NuStar Energy LP (NS) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q3 2020 NuStar Energy 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, Pam Schmidt, Vice President of Investor Relations. You may begin.

Good morning. We are sorry for the short delay due to some technical difficulties, but we'd like to welcome you 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, 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 risk, 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.

Also, throughout the call today when we talk about our results, we will be describing our results from continuing operations. In other words, the results we will refer to in this call exclude the St. Eustatius facility we sold in July 2019.

During the course of 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.

With that, I will turn the call over to Brad.

Good morning. Thank you all for taking the time to join us. We have a lot of positive news to report today. Positive news on demand recovery, on another quarter of solid results and on the progress we're making on NuStar's strategic priorities. Despite the challenges this year has posed for the country and the world, I continue to take pride in how well our employees have persevered working to ensure that our customers have reliable access to the energy needed to fuel the fight to overcome this pandemic and to rebuild our economy.

During third quarter alone, we moved 204 million barrels of crude oil and refined products through our pipelines and terminals safely and responsibly. Over the course of the third quarter and through October, we continue to see demand rebound and return to levels at or near normal pre-COVID levels in the markets our assets serve. In our pipeline segment, we saw refined product demand improve throughout the summer, and we have continued to see stable progress in October and on into November. On average, across our refined product systems so far this quarter, we returned to 100% of typical demand.

We're also pleased that our Permian crude volumes have remained steady since our last call and we averaged around 420,000 barrels per day in October. Our throughputs increased from an average of 401,000 barrels per day in the second quarter to 422,000 in the third quarter. We're also pleased with our November nominations of 428,000 barrels per day. We believe these numbers reflect our Permian systems geological advantages, lower production costs and higher product quality, which distinguish our core of the core assets in the Midland Basin from other shale plays, and also other gathering systems in the Permian.

We're seeing some indications of recovery in exports as well. After our Corpus Christi exports dipped below MVCs in May, we've been pleased with the ramp-up we saw in the third quarter with throughputs increasing from an average of 306,000 barrels per day in the second quarter to 380,000 barrels per day in the third quarter, which is above our MBC of 377,000 barrels per day. We continue to forecast revenues for our Eagle Ford and WTI commitments at the MVC levels.

We're encouraged by the hopeful signs we see, but we're also keenly aware of the uncertain environment we're facing here in the United States and around the globe. Become rain or shine for the rest of this year and in '21, we plan to remain focused on our strategic priorities to ensure we continue to build our financial strength and resilience. First, lowering our leverage; second, maximizing our ability to fund our spending with our internally generated cash flows.

First, as we've mentioned you in the past, we are continuing to take steps to lower our leverage. We told you last quarter that we were continuing to evaluate divestitures of noncore assets with midstream M&A markets recovered. And on Monday, we announced we signed an agreement to sell our Texas City Terminals for $106 million, a purchase price that implies a healthy double digit multiple. While parting with assets is never easy, we believe this divestiture is a win-win. Facility will benefit from the buyer's business model and NuStar will deploy the sales proceeds to improve our debt metrics.

Second, we reduced our spending significantly. We plan to continue to do so in order to maximize our ability to fund all of our spending, including all of our CapEx from our internally generated cash flows. To that end, we have cut our strategic capital, we have reduced our operating expenses, and we have reduced our financing costs. In total, we reduced our costs in 2020 by $340 million or 22%. These cuts are part of a structural transformation that allows us to fund our operations from internally generated cash flows. As such, we expect these cuts to continue and to benefit us well past 2021.

We have further reduced our 2020 strategic capital down to a range of $165 million to $185 million which midpoint to midpoint is a $150 million reduction from our pre-pandemic guidance. We've also lowered our 2020 projected reliability capital spending to be in the range of $35 million to $45 million. In addition, we previously identified about $40 million to $50 million of controllable and operating expense reductions for the full year 2020, but we didn't stop there. We continued looking for savings across our organization, and we are now expecting to reduce controllable and operating expenses by another $7.5 million.

The most tangible indications of progress with rebound and recovery are, of course, our third quarter results. And our business has performed well again this quarter as you have seen and as Tom will discuss in more detail in a few minutes. This quarter, our operating income and our segment operating income were both up, not only outperforming our second quarter of 2020, but also better than the same period in 2019. On an adjusted basis, our EBITDA was $180 million in the third quarter, which is 7% higher than the third quarter of 2019, $169 million.

2020 has been a rough year for many people in many industries. But our results for the third quarter once again demonstrate the diversity and resilience of our asset base even under challenging conditions.

