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Oiltanking Partners LP (NYSE:OILT)

Q2 2013 Earnings Call

August 8, 2013, 11:30 am ET

Executives

Mark Buscovich, Manager Financial Planning & Analysis and Investor Relations

Anne-Marie Ainsworth - President, Chief Executive Officer, Director of the General Partner

Robert McCall - Senior Vice President - Commercial and Business Development

Jonathan Ackerman - Chief Financial Officer, Vice President of the General Partner

Ken Owen - Terminal Manager

Analysts

Brian Zarahn - Barclays

James Carreker - US Capital Advisors

Matthew Phillips - Clarkson Capital

Cory Garcia - Raymond James

Selman Akyol - Stifel

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Oiltanking Partners' 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.) The conference is being recorded today, August 8, 2013.

I would now like to turn the conference over to Mark Buscovich. Please go ahead, sir.

Mark Buscovich

Thank you, operator. Good morning, everyone and welcome to today's conference call to discuss Oiltanking Partners' second quarter 2013 results. On the call this morning, is Anne-Marie Ainsworth, President and CEO of the partnership's General Partner, Bo McCall, Senior Vice President of Commercial and Business Development, Jonathan Ackerman, Vice President and Chief Financial Officer as well as Ken Owen, former CFO and current Terminal Manager, along with other members of the management team.

After market close yesterday, we issued a press release announcing our financial results which is available on our partnership's website at oiltankingpartners.com. You can also access a replay of today's call from the Investor Relations section of the partnerships' website or view a recorded replay until August 14, 2013. Information on how to access the replay was provided in yesterday's earning release. Information reported on the call speaks only as of today Thursday, August 8, 2013 therefore you are advised that any contents of this information may no longer be accurate as of the time of any request.

Before I turn the call over to Anne-Marie, I would like to remind you that certain statements made by management during the conference call will include the use of statements that are forward-looking in nature and the statements made during this call that refer to management's expectations or future predictions are forward-looking statements and reflect management's current expectations and opinions, views or beliefs with respect to future events, and are based at what we believe are reasonable assumptions.

No assurance can be given, however, that these events will occur and therefore many factors could cause results to differ from management's expectations, and actual results may differ materially from those projected in any forward-looking statements. Material factors that could cause our actual results to differ from our projected results are described in our filings with the SEC. We expressly disclaim any obligations to update or revise any forward-looking statements made during this call and request that you refer to the forward-looking statements made in our earnings press release for additional information.

With that, I will turn the call over Anne-Marie

Anne-Marie Ainsworth

Thank you, Mark. Good morning, everyone. We appreciate you joining us on the call today. As Mark mentioned, our new Chief Financial Officer, Jon Ackerman is with us today. Jon joined Oiltanking on July 1. He brings with him a wealth of transaction experience and knowledge of the energy and MLP industry. He comes to us from UBS Investment Bank, where he specialized in advising clients on complex M&A and capital markets transactions. Before joining UBS, he was an attorney, both in private practice and as a policy advisor in Washington DC. Jon is also a CPA, having begun his career in public accounting. All of us at Oiltanking are excited to have Jon onboard.

Ken Owen our previous CFO is also in the room with me today. In his new role, Ken will oversee the operations of our Houston terminal as well as the ongoing Appelt expansion. The partnership will benefit from the financial acumen and analytical rigor Ken will bring to the operating side of our business. I want to thank him for his extraordinary contributions as CFO. He has been invaluable during the partnerships' IPO and building out the finance and accounting team and as a strategic partner. Ken will start at the terminal, September 1, and will continue to work with Jon to ensure a smooth transition until then.

Turning to our performance. We are very pleased with our results during the second quarter of 2013 as we achieved a number of significant milestones for the partnership and Oiltanking. For the second quarter of 2013, we averaged over 1.1 million barrels per day of throughput volumes of crude, LPG and refine products. We generate record storage service and throughput fee revenues and just two weeks ago, we put the first of many tanks at our new Appelt facility in service.

The strong operational and financial results were driven by continued growth in our storage fee revenues and higher throughput volumes. The increase in storage service fees during the second quarter was primarily due to the new tanks we placed in service in the first quarter of this year and to a lesser extent due to an increase in the average monthly rate we earned per barrel stored.

We also saw a robust increase in throughput service fees this quarter due to the new pipelines we placed in service during the first quarter and, more significantly, due to the continued very strong LPG export market. Bo will discuss this business and related trends in more detail momentarily but, needless to say, we are pleased with how this business is performing, both as it relates to the straight volume throughput as well as the margin sharing component that we earned during the quarter. After the close of the second quarter, we brought online the final tank in the four tank expansion project at our Houston terminal. We now have our 1.1 million barrel expansion completely in service and backed by long-term fixed fee contract.

