Genesis Energy LP Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Genesis Energy, (GEL)

Genesis Energy LP (NYSE:GEL)

Q1 2013 Earnings Call

May 02, 2013 9:00 am ET

Executives

Karen N. Pape - Principal Accounting Officer of Genesis Energy, LLC, Senior Vice President of Genesis Energy, LLC and Controller of Genesis Energy, LLC

Grant E. Sims - Chairman of The Board of Genesis Energy, Llc and Chief Executive Officer of Genesis Energy, Llc

Steven R. Nathanson - President of Genesis Energy, Llc and Chief Operating Officer of Genesis Energy, Llc

Robert V. Deere - Chief Financial Officer of Genesis Energy, LLC

Analysts

Paul Jacob

TJ Schultz - RBC Capital Markets, LLC, Research Division

John Edwards - Crédit Suisse AG, Research Division

Michael Gaiden

Jeffrey Birnbaum - UBS Investment Bank, Research Division

Karen N. Pape

Welcome to the 2013 First Quarter Conference Call for Genesis Energy. Genesis has 3 business segments. The pipeline transportation division is engaged in the pipeline transportation of crude oil and carbon dioxide. The refinery services division primarily processes sour gas streams to remove sulfur at refining locations. The supply and logistics division is engaged in the transportation, blending, storage and supply of energy products, including crude oil, refined products and CO2.

Genesis' operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, and the Gulf of Mexico.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission.

We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, LP. Mr. Sims will be joined by Steve Nathanson, President and COO; Bob Deere, Chief Financial Officer; and Karen Pape, Chief Accounting Officer.

Grant E. Sims

Good morning, and welcome to everyone. Genesis Energy delivered strong first quarter results, reporting available cash before reserves of $48.7 million, a 23% increase over the prior-year quarter and providing a coverage ratio of 1.21. Our growth has allowed us to increase distributions to our unitholders for the 31st consecutive quarter, 26 of which have been 10% or greater over the prior-year quarter and 9 were less than 8.7%.

As a result of a 35% increase in our unit price during the quarter, our equity-based compensation expense increased by $2.6 million.

Without such significant increase in our unit price, our available cash before reserves would have been $51.3 million, providing a coverage ratio of 1.27x, and our adjusted EBITDA would have been $63.4 million.

Our results reflect the continuing impacts of our efforts to secure new opportunities for our partners to participate in the growing demand for our integrated services and capabilities. These new opportunities have created volume growth. This growth, in combination with an extremely low exposure to volatile commodity price level, has resulted in consistently increasing available cash before reserves.

So with that, I'll turn it over to Steve.

Steven R. Nathanson

Thanks, Grant. The first quarter of 2013 was a very busy one for Genesis, as we initiated full commercial operations at several of our crude oil rail facilities and made significant construction progress on other previously announced projects to ensure on-time startups.

With the completion of a 100,000-barrel storage tank at our Walnut Hill, Florida crude oil rail facility, we became fully integrated with our Jay Pipeline System, following the planned turnaround in March of 1 of our major refining customers.

Our terminal at Natchez, Mississippi, as reported to you last quarter, was commissioned with the first cars of bitumen/dilbit originating in Alberta, Canada, being unloaded in January. Barge shipments from our integrated docks to our refinery customers along the Mississippi River are now operational as well. By the end of May, we will be capable of efficiently handling 40 cars a day. Plans, as well as discussions with potential customers, are underway to possibly expand Natchez to handle full unit trains.

The Wink, Texas rail facility, which serves the Permian basis (sic) [Basin], as of February, is now shipping unit trains. It is the Genesis' model to commission our facilities in multiple phases. Wink is in Phase 1. Construction of tank storage and truck racks is well under way as Phase 2. The second phase will both expand our capacity and enhance the quality and safety of our service in the Permian shale play.

In the first quarter, we shipped our first crude barges from our newly commissioned terminal and barge dock in Texas City, Texas. Like Wink, this operation is in Phase 1. Phase 2 is the completion of our 18-inch pipeline from Webster to Texas City. Upon completion of this line in July, we expect to see increasing levels of throughput, as we are able to access increasing volumes of the Eagle Ford Shale production and other light sweet crudes coming into the Houston area. With our dock facilities, the crude can be transported to refiners in need of such crude.

