NuStar Energy LP (NS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 NuStar Energy L.P. and NuStar GP Holdings, LLC earnings conference call. (Operator Instructions). As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Chris Russell, Treasurer, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, everyone, 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, Executive Vice President and CFO; along with other members of our management team.

Before we 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 (technical difficulty) forward-looking statements. These statements are subject to the various risks, uncertainties, and assumptions described 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 websites at NuStarEnergy.com and NuStarGPHoldings.com.

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

Good morning. Thanks for joining us today. As you may have seen in this morning's news release, our third-quarter results came in quite strong. In fact, we covered our distribution for a 10th consecutive quarter, and we're on track to cover our distribution for a third year in a row, even as the energy industry continues to weather the impact of sustained low commodity prices.

Our ability to deliver strong earnings and cash flows in a continued weak crude oil price environment reflects the resilience of our business model and the strength and diversity of our asset base.

As I've said many times in the past, we are not just a crude MLP. And we've demonstrated that again this quarter, as our strong refined product throughput volumes and robust storage business have driven solid earnings, even in tough market conditions.

During the third quarter, our pipeline segment continued to benefit from strong refined product pipeline throughput volumes, while our storage segment benefited from the additional 1.8 million barrels of recently leased storage at our Piney Point facility, and higher revenues at some of our other terminal locations.

In addition, we took steps to reduce operating expenses during the third quarter, which helped us achieve another solid quarter of distribution coverage.

Before I turn the call over to Tom, let me provide a quick update on our recent acquisition announcement and our 2016 strategic capital spending program. On October 21, we announced we had signed an agreement to purchase crude oil and refined products terminal assets in the port of Corpus Christi from Martin Midstream. We have agreed to pay $93 million for these assets and expect the acquisition to be immediately accretive to earnings based on current volumes, generating an approximate 7 times EBITDA multiple with an annual average EBITDA estimate of approximately $13.5 million.

Not only will these assets solidify our presence in a strategic port and provide us greater connectivity to domestic and international crude oil and refined products markets; they fit perfectly within our acquisition criteria, complement our North Beach Terminal, and provide potential for future expansion and upside growth. We expect to close by the end of the fourth quarter 2016. And once completed, we will own over 3.6 million barrels of storage in the port of Corpus Christi.

On the strategic capital front, we're on track to spend close to $275 million this year, which includes $93 million on the Martin Terminal acquisition I just mentioned. It also includes construction of 1 million barrels of storage spread across our East Pipeline system and our St. James storage facility, both of which were placed in service last month. Additionally, we plan to invest in facility enhancements at our St. Eustatius terminal, which will result in higher rates in 2017 for 9.5 million barrels of storage there. Spending on this project should continue through the end of 2017.

Now, Tom Shoaf, NuStar's Executive Vice President and CFO, is going to provide you with some additional detail on our third-quarter results, as well as projections for 2016 and 2017. Tom?

Thanks, Brad, and good morning, everyone. As you may have seen in this morning's news release, strong third-quarter operating results allowed us to cover our distribution by 1.02 times, marking the 10th consecutive quarter we have produced above a 1 times coverage ratio. Year to date, we have covered the distribution by 1.08 times. On last-quarter's call we projected that increased operating expenses would put negative pressure on third-quarter results.

Since that time, I'm pleased to report that we took action to reduce our operating expenses that enabled us to cover our distribution for the quarter, and report EPU of $0.49 per unit, which was within the latest guidance range that we provided back in September, and well above the initial guidance we provided on our second-quarter earnings call.

EBITDA from continuing operations was $142 million for the third quarter of 2016, while DCF from continuing operations applicable to limited partners was $88 million. Third-quarter 2016 EBITDA in our storage segment was $88 million, comparable with the third quarter of 2015.

In just our storage segment, we have 50 terminal facilities which service domestic and international markets. The majority of these facilities are strategically located to serve local refinery markets or international trade flows, and storage is effectively full. So while we have experienced lower throughput volumes at our Corpus Christi North Beach Terminal, our storage segment still performs quite well due to increased storage revenues from recently negotiated contracts, increased refined product throughput fees from several terminals that support the Central West refinery systems, and lower operating expenses for the storage segment as a whole.

