NuStar Energy LP (NS) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NuStar Energy LP and NuStar GP Holdings, LLC fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded.

I will now turn the call over to your host, Chris Russell, Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, Stephanie. Good morning, everyone, and welcome to today's call. On the call today are Brad Barron, NuStar Energy LP 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, 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 through our 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 and investors section of our websites at NuStarenergy.com and nustargpholdings.com. Now let me turn the call over to Brad.

Good morning, thanks for joining us today. Earlier today we released our results for the fourth quarter and full year 2016. Which once again demonstrated the resiliency and strength of our pipeline and storage operations during a year of sustained low commodity prices.

For the fourth quarter, we covered our distribution by 1.02 times, marking our 11th consecutive quarter of distribution coverage. And more importantly, we covered our distribution for our third consecutive year with a full-year 2016 coverage ratio of 1.07 times.

If you recall, as part of the sale of our asphalt operations in early 2014, we agreed to provide a term loan and credit support to Axeon. Recently the owners of Axeon informed us they have entered into an agreement to sell Axeon's asphalt-marketing business. Upon closing this sale, which is expected by the end of the second quarter of this year, we agreed to accept $110 million in cash in the elimination of all credit-support obligations as final payment.

Due to this pending sale, we wrote down the carrying value of the term loan to the agreed upon amount resulting in a $59 million non-cash charge that was added back as an adjustment to DCF. With this in mind, you'll note that the fourth quarter of 2016 we reported a net loss of $0.31 per unit and for the year we reported net income of $1.27 per unit.

While both these amounts include the $59 million non-cash charge, we feel this is a small price to pay to not only receive a $110 million cash payment that will reduce the amount of capital needed to fund our future growth capital needs, but also to eliminate any future obligation to Axeon in the form of credit support.

As you all know, 2016 was a tough year for the oil industry, but as we have discussed many times in the past, we are not just a crude oil MLP. We are a well diversified fee-based MLP with high-quality assets in strategic locations. This was more evident than ever during 2016 as improved results at some of our storage facilities and several of our refined products pipeline systems offset some of the reduced earnings that we experienced as a result of lower crude oil prices.

Within our storage segment, we saw year-over-year increases in lease revenue at many of flagship facilities, while some of our refined products pipelines benefited from increased refinery utilization rates and an expansion project on our Central East pipeline system.

Despite the severe headwinds in our industry, NuStar Energy's common units provided a 38% total return which significantly outperformed the overall market and the Alerian MLP index. What's even more impressive is over the last three years, NuStar Energy's common units provided a total return of 26% during one of the worst energy downturns in recent memory while the Alerian MLP index generated a negative 16% return.

Now, before I turn the call over to Tom, I would like to provide a quick recap on some of the major milestones we achieved during 2016 and also provide you an update on our 2017 spending program. During 2016, we reactivated 2.5 million barrels of idle tankage at our Piney Point, Maryland facility. These tanks are currently leased through the end of 2017. If you recall, this facility had been mothballed for the past few years. Additionally, we renegotiated 9.5 million barrels of long-term storage at favorable rates at our St Eustatius facility.

As I briefly mentioned earlier, during the year we also expanded our Central East pipeline system. This expansion allowed us to increase distillate and propane supply throughout the upper Midwest. The additional volumes made possible by this project were a key contributor to some of the increased refined projects pipeline throughputs we saw this past year.

On the M&A side, in December, we closed on the transaction to purchase a crude oil refined products terminal from Martin Midstream. We payed $93 million and the acquisition is immediately accretive to earnings. Based on current volumes, we expect the acquisition to generate a 7 times EBITDA multiple based on an annual average EBITDA estimate of approximately $13.5 million.

With the completion of this acquisition, our Corpus Christi terminals now include over 3.7 million-barrels of total storage with direct connectivity to two premier pipeline systems coming out of Eagle Ford as well as state-of-the-art docks in Corpus Christi. Additionally, these new assets have begun to provide synergies with our existing Northeast terminal and will provide for future expansion and growth.

From a financing perspective, 2016 was a very busy year for us. During the year, we repatriated approximately $100 million worth of cash from our international operations. In the third quarter, we used our aftermarket program to issue approximately 600,000 common units per net proceeds of around $28 million.

In the fourth quarter, we issued 226.5 million of 8.5% perpetual preferred units with a cost significantly lower than issuing NuStar common equity. With these 2016 financing activities, along with the $110 million of proceeds we expect to receive upon closing of the sale of Axeon's asphalt-marketing business during 2017, we have effectively prefunded most of the capital that we need for our 2017 strategic capital spending.

