NuStar Energy LP (NS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NuStar Energy L.P.'s Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Chris Russell, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thank you, George. Good morning, everyone, and welcome to today's call. On the call today are Brad Barron, NuStar Energy L.P.'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'd like to remind you that during 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 this call, we will also refer 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 section of our website at nustarenergy.com.

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

Good morning. Thank you for joining us today. This morning before I turn to what we accomplished this part quarter, what we see on the horizon for NuStar, I want to take a moment to highlight some of the key components of this transformational year to date. Given the difficult year we've been through, it may be hard to remember that during the historical 3-year low crude price environment between 2014 and last summer, we were able to consistently cover our distributions and outperform most of our peers for optimizing our assets and employing strict fiscal discipline. However as the Eagle Ford slowdown continued, it became obvious that we needed a new growth platform and we set our sights on the Permian Basin.

After passing on a number of asset packages, in early 2017, we found a pipeline system in the core of the core of the Midland Basin that met all of our acquisition criteria. We knew that our cover would be under 1x for a short period of time, but the impact of a near-term dip is far outweighed by our longer-term growth projections.

However, last July and August, there was a dramatic paradigm shift in the MLP sector. The capital markets that had fueled unprecedented growth in the sector for many years suddenly dried up, and it became clear that in order to succeed for the near future, MLPs would have to have 5 key characteristics: number one, strong coverage; number two, low leverage; number three, minimum need to access the equity capital markets to finance capital spending; number four, a simplified structure and transparent governance; and number five, no IDR burden. So we developed a comprehensive plan to meet the markets' new demands and reposition NuStar for strong, stable unitholder growth.

Let me talk about how we've addressed each of these 5 characteristics. In order to improve our coverage ratio, we reset our distribution starting with the first quarter distribution paid in May. We now expect our full year 2018 distribution coverage to be in the range of 1.2 to 1.3x, and our yield is now right around 9%. We also executed on our financing plan and raised approximately $600 million in the private equity markets to lower our leverage. As a result, we currently project our year-end 2018 debt to EBITDA to be around 4.7, but we're working on initiatives that will take that number even lower.

And finally, we simplified our structure and governance and eliminated our IDRs for emerging NuStar GP Holdings and NuStar Energy. We're pleased that 98% of the NSH units that were voted by our unitholders were voted in favor of the merger. As a result, NuStar Energy is now a single, publicly traded entity with a $3 billion market cap and no IDR burden. Each one of these steps was critical to NuStar's future success, and I'm proud of the hard work we've done to accomplish these milestones.

NuStar now has the solid balance sheet and financial flexibility to build on our foundational strengths. We're also well positioned to execute strong return growth projects to enhance unitholder value as markets recover in the Permian and across our footprint.

Turning to the Permian. The Permian Basin, as many of you know, is truly a marvel with more recoverable oil than any field in the world except for Saudi Arabia's Ghawar oilfield. In fact, if the Permian were a country, it would rank #7 among the top liquids producers in the world. It's by far the strongest, fastest growing, most resilient U.S. shale play, now accounting for 55% of the nation's active oil rigs even with oil at roughly 65% of 2014 prices.

Industry experts expect the basin to grow from the current 3.3 million barrels per day to 5 million barrels per day by year-end 2020 and then continuing to grow over the next decade, surpassing the production of every member of OPEC. By any standards, both the performance and the prospects of the Permian Basin are impressive, which makes it just that much more impressive that since our acquisition of our Permian System last May, our throughputs are up 140% to 300,000 barrels per day, significantly higher than the overall growth in the Permian volumes of 46% during that same period. The reasons for the superior growth for Permian Crude System are its location in 5 of the 6 most prolific counties in the core of the core of the Midland Basin and the fact that it's supported by top-tier producers.

Our August 2018 nominations are 320,000 barrels per day, and based on our producers' projections, we expect to exit 2018 between approximately 360,000 to 380,000 barrels per day. We're excited about our system's current performance and its prospects for future growth.