Third-quarter 2016 EBITDA in our pipeline segment was $81 million, $9 million lower than the third-quarter 2015. Throughputs on our crude oil pipeline assets were down 20% or 93,000 barrels per day when compared to the third quarter of 2015, mainly due to decreased volumes on the South Texas Crude system. Throughputs on our refined product pipelines increased about 5,000 barrels per day compared to the third quarter of 2015 as increased throughputs associated with the recent completion of some internal growth projects on our East Pipeline more than offset a decline on our ammonia pipeline, which was due in part to hydrotesting a portion of the line and weather-related issues during the quarter.

Our fuels marketing segment broke even for the quarter, which was an improvement over the third quarter of 2015. This was mainly due to steps we took to lower operating expenses.

Our September 30 debt balance was $3.2 billion, while our debt to EBITDA ratio was 4.6 times.

During the third quarter of 2016, we issued approximately 600,000 common units under our at-the-market, or ATM, equity program. The net proceeds of around $28 million were used to pay down debt balances. On October 28, NuStar Energy announced a third-quarter distribution of $1.095 per unit, which will be paid on November 14. NuStar GP Holdings also announced a third-quarter distribution of $0.545 per unit, which will be paid on November 16.

Now let me spend a few minutes talking about our projections for the remainder of 2016 and for 2017. We expect fourth-quarter 2016 EBITDA results in our storage and pipeline segments to be lower than fourth-quarter 2015 EBITDA results due to decreased Eagle Ford throughputs. Fourth-quarter 2016 EBITDA results for the fuels marketing segment should be higher than the fourth-quarter 2015. Based on these projections, fourth-quarter 2016 earnings per unit should be $0.50 to $0.60 per unit.

Now turning to full-year 2016 EBITDA guidance, our full-year 2016 pipeline segment EBITDA guidance remains unchanged from the guidance we provided in September, as we still expect to earn $325 million to $345 million for full-year 2016. These estimates continue to assume forecasted T&D contractual minimums for our South Texas Crude Oil Pipeline system for the remainder of the year. Our 2016 storage segment EBITDA guidance also remains unchanged from our September guidance, and is projected to stay in the range of $330 million to $350 million.

2016 segment EBITDA guidance for our fuels marketing segment has been decreased to reflect continued challenging market conditions in our fuels trading business, and is now expected to be in the range of $5 million to $10 million.

As Brad mentioned earlier, we expect to spend $93 million, net, on the Martin Terminal acquisition, and close by the end of the year. In addition, we now expect to spend $160 million to $180 million on internal growth projects, and continue to expect reliability capital spending to be in the range of $35 million to $45 million for the year. Based on these projections, we remain confident we can cover our distribution for this year, and for the third consecutive year.

Looking ahead to 2017 full-year guidance, we expect NuStar's 2017 total EBITDA to be $600 million to $650 million. This EBITDA estimate assumes approximately $100 million to $110 million of general and administrative expenses in 2017 that is not allocated to our segments' EBITDA results. These projections represent an increase in total EBITDA over forecasted 2016 EBITDA, which is mostly attributable to incremental EBITDA expected from strategic capital projects coming online in 2016 and 2017, the full-year benefit from higher renewal rates recently negotiated at some of our terminals, combined with additional EBITDA projected from upcoming Martin Terminal acquisition.

Additionally, this full-year 2017 EBITDA estimate assumes minimum volumes on our South Texas Crude Oil Pipeline system for the entire year, allowing for possible upside to our estimates if production in the Eagle Ford begins to ramp up.

With regard to 2017 capital spending estimates, we plan to spend about $530 million to $550 million on strategic and other capital, which includes spending related to our pending pipeline project with Pemex to supply like northern Mexico with LPGs and refined products. We expect our 2017 reliability spending to be in the range of $35 million to $55 million. Based on these 2017 estimates, we expect to cover our distribution for the full-year 2017.

And with that, I will turn it back over to Brad for any closing remarks.

Thank you, Tom. As you've heard us say throughout the call, we had another solid quarter, meeting earnings expectations and covering our distribution for the 10th consecutive quarter. Our performance throughout 2016 speaks to the quality of our strong, stable, and diverse asset base, and the resiliency of our business model and strategic direction. I'm extremely proud that in the midst of a continued weak crude oil environment, NuStar is on track to cover our distribution for a third consecutive year.