With that, I'll turn it over to Tom to give you the details of our third quarter results.

Thanks, Brad, and good morning, everyone. Just a reminder that all our results discussed will be from a continuing operations for all periods. In addition, for the third quarter of 2020, our results include a $138 million charge related to the early repayment of the $500 million balance on the Oaktree term loan, which is separately reported on loss on extinguishment of debt. As such, third quarter 2020 adjusted EBITDA of $180 million excludes this loss and is up $11 million or 7% over third quarter 2019 EBITDA of $169 million.

Third quarter 2020 EBITDA in our pipelines segment was $129 million comparable to the third quarter 2019 EBITDA of $130 million, which is quite remarkable in this environment as we not only returned to pre-COVID throughputs by the end of the quarter in our refined products business as Brad mentioned earlier, but we were also able to recognize over $2 million of OpEx savings within the pipeline segment due to lower power and rent costs.

Our third quarter 2020 EBITDA in our storage segment was $74 million, up $12 million or 19% from the third quarter 2019 EBITDA of $62 million. As a full quarter's contribution from the completion of our Taft 30-inch pipeline, which flows into the North Beach terminal within our Corpus Christi crude system, more than offset any lingering COVID '19 related throughput declines at certain facilities that directly support some of our customers' refineries. In addition, our storage segment continued to benefit from our Mexico refined products projects as well as our West Coast biofuels projects, and also new storage contracts and renewals of existing contracts that we executed earlier this year that brought our storage facilities to a 100% utilization.

We are also able to recognize $3 million of OpEx savings in our storage segment due to efficiencies gained throughout the segment while increasing our throughputs. Third quarter 2020 EBITDA in our fuels marketing segment decreased by $4 million compared to the same period last year due to lower bunker and butane blending margins. Our September 30 debt balance was $3.6 billion and we had no borrowings outstanding under our revolving credit facility, and our debt-to-EBITDA ratio was 4.1x.

As a reminder, in September we seized the opportunity to issue $1.2 billion of new notes at attractive rates to provide us the liquidity to ultimately clear our bond maturity runway for the next 5 years. We issued 2 $600 million tranches of 5 and 10-year senior unsecured notes maturing in 2025 and 2030. The proceeds were used to repay the term loan as well as all the borrowings outstanding under our revolving credit agreement. In addition, we plan to utilize our revolver availability to pay off our February 2021 and February 2022 bond maturities, all of which will reduce our interest expense over the next couple of years.

Turning to our full year 2020 projections. Given the resilience of our business and continued recovery in product demand in 2020, we are raising NuStar's 2020 adjusted EBITDA midpoint by $10 million and narrowing the range to $690 million to $730 million. And we are lowering our 2020 projected strategic capital spending to now be in the range of $165 million to $185 million, which is approximately 63% below our 2019 strategic capital spending. Of that total for the year, about $60 million is for the Permian system and around $20 million will be for renewable fuels and related improvements for our West Coast storage assets. In addition, we have lowered 2020 projected reliability capital spending to be in the range of $35 million to $45 million.

Looking further out to 2021, we expect NuStar's result to be comparable to our 2020 results. That's pretty impressive given the pre-pandemic first quarter of 2020 was a record breaker for NuStar on several fronts. We also expect our strategic and reliability capital to be comparable to 2020. And as Brad mentioned earlier, we will still be achieving these great results while generating internal cash flows to meet all of our spending needs.

And with that, I'll turn the call back over to Brad.

Thanks, Tom. With 10 months of 2020 now in the rearview mirror, as Tom mentioned, we now project that NuStar will generate full year 2020 adjusted EBITDA in the range of $690 million to $730 million, which at the midpoint is 6% above our 2019 EBITDA results. We're proud of the resilience and strength that our business has demonstrated in 2020, and we're encouraged by the recovery we see across our footprint. While uncertainty remains as to what the future has in store, we also expect 2021 EBITDA to be in a range comparable to the range we've provided for 2020.

And thanks to the decisive actions we've taken this year, we expect to fund our 2021 spending from our internally generated cash flows, which is a notable accomplishment for an MLP in any environment. 2021 will also Mark NuStar's 20th year as a public company. And while a lot has changed over the years, I assure you the one thing has not. Each and every day, all of us here at NuStar are working to protect our unit holders, our employees, the environment and the communities in which we operate.

