NuStar Energy LP (NS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the NuStar Energy L.P. and NuStar GP Holdings, LLC second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd like to introduce you to the host of today's conference, Mr. Chris Russell, Treasurer and Vice President of Investor Relations.

Sir, please begin.

Thank you, Macy.

Good morning, everybody, and welcome to today's call.

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

Before we get started, I'd 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 risks, uncertainties, and assumptions set forth in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

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 certain of these non-GAAP financial measures to US GAAP may be found in our earnings press release, with additional reconciliations located on the financials page of the Investors section of our website at nustarenergy.com and nustargpholdings.com.

Now I'm going to turn the call over to Brad.

Good morning. Thanks for joining us today.

This morning, I'm happy to report that in the second quarter, we covered our distribution by 1.09 times, marking the ninth consecutive quarter that NuStar has exceeded a 1.0 times coverage ratio. Strong refined products pipeline throughputs, the benefits from the 1.1 million barrels of storage leased at our Piney Point, Maryland facility, along with lower-than-expected operating expenses, contributed to better-than-expected second-quarter results.

This marks another good quarter for NuStar in a tough energy market environment. As I said on last quarter's call, our ability to deliver strong earnings and cash flows continues to reflect the resilience of our business model and the strength and diversity of our stable asset base. The fact that we were able to report these solid results with throughputs on our South Texas crude oil system only slightly above contract minimums further demonstrates this resilience.

Our remaining fee-based pipeline and storage operations continued to deliver strong and consistent results in a continued weak crude oil price environment. The positive second-quarter earnings impact from increased refined products pipeline volumes and leasing out some idle storage at our Piney Point storage facility are just two examples of how NuStar benefits from a highly diversified asset base.

Our second-quarter results were stronger than expected. As I told you on our last call, we expect our third-quarter results to be lower. Turn-around activity at one of our customer's refineries and heavy seasonal maintenance should contribute to lower third-quarter results. While these factors could push our third-quarter coverage ratio below 1.0 times, we still expect our full-year 2016 coverage ratio to exceed 1.0 times.

Before I turn the call over to Tom, let me provide a quick update on our 2016 strategic capital spending program.

We continue to expect to spend between $180 million and $200 million on strategic capital during 2016. We plan to spend about $35 million to complete construction on 1 million barrels of storage that will benefit both our East pipeline system and our St. James, Louisiana storage facility.

Some of this tankish construction has already been completed and is generating cash flow. We expect the remaining tankish to be completed and online by the end of 2016. In addition, we are developing expansion projects for our Linden terminal facility and a couple of our West Coast terminal facilities. These projects should be online by the end of 2017.

Our team continues to work closely with Pemex management in developing our pipeline project to supply northern Mexico, and over the past month or so, we've made several trips to Mexico to discuss the project. We're making good progress, and we remain confident about the project's prospects; but final agreements have yet to be signed.

With that I'm going to turn the call over to Tom Shoaf, NuStar's Executive Vice President and CFO, to provide you with some additional detail on our second-quarter results and 2016 projections.

Tom?

Thanks, Brad.

Good morning, everyone.

As Brad mentioned earlier, we experienced another solid quarter of operating results that allowed us to cover our distribution by 1.09 times, marking the ninth consecutive quarter that we have produced above a 1.0 times coverage ratio. Year-to-date, we have covered the distribution by 1.11 times.

EBITDA from continuing operations was $145 million, while DCF from continuing operations available to limited partners was $93 million. For the second quarter of 2016, we reported EPU of $0.52 per unit, which exceeded both our second quarter earnings guidance and consensus estimates Second quarter EPU came in higher than we expected, due primarily to lower-than-expected operating expenses.

Turning to our segment performance, second quarter 2016 EBITDA in our Pipeline segment was $85 million, basically in line with the second quarter of 2015. Throughputs on our crude oil pipeline assets were down around 15%, or 69,000 barrels per day, when compared to the second quarter of 2015. During the quarter, our total South Texas crude oil pipeline system's physical volumes averaged slightly below our contract minimums of 133,500 barrels per day.

However, due to the fact that some of our customers shipped above their respective contract minimums, we recorded revenue equivalent to approximately 142,000 barrels per day, down from 193,000 barrels per day in the second quarter of 2015. Throughputs on our refined product pipelines increased 8%, or 40,000 barrels per day, mainly due to increased volume on several lines that serve our refinery customers in the Central West and Central East regions.

