty -- that's probably the most reliable piece of that segment. Everything else is pretty much -- there is not a lot of seasonality to it on the bunkering.

Okay.

There is probably not a lot of upside or downside to the guidance that we put out there from a seasonality standpoint.

Got you. Thank you. I wanted to follow up on the process condensate potential opportunities that you guys were speaking about. And I was just wondering if you might be able to talk a little bit on what type of CapEx spend or what type of profit this could generate, and is it up -- is there a chance this could be pretty -- more sizable going forward as far as the opportunity set here?

I think it's a significant opportunity. Capital -- we've got the system, the pipelines in place. There may be some expansions, but it is mostly just adding some storage for an extra segregation, which won't be that significant relative to the opportunity, I don't think.

Okay, great. And then, as far as (multiple speakers)

(multiple speakers) comment on the profitability (multiple speakers)

That makes sense. Fair enough. And then, as far as South Texas Phase 2, I was just wondering if you could -- might be able to update us as far as customer interest there and filling up all the capacity that you have coming online?

We have strong interest on that. We have signed a portion of that second phase already. I think we are very close in our negotiations to signing up the remaining balance of that expansion, and we are still anticipating that coming into service about the second quarter of next year.

So, between now and then, I think you'll see us in the third quarter ramp up, continue to ramp up on volumes until we get near or at our current capacity, and then we will have -- the next step change will be when that second phase goes into service next year.

Okay, and then pivoting over to the storage side, I was just wondering if you had any thoughts as far as other expansion opportunities with the terminals out there, specifically Vancouver as well, if you see any opportunities there?

We do. We see -- we're working a couple of opportunities, both on the East Coast, actually up in Canada at our Tupper facility and in Vancouver for some crude-by-rail projects. We are working them very hard. They are real opportunities, but again in the development stage, so not a lot we can say in terms of detail.

Okay, that's helpful. And then, last one for me, just wondering about the maintenance CapEx, just wondering what is driving the variance that you see now versus original plan. Is it just timing or is there something else in play?

It's just timing.

That does it for me. Thank you very much.

Brian Zarahn.

In the storage business, is that -- are lease revenues, they were down year over year. They are up from the first quarter. How should we think about the -- is that a reasonable run rate? I know there was some re-contracting in the first quarter, but is the second quarter a reasonable run rate for the storage lease revenues?

Yes, Brian, this is Chris Russell. Yes, I think it is. It is down year over year largely due to the fact we had the profit-sharing benefit in the second quarter of last year, same change, and we didn't have much of that at all in the second quarter this year.

Yes, I think your run rate going forward should be pretty good with the second quarter this year -- pretty consistent with the second quarter this year, I would say.

And then, also, on volumes in the storage segment, approximately how much of the throughput was from Corpus Christi?

The total throughput or the increase?

Total throughput.

It should be close to just under 200,000 barrels, I believe.

Okay. That's helpful. And then on the -- on the T&D payments and the DCF reconciliation, is there additional adjustments you expect for the remainder of the year or is it more of a second-quarter event?

For the T&D, that goes on each quarter.

The reservation fee goes on each quarter for the rest of the year. The T&D, it will just depend on the volume that the customer is putting through the facility. So we expect them -- we are forecasting that they will meet their minimum throughput (technical difficulty)

Of the $4 million, is that primarily T&D payments?

The $4 million, it's the reservation fee with OXY and the T&D payment.

Okay.

And then on your question on Corpus, Brian, it's actually 150,000 barrels a day in (multiple speakers)

150,000, okay, thank you. And then on -- you made great progress in covering your distribution, and you see no good visibility for the remainder of the year. How do you think about potential distribution growth medium and longer term?

What we have always said is, like I said, our number one priority is covering the distribution for this year. So, once we have achieved that, then probably our second priority after that is securing the distribution going forward. So, I'd like to see several quarters of covering the distribution before we even begin to look at increasing it.

Thanks for the color.

Brian Lasky.

I was wondering if you could just provide a quick update on the 12-inch line and if you made any progress contracting the remaining portion.

Nothing new contracted. We are working some -- with some customers on doing just that, but nothing completed yet. Just a reminder, we've got about two-thirds of that line guaranteed with our base customer, so that remaining one-third, we are pursuing as quickly as we can.

And then this quarter, your storage and pipeline, obviously, came in a little bit above where you guys expect, but yet you maintained your full-year guidance. Is that just conservatism? Is it more some of the transitory stuff you guys mentioned before or is there some other type of offset that we should be thinking about there?

It was a little bit higher. As we said before, we had some throughputs, higher throughputs coming from Eagle Ford, which helped out the second quarter, and then we had some costs that just slipped into the back half of the year.