Doing the right thing the right way is so much part of our culture here at NuStar that we may sometimes take it for granted. We've done this for 2 decades now and we've never mentioned it because we believe that doing the right thing is just what you're supposed to do. But we recognize that in a world increasingly critical of the oil and gas industry, we need to tell our points of pride and we plan to do just that in our first sustainability report in 2021. In that report, we will take the opportunity to demonstrate NuStar's environmental and social responsibility, industry-leading safety record and tangible contributions to our communities as well as how we plan to continuously improve our day-to-day operations and take advantage of evolving opportunities presented by energy transition across our footprint.

Our West Coast renewable fuels network is a great example of the opportunities we are finding embedded in unfolding energy challenges. Several years ago, across our West Coast terminals, we began developing a series of low multiple projects in partnership with some of the largest renewables producers in the world to facilitate adoption of low carbon fuel standards across that region. While we've mentioned these renewable fuels projects on prior calls, we haven't told you just how significant a role NuStar is now playing in the low carbon transition of the largest driving state in the union.

For example, in the first quarter of 2020, NuStar handled about 5% of California's total biodiesel volumes, over 15% of its ethanol and close to 30% of its renewable diesel volumes. That's an impressive share of a key market that we have achieved with a relatively modest spend. And our market share, along with our associated EBITDA, continues to ramp through 2023. Our West Coast renewables initiative reflects our business development department's ability to identify and find creative solutions for energy dislocations, adapting as our customers' needs evolve. That ingenuity and innovation will continue to be the key to NuStar's ability to thrive as we all navigate toward the nation's energy future.

None of us could have predicted the obstacles that 2020 as presented and we, like many of you listening, will be happy to bring this year to a close. But even though 2020 has been challenging, we're proud of the resilience and strength that our business has demonstrated with the progress we are making on our financial priorities and our continued health, safety and environmental excellence across our footprint. Given what we've sustained and built over the course of this year, I'm confident that in 2021 and beyond, NuStar will not only weather challenges, but will find opportunities as the recovery continues.

From all of us here at NuStar, we wish you and your families a healthy and safe holiday season. We look forward to talking to you next year. So thank you very much.

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

(Operator Instructions) The first question comes from the line of Shneur Gershuni with UBS.

Maybe to start off, I was just wondering if we can sort of chat about the puts and takes with respect to your guidance -- our initial guidance for next year. I was wondering if you can share with us your assumptions around Navigator volumes and corporates' exports, just given the fact that your refined products has since back to 100%. I assume that's where the puts and takes would be or are there some other things that we can be thinking about as well too?

Yes. Shneur, this is Daniel Oliver. Basically in the basin, we're assuming some muted growth in '21. We expect to exit this year somewhere in the 410 to 420 range. And we expect to exit 2021 around 470. Basically, that's from a lot of conversation with our producers. What they're planning for is a price set in the first half kind of in the low 40s or around 40. And then in the back half of the year, mid to upper 40s, which would generate a little bit more activity. But I want to remind you, and we've mentioned on previous calls, when the pandemic first hit, we had over 500 DUCs on our system up there. And our producers are relying on those DUCs to maintain production in this current pricing environment. We expect by the end of this year to be down around 430 DUCs. And by the end of '21 to be just under 200 DUCs with probably some slight improved rig activity in the back half of the year.

Okay. So you don't even need much of rig activity just given the DUCs. Okay. That makes perfect sense. And maybe to pivot a little bit here. I think, Tom, you sort of highlighted the efforts that have been made with respect to cost reductions and that you see incremental cost reductions that you've already identified. Can you talk about the continuous improvement process? Is there a scenario where we could see another $30 million to $40 million of costs come out? Or kind of what you played out is probably the max that we're going to be able to see?

Well, I wouldn't say it's the max. I mean we're always continuing to look for more cost reductions in our -- throughout our system, whether it's OpEx, G&A across the board. And as Brad's comments, he made the point that we've done -- made some pretty significant cuts across the board. And we look at our cuts holistically. We've cut expenses. We've cut capital in a big way. We've reduced our financing costs. We've made a lot of efforts to reduce all of our costs going out and our cash outflows to become closer to getting to the point where we're paying for all of our costs with internally generated cash flows. That is absolutely the goal. The other goal is to continue to delever. And so all of those are kind of intertwined together. So yes, is there a room for more? There might be. We'll continue to look at that. But I think what we've done so far has been very prudent and --

To follow up on Tom's point, we expect to be to cover all of our costs in 2021 with internally generated cash flows.

