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Dakota Plains Holdings, Inc.(NYSEMKT:DAKP)

Q1 2013 Earnings Conference Call

May 09, 2013 4:30 p.m. ET

Executives

Peter Seltzberg – Investor Relations, Hayden IR

Craig McKenzie – Chairman & CEO

Timothy Brady – CFO & Treasurer

Gabe Claypool – President & COO

Analysts

Jerry Lewis – Northland Securities

Operator

Ladies and gentlemen thank you for standing by and welcome to the Dakota Plains Holdings, Inc. 2013 First Quarter Earnings Conference Call. (Operator Instructions).

Today’s Conference is being recorded May 9th 2013. I would now like to turn the Conference over to Peter Seltzberg of Hayden IR, please go ahead.

Peter Seltzberg

Thank you and good day. We’d like to thank everyone for joining us today for Dakota Plains Holdings First Quarter 2013 financial Results Conference Call. The Conference will be hosted by Craig McKenzie Chairman and CEO, Tim Brady Company’s CFO and Gabe Claypool President and COO of Dakota Plains. Following the discussions there’ll be a formal Q&A Session for the participants on the Call. Before we get started I’m just going to review the safe harbor statement, the Conference Call making the forward statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, forward-looking statement involve risks, uncertainties and assumptions as that derive from time to time in registration of paper and reports and other periodic reports that the Company has filed with the SEC.

All the statements other than statement of historical facts which address the company’s expectations or source of capital with respect to the company’s expectations of the future except financial performance or operational strategy and be identified as forward-looking statement. As a result there can be no assurance that the company’s results will not be material may differ although described in forward-looking statements may be identified as a source of belief that this may estimate or impact with respect to current use of Company or in respect to future event. We caution listeners that these forward statements will be only as of the dates well the company here by expressly disclose any obligation undertake the relief probably any update revision, any such date, event or to reflect any change in public expectation or any change in event, conditions or circumstances, all which those basics are based.

Without out of the way, I’d like to now turn the call over to Craig McKenzie, Chairman and Chief Executive Officer for opening comments.

Craig, next quarter, the floor is yours.

Craig McKenzie

Hey thanks Peter and welcome everyone. I hope everyone can hear me, okay? We have a train actually passing by our office, much as our business.

It’s my pleasure to be here today to discuss Q1 performance for what is the company’s First Earnings Call, and also what was my first quarter with the Company. I might add, for those that are not in this area, it’s a pleasure to see the spring filing here. We had a very cold and snowy first quarter but as the result for the company show, our operations performed very well in spite of these conditions.

We’ll spend about 10 minutes for our prepared remarks and then we’ll open the call to questions.

Shortly, I’ll turn over the call to Tim Brady, our CFO and she’ll discuss the financials. Gabe will follow on with some operational remarks and then we’ll open the floor.

Before I turn it over, I really wanted to just call attention to what I think will make the difference in the coming quarters and years for the company and for shareholders.

As a company, we are focused on three things -- first, improving operational efficiency while maintaining safety across our three existing Business Segments. These are Trucking, Trans-Loading and Marketing segments, which we operate through joint ventures.

Second, we are taking action to build out and transform our facilities in New Town, North Dakota, which we refer to as the Pioneer Thermal Expansion and you may have seen in our press release on this, back in March.

And third, we are expanding into new but related businesses that will leverage our site and with contracts in place at some point in the future, we can increase the diversity of our business, and hopefully also provide new revenue streams.

As I said, Gabe will address the operations in a few minutes, but with regard to growth, I wanted to emphasize that our location has a tremendous competitive advantage by being at the neck of a peninsula, in the heart of the Wilson basin, with the closest proximity to thousands of development wells planned in the surrounding area.

The pioneer expansion of that site is on schedule and forecast to be operational by year-end which will nearly triple our trooper capacity to 80,000 barrels of oil per day. We’ll first target 50,000 barrels per day due to the size of our tank car fleet, which now totals 1104 tank cars, but then all that leaves room for more growth beyond that rate in 2014, as we consider additional options.