As I mentioned, we have started to bring on the first phase of our is continuing to bring the first phase of our Appelt expansion. We now have in service three tanks or 1.2 million barrels along with pipelines connecting the Houston terminal to Appelt. In total, the first phase of our Appelt expansion consists of 10 tanks or 3.2 million barrels of additional storage capacity. Construction on the remaining seven tanks of this first phase is proceeding very well, on time and on budget. We expect to place the rest of phase one in service by the end of this year.

Similarly, we are also pleased with the progress on the second phase of the Appelt expansion, representing an additional 3.3 million barrels. Environmental permitting and grading for all 11 tanks are complete. We began construction on the first five tanks and have foundations poured and the ring walls completed to varying level. This project is progressing very well and we still expect to have phase two completed and in service by the end of 2014.

As you know, adjacent to our current Appelt expansion, we have additional land to accommodate another 3.5 million barrels of storage. We have started the permitting process for this project and there are strong interest from multiple customers.

When our previously announced expansions are complete by the end of next year, the partnership will have a total storage capacity in excess of 25 million barrels. These projects are being driven by customer demand for greater storage and handling services in the crude oil, refined petroleum products and LPG value chain. This demand is amplified by our best-in-class dock system, superior connectivity and a track record of exceeding customer expectations.

Speaking of our dock system, we have recently broken on the new deepwater dock at our Houston terminal. This is part of the $44 million project we announced in March. We are also adding infrastructure to existing docks with the capability of handling significantly more LPG vessels at multiple docks. This project is expected to be completed by the end of 2014. As anticipated, we have clearly seen export volumes and associated revenues increase, based upon the new agreement with Enterprise.

As I mentioned in our last call, the partnership is pursuing other opportunities. Bo will speak about these opportunities in greater detail but the key is that we continue to look for new ways to use our world class connectivity and operating expertise to be the logistics provider of choice for our customers.

I will now turn the call over to Bo to discuss our growth projects and prospects in more detail.

Robert McCall

Thank you, Anne-Marie. As Anne-Marie mentioned, we are seeing a number of operational records. As part of the Enterprise agreement, we will be adding a $44 million deepwater dock bringing our deepwater dock count to seven in addition to our two barge berths. Work on the dock has commenced and a lion's share of material has been ordered. We expect to complete it in the latter part of 2014. We are very pleased with the arrangement within our products. Enterprise has indicated that they are seeing solid bookings for LPG exports through 2015 and booking out in forward years. In addition, beginning January 2014, we will be entitled to participate in margin sharing with Enterprise on all customer vessels loaded at our Houston facility which will be in addition to base throughput fees earned under that contract.

Driven by the growing demand in storage, we are continuing to evaluate projects in both Houston and Beaumont. In addition to Appelt phase 3 development that Anne-Marie mentioned we have identified a property near our Houston terminal, that could also be used for 5 million to 6 million barrels of additional storage capacity expansion. We believe this need for additional storage is primarily driven by the increased numbers of barrels to be in the Houston market via pipeline from both Canadian and West Texas production.

To continue to increase Oiltanking's connectivity in the Houston market, we are in the late stages of contract negotiations to build a 24 and a 36 inch pipeline to Crossroads. The termination point of Keystone's marketlink pipeline, the origination point of Shell's Ho-Ho pipeline and the critical distribution point for the Houston market. We have right-of-ways for the pipelines and we are in the process of gauging customers' need and utilization of these pipelines. We hope to have more to say about this project in the very near future.

In Beaumont, we have seen a strong uptick in customer interest for a number of projects as well. As we mentioned in last quarter's call, the interest in the crude initiative is starting to take hold. With pipelines bringing more and more volumes to the Beaumont market as well as the need of local refiners, we are excited about this project really starting to develop. We have strong customer interest in the project. Specifically, we are having detailed discussions with Canadian and Gulf of Mexico producers that want additional access to this market.

Beyond our crude initiative, we have several other projects in the works for Beaumont. We have customer who will build 500,000 barrels of BGO tanks to add to our strong black oil position. We are continuing to evaluate and increase to the pipeline connectivity in the Beaumont/Port Arthur. We are also looking at a potential splitter project to tie into our terminal to process condensate from domestic shale plays. Lastly, we are seeing strong interest from a number customers in using our existing docks and potentially new docks to move products to support the growing export demand.

