Dakota Plains Holdings, Inc. (NYSEMKT:DAKP)
Q2 2013 Earnings Conference Call
August 08, 2013 4:30 pm ET
Craig McKenzie - Chairman and CEO
Tim Brady - CFO and Treasurer
Gabe Claypool - President and COO
Peter Seltzberg - Investor Relations, Hayden IR
Jared Lewis - Northland Securities
Dan Davis - Stifel Nicolaus
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Dakota Plains 2013 Second Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) I'll now like to turn the call over to Peter Seltzberg, Vice President of Hayden Investor Relations. Please go ahead, sir.
Thank you and good day. We’d like to thank everyone for joining us today for Dakota Plains Holdings second quarter 2013 financial results conference call. The call today will be hosted by Craig McKenzie, Chairman and CEO; Tim Brady, the Company’s CFO; and Gabe Claypool, President and COO. Following the discussions, there will be a formal Q&A session with the participants on the call.
Before we get started, I’ll just review the Safe Harbor statement. The conference call may contain forward looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports that the Company has filed with the SEC.
All statements other than statements of historical facts which address Company’s expectations or source of capital with respect to Company’s expectations of the future with respect to financial performance or operating strategies can be identified as forward-looking statement. As a result, there can be no assurance that the Company’s results will not be materially different from those described here-in. We caution listeners that these forward-looking statements will be only as of the date hereof and the Company hereby expressly disclaims any obligation to undertake and release publicly any updates or revisions to any such statements to reflect any change in the Company's expectation or any change in events, conditions or circumstances on which those statements are based.
With that 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, the floor is yours.
Thanks, Peter, and welcome everyone. We have a lot to discuss here this afternoon, so I'll skip to it. I'm going to start with an overview and then I'm going to turn over the mike to Tim to discuss the financials and also of course have Gabe discuss the operations and then we'll take questions from the floor.
I'm sure there's a lot of interest in the current pricing spreads and the resulting impact on our business but I'll also draw your attention to the progress we have made in areas of the business that we control. During the second quarter, we as the management continued to focus on three priorities; first, the performance is of our joint venture operations in North Dakota; second, construction of the Pioneer Terminal expansion; and third, the growth beyond the Pioneer Terminal expansion which includes diversifying into new business segments and replicating Pioneer elsewhere. We have made progress on all three priorities and I'll discuss those now.
So to begin with the operations and our focus on volumes and margins, the operations in New Town are well-positioned for 2014 and we expect to move higher volumes through the facility at a higher level of efficiency. To that end, we recently announced Paradigm Midstream pipeline from McKenzie and Dunn Counties will bring us to 120,000 barrels of oil a day to Pioneer's doorstep. This provides access to additional sources of oil and it also expands our supplier radius to the terminal.
While making tangible progress on volumes, current marketing margins overshadow our achievement, and let me discuss these for a moment. There are two ways to get Williston crude oil to market, that's by pipeline and by rail. Pipelines have lower transportation costs but there is not enough capacity to handle the production. Crude by rail results in a higher transportation costs but provides a market for crude that has no other viable outlet. Also when the spreads widen, we'll have the flexibility to connect through premium coastal markets where Brent pricing prevails.
In early Q2, rail accounted for about 70% of the takeaway volumes. As the quarter progressed, the spread narrowed to a point where the coastal Brent pricing did not offset the additional rail costs and those E&P producers that could switch to pipelines, did. By July, we [indiscernible] to show that rail accounted for less than half of the takeaway. As a result, competition amongst terminals was intense in Q2. However, we held our own as our volumes dropped, which was inevitable, we also were able to increase our market share.
Brent to WTI spread is an important factor in determining our margins as we just discussed their nature in the last few minutes, especially during periods of transition like the collapsing of the spread in Q2, but it's not the only variable that we should pay attention to. The location, cost structure, logistics and transportation costs are also key elements. The Pioneer Terminal is located in an advantaged position at the neck of the peninsula there in Mountrail County, our cost structure in New Town is only getting better with the Pioneer Terminal expansion, and with our partner, we continue to refine all aspects of logistics and transportation costs.
So back to our priority list, the second item relates to the Pioneer Terminal expansion. In the second quarter, we procured financing for our share of the Pioneer expansion, and notwithstanding record rainfalls that have occurred, we still expect the project to be completed by year-end, and Gabe will expand on this in a few moments.
Finally, our third priority of securing future growth, I wanted to mention that last week we announced an agreement for frac sand storage and transloading facilities to be built at the Pioneer Terminal and that's with UNIMIN Corporation. The new facility will have a throughput capacity of about 750,000 tons per year. Construction is underway and operations are expected by January 2014. We'll provide a land lease to UNIMIN of up to 30 years and our JV will provide fee-based transloading services.