I'm also confident that our strategic investments this year and in 2017 will positively impact our distributable cash flow, and allow us to continue to look for strong and stable results to our unitholders.

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

(Operator Instructions). Jeremy Tonet, JPMorgan.

Good morning. It's actually Andy for Jeremy. First question regarding the CapEx guidance for next year, about how much of that is Pemex-related? And thinking about financing, do you think the ATM will be sufficient for the equity portion of the backlog?

Looking at the CapEx guidance for 2017, probably about -- I would say probably about one-third of that, maybe about $200 million, $250 million or so, is next year in terms of what we plan on spending for Pemex.

Okay. And then in terms of funding, is there any update to the funding strategy, since the backlog seems quite a bit bigger than it was this year?

Absolutely. It is the bigger next year than it was this year. No, the strategy is still the same. We plan on maintaining around a 4.5 times debt to EBITDA ratio. That's really our benchmark through this whole process. And we have various tools that we can use to finance that we've all spoke about over the last year, including our ATM program, preferreds, our bank lines, debt capital markets -- all of that is at our access. So the markets are open; the markets are doing well. So we feel like we have ample access to the capital markets to be able to finance this CapEx program in 2017.

Okay. And I may be wrong, but if the Pemex project is due online I think in 2017, so the full coverage that you expect for next year incorporates any type of financing drag that may be related to cash flows that you are not getting from Pemex until 2017, right?

Well, yes, sort of. The Pemex project isn't scheduled to be online until 2018. It's the --

Early 2018.

Yes, early 2018. But yes, we would expect -- coverage is going to happen, even though that project isn't completed yet.

Great. And final question, just a clarification. I think on the last call, Tom, you had said that there may be some seasonal maintenance in the storage segment, some higher operating expenses. But I think the number sequentially was actually down. Was that just elimination of costs, or is there anything pushed back into 4Q or next year that we should know about?

It absolutely was. I'd put it this way: about half of that was related to maintenance. The other half of it was relating to many other things. And the way to look at it, about $3 million to $4 million of that was actually pushed out to the fourth quarter. The remainder of that were just cost reductions.

Great. Thanks very much, and nice quarter.

Brian Zarahn, Mizuho.

Can you provide a little more color on the Corpus terminal acquisition? It is next door to your North Beach Terminal. But I guess maybe talk about some of the positives, but also the current market dynamic of declining Eagle Ford production.

Yes, we think it's a great addition to our assets in the port of Corpus Christi. We price that -- we bought it at what we think is the low of the market. It's accretive with current volumes going through the terminal. We stress-tested it, so that even if volumes go quite a bit lower, it is still accretive to our earnings. So for us it's a solid acquisition. It fits with our strategic direction.

We also have a number of operational synergies between that facility and our own. We're right next to each other in the port.

And are the cash flows contracted? Are they volumetric?

They are contracted currently.

They're both.

Yes, and volumetric. But they do have a contract for those volumes. But they can, per Brad's point, the accretion is based on current volumes flowing, not any kind of deficiency payments required to make that accretive.

Okay. And then on the CapEx budget, obviously the Pemex project is a big part of it. Can you highlight some of the other projects? I think St. Eustatius has some capital there. But any quick overview, what else is in the 2017 budget?

Yes, for 2017, I have already described -- the Pemex project would be a good portion of that. And yes, the St. Eustatius project we have ongoing is in another big piece of that. We also have some work we're doing at Texas City. We have a Linden tank expansion we have scheduled, as well, for 2017. And we also have just a little bit of South Texas work we're doing for a customer.

So, when you combine all of that -- oh, and there's also Grays Terminal over in the UK that we are doing some expansion work on. So, when you combine those, that's pretty much the lion's share of what we have scheduled for 2017.

Okay. And then the last one for me on financing. You have a few different options. Is repatriation still an option, or is that mostly completed?

It's still an option. We're going to be repatriating the remainder. We've already done $35 million this year from the Caribbean, and we plan on doing some more from Canada. In fact, most of it still needs to be done, and we plan on doing that in the fourth quarter. I think we have indicated that, combined, it's about $100 million of repatriated cash.