So, I think it's just really -- a lot of it is timing and all that, so I think that's why we are keeping our full-year guidance where it is right now. I don't think we are trying to be overly conservative, but I think we just have some timing dips there that are moving around for the quarter.

Got it, thank you.

Cory Garcia.

I appreciate the incremental color. Quick question on the pushout that we have seen in the organic CapEx budget. Is it fair to say that it is really more of a redefining or maybe some reengineering of your 2015 projects, or is it maybe some actual growing pains within the Eagle Ford that you guys are seeing? Just any color that you guys would be able to provide would be helpful.

It's none of that. It is absolutely just the timing of getting things done, the work schedules and things like that. So, there is really no change in what we are doing or how we are doing it. It's just -- basically just the ability to get things done and the timing of those projects.

Got you. And when do you guys expect to announce a better view on what 2015 budget could look like?

We typically do that after -- at the third-quarter call.

Got you. Appreciate it. Great quarter, guys.

Mohit Bhardwaj.

Thanks for taking my question. This is Mohit Bhardwaj from Citigroup. Brad, I had a question on St. James, so if, as you see, the volumes are dropping over there and, as you also mentioned, the profit-sharing is not visible once [LLSDI] is below $7. Your facility is contracted until 2016, but then at the same time, some of the pipeline solutions from Bakken into St. James will also come along.

So, how are you thinking about that project going forward and what your expectations are? Do you maintain that $50 million to $60 million in EBITDA that you generated from that facility right now?

We're working other projects there with other shale plays. We are starting to see more crude come into that facility from the Permian, which has offset a little bit of some of the declines we have seen coming out of the Bakken.

But the Bakken is sensitive to that WTI LLS spread and it has been coming back lately, so we don't forecast any of that profit-sharing, but if it comes back, it helps both volumes by rail and also on the profit-sharing if it's high enough.

But we are currently working some significant projects in another shale play that would be directed at St. James. Again, it's very early in the stages of development so we can't discuss a lot of details, but I think St. James is and continues to be a hub location that is advantageous for a lot of these shale plays.

Thanks for that. And just on Eagle Ford, you mentioned some of the throughputs were higher than what you were expecting, and I think the number that you guys have provided before for Eagle Ford was 220,000 barrels per day for the second quarter. Do you have a revised number what the actual throughput was?

Brad said 218,000 in his remarks so -- Tom did, I'm sorry. Yes, so it was right around that 220,000 number in the second quarter.

Great. Appreciate the color, guys. Thank you.

Matt Niblack.

My questions were answered. Thank you.

(Operator Instructions). Selman Akyol.

Congratulations on a nice quarter. I just have one quick question. On the G&A line, I guess in the first quarter closer to $21 million, $22 million, now $23 million, and if I heard your guidance correctly, $26 million to $27 million going into the third quarter. Can you just talk a little bit about what's going on there and why we are seeing it continue to grow?

Yes, there is a couple of things going on there. One is we have a service agreement with the asphalt JV that we spun off. We sold the last 50% of that, as we said earlier in our comments, and there is a service agreement there, and now we are not providing those services to them, so you're going to see a drop.

We were getting revenue from them on that services agreement. We're no longer providing those, so you're going to see a decline from that and that's driving that.

And then, it is also just -- some of our expenses are based on unit price, and as the unit price goes up, so does the expense, so that's also a driver for that.

All right, thank you very much.

John Edwards.

Nice quarter. Just in light of the fact you are pushing some growth projects into 2015, I'm wondering if you could talk a little bit about the backlog of opportunities you are looking at. Are they holding stable, rising, falling off a bit? Maybe if you could comment on that, it would be great.

Let me clarify something. The growth projects are not being pushed out. Some of the spending, so the spending profile straddles 2014 and 2015. So more of the spending is going to occur in 2015 than in 2014 than we originally expected. But the growth projects are still on track. So, we will get that out of the way.

In terms of other opportunities, we are looking at over a $1 billion set of opportunities, and that's higher than it has been in our history, and we're going to continue adding to that pipeline and evaluating opportunities at an increasing pace.

Okay, and then any kind of sense for potential timing on that? Is that over, say, a three-year period, five-year period? Any kind of additional color there would be helpful.

No, the way that really works is at any given time, you have between $1 billion and $2 billion worth of opportunities you're looking at. Obviously, not all those come to fruition.

We have historically spent around $300 million a year in strategic CapEx, and our plan is to spend more than that, and that's every year going forward in history. So I think what you can expect to see is that number to increase. How much it is going to increase, I can't tell you with precision at this time, but it will be higher in the future.

Okay, great. All right, thank you.

There are no further questions at this time. I return the call to the presenters.

Thank you, Operator. We would once again like to thank everybody for joining us on the call today. If anybody has any additional questions, please feel free to call the investor relations group at NuStar. Thank you.