NuStar Energy LP (NS) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NuStar Energy L.P. and NuStar GP Holdings, LLC Q3 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Chris Russell, Treasurer and VP of Investor Relations. Please go ahead.

Thanks, Julienne. Good morning, everyone and welcome to today's call. On the call this morning 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, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. 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 U.S. GAAP may be found in our earnings press release with additional reconciliations located on the Financials page of the Investors sections 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. Before turning the call over to Tom discuss our third quarter results, I want to say a few words about our views on 2017, 2018 current markets in MLP sector and the impact of all this on NuStar. As 2017 draws to a close, we're looking at the fourth consecutive year of crude prices stalled at approximate 50% of their 2014 levels. As I've noted on several of our previous calls, the equity markets have been disproportionally punitive toward the MLP sector due to this low crude price cycle. Dysfunctional MLP equity markets have driven average yields to near-record highs, in what seems to have become a self-perpetuating cycle. Price volatility creates concerns for investors, investor skittishness, then moves unit prices.

In addition to the significant market headwinds that the MLP sector's faced for some time now, in September, a spate of hurricanes caused damage in the Gulf and substantial destruction in the Caribbean. As a result, a large proportion of the nation's refining capacity was shut down, in some cases for weeks, negatively impacting operations of many MLPs, including NuStar. Hurricanes Harvey and Irma impacted 6 of our facilities in Texas and Florida. Fortunately, those storms were primary rain events rather than wind events. Thanks to our employees' planning and hard work, we were able to install pumps and make other preparations which resulted in relatively minimal damage at our Texas and Florida facilities, and we were able to resume operations soon after the storms had passed. Unfortunately, Hurricane Irma, as it passed almost directly over our facility at St. Eustatius, brought extremely high wind and high seas. And while our planning and preparation mitigated the effect of rising water, virtually no advanced planning can buffer the impact of 146-mph winds and 30-foot seas. The sheer force of Irma’s high winds and waves inflicted substantial damage to our facility, as the storm battered our tanks, marine facilities and terminal buildings, eroded the shoreline and deposited debris throughout the terminal. We are grateful that all of our tanks, other than those under construction, were largely spared and are safe to stay in service. We were able to resume operations in a relatively short period of time, and we expect the facility to be fully operational by mid-December. For the remainder of facility, we're implementing a comprehensive repair program to address the damage on minimizing disruptions to our commercial operations. Importantly, we expect our insurance to fully cover the cost of repairing the property damage at our St. Eustatius facility as well as most of our lost revenue from the damage and the repairs over our insurance deductible. In total, across our 7 affected facilities, we currently expect net losses from the hurricanes to be about $11 million. When a destructive storm is forecast, you plan and prepare for the storm with an eye toward improving your ability to withstand the next one.

In this 3-year low crude price cycle, and its impact has been akin to a very long, very destructive hurricane for the MLP sector, planning and preparation are critical, whether you're talking about inclement weather or business cycle. And is due to the planning effort we launched in 2014, at the outset of the historical low crude price cycle, that we successfully returned to a 1x cover of our distribution, maintained full coverage for the last 3 years, de-risked our business and optimized our base business assets. Perhaps most importantly, the groundwork we laid [down] positioned us to establish a significant platform of growth in what's proven to be the strongest, most resilient U.S. shale play, the Permian Basin. When we purchased our Permian Crude System this past May, we projected the acquisition would be dilutive to our coverage for a little over a year. We made the decision to move forward because we believe the system's long-term growth far outweighs (inaudible) back to our coverage ratio. That's exactly what we're seeing. The Permian basin is meeting, and in some cases exceeding, our initial forecast. Overall, the basin continues to grow, with Midland rig counts up 25% since the acquisition. We've seen rig counts on our dedicated interconnected acreage that are already 35% above what we had forecast through year-end in 2017. Receipts on our Permian system are up 56% from 115,000 barrels per day in April to our October monthly average of about 180,000 barrels per day. While the volume ramp, given the number of new rigs, is lumpier than we would have expected, we believe this is due to a combination of some producers waiting on frac crew availability and the development of multi-well pads, where are many as 24 wells come online at one time. We continue to be confident that our Permian Crude System will grow as we forecasted in 2018 and beyond. And our view is based on our performance to date and perhaps the most critical indication of future growth, what our Permian system producers and shippers are saying, not just to us, but also publicly in their earnings calls and filings. In their third quarter earnings calls, major producers are reporting strong results in the Midland Basin this quarter, and they are able to continue to capitalize on the Permian's geological advantages through refinement and improvement of drilling technology combined with strict cost control. And they're assuring their investors that even if 2018 proves to be a fourth year of lower crude prices, they expect production growth in many cases in the double digits.