Outside of the fence of our current partnership locations, we continue to evaluate potential opportunities further upstream. Our objective is get closer to the wellhead where we believe there could be continued need for additional infrastructure and related ministering services. We are focused on looking at those opportunities that could offer excellent returns and growth opportunities while maintaining a fee based traditional MLP financial profile. This would expand our geographical footprint and provide a path for synergies from the field through our strategic distribution facilities on the Gulf Coast.

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

Jonathan Ackerman

Thank you, Bo. I would first like to say how excited I am to join the Oiltanking family. I got to know Oiltanking years ago when it was a client and always viewed this as a very special company. Now, I look forward to being part of this dynamic team during this exciting time as we execute on our existing plans in multiple growth opportunities. As a reminder, we will discuss today certain non-GAAP financial measures like distributable cash flow and adjusted EBITDA, which are defined and reconciled in our earnings release.

For the second quarter of 2013, our net income increased 77% to $29.5 million or $0.61 per unit compared to $16.6 million or $0.41 per unit for the second quarter of 2012. The partnership's strong results for the second quarter of 2013 were primarily led by higher storage and throughput volumes, compared to the same period in 2012. Revenues increased approximately $18.3 million or 54% to $52.1 million during the second quarter of 2013 due to higher storage and throughput fee revenues.

Looking at our revenue by service category. We achieved a 15% increase in storage service fees, 197% increase in throughput fees and a 23$ increase in ancillary service fees in the second quarter of 2013 compared to the prior year period. Storage service fee revenue grew $3.7 million due to new storage capacity placed into service in the first quarter of 2013 and due to an escalation in the average storage fee charged.

Throughput fee revenues grew by $14.2 million during the second quarter due to fees generated on our pipelines placed in service in the first quarter of 2013 and to a greater extent, due to an increase in fees under our amended agreement with our LPG customers in Houston. A significant proportion of the overall increase in throughput fees reflect revenues attributable to the margin sharing component of the LPG customer contract that went into effect during the first quarter of this year.

higher LPG exports. These increases in revenue were partially offset by lower ancillary service fee revenue during the quarter, which decreased by $1.4 million, largely attributable to a onetime pipeline-related construction project for a customer that was completed and recognized during the first quarter of 2012.

Operating expenses during the second quarter of 2013 were $11 million, $3 million higher than compared to the same period in 2012, primarily due to higher property taxes, operations personnel, power and fuel and repairs and maintenance costs. Selling, general and administrative expenses of $4.7 million remained relatively flat compared to the same period in 2012.

As noted in our filings, the Conflicts Committee of our board of directors of our general partner approved a requested increase to the fixed fee charged to us under the services agreement to $18.8 million on an annualized basis. This reflects higher selling, general and administrative expenses associated with expansion projects placed in service in 2013. These expansion projects include the Houston crude oil storage and pipeline expansion, the first phase of our Appelt storage facility and related pipeline connections and incremental refined petroleum products storage at our Beaumont terminal. The fee increase of approximately $925,000 per quarter will take effect in the third quarter of 2013.

Adjusted EBITDA increased 72% to $36.4 million for the second quarter of 2013 compared to $21.1 million for the second quarter of last year. The increased EBITDA was driven substantially by higher revenues, partially offset by higher operating expenses of $3 million. Maintenance capital expenditures decreased 35% to $250,000 for the second quarter of 2013 compared to $397,000 for the second quarter of last year. The decrease in maintenance CapEx was largely attributable to delays in some big ticket projects that will be completed later this year or early next year. Distributable cash flow for the quarter was $34.2 million or 67$ higher than the same period last year.

On July 22, we declared a quarterly cash distribution $0.425 per unit or $1.70 on an annualized basis for all of our outstanding limited partner units. The second quarter distribution represents an 18% increase from second quarter of 2012. We are also proud of the fact that the second quarter distribution was our seventh consecutive quarterly increase since going public in the third quarter of 2011.

After taking into account the distribution, our distribution coverage ratio this quarter was 2.0 times. Although our coverage this quarter was significantly higher than our previously stated long-term coverage target of 1.15 times, we believe the approved increase strikes that proper balance between delivering distribution growth to our unitholders in light of the growth we are seeing in our underlying business while achieving a distribution growth trajectory that is sustainable. We will continue to evaluate our distribution policy on an ongoing basis.

In our previous call discussing fourth quarter of 2012 and the first quarter of 2013 results, we indicated our estimated capital spending for 2013 to be between $135 million and $145 million. At this point in the year, we are maintaining that projection based on current construction and project timelines. As of June 30, 2013 we had borrowings of $63 million under our $150 million revolving credit line. With the total debt outstanding of $205.1 million at June 30, the partnership had a debt-to-EBITDA ratio of 2.0 times. Due to our relatively underlevered financial position, we anticipate funding the previously announced 2013 and 2014 expansion projects primarily with long-term borrowings at market rates from Oiltanking Finance.