The facility will include 8,000 tons of fixed storage, twin high-speed truck loadouts, and track capacity for 70 loaded railcars. This agreement and continuing buildout at Pioneer reflects our aggressive approach to maximizing the potential of this tremendous asset.
We are pursuing other projects not only to create more supply and reliability of our outbound oil volumes but are also creating opportunity to leverage Pioneer by supplying the upstream operators in the area with NGL outgas service and inbound services that include diesel and pipe supply as well as providing an industrial yard for storage. So we are building a lot of momentum at Pioneer in 2013 and we expect this to continue in the years to come.
Finally in terms of my prepared remarks, I'll feel remiss if I did not comment on the tragic derailment that occurred in Quebec on July 6, 2013. The train involved in this derailment was carrying crude oil transloaded at the Pioneer Terminal in New Town and was being shipped to a refinery in Canada for the benefit of our marketing joint venture with World Fuel Services. To date, we have remained in lawsuit in Canada and in the U.S. We believe the allegations to get the Company in these lawsuits to be without merit and that we also maintain sufficient insurance to protect the Company.
So with that being said, I'll turn over the mike to Tim.
Thank you, Craig. I will start with corporate results and then I'll provide the segment metrics. The Company reported net loss of approximately $600,000 for the second quarter compared to net income of $600,000 sequentially and net income of $3.4 million year-over-year. The net loss in the second quarter was driven primarily by a significant decrease in margins experienced within our marketing joint venture as a result of the collapsed spread between Brent and WTI oil pricing.
It should be noted that we utilize the equity method of accounting for our joint ventures. As a result, all income generated is reflected below the line in other income. Our revenues consist of Brent and we charge the transloading joint venture to utilize the facility. The Company recognized rental income of $100,000 compared to $95,000 sequentially and $78,000 year-over-year.
General and administrative expenses were $2.5 million compared to $1.4 million sequentially and $600,000 year-over-year. The increase was mostly due to recognition of share-based compensation to the Board of Directors and new employees. Of the $2.5 million expense, non-cash one-time provisions represent approximately $1.6 million.
The Company's adjusted EBITDA was $1.5 million compared to $2.4 million sequentially and $6.3 million for the second quarter of 2012. Year-over-year results were impacted by a $2 million increase in G&A and lower marketing margin, offset by higher volumes. I would like to point out that the marketing margins in the second quarter of 2012 were our highest margins since inception of the business in July of 2011.
Total debt as of June 30 was $26.6 million, of which $4.6 million is currently classified as short-term liability. Cash at the holding company level was approximately $900,000 as of June 30, 2013, down from $2.3 million at December 31, 2012. As of June 30, we had approximately $28.5 million of restricted cash at the joint venture level.
Now I'll provide some segment information. Income from our investment in the transloading joint venture was $1.4 million which was less sequentially and $990,000 year-over-year. The increase was driven by volume. Cost of revenue was higher due to the increased volumes and the higher fee per barrel by our contractor. However, this was offset by the reduction in general and administrative expenses, in particular professional fees.
Income from the Company's investment in marketing joint venture was $900,000 compared to $1.8 million sequentially and $5.7 million year-over-year. The joint venture experienced tighter volumes but the severe narrowing of the spread between Brent and WTI oil pricing in the second quarter negatively impacted our per barrel margin.
Income from the Company's investment in the trucking joint venture was $136,000 compared to $62,000 sequentially. The trucking joint venture increased its trucking fleet from 14 trucks at the end of May to 22 trucks, as we began trucking for additional third parties to destinations other than New Town, North Dakota. The trucking joint venture was not operational during the second quarter of 2012.
Now, I'll turn it over to Gabe for some comments on operations. Gabe?
Thank you, Tim. Good afternoon, everybody. I'll start by giving a brief overview of what we've been seeing happening in the Williston Basin. The official results for May from North Dakota produced 810,000 barrels a day but Montana adding roughly another 75,000, so an aggregate of 885,000 barrels a day.
Specific to North Dakota production, that represents an increase of 170,000 barrels a day over May 2012. Rig count has been consistent with 187 rigs throughout the quarter. Rigs continue to outpace the completion crews with around 500 wells waiting for initial production as of the end of May. With the average initial production of 1,000 barrels per day per Bakken well, we have strong fundamentals to continue production increases.
On our transloading side, we transloaded 2.3 million barrels in the quarter, a decrease of 4% sequentially from 2.4 million, and an increase of 27% year-over-year. We continue to see efficiency improvements and the JV's investment in North Dakota resources is proving to be a wise investment.