To update you on our capital spending program, for 2017 we plan to spend $470 million to $490 million of strategic capital. The program includes approximately $100 million of facility enhancements at our St Eustatius terminal and an additional $170 million to $190 million of projects spread across our system including an expansion of our New York harbor capacity at our Linden, New Jersey terminal; completion of the remaining propane projects in our Central East System; several facility upgrades in our West Coast operations; and a planned expansion at one of our large UK facilities. We expect all these projects to generate an EBITDA multiple in the 6 to 8 times range.

In addition, we've earmarked approximately $200 million for our pending pipeline project with Pemex to supply Northern Mexico with LPGs and refined products. As you can see, we have great plans for 2017. 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 details on our 2016 financial results and 2017 projections. Tom.

Thanks, Brad, and good morning, everyone. As Brad previously mentioned, this morning we reported that we once again covered our distribution by 1.02 times in the fourth quarter, marking the 11th consecutive quarter that we have produced above a 1 times coverage ratio. For the year, we covered distribution by 1.07 times, our third consecutive year above 1 times. For the fourth quarter of 2016, we reported a net loss of $0.31 per unit; and for the year, we reported net income of $1.27 per unit.

EBITDA from continuing operations was $83 million for the fourth quarter of 2016. As a reminder, these amounts include a $59 million non-cash charge related to the write-down of our term loan to Axeon, which Brad discussed earlier in the call. DCF from continuing operations available to common limited partners was $88 million for the fourth quarter of 2016.

Turning to the segment results, fourth-quarter 2016 EBITDA in our storage segment was $78 million, down $7 million compared to the fourth quarter of 2015. Higher renewal rates, increased utilization and lower operating expenses across the segment were offset by lower Eagle Ford throughput volumes in our Corpus Christi North Beach Terminal as compared to the same period last year.

Fourth-quarter 2016 EBITDA in our pipeline segment was $85 million, $5million lower than the fourth quarter of 2015. Throughputs on our crude oil pipeline assets were down 14% or 61,000 barrels per day when compared to the fourth quarter of 2015. Also due to the decrease in Eagle Ford shell production transported on our south Texas crude system.

Throughputs on our refined product pipelines decreased by about 4,000 barrels per day compared to the fourth quarter of 2015, mainly due to the lower naphtha demand on our Burgos pipeline. However, these Burgos volumes are covered by a throughput and deficiency agreement, and we will be paid for the throughput deficiency in the first quarter of 2017. Fourth-quarter 2016 EBITDA in our fuels marketing segment was $3 million comparable to the same quarter last year. Our December 31 debt balance was $3.1 billion, while our debt-to-EBITDA ratio decreased to 4.3 times.

On January 27th, NuStar Energy announced a 2016 Series A preferred unit distribution of around $0.65 per unit, which will be paid on March 15, and a fourth-quarter common unit distribution of $1.095 per unit, which will be paid on February 13. NuStar GP Holdings also announced a fourth-quarter distribution of $0.545 per unit, which will be paid on February 15.

Now let me spend a few minutes talking about our projections for 2017. We continue to expect NuStar's 2017 total EBITDA to be $600 million to $650 million. This EBITDA estimate still assumes $100 million to $110 million of general and administrative expenses in 2017 that are not allocated to our segment's EBITDA results.

These projections include incremental EBITDA from the strategic capital projects completed in 2016 and 2017; the benefit from higher renewal rates recently negotiated at some of our terminals, combined with additional EBITDA projected from recently acquired Corpus Christi terminal assets from Martin Midstream. Additionally, the 2017 EBITDA estimates assume near minimum take-or-pay contract volumes for our South Texas Crude Oil pipeline system for the entire year allowing for possible upside to our estimates in production in the Eagle Ford ramps up in 2017.

As Brad mentioned earlier, we now plan to spend $470 million to $490 million on 2017 strategic capital. Our current strategic capital spending guidance is down $60 million from the guidance we provided on the third-quarter earnings call, primarily due to some spending on Pemex projects and a few other projects being deferred into early 2018. We expect our 2017 reliability spending to continue to be in the range of $35 million to $55 million. And based on these 2017 estimates, we expect to cover our distribution for the full year 2017.

Before I turn the call back over to Brad, I want to reemphasize the quality and the performance of our stable fee-based pipeline and storage operations. In our pipeline segment, we are over 90% committed through either take-or-pay or structurally exclusive arrangements. Our Eagle Ford operations, which are the only part of our business directly impacted by crude production, has minimal volume commencements in place with strong credit-worthy customers and comprised less than 15% of our total 2016 segment EBITDA.