While there's some speculation that a potential pinchpoint will emerge in Permian takeaway capacity, we're confident about our ability to get our producers' barrels to market because we have solid shippers with firm commitments for at least 85% of their planned production. While we continue to take measures to provide our Permian producers and shippers the flow assurance to get to the existing long-haul outbound pipelines, we're also working on low-cost capital projects that will give our customers alternative solutions to keep barrels flowing out of the Permian. For example, backed by customer commitments and ongoing customer interests, we're currently constructing 10-bay truck loading rack and evaluating whether to construct a second at a couple of terminals located on our Permian Crude System. First, these truck racks will provide our shippers with the ability to load 30,000 barrels per day, and the second could bring that total to 40,000 barrels per day. Also, just last week, we executed a new contract to utilize our St. James terminal unit train facilities, storage tanks and docks for 1 of our customers to rail 3 to 10 trains per month the Permian crude to St. James.

In addition, we're evaluating connecting our Wichita Falls crude oil pipeline to the Sunrise pipeline expansion from Colorado City to Wichita Falls. Connecting to the Sunrise pipeline could provide some of our customers additional access to Permian crudes.

Lastly, in regard to Permian-related projects, we continue to have discussions with the companies that plan to construct and with shippers that plan to utilize the 3 new long-haul pipelines out of the Permian to Corpus Christi. Our discussions include connecting our Permian system to the new long-haul pipelines, so our shippers can access new systems. We're also discussing connecting our Corpus Christi North Beach terminal to the new pipelines so the system shippers can utilize our storage instead of the dock facilities at Corpus Christi.

We are also currently pursuing several synergistic opportunities outside of the Permian. Earlier this year, we announced we signed several long-term T&D contracts with strong, creditworthy customers, including Bolero and Howard Energy to support a series of healthy return capital projects to connect the third-party rail facility in Corpus Christi, expand certain South Texas products pipeline systems and expand our terminal in Nuevo Laredo.

Within the past couple of months, we signed a 7-year contract with another customer to utilize some of our expanded South Texas products pipeline systems to supply additional barrels to Mexico's markets. All these projects will supply refined products to the growing markets in Mexico, and all are progressing on schedule. We're forecasting incremental EBITDA from some of these projects as soon as late in 2018.

On previous earnings calls, we've mentioned that a few of our South Texas crude oil system take-or-pay contracts expired -- expire in August 2018. These expiring contracts represent about 45% of our South Texas crude oil system take-or-pay volume commitments. Today, I'm happy to say, we have successfully renewed these contracts for an additional 2 years at current throughput volumes. Our minimum take-or-pay volume commitments on our South Texas crude system are now around 116,000 barrels per day. As projected, the tariffs on these new contracts will be about 50% lower than our previous contracts. However, the new contracts ensure that the committed volumes are consistent with what we are actually shipping today and consistent with our current forecast.

Over the past year or so, we've also been investing in a new strategy to improve the returns for our West Coast terminals. We've invested in a number of low-cost high-return biofuel projects to meet emerging demand for biofuel storage, which commands a premium over other storage rates. With a total investment of approximately $60 million, we expect these projects to deliver an EBITDA multiple of approximately 6x. We've already begun seeing the improvements from some of the projects, and we expect that to continue as the remaining projects are completed.

So I hope it's abundantly clear that we have done and continue to do the hard work to position ourselves to thrive as MLP fundamentals continue to improve. We're focused on our core objectives to solve logistics dislocations through carefully managed solid return and synergistic projects, provide world-class service safely and efficiently and enhance unitholder value.

With that, I'll turn the call over to Tom Shoaf, NuStar's Executive Vice President and CFO, to discuss Q2 results. Tom?

Thanks, Brad, and good morning, everyone. Turning to our overall second quarter 2018 results, we generated net income applicable to common limited partners of $13.7 million or $0.15 per unit and EBITDA of $157 million, up $16 million or 11% from the second quarter of 2017. DCF available to common limited partners was $82 million, up $22 million or 36% from the second quarter of 2017. And our distribution coverage ratio for the common limited partners for the second quarter was 1.28x and 1.45x for the 6 months ending June 30, 2018. Second quarter 2018 EBITDA in our pipeline segment was $102 million, up $15 million or 17% from the second quarter of 2017, largely due to the contributions from our Permian Crude System as well as our North System due to a customer's refinery turnaround last year.