On the marketing side, we processed 2.6 million barrels in Q2 which is comparable sequentially to Q1 and an increase of 34% year-over-year. We experienced solid demand for the rail barrels reinforcing the notion that our location is more influential than the larger Williston Basin macro. As was the case with last quarter, consistent marketing volumes were offset by the collapse of the Brent-WTI spread and margins were well below plan in the quarter. While marketing margins have the least visibility of our three segments, we do expect to see margins improve during the balance of the year, although we have not begun this reversal yet.
On the trucking side, we handled 1.3 million barrels in the quarter, an increase of 185% from the fourth quarter of 2012 which was our first full quarter of the trucking business. We averaged just shy of 15,000 barrels a day, up from 12,000 barrels a day in Q1. Our team is growing, our fleet is growing, and our client base grew, as Tim just referenced, from one client to four, and I'm very excited and looking forward to our Q3 [order] (ph) expand on our truck growth and hauling crude oil for our new rostered clients.
I just returned from North Dakota this morning literally leaving about 5 o'clock this morning, but here's a way to sum the Pioneer Terminal and the project itself. As discussed last quarter, we broke ground at the end of the month or the end of March and we have seen enormous amount of rains this spring and summer but May literally becoming the wettest in the North Dakota history. But despite all of this, our first tank is now fully erected and is a great sign and indication, if you will, of where we are working or what we are working towards.
We have over 75 contractors on site and more coming throughout Q3, we have an incredible team, and I can't discuss that enough, and they continue to make tremendous progress while dealing with the elements that are out of their control. We are still expecting to come online in December of this year and with over 90% of the project materials purchased, we remain on budget. I believe at this point, we'll open it up for questions, is that right?
(Operator Instructions) The first question is from Jared Lewis with Northland Securities. Please go ahead.
Jared Lewis - Northland Securities
Couple of questions. One just on the volumes, nice job on the marketing kind of keeping that flat, I guess why the little bit of a decrease in the transloading, was that due to the pipelines or something else, and why can't it stop before those numbers would be a little bit closer that they would match each other?
It's Gabe. I can answer a little bit of that question, I might rely on Tim to do some of it. So the majority of the volume that we purchase at the joint venture level does come through the transloading terminal but there are scenarios where we will sell it to other facilities or other access points in the event of running short of cars or in the event that another destination makes more sense. So they are very short-term scenarios. It's also a little tricky, and this goes back to the accounting side, where barrels purchased in a quarter might not actually be sold in the same quarter, so therefore there can be some discrepancy there.
Yes, Gabe, to your point, inventory in transit sold, for example oils we purchase or barrels of oil we purchase in May we may not sell until the following month, so that we term it inventory in transit, so that's – and Gabe, regarding sending barrels obviously at different destinations, so just those are usually the reason for the differential in volume between the two joint ventures.
Jared Lewis - Northland Securities
Okay, that's helpful. And just on the transloading, you mentioned that fee was higher from a contractor, is that a one-time thing or is that just been reset going forward.
This is a new contractor, [SSP] (ph), that we brought in September of last year as a more professional firm to manage our facility. We knew that the rates would be a little bit higher compared to our previous contractor but we have made it up in excess on the efficiencies that we have seen so far. As I mentioned, almost 90% reduction in professional fees G&A was a result of the efficiency by earning contractor.
Jared Lewis - Northland Securities
Okay, excellent. And then if I could really ask one more just on the inbound here, nice release early in the week with UNIMIN, do you still have the four tracks available, just what can you tell us about the other timeline or possibly something else on the inbound and if maybe some rough numbers on what kind of opportunities this inbound could be as we move into 2014?
This is Gabe. The answer is, we are still incredibly excited about what we have there because we are not cutting those four tracks. So we still literally have 10,000 feet of track open for business. It's a little tricky right now because we can't do anything with that infrastructure including committing to a client who wants to come in, and so we are 100% comfortable that we have moved on to loop track infrastructure. So, my current prediction would be we'll start to generate revenue from an inbound perspective on those existing four lateral tracks in Q1 2014 timeframe simply because I just can't let anybody in before we transitioned over. Does that make sense?
Jared Lewis - Northland Securities
Yes, that's very helpful, I appreciate it.
(Operator Instructions) Our next question is from [Stan Verrett with Verretts Financial]. Please go ahead.
Can you describe the kind of lease payments that are going to be coming in to you over the next 30 years from the sand joint venture? That's one question. And the second question is, the difference in price between Brent and WTI is very low right now, could you tell us what that is and what sort of your base case is for that margin throughout the rest of this year and then into 2014, your best guess number?