Thanks, Tom.

Ryan Levine, Citi.

Can you provide an update around ways to generate incremental cash flow around the disputed pipeline with Oxy? Is there any color you can provide on that?

Well, certainly part of our project with the Pemex; and once that project is flowing we've got several other projects under development to hook up other both supply points and customers on to the line, but those are in development now.

Yes, let me just say that we haven't forecasted any volumes in that pipeline in our guidance, or anything we've given you guys. So anything that goes through that pipeline is incremental.

Okay, thanks. And then regarding the PMI or Pemex opportunity, is there any update around timeline to get that agreement signed, or any visibility that you could provide?

All I can say is that we're continuing to work with them. We've had positive calls just in the last few weeks and few days. And we're on track to get that thing signed. I can't tell you exactly when, but I'm still confident that we will get that signed.

Okay. And then regarding the Martin Midstream acquisition, what's the long-term strategic advantage to that as it relates to crude exporting in the decades to come?

One of the big ones is being able to operate the dock facilities of both our facility and the Martin facility as one. Of course they are having a new dock built, as well. But that enables us to reach out and re-contract certain of our customers who want access to certain docks there that we can schedule, instead of just being a first-come, first-serve situation. And owning both those facilities allows us to do that.

Okay. And then last question, regarding the financing of that transaction, what's the expectation to use the ATM to fund that near-term obligation?

Well, as I mentioned previously, we have already done $28 million in this quarter under the ATM. And we're just -- we don't really get that specific on our financing plans. But I will tell you, that is one tool we have to help finance this acquisition.

Thank you.

(Operator Instructions). Robert Balsamo, FBR.

Just a quick clarification from your comments. You mentioned the South Texas volumes remaining flat at the MVC level, so upside there if volumes were to improve. Was that the comment that basically you're expecting those volumes to remain steady in the Eagle Ford volumes?

Yes, our current guidance takes into account minimum volumes, minimum contractual volumes, on that system. So yes, if we were to transport any more than that, then that would be upside to the numbers we've given you guys.

Okay. Well, I understand you're going to get paid for the minimum volumes. But is that expecting that the volumes will actually stay at that level, not fall too far below? So you think they will be relatively --

If I understand question right, our current volumes are very near our MVC.

Yes.

So if there's any increase, we would see pretty quick upside.

(multiple speakers) Not expecting further declines, so more of a hill to get back out of that?

We seem to have leveled off here in the last five or six months.

Great.

Right there in the few thousand barrels a day each month of the month prior, so we seem to have leveled off.

Okay, great. And then just regarding maintenance CapEx of 2017 looking lower than 2016, just how to think about that moving forward. Is this anything being deferred, or do we think about that as a better run rate moving forward?

You said CapEx is lower in 2017. That's not true.

Maintenance CapEx?

No. No I think -- no, we didn't say that.

I'm sorry. I thought it was $25 million to $35 million.

No, $35 million to $55 million.

Oh, then never mind. Thank you very much, that's it.

Parisa Alizadeh, Simmons and Company.

I just have a quick one, just on the port of Corpus Christi terminal acquisition. So the operational synergies that you talk about, is that included in the 2017 guidance that you gave today? EBITDA guidance?

Yes.

Yes, it is.

Okay. Okay, great. And then just another one, just a general one on the Eagle Ford. I know there's been lots of talk on potential M&A to come in the Eagle Ford with producers such as Anadarko potentially divesting their non-operated position in the basin.

Given your focus in the Eagle Ford, can you discuss what you are seeing in the basin, how the upcoming acreage sales may affect NuStar's throughput and opportunity for new contracts as acreage falls in the hands of producers who could accelerate activity on assets that may have been non-core in another operator's portfolio?

Yes, well, I think you hit on it. We see that as potential upside if somebody who is not wanting to invest in that area wants to sell their acreage to somebody that does want to invest, it could only be positive. Anadarko is a good example of someone. We receive barrels from them onto our system, but they are just not investing.

Okay, great. Thanks for that color. I appreciate it. That's all for me.