Second quarter 2016 EBITDA in our Storage segment was $81 million, $3 million lower than the second quarter of 2015. A combination of increased storage rates, increased throughputs and handling fees, and lower operating expenses at several of our terminals nearly offset the impact of lower crude oil throughput volumes at our crude storage facilities.

Our Fuels Marketing segment earned approximately $1 million of EBITDA during the second quarter of 2016, approximately $1 million lower than the second quarter of 2015, due primarily to lower margins in our crude and fuel oil trading operations. Our June 30, 2016, debt balance was $3.2 billion, while our debt-to-EBITDA ratio was 4.6 times.

On July 29, 2016, NuStar Energy's Board of Directors declared a second quarter distribution of $1.095 per unit, which will be paid on August 12, 2016. NuStar's GP Holdings' Board also declared a second-quarter distribution of $0.545 cents per unit, which will be paid on August 16, 2016.

Now let me spend a few minutes talking about our projections for the third quarter and full year 2016. We expect third-quarter 2016 EBITDA results in our Pipeline segment to be lower than our third-quarter 2015 EBITDA results, due to a decrease in Eagle Ford throughputs on our South Texas crude oil pipeline system, as well as increased seasonal maintenance in the quarter. Third-quarter 2016 EBITDA results for our Storage segment should also be lower than third quarter 2015 EBITDA results.

Even though we just increased our amount of storage leased at our Piney Point, Maryland facility to 1.8 million barrels, we expect increased seasonal maintenance expenses, as well as the continued impact of lower crude throughputs at our Corpus Christi North Beach facility, to weigh heavily on segment during the third quarter. Third-quarter 2016 EBITDA results for the Fuels Marketing segment should be slightly higher than the third quarter of 2015 results due primarily to improved bunkering margins when compared to last year's third quarter. Based on these projections, third-quarter 2016 earnings per unit should be $0.30 to $0.40 per unit.

As Brad mentioned earlier, turnaround activity at one of our customer's refinery, as well as a $15 million increase in maintenance and other operating expenses from to Q2 to Q3, should contribute to our lower estimated third-quarter results. Based on these projections, we expect that our third-quarter coverage ratio may be below 1.0 times. However, we still expect our full-year coverage ratio to exceed 1.0 times.

Now turning to full year 2016 EBITDA guidance.

Our full-year 2016 pipeline segment EBITDA guidance remains unchanged at $335 million to $355 million, as we continue to forecast crude oil throughputs on our 2016 South Texas crude oil pipeline system at contractual minimums. As a reminder, since we have forecasted T&D minimums for the remainder of 2016 on our South Texas crude oil pipeline system, any barrels in excess of that floor would serve to improve our actual results in the second half of the year.

Our 2016 Storage segment EBITDA guidance also remains unchanged and is projected to stay in the range of $310 million to $330 million, as we continue to expect the benefit from higher renewal rates and increased utilization across the segment to mostly offset lower expected South Texas crude throughput volumes moving into our Corpus Christi North Beach terminal. 2016 segment EBITDA guidance for our Fuels Marketing segment has been decreased to reflect changing market conditions, and is now expected to be in the range of $5 million to $20 million.

Our 2016 strategic capital spending program remains in the $180 million to $200 million range, while we continue to expect reliability capital spending of $35 million to $45 million. Based on our expectations, we remain confident that we will cover our distribution this year for the third consecutive year.

Lastly, before I turn over the call to Brad, I'd like to quickly mention a few housekeeping items.

As you have noticed in this morning's release, we made some subtle changes related to the disclosure and inclusion of certain non-GAAP information based on recent SEC guidance. In combination with this recent SEC guidance related to non-GAAP measures, we have also begun to evaluate the current level of quarterly and annual guidance we provide to the Street on a recurring basis.

To better align our forward-looking information with the SEC guidance related to non-GAAP metrics, management's long-term objectives and our peers' practices beginning next quarter's earnings call, we plan to change the level of guidance we provide. What you can expect for 2017 guidance is a focus on the Company-wide full-year metrics and less on the emphasis on quarterly guidance information.

With that, I will turn the call back over to Brad for any closing remarks.

Thanks, Tom.