Our storage segment continued to benefit from increased utilization and we were able to negotiate many contracts at favorable rates. As of December 31, 95% of our leasable storage was utilized. And from a financing perspective, during 2016, we raised enough capital through repatriation in equity markets to fund most of our 2017 growth capital needs. And with that, I'll turn the call back over to Brad for any closing remarks.

Thanks, Tom. 2016 was one of the more challenging years in the history of the energy industry, but it was a great year for NuStar and I'm very proud of what we accomplished. In 2016, we focused on our core business and we delivered strong distribution coverage. We outperformed most of our peers by leveraging our strengths, our diverse assets, our strategic direction, our fiscal discipline and our outstanding operations.

I want to take a moment to praise our employees whose dedication to operational excellence in 2016 was truly impressive. Here at NuStar, we always emphasize working safely and last year our employees had the best safety record in our history. On top of that, our employees are good environmental stewards and have an outstanding environmental performance.

To put that performance in perspective, last year we transported over 700 million barrels of product and only experienced a release of one-half, of actually less than one-half of one ten-millionth of the products we moved, which is an all-time record for us and an outstanding performance by our employees.

I want to thank our employees for their ongoing commitment to safety and to environmental excellence. Both of these accomplishments are good for our employees, good for our environment and good for our bottom line. Summing up, this year we're going to stay true to our strategy. We're focused on our core business and solid distribution coverage, and I expect another strong showing in 2017.

At this time, we'll turn it over to the operator. We can open it up to Q&A.

(Operator Instructions)

Our first question comes from Gabe Moreen with Bank of America Merrill Lynch.

Good morning, everyone.

Good morning.

Quick question for me in terms of, it seems like a lot more Permian barrels are potentially coming into Corpus Christi here over time. Can you just talk about your positioning in the Corpus Christi market, whether you expect to benefit directly from some of those Permian volumes coming in and then how that might also fit with the Martin acquisition.

Right now, we're not-- this is Danny Oliver. We're not hooked up to any of those Permian pipelines coming down into Corpus, although we're working some projects to do just that, as well as looking for some opportunity for another main trunk line into the Corpus Christi area. So right now all of our storage assets in the docks are hooked up to Eagle Ford pipelines, but we're looking to make those connections in the near future.

You also mentioned the Martin acquisition, that terminal positions us well to take advantage of the connections that Danny is talking about, so.

Got it. Thanks guys, and I assume that is not necessarily in the 2017 CapEx budget at this point or it wouldn't be huge CapEx dollars anyway?

Right.

Okay. Another question for me, Brad, is in terms of the opportunities you're looking at, is it -- you have talked in the past about I think feeling somewhat constrained in terms of ability to spend CapEx. Clearly the 2017 CapEx was a lot bigger than it's been the last couple of years. Is it fair to say you're kind of feeling past constraints or you feel like you're still high grading projects in terms of what you're evaluating overall?

I feel like we have moved past most of those constraints. As you know, last year the market was frozen for everybody in the first half of the year and then it opened up significantly. And Tom and his team did a great job of taking advantage of the opening markets. And as we mentioned here, we've pretty much prefunded most of what we need in order to execute on our plan for 2017. So we feel pretty good about where we're sitting right now.

And then last question from me just is on Pemex in terms of what the next steps or milestones are in that project to get the timeline really firmed up there.

Yes, we would like to see it firmed up as well. We have had very positive discussions you've heard me say on the last couple of earnings calls. We have had positive discussions with the very top leaders at Pemex and I think the next challenge -- as you know, there's been a lot of distractions in Mexico. Discussions with the United States and then opening up with the Mexican oil markets and so we just need to bring everybody back to the table and get something signed. So we will be working on that here in the next month or so.

Okay. Good luck. Thanks, guys.

Thank you.

Our next question comes from Theresa Chen with Barclays.

Good morning.

Good morning.

Tom, I wanted to follow up on your comments related to the Eagle Ford and just given that we have seen some positive news related to rig activity there and taking into account obviously that there's a lag with volumes coming online, but can you talk more about your outlook for your systems there in 2017 and namely when you might expect to see an uplift, if at all, and how much?

Yes, I mean, I think Danny Oliver our veteran BZBD is better suited to answer that. But I think we, we've put a slight uptick in 2017 during the back half of the year, not very much. I mean, for the most part, I mean, we have seen a lot of some rig-count improvement and all that going on in the Eagle Ford, but we're being a little bit conservative here in 2017. So first half we're still running minimum volume commitments in our forecast. And in the back half, it ramps up just slightly. Danny, I don't know if you want to add anything to that.

I think that pretty much covers it, it's just a few thousand barrels a day in the back half of the year. We ramped it up, but if we continue to see rig counts increase like we have seen in the last six months or so, we probably are a little conservative in the back half of the year.