Second quarter 2018 EBITDA in our storage segment was $79 million, down $9 million from the second quarter of 2017, largely as a result of weakness experienced at some of our Gulf Coast terminals. As Brad mentioned earlier, we recently closed on a private placement of $590 million of Series D cumulative convertible preferred units. The initial closing of $400 million of units occurred on June 29, while the second closing of $190 million occurred on July 13. In addition, on June 29, we closed on the issuance of $10 million of common units to Bill Greehey, our Chairman. During the second quarter, we used the initial closing proceeds to pay down borrowings under our revolver, bringing our June 30 debt balance down to $3.4 billion and our debt-to-EBITDA ratio to 4.7x, below our credit agreement covenant threshold of 5.25x. It's important to note, had we been able to complete both closings of the preferred in the second quarter, it would have taken our debt-to-EBITDA ratio even lower.

Turning to our 2018 projections. We continue to expect NuStar's 2018 EBITDA to be in the range of $700 million to $750 million, which includes the first quarter $79 million gain associated with the cash receipt of hurricane-related insurance proceeds discussed on last quarter's call. If you exclude the hurricane gain, we expect our 2018 adjusted EBITDA to continue to be in the range of $620 million to $670 million.

With regard to 2018 capital spending, we still plan to spend $360 million to $390 million on strategic capital of which approximately $190 million relates to the Permian Crude System. Our 2018 spending guidance also includes about $50 million of spending associated with the strategic projects to supply refined products to Mexico.

Regarding our reliability capital spending for 2018, we still plan to spend $80 million to $100 million of which approximately $37 million relates to hurricane repair spending at St Eustatius funded with hurricane insurance proceeds.

Based on these projections, we continue to expect our common unit distribution coverage ratio for 2018 to be in the range of 1.2 to 1.3x. Additionally, we continue to expect our debt-to-EBITDA ratio to be around 4.7x by the end of 2018, but as Brad noted earlier, we're working on initiatives that can take that number even lower.

And with that, I'll turn the call back over to Brad for his closing remarks.

Thanks, Tom. About a year ago, we experienced a fundamental shift in the MLP sector that required some transformative actions to ensure the long-term financial strength of the company. When MLP market priorities changed, we course corrected to address those priorities and adjusted our strategy to position NuStar for success. We're proud of the transformation we've accomplished to date in 2018 as we've checked a number of mission-critical boxes in a short time frame.

Our decision to simplify our corporate structure and eliminate the incentive distribution rights has lowered our cost of capital and will allow us to continue to build on the strength of our superior asset base with less dependence on the equity capital markets. It'll also create a more efficient and transparent structure, and it was a critical step in the implementation of our comprehensive plan to position NuStar to successfully delever and deliver strong, sustainable disruption coverage for the future.

We now see encouraging signs of improvement in the MLP sector, and there are significant opportunities emerging for strong, stable midstream MLPs. With each of these steps in our plan now complete, NuStar is poised to be one of the MLPs that thrive as markets recover, and I'm truly excited about the opportunities on the horizon for NuStar.

With that, I'll open up the call to Q&A.

(Operator Instructions) And our first question comes from the line of Jeremy Tonet from JPMorgan.

Just want to start off with Navigator if we could. I was wondering if you might be able to share what the EBITDA contribution was during the quarter, how much CapEx you spent in the quarter and kind of where you see that shaken out for 2018 and 2019 for Navigator CapEx there.

Yes, I mean, as far as the EBITDA goes for the second quarter, the Permian generated about $19 million of EBITDA during the second quarter. As far as CapEx goes, I think, we have about $190 million of CapEx associated with the Permian in 2018. We haven't really given any guidance for '19 yet, but that's what it is for that. In terms of CapEx spend for the second quarter, Chris, you...

About $45 million.

About $45 million in the second quarter.

And then for the system, do you still see kind of expansion to 460,000 barrels a day of capacity? Or what's your latest thoughts on how big the system could get?