We are solidly on track to complete the connection of our Wyoming pipeline with a local refinery that further integrates our investment in a suite of midstream assets in the Niobrara Shale development in Wyoming. In Louisiana, our previous announcement to improve existing assets and develop new infrastructure connecting to Exxon Mobil Corporation's Baton Rouge Refinery is on schedule. Key components have been purchased and critical path environmental permits have been granted. These assets have a planned startup by the end of 2013 for the barge terminal and pipeline operation and mid-2014 for the rail terminal commissioning.

Ongoing investment in trucks, rail cars and barge -- barges support the aforementioned activities, not only in new volume, but higher levels of service to our ever-expanding portfolio of customers.

We will take delivery on 400 crude rail cars by the end of the third quarter and 4 new asphalt and crude-capable barges by the end of 2013. These assets will be integrated into our ongoing operations.

Turning to offshore operations. SEKCO pipeline construction remains on schedule with all of the 149-mile, 18-inch pipeline lay-down complete. The pipeline will receive oil in mid-2014. Recent announcements by Anadarko, citing success in the Phobos discovery located 11 miles south of the Lucius facility, further enhances the economics of this development and, ultimately, throughput in the SEKCO pipeline, as well as Poseidon and/or CHOPS.

Our new sulfur removal and NaHS production facility at the HollyFrontier refining complex in Tulsa, Oklahoma is scheduled for Q3 startup. This production is welcomed in light of increased demand from our pulp customers and announced new mine project startups in 2014.

Grant E. Sims

Thanks, Steve. So we are pleased with the growth in our ongoing businesses, as well as with the contribution at our recently -- of our recently completed initiatives. We are also pleased with the synergies that the new initiatives are creating with our existing businesses, such as the Walnut Hill rail facility, which ties into our existing previously underutilized Jay Pipeline System in Florida.

We continue to be excited about the new projects that we have identified and disclosed to capitalize on opportunities across our footprint.

Before I turn it over to Bob to discuss our reported results in greater detail, I'd like to recognize the contribution of our folks here at Genesis. Because of their dedication to safe, responsible and reliable operations, we continue to work together to deliver increasing long-term value to all of our unitholders.

With that, I'll now turn it over to Bob.

Robert V. Deere

Thank you, Grant. In the first quarter of 2013, we generated total available cash before reserves of $48.7 million, representing a $9.1 million or a 23% increase over the first quarter of 2012.

Adjusted EBITDA increased $9.6 million or 19% to $60.8 million dollars over the prior-year quarter.

Net income for the quarter was $22.8 million or $0.28 per unit compared to $19.6 million or $0.27 per unit for the same period in 2012.

Available cash before reserves, adjusted EBITDA and net income were negatively impacted by a $2.6 million increase in equity-based compensation cost, solely related to the increase in the market price of our common units. The market price of our common units increased 35% from the end of 2012 to the end of the first quarter 2013.

Without such a significant increase in our unit price, our available cash before reserves would have been $51.3 million, and our adjusted EBITDA would have been $63.4 million, both surpassing the record performance we set in the first quarter of 2012.

Total segment margin increased to $72.1 million, an increase of $11.8 million or 20% over the prior-year period. A 64% increase in segment margin from our supply and logistics segment, aided largely from a 28% increase in crude and petroleum product volumes, helped drive our overall solid performance for the quarter. The increase in volumes is principally due to increased crude oil gathering and marketing activities in West and South Texas. Our expanded trucking fleet helped facilitate that activity.

Segment margin also increased due to the contribution from our crude oil rail loading and unloading operations completed in the second half of 2012.

Supply and logistics' operating cost, excluding certain non-cash charges, increased 24% between the periods due to our expanded trucking and barge fleets.

Refinery services segment margin increased $700,000 or 4% between the first quarters of 2013 and 2012 due to higher NaHS sales volumes, as a result of increased demand from our customers in the pulp and paper industry. The pricing in our sales contracts for NaHS include adjustments for fluctuations in commodity benchmarks, freight, labor, energy cost and government indexes. The frequency at which these adjustments are applied varies by contract, geographic region and supply point.