Our forecast for the Permian Basin, our Permian Crude System look sunny. Our base business, along with the rest of the MLP sector, is showing strain from weathering this historically long-lived low crude price cycle. On top of ongoing macroeconomic pressure, so far this year our base business is also bearing the considerable brunt of an aggregate $43 million of additional headwinds. These stemmed from the hurricane impact that I've described above, along with some significant unplanned turnaround in downtime at our customers' refineries and a large unanticipated reliability project on our ammonia system. The reliability projects serviced in the course of our ongoing pipeline integrity program, through which we inspected and identified a 50-mile segment of our ammonia pipeline that requires replacement. While regulatory standards would permit spreading the replacement over 5 years, we made the decision to complete the project immediately for a cost of $19 million in 2017 and an additional $26 million in 2018. We did that because fast-tracking the project is the prudent thing to do. Completing the project sooner saves NuStar over $7 million. I think this decision, along with our acquisition and integration of the Permian Crude System, illustrates this management team's focus on doing what's best for the company and our unitholders for the long term. We're committed to positioning the company solidly to build the unitholder value through stable, consistent growth now and in the future.

With that, I'll turn the call over Tom Shoaf, NuStar's Executive Vice President and CFO. Tom?

Thanks, Brad, and good morning, everyone. For the third quarter of 2017, we reported net income of $39 million or $0.15 per unit and EBITDA of $156 million, up about $14 million or 9% over the same period in 2016. As we projected at the time of the acquisition, our distribution coverage ratio for the third quarter 2017 was below 1x. Due to the anticipated higher acquisition financing cost along with unanticipated higher reliability capital in the third quarter of 2017, our DCF available to common limited partners was $67 million, or about $20 million less than the third quarter of 2016. And our distribution coverage ratio to the common limited partners for the third quarter was 0.66x. Third quarter 2017 EBITDA in our Pipeline segment was $96 million, up $15 million or 19% from the third quarter of 2016, mainly due to contributions from our Permian Crude System and higher ammonia throughputs due to the -- our ammonia system's hydro test in the third quarter of 2016. Third quarter 2017 EBITDA in our Storage segment was $91 million, $3 million higher than the third quarter of 2016. Earnings from our Martin Terminal acquisition as well as higher EBITDA at our St. Eustatius Terminal were partially offset by lower EBITDA at our Paulsboro Terminal due to a customer exiting the facility. While our EBITDA for the Storage segment was up for third quarter of 2017, you would recall from our calls earlier in the year that beginning January 1, 2017, our contracts for refinery storage at our Corpus Christi, Texas City and Benicia terminals changed from a throughput arrangement to a lease. So while our reported throughputs did decrease by approximately 515,000 barrels per day when comparing our third quarter 2017 storage throughputs to the same period for 2016, on an apples-to-apples basis, our throughputs were only down 25,000 barrels per day, or 8%. Our September 30 debt balance was $3.7 billion, while our debt to EBITDA ratio was 4.8x, in line with our revolver debt covenant. On October 18, NuStar Energy announced the third quarter Series A preferred unit distribution of $53.125 per unit and the third quarter Series B preferred unit distribution of $47.657 per unit, both of which will be paid on December 15. In addition, NuStar Energy announced the third quarter common unit distribution of $1.095 per unit, which will be paid on November 14. NuStar GP Holdings also announced a third quarter distribution of $54.05 per unit, which will be paid on November 16.

Now let me spend a few minutes talking about our projections for the remainder of 2017 and for 2018. Now we expect NuStar's 2017 total EBITDA to be $575 million to $625 million, down 4% from our previous estimate of $600 million to $650 million as a result of the hurricane-related cost that Brad mentioned, together with significant unexpected and unplanned turnarounds and operational issues at our customers' refineries, as well as some remaining costs associated with exiting our heavy fuels marketing business. We're lowering our 2017 internal growth spending estimate to $360 to $380 million, down 8% from our previous estimate of $380 million to $420 million. And we have increased our 2017 reliability spending to $50 million to $70 million, up from $35 million to $55 million, due to the additional spending for the ammonia system replacement project that Brad described.