Lin Shen, HITE.

Just want to follow-up on the previous question. So, when you think about your contracts for Southern Texas Pipeline, when do you think you will start to discuss their potential renewal with their shippers?

We have three different blocks of contracts. Our first contracts start to expire in mid-2018, in July of 2018. The rest expire in 2019 and in 2023. We're always talking to our customers about that, but I don't think you'll really get into serious conversations about renewals until probably early 2018.

Great. Thank you.

Shneur Gershuni, UBS.

My question may have been asked and answered already; there's so many conference calls going on today. But I was wondering if we can talk about fuels marketing a little bit; the performance this quarter, and how you think of that on a go-forward basis, how you are budgeting and planning for it.

Yes, so, we've got -- there's three main parts to that segment. One is our butane blending business. That's a very solid business. Margins haven't been quite as strong as we predicted this year, but they are still on track to make $7.5 million, $8 million this year. And normally they are little closer to $10 million, but they are very, very solid. Our bunker business is another big part of that; also a solid part of that business. Again, that one, we made a little less money than we originally anticipated, but we're still making about $14 million in that segment this year.

The big issue we've had in that segment is our fuel oil blending and trading business. There have been some fundamental changes in that market. And what we've done to react is we have -- actually just at the beginning of the fourth quarter, we reduced the storage available to that business by two-thirds. So they went from almost 1 million barrels of storage to about 300,000. And they are serving more of a supply function to our bunker business than on purpose blending and trading. So we're minimizing our exposure to the margins in that part of the business. We hope to see that improve, going forward.

Okay. I guess that makes sense. And then secondly on the cost side, how should we be thinking about how you are managing it on a go-forward basis?

Are you talking about the fuels marketing segment or the Company (multiple speakers)?

No, just the Company as a whole.

Yes, on the cost side, we have been reducing costs throughout this year, last year. So I think from a standpoint of OpEx and G&A, and those type of things, I think the guidance we put out there, where you're at in the third quarter is probably a good run rate.

Okay. And then finally on the storage segment. I understood that Eagle Ford volumes was the negative there in past quarters. Piney has been a nice positive offset, both last quarter, this quarter. Should we -- until we see a pickup in Eagle Ford volumes, is this where we're at right now? Or is there a little bit more that we can see on the refined product side?

I think from the storage segment perspective, looking out over the next year, we've got -- the storage segment has been very strong for us. And outside of Eagle Ford, we've seen better renewal rates. Our storage is effectively full for that particular segment. As we renew contracts and they come in stronger, as we build more out -- we've talked about the Linden expansion, and the other expansions we have going on that are part of that 2017 CapEx program -- the storage segment should continue to perform and be incremental EBITDA coming from that.

Yes, one thing I would add. Brad mentioned stronger renewal rates, but some of those renewals have been done that won't take effect until sometime between now and the end of the third quarter of 2017. So, we will continue to see improvements, I think, in the storage segment going forward.

Yes, I'm glad to hear the questions about our storage segment, because one of the things I want to reemphasize to people is we're not just a crude-focused MLP. Actually, crude is a fairly small portion of what we do. It's about 15% of our segment EBITDA. And so if you look at it, yes, we're down a little bit on 15% of our business. The rest of our business is extraordinarily strong, and we turned in great results in our storage segment again this quarter. We have a positive outlook for storage in 2017 as well.

No, that's very helpful. And one final question; I'm sure you probably discussed this earlier. But with respect to the acquisition from Martin, I believe they had some contract expirations coming up in 2018, 2019. Are you better able to position to be able to manage those type of expirations, just given your relationships that you have, and the bigger system and footprint that you have there? Is that the right way to be thinking about that?

We think so; and we think that running those two facilities -- integrating those two facilities will allow us to better serve some specific customer needs, going forward. So, we think it's a net positive in terms of renewals.

All right, guys. Thank you very much. Really appreciate the color and the patience with me. Thanks.

Thank you. And that concludes our Q&A session for today.

I'd like to turn the call back over to Mr. Chris Russell for any further remarks.

Okay. Thanks, Christie. I would like to thank everybody again for joining us on the call today. If anybody has any additional questions, feel free to call NuStar's Investor Relations department. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.