Results from our pipeline transportation segment decreased $200,000 or 1% between the first quarter periods. Crude oil tariff revenues from our onshore pipeline systems improved due to increased total throughput volumes on our Texas and Jay Pipeline Systems and upward tariff indexing on our FERC-regulated pipelines. The rise in our onshore crude oil tariff revenues was offset due to lower pipeline loss allowance revenue, both onshore and offshore, caused by decreases in barrels sold and in period-to-period decreases in average crude oil prices. Also, the decrease was due to an increase in onshore pipeline operating costs due to in part to a required 5-year integrity testing expenditures and general increases in operating costs, inclusive of increased safety program costs.

Interest costs, corporate general and administrative expenses, maintenance capital expenditures and income taxes to be paid in cash affect available cash before reserves. Interest cost increased in the first quarter of 2013 as compared to the first quarter of 2012 by $800,000, primarily as a result of increased borrowings for acquisitions and growth projects, a portion of which were financed with our issuance in the first quarter of 2013 of $350 million of senior unsecured notes bearing interest at 5.75% per annum. The increase was net of increased capitalized interest costs attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate cash, general and administrative expenses increased by $2.2 million, primarily due to an increase in equity-based compensation costs related primarily to the rise in our unit price.

In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Net income also includes the effect of unrealized gains or losses on derivative contracts that have not -- that are not included in available cash until they are realized.

In the first quarter of 2013, non-cash unrealized gains totaled $100,000 compared to non-cash unrealized gains of $2 million in the 2012 first quarter.

Additionally, in the 2013 first quarter, we recorded a non-cash expense related to legacy SAR compensation plans of $4.6 million compared to $1 million in the first quarter of 2012. Fluctuations in the market price of our common units were the reasons for the difference.

Grant will now provide some concluding remarks for our prepared comments.

Grant E. Sims

Thanks, Bob. Our existing businesses continue to perform as expected, benefiting from the successful integration of new truck, barge and rail assets that has allowed us to increase volumes. We continue to expect to realize an increasing contribution in 2013 to 2014 from our announced organic projects.

Our 2 largest growth projects announced to-date are SEKCO joint venture with Enterprise Products, and our project around ExxonMobil's Baton Rouge Refinery complex will contribute in 2014 and accelerate into 2015.

We believe we are well positioned, given the current available capacity in our offshore oil pipelines, to benefit in the latter part of this decade from the dramatically increasing level of development activity in the deepwater Gulf of Mexico. We continue to evaluate and pursue opportunities that we have identified that fit our core competencies. As a result, we believe we are very well positioned to continue to achieve our goals of delivering low-double digit growth and distributions, having a strong coverage ratio and maintaining a better than investment-grade leverage ratio, all without ever losing sight of our absolute commitment to safe, reliable and responsible operations.

With that, I'll turn it back to the moderator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Paul Jacob with Raymond James.

Paul Jacob

Touching on the equity-based compensation charges that you mentioned, if I just back into the rate, I'm getting about a $200,000 increase for every $1 increase in the stock. Is that a fair way to think about it?

Robert V. Deere

No, that isn't. It's probably a little bit more than that. It's probably about $300,000.

Paul Jacob

Okay. And then, could you talk a little bit about the Q-over-Q drop in pipeline transport volumes? I mean, I recognized that you could see some volatility on those volumes, but did you see any effects from refinery turnaround or were there any significant issues that you could point to or was that just seasonal demand?

Robert V. Deere

The -- hang on just a second. I'm getting those in front of me. Are you talking about -- on the linked quarter or the year-earlier quarter?

Paul Jacob

Yes, for the linked quarter.

Robert V. Deere

Basically, as I look at it, the Jay System was basically down because of the turnaround that we referenced in our prepared remarks that 1 of our major refinery customers wasn't down a lot, but it was down relative to the fourth quarter. Mississippi was basically flat. Texas was down slightly, primarily associated with the hydro test of the Webster to Texas City line, which is basically the line that we referenced in our prepared remarks, which goes into the Marathon refinery in Texas City. The presentation of the offshore volumes, there were approximately 3 to 4 week turnarounds at 2 major fields each on the Cameron Highway System. The way that -- and so, these are the actual January through March average numbers associated with that. But given how we present them in terms of they're accounted for an equity method that we back out the equity contribution and added to cash. The cash was a practical matter that we received was really on a 1-month lag. So the cash distributions out of those joint ventures is really associated with the December, January and February activity throughputs, so that the effect of the turnarounds in March and continued into the early part of April will actually be felt, if you will, in terms of reduced distributions out of those joint ventures in the second quarter.