Great. And maybe one final question. You managed to sell an asset this week in a healthy multiple. Have you identified any other assets that you have deemed noncore that you may be looking to sell as well also?

We're continuing to look at our portfolio to see what's core and noncore and what we might do to help improve our leverage metrics.

Our next question coming from the line of Michael Blum with Wells Fargo.

Just wanted to go back to a comment you made about your refined products volumes being back to basically 100% normalized levels I guess you'd say. Can you just talk more to that because clearly refineries are not running at their normal utilization? And if you look at national trends, we're not back to 100%. So is that just only specific to your markets? I was wondering if you could just expand on that a little bit.

Yes, Michael, this is Danny again. I think it is specific to some of the markets that we serve. I think we talked about in the middle of the lockdowns, we were spared some of the deeper cuts in demand because of the rural nature of a lot of our assets up in the Mid-Continent. Those markets still continue to perform very well. We have a few assets that serve some large urban areas like Dallas and Denver and Phoenix that continue to lag just a little bit, but our volumes down in the Rio Grande Valley have more than offset those. So as a whole, we're doing -- as Brad mentioned, we're right at a 100% a year ago levels.

Great. Just wanted to ask another -- more like a high level capital allocation question. So I recognize the push here to reduce leverage and it makes sense to me. Just wondering, I understand with your current distribution, you can certainly support it with your cash flows and where your balance sheet sits. But just with your yield where it continues to trade, just wanted to get your latest thoughts on, at some point, do you think about redirecting some of that cash to a better use if you're not getting proper value in the equity market?

I mean, we've looked at that. And when we made the cut earlier this year, we thought -- we absolutely believe we right sized our distribution based on what our projections are going forward. So right now, we think we're in pretty good shape on the distribution. We don't have any plans to cut that any further. We -- as we've said over and over, we've built in a point where we're going to be paying all of our costs with internally generated cash flow. So we think we're in pretty good shape there and we don't think there's a need to do any more distribution cuts.

(inaudible) necessarily to change our distribution policy just based solely on stock price. So if you look across where our metrics are, our distribution coverage is strong. As we mentioned, we're going to fund all of our costs next year with internally generated cash flows. So I don't think it would be rash to cut the distribution just to where our stock happens to be trading at the moment.

Great. And I appreciate that. Last, just one housekeeping item. Just wanted to confirm the $138 million nonoperational charge, was that all cash? Or is there some noncash component to that?

It was a noncash -- well, it was all cash, eventually, yes, the $137 million, yes.

We have our next question coming from the line of Ujjwal Pradhan with Bank of America.

This is Ujjwal. I first wanted to begin with your West Coast biofuel business. I appreciate the commentary on the press release and your prepared remarks. Just wanted to see if you could speak to the size of the addressable market here for you? And how much of that is accessible to you in terms of meeting your return thresholds?

Well, we certainly expect our business there related to the biofuels and the renewable distillates to grow over time. We're just really in the very beginning of kind of a 10-year phase out of fossil fuel diesel in California. So we expect those volumes to grow. And our projects have been sized to grow with those needs. And we're not finished yet. We have another big project that we're working on. We're not quite ready to announce, but we hope to be talking to you about that probably early in 2021.

Got it. And to follow-up on that, certainly, a few refiners have moved to convert more of their refineries to handle molecules in the West Coast. Do you see more of those trends outside of West Coast in other parts of the country? And do you see opportunities for you to approach those opportunities from the NuStar's side?

Yes. I think we're benefiting from some of those conversions directly on the West Coast as we handle some of these renewable distillates and biofuels. But we've also had some indirect benefit from refineries that are converting to renewable distillates in New Mexico and also up in Cheyenne, where we have assets in our Central East and Central West system that will benefit on throughputs of regular fossil fuels as those refineries convert.

Got it. And a second one here, a quick clarification on your 2021 exclusive CapEx comment. Certainly, you're saying it's likely going to be comparable to 2020 levels. But would you be able to talk to the different components of that budget next year?

Talk to the confidence?

Components of that budget.

No. I mean, certainly, much of that will be related to the Permian, but I don't know that we're really talking about components of that yet.

As well as West Coast as well.

Yes. West Coast biofuels is going to be a component of it or may be a component of it. So kind of I'd say roughly along the lines of what we've seen this year.

I'm sure there'd be say color to that in '21.

Yes. Right.

Got it. That's helpful. And if I may, just wanted to get a quick update on your overall deleveraging plan at the high level. So going forward, should we just expect you to delever as your EBITDA grows over time and with some help from prudential asset sales? Is that the overall framework that we should expect you to follow?