Looking further out to 2018 full year guidance, we expect NuStar's 2018 EBITDA to be $675 million to $725 million. This EBITDA estimate assumes approximately $100 million to $110 million of general administrative expenses in 2018 that are not allocated to our segments' EBITDA results. These projections represent an increase of about $100 million or almost 17% in total EBITDA over forecasted 2017 EBITDA, which is mostly attributable to incremental EBITDA expected from a full-year benefit and volume ramp from our Permian Crude System, additional EBITDA from several storage projects coming online, and fewer expected turnarounds at our customers' refineries next year. We expect these increases to be partially offset by lower throughputs and lower renewal rates next year on our South Texas Crude System and at our St. James Terminal. With regards to 2018 capital spending estimates, we plan to spend $360 million to $390 million on strategic and other capital, approximately $225 million of which relates to the Permian Crude System. We plan to spend $65 million to $85 million on -- sorry, reliability capital, which is significantly higher than our historic reliability capital run rate due to the ammonia system replacement project that Brad mentioned. Although our projected 2018 capital spending is slightly higher than our 2017 estimates, we've built in the flexibility to reduce our capital spending if necessary, depending on the state of the MLP equity markets next year. And with that, I'll turn the call back over to Brad for his closing remarks.

Thanks, Tom. Based on the 2018 projections that Tom just went over, it won't come as a surprise that, assuming next year turns out to be the fourth year of this prolonged lower crude price cycle and given the substantial unanticipated challenges that our base business is facing, we're not forecasting we will return to cover in 2018. If crude prices were to rebound sooner than expected, global demand grow significantly, or if contango returns in a significant way, that outlook could change. But right now, we just don't see current price and growth forecasts overcoming the base business headwinds we've discussed today. As we all know, it's unlikely that any forecast for markets or for weather will be 100% correct. So as we continue to plan and prepare for storms that might come our way, we're also building on our Permian Crude System and positioning ourselves to be ready when conditions improve in our base business. Regardless of conditions, we will continue to work efficiently, safely and responsibly to build long-term unitholder value, to return to 1x cover, and to reduce our leverage through stable consistent growth. With that, I'll open it up for Q&A.

(Operator Instructions).

Your first question comes from Theresa Chen from Barclays.

That was a lot of information. Can you just go over the breakdown of the unplanned expenses related or the lost revenues related to the $43 million that you had you spoken about earlier? Just the breakdown between the unplanned turnarounds at your customer refineries and any additional hurricane impacts in Q4 aside from the $11 million already spent? And how much ammonia is accounted for in that $43 million?

Okay, Theresa, this is Chris Russell. That $43 million can be broken down into 3 pieces, as Brad mentioned. $11 million of it relates to the impacts from the hurricane, and of that $11 million, $7 million of that falls in the third quarter, $4 million of it falls in the fourth quarter. You've got about another $18 million related to turnarounds and unplanned outages, so that takes your total to $29 million. And the remaining $14 million relates to the ammonia project that Brad talked about, the reliability project.

Great. And going back to Brad's comments about how these macroeconomic and commodity price developments continue to be unknown, and that will dictate when you ultimately return to coverage. Has that changed your distribution policy outlook at all?

I don't think so. I mean, the real question is, where are we in the cycle? Is this a short-term thing or a long-term thing? I've been involved in this business for 17 years and we've seen these things come and go. But what I'll say is that this is probably the most unusual one I've seen. I would have never dreamed over the past year and a half you'd have close to 20 MLPs that have either restructured or reset or cut their distribution in some way. So what we're trying to figure out is, what is going on in this sector, and I think most analysts -- many analysts and many investors don't even know what's happening in the sector. And there's a raging debate on how do you value MLPs. Is it a dividend discount model? Is it an enterprise to EBITDA model? And so what I think would be most helpful for the space to return to normalcy is for the equity markets to begin acting rationally again. I think most MLPs believe -- most MLP management teams believe that they are undervalued and their yields are too high. I think, really in this market, the value of NuStar is not being recognized appropriately. With our great assets, our cash flows, and you got to remember, we are managing this business for the long term. So that's a long answer to your question.

No. That's helpful. And speaking of the long-term, in terms of Navigator, are you still expecting the ramp to high single-digits multiple by 2020? Has that changed at all?