This is Craig McKenzie. So to your first question, we at Dakota Plains own the land but yet the transloading will be done through our joint venture with World Fuel Services, and to make sure all the parties are aligned, we use our income towards the transloading JV. So the rental amounts are pretty notional and more or less cover incidental cost and ancillary sort of utility fees and so on and so forth including taxes. What we've done is really load up the transloading fee to the point where we are perfectly aligned with World Fuel Services, we haven't been disclosing that fees because it's a signal to competitors as well as disclosure point for [indiscernible]. So, to save that, we refrain from disclosing that fee.
But in terms of possibly an underlying question, the materiality of the business is likely to be in the sort of single digit millions of dollars per year income, and for each one of these businesses that we are trying to build that utilizes our distinct lateral track, namely the people, the pipe, and the sands, et cetera. in aggregate we think this would be a pretty substantial contribution to the Company's income, in particular since our investment beneath these businesses are expected to be pretty small amount and we are just going to be extracting or totaling our fee-based revenue.
And so in aggregate, it will be pretty material and pretty substantial to the Company, but sand by itself, although one could argue it's actually material, if [indiscernible] probably material because our EBITDA took the hit this year, but the next year when Pioneer is running at higher volumes and we expect margins to recover, we think that it will be a nice business to bolt on to our core business but it won't replace our core business, to put it that way.
In terms of your second question, the spreads, we at Dakota Plains are not expert at predicting spreads. We certainly have a continuous dialog with our partner who are much more experts in that field and they are the trading partner for the joint venture and they have multiple products that they trade at commodities and they're all petroleum related so they have much more intimate knowledge, but we rely on just third-party experts like EIA and also like the forward curves themselves.
In general terms, it looks like the spreads are destined to expand again. To what degree, it's hard to predict, but I know that EIA is saying that spreads to be back closer to $10 per barrel before year-end. Talking to certain producers in the Williston Basin, they are pretty bullish that that spread is going to open up quite a bit because there is a lot more volume coming online in the Williston Basin that they will be trying to find an outlet.
As the supply increases, it makes the producers more of a price taker into this whole equation. And certainly for a good part of the Williston Basin, if the crude oil market or companies themselves are not making money then the value chain falls apart. And as such, we think that while we've got a squeeze this quarter, I think that over sort of a longer-term timeframe, that the margins will come back and that just as a business over a longer wavelength, any one quarter can carry the other three bad quarters, but really it's the business that we kind of look at on a multiyear basis.
Last year our margins were $2.73 per barrel on average. That was in contrast to this year's this quarter with $0.70 a barrel for the marketing, and just throwing out one more number, I think this time last year, the marketing margin was what $5.60?
So that's three sets of numbers, $2.73 for average in 2012, with a peak quarter last year 2Q with $5.60 a barrel, and here we are at $0.70 a barrel this year, but it's cyclical, it'll come back. If history is any indicator, we can expect this business to be a substantial contributor to Dakota Plains going forward, and most of it will be at higher volumes here pretty soon.
Our next question is from Dan Davis with Stifel Nicolaus. Please go ahead.
Dan Davis - Stifel Nicolaus
Just to get my hands around the ownership of the oil that was involved in the accident in Canada, can you go through, as I understand you owned it until you loaded it into the tank car and then that went to a joint venture and did you have part ownership of that, or just tell me where Dakota Plains ownership stopped?
Okay, I'll try to be very clear here. First and foremost, we Dakota Plains never owned the oil. So we have our joint venture with subsidiary of World Fuel Services. World Fuel Services provides a number of roles. One is they operate the facilities in New Town. Second, the subsidiary of World Fuel Services lease the rail cars and sublease those cars to the joint venture itself. And thirdly, World Fuel Services is the title holder of the crude oil supply. So they trade o behalf of the joint venture. So, several aspects are therefore on behalf of the joint venture with Dakota Plains which is different than saying that Dakota Plains was active in a role in the value chain. We at Dakota Plains have a financial interest. So the oil was loaded in New Town and it was taken away by Canadian Pacific through their service provider, and from there, it headed across the border to Canada, and then Canadian Pacific subcontracted MMA to take the oil the last distance in Canada to the refinery.
I am showing no further questions. I'll turn the call back to Craig McKenzie for closing comments.
Thank you all for spending time with us here this afternoon. It's really a very active year for us and we feel like we are building momentum on a number of fronts, and it's unfortunate that we have some circumstantial events that are weighing us down and also with respect to the collapsed spreads in Q2, it overshadows all the good things that we have done. So our business this year is one about building and preparing the Company for 2014 and beyond. It's a build-out year, there's no other way of describing it. So all this that we are doing this year is going to pay dividends in 2014 and beyond when we should be a pretty substantial cash generator as a company. So with that, I'll go ahead and end it here. Again, thank you very much for your time and we look forward to the next instalment. Bye for now.
Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.
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