Paul Jacob

Okay. That's helpful. Can you remind what the maximum throughput capacity is on the Jay Pipeline System?

Grant E. Sims

Somewhere north of 100,000 barrels a day.

Operator

So our next question comes from the line of TJ Schultz with RBC Capital Markets.

TJ Schultz - RBC Capital Markets, LLC, Research Division

I guess, first, at Walnut Hill, with the tanks complete and the refinery turnaround complete, how many trains per week are you taking now? And how do you view market demand, I guess, if you could talk about how you would expect that to ramp through the year?

Grant E. Sims

We are basically anticipating to average, call it, 10 trains a month. Currently, under current expectations, we have reinstituted an interconnect with another third-party pipeline, which -- towards the end of this year we'll have pipeline -- a new pipeline built down to another refinery. So we would anticipate that the potential market demand and, therefore, the use of Walnut Hill and the use of the Jay Pipeline System could go up from that, call it, 10 a month to a greater volume once all of that is complete towards the end of the year.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. Similar question at Wink. I guess, Phase 1, you said it's complete, and you're taking unit trains. So maybe a little bit more color with Phase 2. When will capacity be expanded? How many trains you're taking now in Phase 1? And what impact would Phase 2 have on that?

Grant E. Sims

Basically, we are unloading crude directly from truck into railcar, which is fairly inefficient, and shipping a couple of trains a month, if you will. Currently, once the -- our truck racks and tanks are all placed into service, which should be fourth quarter of this year, then we'll be able to be much more efficient. Again, based upon market demands, if you will, the design capability of it is to move potentially a train a day, if the market does justify that, once we're fully operational with our Phase 2 facility.

TJ Schultz - RBC Capital Markets, LLC, Research Division

So just moving to SEKCO. Given the Phobos news, is that pipe expandable, or does it need to be expanded? Or maybe you can talk about how we should view utilization initially out of the gate in 2014?

Grant E. Sims

The capacity of the 18-inch pipeline, given the viscosities and the pressure regimes, is approximately 115,000 barrels. There's not a whole lot that you can do as opposed to onshore pipes. You really can't put intermediate pump stations in 6,000 feet of water. At least, we haven't figured out how to do that yet. The Lucius, which is the anchor tenant, is in a public domain, is being designed to handle 80,000 barrels a day. I'd caution the long lead time associated with the development of anything in the Gulf of Mexico. I mean, I think that when the Lucius platform was first sanctioned, it was advertised, if you will, or discussed by the various working interest owners, including Anadarko, the operator, is a regional hub for other things in terms of subsea tiebacks over the next decade. And obviously, with the commercial success announcement of the Phobos discovery well, that is a likely candidate, at some point, not in the near term, but at some point should be tied back on the subsea completion basis back to the existing production facilities of Lucius.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. Last one for me. Just on Texas City. I may have missed this. But the Phase 2, the 18-inch from Webster to Texas City that's in process, what's the timing on that?

Grant E. Sims

We anticipate commissioning the pipeline and station work in July of this year.

Operator

Our next question comes from the line of John Edwards with Crédit Suisse.

John Edwards - Crédit Suisse AG, Research Division

Just a quick question here. With the recent fall-off in copper prices, are you seeing any impact to volumes on demand for NaHS?

Steven R. Nathanson

We are not. In fact, some of the previously announced mine construction projects and ones that we have shared with you are starting to come online now and have been announced publicly. Others will be in -- on a late Q4 of this year and the first of next year. So we're not seeing a drop-off there at all.

Grant E. Sims

I think that -- I didn't review Freeport's earnings release, which I typically do, because they're fairly open. But once I take into account the tenants [ph] back from the gold and molybdenum that's covered in -- typically in their mining process, the cash cost to lifting copper is around $1.60 a pound. So that $3.10 a pound -- current price is $3.20. I think we haven't seen any reduction and -- as Steve said, in current demands from our mining customers or any significant changes in the developments and expansions that are currently underway.

Steven R. Nathanson

You may have seen this week that Southern Copper, who have 4 mines both in north -- straight across North and South America, plans to double their output capacity by 2017 was their announcement. And again, their cost was combined in line with what Grant has shared with you. So the price has not affected the mine output production.