No. Still good. So what we're seeing there, like I mentioned in my comments, volumes are lumpier. When we modeled it, it was right at the beginning of the advent of these multi-well pads, and now we're seeing people -- lots of 10-plus well pads coming on and not just singles. So that makes your cash flow -- your volumes and then your resulting cash flows a little bit lumpier. And then across the Permian, what you've seen is a little bit of a delay in the volume ramp. And so what I told people at the MLP conference back in August is that the volumes are ramping. They are just a couple months delayed. So with everything that we hear from the Permian is positive. The producers are still positive on the rock they have, the acres they have, the drilling plans and people are actually even figuring it out to earn better each day. It's kind of a work in progress. I mean, these multi-well pads are at new development and so these type curves are actually starting to shift upwards as well.

Okay. That's helpful. And in terms of the labor shortage issue that you mentioned in your prepared remarks. On given that you have eyes and ears on the field. Do you have any sense of visibility and time line when that will be resolved?

No. I mean, It's getting better what we hear from producers. It's getting better. I think most people expect a little bit of a blip in December. That happens every year. We saw that back in the Eagle Ford during its heyday. Sometimes [crews] just disappear for the Christmas Holiday. But all I can say is it's getting better.

Your next question comes from Shneur Gershuni with UBS.

Just to start off, you have coverage at 0.66 for the quarter. You expect to be free cash flow negative this year. Based on your CapEx numbers that you were just sharing with us, sounds like you're going to be free cash flow negative next year as well too. Are there any risks of bumping into any of your waiver covenants -- rather your covenants and need for a waiver? Do you plan to issue any equity or equity-like securities, for example, preferreds, for this year or next year?

This is Tom. No, I mean, we've just talked about this during -- when we did the acquisition, we've been talking about it since that time, about our debt leverage coverage. And we fully anticipated the debt leverage to creep up some as a result of the acquisition with all the financings and all that we did. So we've got an eye on that. We're certainly well below the debt limit, the maximum that they allow. If you recall, they allow us 5.5x through the first quarter of '18. So we ended the quarter at 4.8x. It's a little higher than we would like to have, but our plan is to delever over time, as we mentioned when we did the acquisition, and we expect to get that leverage back down again to a comfortable level. But we don't see any big threat in hitting our limits on our debt covenant. We'll certainly manage that. Any equity or equity-like securities that we put out or don't put out in the future is just going to be to manage that covenant. So that's kind of where we're at with that.

And does that expectation sort of take into account some sensitivity around some of the contract expirations you have coming up next year in the Eagle Ford and some challenges that could occur from PDVSA?

Yes, it takes all that into account. We've adjusted for contracts coming off in Eagle Ford and our expected volumes impact and rate impact on that as well. So it's all accounted for.

Okay. And then just following up Theresa's question. You'd sort of -- you talked about, it's kind of an unknown environment right now, managing for the -- a longer-term versus the shorter term. How do you balance the era that we're in, where the market seems to prefer a faster deleveraging pace and higher coverage, and you can see that when you measure by equity risk [frame] and you can look at some peers that have those metrics and have much higher multiples and lower yields as a result? And balance that against the signal of a distribution cut. You do have rising EBITDA and so forth, but the potential to get there faster versus a lower -- a longer, protracted rate. How do you kind of think about that in terms of even the potential of diluting growth with equity issuance if it comes to it?

The way I'd think about it is we manage our MLP for the long-term. We want to provide long-term unitholder value, not just short-term. It's one of the most frustrating things about the MLP sector. So you take that ammonia pipeline replacement situation. You could manage for quarterly coverage and spread that thing out over 5 years. That would cost the MLP an additional $7 million, right? So why would we do that? That's the wrong way for -- I think, to look at it. So what we're doing is taking a long view on all this, and what I think is going to happen over the long term is, like I said, the MLPs that are going to thrive will have high coverage, low leverage, diverse, high-quality assets and exercise fiscal discipline. So we will continue to work toward all of those things.

So how do you think about the scenario, where if you were to, let's say, temporarily reduce your distribution, say by 30% or 40%, where you would lower the claim on cash flows that the distribution claim puts on it by a couple of hundred million dollars, which would then make you -- or put NuStar in a stronger position to make the investments over the longer term without diluting growth.

So what's your question? How do we view something like that?

Yes, how do you balance that? I mean because you are talking about managing for the longer term and so forth. And it just seems that the distribution at the end of the day is just really a claim on cash flows and it's kind of at the GP's discretion. And so, if you were to lower the distribution by $200 [million], that would put you in a much stronger position to potentially have lower cost of funding and there would be less dilution of growth.