In addition, we are actively pursuing other projects to not only create more supply and reliability of our outbound oil volumes, but as I mentioned earlier, we are also working on growth options to leverage Pioneer by supplying the upstream operators in the area with NGO outbound service and inbound services that include fan, diesel and pipe supply, as well as providing an industrial yard for storage.

Simply put, there are a substantial number of growth options available to the company and we’ll pursue these opportunities in a proactive but disciplined manner. At this point, I’ll turn over the call to Tim.

Tim Brady

Thanks Craig. I will start with corporate results and then provide a segment matrix. For the period ended March 31, 2013 the company had net income of approximately $600,000 compared to a net loss of $15.9 million for the three months ended March 31, 2012.

Net income for the first quarter was driven by an increase in crude oil volume, trans-loading and marketing segments. The net loss for the comparable period 2012 was primarily due to higher interest band related to the change and fair value of the additional payment provisions in our outstanding promissory note.

It should be noted that we utilized the equity master of accounting for our JV. As a result, all income generated is reflected below the line in other income. A revenue consists of rent we charge to trans-loading JV to utilize the facility.

The company recognized rental income of $95,000 for first quarter, compared to $80,000 for the same period last year. General administrative expenses were $1.4 million for the three months ended March 31, 2013, compared to $800,000 for the three months ended March 31, 2012.

The increase was primarily due to the addition of personnel and related expenses. Of the $1.4 million expense, the non-cash one type provision represents approximately $500,000.

The company’s adjusted EBITDA for the first quarter ended March 31, 2013 was $2.4 million, compared to $1.8 million in the fourth quarter of 2012, and $2.4 million for the first quarter of 2012.

Year-over-year results were impacted by $700,000 increase in G&A and lower marketing margin, offset by higher volume. The sequential improvement was driven by higher volumes in trans-loading and marketing, once again offset by higher G&A.

Total debt, as of March 31st, was $26.6 million of which $4.6 million is currently classified in the balance sheet as short-term. Cash of the holding company leveled with approximately $660,000 for March 31st, 2013, down from $2.3 million of December 31st, 2012.

Subsequent to the end of the quarter, we received a $1.8 million distribution to our holding company from a marketing JV. This was our first distribution. As of March 31st, we’ve approximately $30 million to cash and restricted the cash at the JV level.

Now provide some segment information. Income from our investment in trans-loading joint venture was $1.4 million for the three months ended March 31st, 2013, compared to $1.1 million for the three months ended March 31, 2012. The increase was driven by volume.

Cost of revenue was higher due to the increased volume in a higher fee per barrel by our new contractor. However, this was offset by the reduction in general and administrative expenses, in particular, professional fee.

Income from the company’s investment in the marketing joint venture was $1.8 million for the three months ended March 31, 2013 compared to $1.9 million for the three months ended March 31st, 2012. Higher volumes were partially offset by lower margin.

The income from the company’s investment in the trucking joint venture was $62,000 for the three months ended March 31st, 2013. The trucking joint venture increased its trucking fleet to 14 trucks for the three months ended March 31st, 2013. The trucking joint venture was not operational during the first quarter of 2012.

Now I will turn it over to Gabe for some comments on operations. Gabe!

Gabe Claypool

Thank you Tim. I’ll start by giving a brief overview of what we’ve seen happening in the Wilson basin. The Wilson basin production was roughly 850,000 barrels a day in February 2013, an increase from 37% from February, 2012 and roughly 100% growth since when I started in early February 2011.

Quarter-to-quarter represents 92% of that Wilson basin production or 780,000 barrels a day. For those who are not aware, North Dakota is now the second largest producing state in the United States, behind Texas.

In February 2013, crude by rail accounted for 71% of the Wilson basin volumes delivered to markets, up from 28% in February 2012. On the trans-loading side, we had a solid quarter despite what is arguably the toughest period of the year, from a weather and personnel

personnel perspective. We trans-loaded $2.4 million barrels in the quarter, an increase of 15% sequentially and 45% year-over-year.

Operation continues to make significant efficiency gains and we recently hired at the Dakota Plains two full-time (inaudible) employees on the ground to ensure that we are consistently looking at every aspect of our operation and safety.