John Edwards - Crédit Suisse AG, Research Division

Okay. Great. And just, if you could comment -- I mean, obviously, you have a lot going on. Just if you could comment on any, say, unannounced project backlog or inventory projects you might be evaluating? If you could just give us an idea of perhaps what could be coming.

Grant E. Sims

Well, they're unannounced for a reason. We're always working on stuff, as I said in the prepared remarks. I mean, we are pursuing and evaluating a number of opportunities that we have identified. But there can be no guarantees that we'll get to the appropriate commercial realization with the counterparties associated with it. But we do think that we have a reasonably wide array of choices for organic opportunities and potentially even kind of bolt-on acquisition opportunities that we are currently pursuing.

Operator

Our next question comes from the line of Michael Gaiden with Robert W. Baird.

Michael Gaiden

Can I please ask about the prospects for continued strong margins in the crudes logistics business -- now continued to be a real driver of profits right there? And I just want your perspective on how much of this could be potentially, transitory market-related issues and how much actually should we think about sustaining over the intermediate to long term?

Grant E. Sims

Basically, we really -- we don't trade a lot, if you will. We're pretty -- we don't really trade. We're kind of blocking and tackling. We got to make money providing the logistical assets and moving stuff from point A to point B. Obviously, there's been a compression in, at least, some of the marker prices and stuff like that. But our base business is increasing our volumes and providing the service and covering our cost and clipping a coupon and let somebody else kind of internalize those wide margins.

Michael Gaiden

Great. That's very helpful. And lastly, can I ask about the prospects for offshore throughput growth in the second quarter and over the back half of the year?

Grant E. Sims

The turnarounds of the 2 large builds that I mentioned are basically over. So I mean, I would think that we would anticipate second quarter volumes to be above those in the first quarter. But I'd also hasten to remind you what I've discussed earlier that, that reduction that occurred in March in the first part of April is really going to be felt in the second quarter. The increased volumes from the distribution out of the joint ventures will be reflected more in the third quarter and beyond. Near term, in 2013, is basically anticipated, a continued pace of development drilling in and around existing production facilities in the deepwater. And then, obviously, in 2014, with the commissioning with SEKCO and commissioning with the Lucius, Farah [ph] which is the anchor tenant here, then that will kind of provide the growth in the offshore volumes over the next, call it, 18 months.

Operator

Our next question comes from the line of Jeff Birnbaum with UBS.

Jeffrey Birnbaum - UBS Investment Bank, Research Division

So I apologize. I missed a part of the call upfront. But I was wondering if you had given any color on Wink and whether the majority of the trains using there today were headed east or west?

Grant E. Sims

We haven't discussed that. I think, with the -- due to the lack of unloading, currently, it's fair to assume that most of them are moving to east. And I think the longer term with that is a very logical western path, as unloading capability is further developed in, call it, the West Coast [ph] refinery complexes.

Jeffrey Birnbaum - UBS Investment Bank, Research Division

Okay. Great. And then, the other kind of broader question I wanted to ask was just, given your relationships with a lot of the refiners on the Gulf Coast, I was curious just kind of how you think that Gulf Coast market resolves its issues of eventually here being pretty long [ph] light sweet crude? And essentially, what, if any, opportunities Genesis sees for itself in that context?

Grant E. Sims

So, Jeff, if anybody knew the exact answer to that, -- it is a perplexing problem. I mean, I think -- as we've stated, conventionalism over the last 20, 30 years was that America was out of light sweet crude oil. A number of refiners, primarily in Texas, have reconfigured themselves to run a more medium sour-type barrel and can efficiently use all of the light sweet crude oil. I do think that the opportunities we are finding with the commercial interest in Natchez, being able to bring the heavy oil sand-type product, whether or not it's straight bitumen or in a dilbit form, substantially less diluted in pipeline quality, that the blend capabilities of bringing that heavy product down to blend with the light sweet crude oil, we believe that there's opportunities to make, if you will, the kind of 25- to 30-degree, 8-feet high barrel that fits the plumbing, if you will, in most of the -- in the large amount of the complex refineries in the Gulf Coast.

Operator

[Operator Instructions] It appears there are no further questions at this time. I will now turn the floor back over to management for closing remarks.

Grant E. Sims

Okay. Well, thank you very much, and we'll visit with you in another 3 months or so, if not sooner. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.

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