I think that's a good way to put it.

We have our next question coming from the line of Joe Martoglio with JPMorgan.

I just wanted to first build off a Shneur's question around the 2021 guidance. And if I heard it right, it sounds like Permian crude should be up a good bid. And then also kind of, I think general consensus is for refined product outlook to be a bit better next year compared to some of this year. Just wanted to understand, I guess, what's kind of the -- some of the offsets there? And I apologize if I missed it, that keeps EBITDA flat. And also, are there any kind of price assumptions baked into that guidance?

Well, one big offset on year-to-year is in 2020, we had -- our first quarter was a near record quarter pre pandemic, which we won't have in '21. It will be a full year of pandemic type environment.

Yes. That's probably your biggest offset.

Okay. Sure. That makes sense. And then also kind of on the 2021 CapEx guidance, you guys have kind of done a good job of reducing CapEx throughout 2020. Well, you do think there could be similar opportunities in 2021? Or is it still looking like it will be flat with 2020, no matter what? And also, what kind of assumptions do you have baked in for the CapEx guidance?

Well, yes, we think -- 2021, as we said will be comparable to 2010 maybe a little bit better, but certainly comparable. We also think that's sustainable for as long as we need to do that. And so that's kind of where we're at with that guidance. And so yes, comparable.

One example of something that could potentially impact CapEx next year is if we see crude oil prices improve quicker and higher than what we're assuming, then we could see the Permian scale up, but those are good low multiple projects, and we'd be happy to see them.

Okay. That makes sense. And then one more quick one. I guess, the $180 million for 3Q, is that kind of a good number to think of a run rate kind of for 4Q and beyond or anything else you should keep in mind?

For EBITDA?

Yes. Correct.

Yes. We're not giving quarterly EBITDA guidance, but I think we said what we think the guidance is for the year.

We have our next question coming from the line of Robert Mosca with Mizuho Securities.

I had a question with respect to your West Coast position. And just wondering if you've learned anything from operating those assets that you could apply elsewhere if the expected energy transition progresses? Or do you view them more as operating in a silo from the rest of your portfolio?

No, we could definitely apply what we've done on the West Coast to other areas that are introducing renewable distillates. This was just the first and the biggest opportunity.

I think we're also building some great relationships with some certain leaders in that area. So I think that is also something that we can carry with us to other areas.

For sure. I think Brad mentioned, we started our strategy on the West Coast several years ago kind of before anybody was really talking about these renewables. And so we feel like we got a good foot in the door early.

For sure. And I guess following up on that, would there be -- it seems like you guys have a pretty decent market share in the California market. Would there be any drive to perhaps expand on that in the next few years, and then make it a bigger piece of the pie in your portfolio?

Certainly.

Yes.

Yes. I would say it's better than these. I'd say we have a really large part of the market share for a company of our size. And we see opportunities to expand that. As a matter of fact, we think this will expand -- continue to expand at least through 2023.

We have a number of capital projects we're currently working on that will help achieve that.

Yes. And like Danny said, we're working on projects right now that we're just not quite ready to announce. But yes, it is going to be a focus -- strategic focus for us going forward.

Okay. That's very helpful. And then a final one from me. It just sounds like the operating stats on your front products pipelines are pretty strong. Does that imply that the refineries that they serve are also operating at higher utilization rates and probably unlikely to experience any short-term shutdowns? Just want to know if that's the right way to interpret it.

That's the way it looks right now. These are mostly refineries kind of in the Midwest or Panhandle or down in South Texas and kind of the more rural or less urban areas. So that's what we're seeing currently.

(Operator Instructions) We have our next question coming from the line of Ryan Levine with Citi.

Just one question. What's the current outlook for expansion on the Ammonia System? And are you pursuing any opportunities related to that system?

The Ammonia System has served some pretty mature markets. We do some small projects here and there, but we have nothing on the drawing board that's material. But that's a very steady performing asset in our mix of pipeline assets.

What's the current utilization on that system today? And is there excess capacity?

I'd have to get you that exact number. We do hit capacity in some peak periods during the year. But typically, I'm going to say we're somewhere around 75%, something like that normally. But we can we can get you a better number.

We'll get back on that, Ryan.

There are no further question at this time. I will now turn the call back over to Pam Schmidt.

Thank you, Celine. We would once again like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks again, and have a great day.

This concludes today's conference call. You may now disconnect.