Got it. And related to the delta and the strategic capital spend of $470 million to $490 million versus previous estimate of $530 million to 550 million. Can you talk about how much of that was related to less CapEx budgeted for Pemex and which of the smaller projects you plan to defer into 2018?

Yes, we said that it was about $58 million to $60 million that we decreased our capital guidance for 2017 and half of that is related to the Pemex project and just the normal delays going on there that everybody's aware of. We also decreased our St Eustatius project that we also talked about in 2017 and pushed some of that spending out into 2018 as well. That was about $10 million that got pushed out and then there was a couple other projects in Texas City that also made up about another $20 million of that number.

Great. Thank you. And lastly, in regards to your fuels marketing business, I realize it's a very small portion of your business right now, but that uptick we saw in fourth quarter, is that at all sustainable?

It's hard to say. It's a margin based business, so it can be better. It can be worse, but it's been -- we haven't talked about this in a while. But we've stripped a lot of the risk out of that business, and mostly what we do is pretty reliable. So, I think it was right online with the 2015 fourth quarter. I hope to just continue that.

Great. Thank you very much.

Thank you.

Our next question comes from Jeremy Tonet with JPMorgan, your line is open.

Good morning.

Morning.

I was just hoping on the storage segment you could provide a little bit more color there. It was kind of down year over year, quarter over quarter, and is that just from the Eagle Ford, the terminals there and has that kind of troughed that activity? And do you see renewal rates still moving up or anymore color you can provide there?

Sure. We have seen all across 2016 increased rates as we renew. We believe we'll continue to see that as terms expire going forward into 2017. But, yes, the shortfall in the quarter was all related to the Eagle Ford. Everything else would have been up. But we have the one terminal that, you know receives those pipeline volumes out of the Eagle Ford. It was obviously down year over year.

Yes, just to reiterate, if you take Corpus Christi North Beach out of that which is tied to the Eagle Ford, I mean we had a really good year in storage. Really all the other stuff really helped compensate for that downfall in Eagle Ford in 2016.

Got you. Great. And as far as the issues with Oxy as far as your conversations there, is there anything else that you can update us with regards to that pipeline?

Not really. I mean, we're still in the early stages of litigation and so there's really nothing to report there.

We have several other projects though that we're working on that pipeline, including the Pemex bill is one of them. It's not holding us back from pursuing other deals.

Got you. Great. And just one last one for me, I guess is thinking about the preferred shares that you guys issued, just curious how that would be presented in the future, if that would show up in the DCF reconciliation or how we should think about that?

Yes, I mean, the preferred we account for it as equity, so it's on the equity section of the balance sheet.

The distribution will roll through the DCF section, and it's in there this quarter as well, it's in the other line item in the DCF statement.

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

Our next question comes from Selman Akyol with Stifel.

Thank you, good morning. Just following up a little bit on storage in the Eagle Ford, the Martin acquisition. I know you guys previously talked about synergies. Can you talk a little bit more about those? Are they operational synergies? Are they marketing synergies? And how quickly do you expect to get an uplift?

I think we'll get some immediate uplift on those synergies. A lot of it is operational. You know, we have a facility, they don't quite share a fence line but almost. But the way that we can now-- we have some shared dock assets between the two companies; and now that we own it, we can schedule those assets in such a way that we can increase throughput on those assets.

One thing that's important to remember about that acquisition is we're not relying on synergies to make that accretive. That's accretive day one based on existing business.

Got you. That's helpful. If I were to think about a more robust Eagle Ford environment, is there any way you can put some bookends on what it might mean in terms of an uplift to cash flow or EBITDA 2% to 5%? Is there any kind of guidance you could give along those lines?

So of every 5000 barrels -- every 10,000 barrels of the increased volume is $5 million annually. So, your guess is as good as mine, as to what we could see in 2017 on increases. It has a lot to do, obviously, with crude price.

Got you. And then last one for me. I know you said you think you've got most of your CapEx covered in any shortfall, we should just look for that to be done off the ATM.

Yes, like we have said, we spelled out what our capital program is in 2017, and we think, especially from an equity perspective, we think that we've got what we need to do taken care of already. Now, if we did any more on the ATM, it would just be opportunistic, it would be because something new came in or something like that. But in terms of the guidance that we have given you, we think we have all we need on equity. We do have a bond offering that we have forecasted towards the back end of the year. We'll see if we really need that. A lot of that is dependent upon when Pemex gets done, how much spend there ends up being in 2017 for that particular project.

All right. Thank you very much.

You bet.

Our next question comes from Brian Zarahn with Mizuho Securities.