Right. What you say may be correct. But I would tell you is that no one step is going to get you there to produce long-term unitholder value. And so, as I said before, we're really looking at managing this business over the long term. So we're going to work to improve our coverage, which we've done substantially. When we took over 4 years ago, we were well below 1x. We returned to 1x. We made an intentional decision to go below 1x so that we could rebuild our platform for growth, and that's turned out well for us. We're still below 1x with that acquisition and that's exactly what we had forecast for this year. So we'll continue to try to build long-term unitholder value.

No, completely appreciate that. I do see the Permian system growing. And we're not questioning the decision, it's more the financing of it is kind of, I guess, what I was looking for comments on. But it sounds like...

But you say is just a -- that's a single lever, and there's a lot of levers out there.

Your next question comes from Jeremy Tonet with JPMorgan.

This is Bill on for Jeremy. First question, what was the EBITDA contribution of Navigator for 3Q '17? And roughly what portion of the 2018 guide does that make up?

The 3Q EBITDA, the contribution was about $18 million, and for the piece of '18, we haven't broken that out.

No we haven't.

Yes.

Okay, understand. And then what was the number of rigs that you exited 2017 with on your dedicated acreage? And what -- is the 2018 exit rig forecast still at 39?

So we projected that we would exit, I think, with about 29. And then I think in the middle of last month, it was about 39. I think we're somewhere in the 30s now. So some rigs have move around within the basin. So it's not as if they've just left the acres, they've just moved over to another section that's adjoining ours. So quite frankly, I can't tell you the precise number, but it's somewhere in the 30s.

Okay. And then any updates on the Pemex project, and is that included in the $360 million to $390 million of growth spending for 2018?

That is not included in the growth spending for next year. So we continue to evaluate the need for refined products in Northern Mexico. And we can find the right partner to do that with, we will.

Great. And then just one last one. What was the storage utilization for 3Q '17?

About 90 -- excuse me, 96%.

Your next question comes from [James Carracher] with U.S. Capital Advisors.

I actually had a couple of follow-ups. Some of the numbers were flying pretty fast and furious. What was the number for your EBITDA guide in 2018?

2018 was $675 million to $725 million.

Okay, I think you also mentioned within the CapEx for 2018, what was the number of that dedicated to Navigator?

$225 million.

$225 million?

Correct.

And then you mentioned, in October, Navigator volumes running at about 180. That’s a pretty nice increase. Do we have an average number during Q3?

Total receipts in Q3 were probably closer to $160 million or $165 million.

Okay. And then you also mentioned that, based on the guidance, you do not expect to cover the distribution in 2018. But does that still leave the door open for like getting to above 1x coverage still by the, perhaps, Q4 of '18?

That's a little bit at the -- I don't know that we're ready to say that yet. Based on the headwinds that Brad had talked about, I mean, it's probably less likely that we would cover in '18. But there's certainly a scenario where we could -- '19 looks better than '18.

(Operator Instructions) Our next question comes from Ryan Levine with Citi.

Hey, Ryan, hold on one second. Chris wants to say something.

Julienne, this is Chris Russell again. Bill, you asked earlier about the Navigator EBITDA for the third quarter, I told you it was $18 million; it was actually closer to $12 million for the third quarter.

If the equity in preferred markets are not available at attractive rates, can you take measures to delay or defer any of the '18 CapEx spending until the financing costs would create more value?

Yes.

Any more color you can provide around the opportunity there and how flexible the spending guidance is?

Yes, we've build in flexibility to that. We'd rather invest that capital. I'd rather continue to grow. But if we have to, we can pull back on a substantial portion of that spend.

What's the current capital issuance guidance or assumption that you may be able to provide?

We haven't given that number.

We haven't given that number out, Ryan.

And then regarding the Oxy pipeline lawsuits, is there any update that you can provide around the status of that [legal] proceeding?

Well, the litigation is ongoing, [in trial]. We expect a decision by the end of the year.

The end of '17?

Mm-hmm.

And then on the PDVSA contracts, there's been a lot of media articles around that. Would you be able to clarify what cash you have or have not received from that customer?

No, we don't comment on specific customers, and we particularly don't comment on cash flows and payments from specific customers. What I can tell you is that we're working closely with them to make sure that we get paid and that their service continues uninterrupted.

Are they currently utilizing the asset as they were 12 months ago?

We haven't changed any contract, so they still lease the same amount of storage as they did from the beginning.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Chris Russell.

Thanks, Julienne. Once again, I want to thank everybody for joining us on the call today. If anybody has any additional questions, please feel free to reach out to NuStar's Investor Relations Department. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation and have a wonderful day. You may all disconnect.