We've got -- we just completed the Colorado City expansion to 70,000 barrels a day we've talked to you about in the past. That's in service. We've got another expansion into Midland and to the enterprise terminal that should come online about January, February of next year. And then, we've got a couple of more -- couple more expansions, another one, a connection in Colorado City and further expansion into Midland, that would likely come online about mid-2019. So we continue to plan for a 600,000 barrel a day system.

Oh, that was Danny Oliver answering that question.

Turning over to St Eustatius. So I was just wondering if you could share with us where utilization sat during the quarter and how much PDVSA revenue or utilization was there. And if you don't want to kind of talk about individual customers, could you just kind of share how you think utilization trends play out this quarter and kind of next quarter over in the balance of the year?

So we are -- this is Danny, again. We are full at

St Eustatius still. All of our customers continue to pay their bills. We are on the PDVSA situation. We're continuing to look at potential replacements and/or maybe lowering their footprint there at the terminal and make room for some replacements to come in. But currently, we're fully utilized, and I think, it's worth noting our storage system across the entire system is at 94% utilization, which is we're not particularly happy with some of the renewal rates we see in a backwardated market, but 94% utilization is an enviable position to say the least.

Got you. Great. And as we kind of roll forward a bit here into IMO 2020, would you be able to share kind of your thoughts on how you think that will impact your business?

I think IMO 2020 is a positive for our business. We'll continue to store bunker fuels, and we have a bunker fuels business. From our standpoint, we don't really care what the sulfur content is. It requires the same amount of storage. We actually believe that we may see an increase in some storage due to IMO 2020 because we're hearing more and more that at least some of the shipowners will continue to take the higher sulfur material, and then we'll have the introduction of the lower sulfur material that we'll have to handle as well.

And just last one, if I could, as far as how you think about your funding plan going forward post the preferreds here and if there's any other kind of asset sales that might make sense if you -- as you look to kind of optimize the portfolio.

Yes. As far as financing plans going forward, obviously, the preferred we just did was a big step to the overall plan that Brad laid out. And so the objective there was to minimize our equity needs going forward. And I don't think we have any plans to go into the equity market anytime soon probably for the next couple of years. So I think we're done there. The only thing really left to do, we still have some bonds that we need to refinance this year. We still plan on doing that. So that's kind of the financing plan going forward.

And our next question comes from the line of Ryan Levin from Citi.

Can you comment on the current status of the $100 million to $200 million potential noncore asset sale process that was highlighted in a recent press release?

I mean, we're still looking at that as a lever we can pull to continue to delever. And we have some assets that we are looking at that are less core than others, and we'll continue to look at that as the year progresses and kind of determine what we want to do there.

Okay. I mean, is it still something that you've already decided you're going to sell? Or is it more of a condition of market pricing?

I think it's a condition of market pricing more than anything else. I mean, you want to -- we think, anything we sell, we would want to get -- obviously, we want to get a very attractive multiple for it and be able to redeploy that into a lower multiple project. So that would be the objective there. So it's -- a lot of it is priced sensitive, yes.

Okay. And you didn't take any write-down related to those potential asset sales, correct?

No, we have not taken any write-downs.

Okay. And what was the cost escalation in the storage business in year-over-year comparison?

Can you say that question again? We're not sure we understand what you mean.

In terms of the operating expense in the storage business also, I guess, pick up year-over-year. What drove that?

Oh, what drove...

Operating expenses are up, I guess, on storage.

Storage, a part of that's going to be maintenance cost. Look here real quick. Yes, most of that, Ryan, is on the maintenance expense side.

Okay. And then in terms of the St. James comment in your prepared remarks, what's the CapEx and EBITDA contribution from that potential expansion? And does that anticipate the recently announced competitor pipe from Cushing to St. James?

It's not -- there's no CapEx involved. We have all the facilities there ready to go. So it's just incremental EBITDA there at the facility. I didn't get the second part of your question.

If there is a large pipe in Cushing that moves to the St. James market, would that create additional opportunity for your business?

Absolutely. And we're working on those connections right now. So -- yes, we do see St. James evolving into a more critical export facility into the future.

And our next question comes from the line of Michael Blum from Wells Fargo.