Good morning.

Good morning.

Just following up on the last question. You don't have much equity financing needs this year. You have pursued alternative sources of equity, are potential noncore asset sales something you may look at? Yes, we don't have that many noncore assets. We have done a great job of utilizing the assets that we have. You take Piney Point, that thing was not functional for several years and our B2B guys have filled that thing up. There might be a few very small things but they're not needle movers. And then on repatriation, is that mostly completed or do you have potential room as tax laws change and maybe make that even more economic.

We're completed with what we want to do so far. Like we said on the notes, we repatriated about $100 million in 2016. So everything we had planned to do is done already. I will say that as long as those international entities continue to generate cash, there will be more that can be repatriated in the future because the things that we change, the things that we structured differently are on an ongoing basis, Brian. So, as we generate cash, we can continue to bring it down.

A couple of housekeeping items in the quarter, can you tell us what expansion CapEx and the cash balance was in the fourth quarter?

Cash balance was $35 million.

Will you repeat that?

$35 million.

$35 million. Okay.

And what did you ask for, maintenance capital, Brian, is that what you asked for?

Expansion CapEx.

Expansion CapEx was about $47 million.

Thanks Chris, that's all for me.

Our next question comes from Ryan Levine with CITI.

Regarding the PMI contract timeline, what's the current expectation that's in your 2017 CapEx guidance as to when spending would start and when the contract would be signed? Are you assuming the 1 to 2 months from now in your budget per your previous comments?

Yes, as far as Pemex project goes, we've already started spending money. We spent some in 2016, a small amount, but we did spend some in 2016. We're planning to continue that. We're getting to a point where we need to get things signed up to spend any really big dollars. That's kind of the big holdup. That's why I said earlier that some of the CapEx that was associated with that project has slipped into 2018. It's just every day that this thing doesn't get signed up, it slips. Right now we have about $200 million slated for 2017 spend.

I think that assumes roughly maybe an end of the first quarter signing.

Right.

Do you think that's contingent on headlines dying down on US-Mexican relations.

You know, in our discussions with our counterparts at Pemex, that has not been an issue. That's not anything that we've -- that they have directly addressed with us.

Okay. And then Q4 2016 results, what portion of EBITDA is attributable to the strategic spending over the past 12 months? So if we could -- is there any way of quantifying organic year-over-year performance as opposed to inorganic?

I don't know. As far as the projects that came out of that in incremental EBITDA, we're really looking at our Central east projects that were the big incremental contributors that we'll see going forward in 2017 EBITDA. I hope I answered your question.

Okay. Thank you.

Our next question comes from Anil Sebal Seaport Global Facilities.

Hi, good morning, guys.

Good morning.

I just wanted to see, you know, what kind of adjustment is going to the leverage metrics? I think you mentioned a 4.3 times debt-to-EBITDA at the end of 2016?

You're asking about the 4.3 times debt to EBITDA. That's what it was at the end of 2016. You're looking at 2017. We're probably planning to be around the 4.4 to 4.5 times. Anil, were you asking for where that gets adjusted to get to that number?

Yes.

On the debt side, what we back out is we back out the hybrids that we issued back in 2013. That's about $400 million and then we also back about $40 million for the go-zone funds that are held in escrow. Okay, that's on the debt side. Then on the EBITDA side, we add in about $20 million for material project adjustments and for the income off the Martin acquisition.

Okay. Got it. And I assume your covenants kind of allow for those adjustments, correct?

Correct.

And could you remind us where your covenants stand now and is there any adjustment that needs to be done for this preferred offering?

No. That preferred is treated strictly as equity and our current debt-to-EBITDA covenant is 5.5 times because we get a half a turn uptick because of this recent Martin acquisition.

And that will turn down by the end of 2017?

That will turn down at the end of the first quarter at 2017. We get two quarters of uptick. The second quarter we're back down to 5 times.

Got it. Thanks, guys. That's all I had.

(Operator Instructions)

Our next question is from Jeremy Tonet with JPMorgan.

Hi, thanks just a real quick follow up on the last point there. The leverage, I think you're referring to was credit-facility adjusted. I was just curious if you could give us a rating-agency adjusted leverage, how that stands?

Your guess is as good as ours. We typically add about a half turn or so to what our debt-covenant ratio is. Just give or take, it's about a half turn more for them, I would guess, but that's a little bit of a mystery to us.

Appreciate that, thank you.

I'm showing no further questions. I will now turn the call back over to Chris Russell for closing remarks.

Once again, I'd like to thank everybody for joining us on the call today. If anybody has additional follow-up questions, please call NuStar's Investor Relations department. Thanks again.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.