The second quarter was another great quarter for NuStar. We exceeded our own earnings expectations, as well as consensus estimates. And we covered our distribution for the ninth consecutive quarter. I'm proud that NuStar has continued to achieve strong results during a challenging time in the energy industry.

And even though, as Tom and I both mentioned, we expect increased operating expenses due to heavy seasonal maintenance next quarter will mean weaker third-quarter results than what we are reporting today, we are confident that we will cover our distribution for full year 2016 for the third consecutive year in a row.

To summarize, we have a great set of diverse, fee-based base assets. We are committed to our stable MLP business model. And we fully expect to deliver strong, stable results to our unitholders.

At this time, I will turn it over to the operator and we can open it up for Q&A.

(Operator Instructions)

Our first question will come from the line of Selman Akyol from Stifel. Your line is open.

Good morning. Couple of quick ones for me. First of all, can you guys talk about crude by rail, what's the contribution, what's your outlook for that?

It's been pretty minimal in 2016, certainly relative to what we saw a couple of years ago. When we look into 2017, we are expecting more of the same, maybe some slight decreases, but it's not very significant in our storage segment anymore.

Okay. And as I look at your storage revenues, and just kind of going back over the last several quarters, it seems like we've had a very positive pricing environment, relatively flat over the last several quarters. Can you talk about that a little bit, please?

Yes, we've seen basically across the system -- we are renewing at higher rates, and across the system we see increases, but those continue to be offset by the decreases in the crude oil system. The Eagle Ford volumes falling off, those go through our storage segment as well, and of course, as those have fallen, they've offset any increase in rate renewals.

Got you, and then just going out to Piney Point, can you just remind us how large that facility is? I know it only works in the Contango markets, but how much of it remains to be leased?

We've got about 2.3 or 2.4 million barrels of refined product storage that is leasable there. The rest is really out-of-service tanks that used to be in heavy oil service. We've leased 1.8 of that 2.3, and are in discussions on the last 500,000 barrels at the single tank. We hope to have the whole 2.3 leased up before the end of the year, but 1.8 is a pretty good start. That facility was mothballed right up until about May or so.

Empty for several years.

And then, I think I heard you say that you're expecting the operating expenses to increase going up into next quarter, but what about the G&A? Is that a good run rate here on a go-forward basis?

Yes. For the most part it is.

All right. That does it for me. Thank you very much.

Thank you.

Our next question will come from the line of Brian Gamble from Simmons & Company. Your line is open.

Morning, guys.

Morning.

Maybe just to jump on that Piney Point piece real quick. So 1.8 million leased right now, 500,000 coming. I think you said the impact on second quarter was 1.1 million barrels, so as we continue to ratchet that up, what does that EBITDA benefit or rough numbers? What is 1.1 versus the full 2.3 mean from an EBITDA impact for the year?

For this year -- these are one-year contracts, about half the contract this year and half next year. We did have some OpEx associated with getting those leased. We had to clean the tanks and flush some lines and things like that. So EBITDA this year has been muted quite a bit by those initial startup costs. The majority of that benefit for us is going to come in 2016, when we don't have any of the associated OpEx for the startup.

2017.

I'm sorry, 2017.

2017, right. I got you. Any way to quantify that piece of it, or maybe could say what your costs have been this year?

Yes, it's -- you know, you're looking at $2.5 million, $3 million of benefit in 2017 versus this year. And very little benefit this year, it was mostly eaten up by the OpEx on the startup costs.

Okay. And then you mentioned the refined product throughput strength year over year was based on some central West and central East benefits on the refining side. Those benefits, as far as what you are expecting from those particular refineries, are they expected to continue in the second half of the year, or was that the seasonality weighing in the second quarter based on some crack margins, and that's not necessarily the model moving forward?

We've had no significant changes in the nominations or customers' forecast going into the second half of the year yet.

Great, and then Brad, you mentioned the PEMEX project's still ongoing, some conversations have been had. I guess, any other details there? You continue to be positive on it, and I think that's fair and obviously dealing with them is likely still a challenge, but any other color you want to provide around how those conversations have been progressing?

What I would say is the conversations have been good. We have teams down there almost every week, and I have met with the director general personally twice on this project, so I think the outlook for the project is good.