Can you just explain a little bit on your comments about initiatives that you're working on to further improve the leverage of the company?

Well, I mean, there's a -- there's several levers, right? I mean, one of them is EBITDA ramp-up, which naturally will improve the leverage of the company over time. We've already issued the preferred debt. That was a big step. That was a big help. And further ramp-up EBITDA, other initiatives we're working on, we already talked about potential asset sales, those types of things. And I think, it's a combination of those 2 that are probably the biggest drivers of the continued delevering over time.

Okay, great. And then you kind of touched on this a little bit before. But can you just give us your general thoughts on storage markets, kind of where you see the trends in rates going? Obviously, you were in backwardation. And do you see that -- do you think we're close to a trough? And when do you think you start to see a rebound in the storage rates?

So -- well, I don't think we'll see a significant rebound until we see some contango in the market, but it's very regional in storage. So we've seen increases in storage rates on the West Coast, overall, in part due to some of the biofuels projects that Brad mentioned earlier but really just across-the-board. We've just seen a couple of markets, mainly in the Gulf Coast and in the Northeast, around the New York Harbor, that we saw a lot of pressure on those markets because they're more trader-blender type storage markets. But I can't speak for the rest of the market, but I think we've pretty much got kind of a lid on the decreases that we've seen. We've recontracted the storage that came up, albeit, at lower rates. So we think we've seen kind of a bottoming effect there in terms of new storage business.

(Operator Instructions) And our next question comes from the line of Sunil Sibal from Seaport Global Securities.

Most of my questions have been hit, but I just wanted to go back to your comments on moving Permian volumes by rail to St. James. I was kind of curious, are those mainly going to be moved on spot market or spot basis? Are you seeing kind of some term length on those kind of contracts too? And what kind of margins can you expect on those kind of volumes?

To be clear, we're not moving the oil. That's our customer that's moving the oil. We're just -- we're handling it in St. James. So they have their own contracts with the railroads on the unit train rates. And I can't tell you exactly what those are, but they -- I believe they have significant margin to do the business.

Okay. Got it. And then on the IMO 2020, I was kind of curious if you could talk a little bit about any potential CapEx needs that you may see as you kind of change some of your tankage around IMO 2020.

I don't see any CapEx needs to switch grades. We may clean a tank to get the higher sulfur stuff out and the new one in, but it won't be significant.

(Operator Instructions) And our next question comes from the line of Selman Akyol from Stifel.

Just a couple of clarifications. When you talked about higher expenses at storage, you said it was maintenance. So do you expect those expenses to come back down as we go through third and fourth quarter? Or does that become sort of the run rate now?

Third quarter, I'm not sure OpEx, Selman. Third quarter OpEx should be pretty flat and they come off in the fourth. Let me look there real quick. Yes, actually, they're going to start coming off a little bit each quarter. They'll ramp down some in the third, and they'll ramp down even further in the fourth. That's not a good run rate.

And then I thought in your opening comments, you made comments about weakness at the West Coast terminals and then you're talking about strengthening in terms of rates there as well, I guess, as you switch...

You misheard. I said the Gulf Coast, not the West Coast.

And I show no further questions -- oh, I'm so sorry. We have one more question that just came into queue. Our next question comes from the line of James Carreker from U.S. Capital Advisors.

I was wondering if you could clarify some of the comments you made around St Eustatius and that all the capacity was leased and all customers are paying that -- are paying their bills. Is that to imply that PDVSA is still, I guess, giving you revenue?

They are still a customer. We still have a contract with them and...

We expect to get paid.

We expect to get paid.

And what is the status, I guess, of the lien supposedly that Conoco has on their barrels there?

There's really been no change in that status from the last time we talked about it. And ConocoPhillips has asserted a lien, and we assert a similar lien to secure payment.

And I show no further questions at this time. I would like to turn the call back over to Chris Russell, Treasurer and Vice President of Investor Relations, for any closing remarks.

Thank you, George. I would once again like to thank everybody for joining us on the call today. If anybody has any further questions, please feel free to reach out to NuStar's Investor Relations department. Thank you very much, and have a great day.

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