On the marketing side, we’ve processed 2.6 million barrels in Q1, an increase of 30% sequentially and 75% year-over-year. We continue to see solid demand for the real barrel, further reinforcing us another location is more important than larger wells in (inaudible).

As we mentioned in our press release, increased marketing volumes were offset by margins that were below plan in the quarter. While marketing margins have the least visibility of our three segments, we do expect the key margins improve during the balance of the year.

Finally, we continue to see destination primal growth on all three coasts. On the trucking side, we handled 1.1 million barrels in the quarter, an increase of 185% from the fourth quarter of 2012, which again was our first quarter of trucking business.

In addition, volumes continue to ramp up in the quarter with March or Feb month averaging below the 16,000 barrels a day.

Finally, a quick update on the Pioneer project or the Pioneer terminal. We broke around at the end of March, earth work is progressing well and track infrastructure began going in this week.

Foundation work for tank, buildings and mechanical and electrical infrastructure should begin next week. We are still expecting to come online in December of this year.

With that, I think I’ll hand it back to Alicia and we’ll go into the Q&A session.

Question-and-Answer-Session

Operator

Thank you. Ladies and gentleman, at this time we’ll begin the Question & Answer session. (Operator Instruction). And our first question comes from the line of Jerry Lewis with Northland Securities. Please go ahead.

Jerry Lewis – Northland Securities

Good afternoon guys.

Gabe Claypool

Hi Jerry, good afternoon.

Jerry Lewis – Northland Securities

Could you give a little bit more color on how the margins were impacted, at best you can tell is where you expected and where they were and kind of where you see it from here going forward in the marketing side of course?

Gabe Claypool

Yes sure. So just for clarity, I’d like to mention that we’ve our joint venture with an indirect subsidiary of Oil Field Services and so Oil Fuel is the trading partner of our joint venture. They do all the trading. They are a trading organization over their core business, and as they take the lead, and I don’t want to speak on behalf of Oil Fuel, but I would simply saying that as everyone could see the Brendt whose WTI spread tightened during the quarter and quite a bit in the month of March, and it takes a while for all that to flow through the chain, especially since we have contracts that will last for a month or more.

And so it takes a while for it to flow all the way back to the producers who are at site as such we expect to see that flow through in the coming months and we know that financial marketing margins are suitable and so I don’t have a crystal ball to be able to tell you what the margin is going to be, when it comes to our projection we’ve done something very simple, which is to take the average in 2012 and apply it towards our 2013 volumes.

So with that said, we don’t try to become anymore scientific than that because frankly, it’s beyond our capabilities. There’s too many variables in the equation.

Jerry Lewis – Northland Securities

Okay, and on the volumes, you mentioned you had to start on weather the tough conditions, did you have an impact during the quarter on the volumes, I mean were they reduced by five or ten percent at all or did you do as you expected?

Gabe Claypool

No, we actually had our largest quarter in the history of the company. So while it was tough, and we literally had a day up there where 40 below zero, windshield and whether you guys have ever been there and experienced we understand about (inaudible). We have dealt big with volumes. We are actually on several headway forecast in all three segments that we forecasted in late 2012.

Jerry Lewis – Northland Securities

Then just on the trucking making trucks on would you see that continue just to grow again two other course of year?

Gabe Claypool

Well, we said at the year of eight that we grew by six in the quarter and we continue to see growth and we will evaluate non-operative portfolio where we are right now but at the end of the year we completed the growth and there is something there is supplemental value based and we see a lot of positive there including some diversification with the product we talked about forest inbound that subsequently to get delivered from our operating wells that we see that as a partner direct refractory company.

Jerry Lewis – Northland Securities

I guess that this is what I had. Thanks.

Gabe Claypool

Thanks.

Operator

Ladies and gentlemen (Operator Instructions) And I am showing no other further questions we have in the queue at this time. I would like to turn the call back to company CEO Craig McKenzie please go ahead.

Craig McKenzie

Again, thank you Elisa, and we don’t have any more prepared remarks and we had pleasure to be here today and we will sign off for now and look forward to our next engagements. Thank you very much.

Operator

Ladies and gentlemen, that’s concludes our conference for today. Thank you for your participation. You may now disconnect.

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