Great, and last thing for me, the Linden and West Coast expansion plans talking about online by year-end 2017, can you remind us kind of what the scope of those expansions could be, what the cost could be now that you have a docket trend?

I don't think we've actually said much about those projects to date, and it's a little bit early until we get those under contract, but we're confident that those are going to be under contract soon.

All right. I appreciate it, guys.

Your next question will come from the line of Theresa Chen from Barclays. Your line is open.

Good morning. Following up on the last question on CapEx, I understand that you haven't given any quantitative guidance on EBITDA and such. But can you just tell us directionally if those multiples and returns have changed since the environment has changed so much?

No. I don't think they've changed significantly. I think the range of multiple that we've been giving you guys on our internal growth projects still holds true.

Okay, great. And then on your storage segment, can you just talk a little bit about the contract terms that are in play with the renewal rate increases? Are customers looking for shorter contract durations, potentially, to capture that part of the Contango but still wanting to maintain some flexibility going forward, or are the terms and durations still pretty much consistent with historic patterns?

I think the terms are pretty consistent with historic patterns, other than Piney Point. These are one-year contracts because it's really just the Contango-play only, but we have some significant volumes of storage coming up for renewal here in the back half of this year, and some of our larger marine terminals like Stacia, and we expect to see those renew again at the old terms, which are three to five years.

Okay. On Piney Point, then, would it not the economic at all for you to convert some of the old tank assets that used to hold fuel oil if there was demand?

If the demand was strong enough. The problem is Piney Point, the nature of that Contango facility, it's far away from any major hub market. So storage is not very expensive there, and the costs associated with retrofitting those fuel tanks to refine products would be most likely prohibitive.

Understood. And lastly, on your Eagle Ford system, if I'm not mistaken previously you talked about walk-up volumes supplementing any deficiencies from a volumetric perspective. Is that still happening, or with the recent decline in prices, are you seeing less of that?

It's still happening. We continue to bill out more than the actual inputs into the system.

Great. Thank you very much.

Thank you. Our next question will come from Gabe Moreen from Bank of America. Your line is open.

Hi. Morning, guys. I don't know if this was asked already, but any update on that Mont Belvieu pipeline litigation, or if you addressed that in your comments?

We are still in the continuing litigation mode, so there is really nothing we can say about it.

Any timing as to when resolution there may happen?

No. Not really.

Okay. And then most of my questions were asked, but in terms of the Eagle Ford at minimum volume [code], any thought of discussing with some of the counterparty there about extending some of those contracts for possibly lower minimum volume commitments so they go beyond 2018. Is that something you've entertained so far, or that has not come up?

We haven't really had that conversation. We expect to have those types of conversations eventually, but we have some of our earliest renewals don't come up until August of 2018. Then we've got in our second open season, those come up in the summer of 2019, and then we have some other commitments that don't end until 2021. I think it's a little early right now, but we are starting to have some conversations with parties that aren't on our pipeline about their renewals. It's going to get busy and 2017 and 2018, I think, in that regard.

All right. Will stay tuned. Thanks, guys.

Thank you.

(Operator Instructions)

Our next question will come from the line of Ryan Levine from Citigroup. Your line is open.

Good morning. Just a follow-up on the volumes, in terms of refined product volumes. What drove the increase in the quarter? Was any of it attributable to outages or challenges at other competitive pipelines?

Some of that was related to turnarounds we had last year. I would say that was a lot of it, and then there were some other lines that just had increased volumes shipped on them.

And we did benefit some from the CHS projects that we completed in the last six months or so in the West. That helped some, too.

Okay, great. In terms of the ammonia project that you're working on, is there any update around the CapEx or contribution that, that could be generating?

I'm not sure we know you're talking about. Ammonia project? We have to projects going on in the central East region, but they are not on the ammonia line.

Nothing on the ammonia line that's not already in service. We had an ammonia project a year or so ago, connecting to a new ammonia plant there. That's in service, but we're waiting on the ammonia plant to come online, which should happen, I think, in the third quarter here.

Okay, great. Thanks.

At this time, I'm showing no further questions. I would like to turn the conference back over to Mr. Chris Russell, Treasurer and Vice President of Investor Relations for any closing remarks.

Okay. Thanks, Macy. I would like to thank everybody again for joining us on the call today. If anybody has any questions, please feel free to reach out to the Investor Relations Group. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.