We are very pleased with our performance, including the financial and operational milestones we have achieved so far this year. We are excited about the organic and strategic opportunities in front of us and believe we are well positioned strategically and financially to capitalize on them.

With that, we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brian Zarahn from Barclays. Please go ahead.

Brian Zarahn - Barclays

Can you provide a little more color on distribution coverage? It was quite high at two times, which is a high class problem to have but it sounds like you are leaning a little bit towards maybe retaining, continuing to run high excess cash flow or is it possible you may see a further ramp in distribution growth?

Jonathan Ackerman

Well, Brian, I think a couple of points. First, I think you saw on our distribution increase that we did, increased our distribution for the quarter by $0.02. That was a higher growth increase than in previous quarters, including the $0.015 from the prior time. Overall, looking at the distribution, you are right, it was very high this quarter. We do look at it over the longer term and in spite of some quarter-to-quarter variance like that, I think we are trying to set a distribution that's both consistent and a growth rate that's also consistent and to make sure it's sustainable. So, I think, at this point, we are continuing to examine this and we are going to look at it over the longer period to set that distribution rate.

Brian Zarahn - Barclays

Okay, and then related to that. A lot of the growth in the quarter came from your throughput revenues. Do you do view that on the second quarter as a reasonable run rate for that line item?

Anne-Marie Ainsworth

Brian, this is Anne-Marie. As you well know, we don't provide specific information on the details of our contracts to our customers. Right now, we are just early innings in this contract and we are just going to watch and see how this really goes forward out into the future. I don't know, Bo or Jon, if you want to comment on that?

Jonathan Ackerman

Sure, obviously we had a very good quarter and throughputs but our LPGs were very strong. As we stated, our customer Enterprise has given us indications that they se booking through 2015 and as far out of 2022. So we feel like it going to continue to be relatively good in the near-term and it is hard to see further out.

Brian Zarahn - Barclays

Okay, and then just a last one from me. On the condensate splitter project you are looking at in Beaumont, can you talk a little bit about that? Would that be more of a 100% Oiltanking project or would you maybe do a JV with a potential customer?

Anne-Marie Ainsworth

Brian, we are having conversations with some customers and Bo can add to that.

Robert McCall

Yes, it would be a JV. More than likely, with of all the excess condensate coming on in the Eagle Ford, we see a lot of opportunities for a lot producers to try to find locations to deliver their barrels into from a liquidity point and we feel like we have a good option in Beaumont with existing tanks that handle the offtakes of the condensate splitter. So it's a good growth project and good opportunity, a lot of work to do yet.

Operator

Thank you, and our next question comes from the line of James Carreker from US Capital Advisors. Please go ahead.

James Carreker - US Capital Advisors

Just to clarify your margin share agreement, that began with the in-service of the propane expansion and prior to that there was no margin sharing. Is that correct?

Anne-Marie Ainsworth

It's correct.

James Carreker - US Capital Advisors

Okay, and I guess, to ask Brian's question kind of a different way. Without going into specifics about the propane contracts but assuming flat international propane spreads, do you feel confident in your ability to repeat your propane-related revenue within your throughput fees for the foreseeable future?

Anne-Marie Ainsworth

Yes, I think the key thing to know this is, every vessel has its own set of economics. We are feeling very, very good about this quarter. we are feeling positive about the quarter that we are currently in. It's a little bit difficult to project what it's going to look like going forward but although we feel positive about it.

James Carreker - US Capital Advisors

Well, I didn't know, maybe there was some additional spot cargoes in this quarter that have allowed for some additional upside that maybe won't be there in future quarters or anything like that?

Robert McCall

Well, James, as Anne-Marie mentioned, the margin share in a vessel-by-vessel basis and our customers are one that has a commercial relationship with the end user. So it is hard to predict the spot market and the international (inaudible) that are open but as I stated, through 2015, Enterprise indicated that they are fairly well booked. So we anticipate to have quite a pretty good view on the future earnings from the revenue share.

James Carreker - US Capital Advisors

Okay, fair enough, and then, I guess, to follow up on the non-propane throughput, the figure that you put. So now that you have got new pipelines in service, do you see that throughput maxed out near term or will that continue to increase as you guys add additional storage?

Robert McCall

Well, yes. The pipelines that we put in our plays are ramping up just like all the inbound pipelines are coming in from the Houston market. So as those volumes continue to increase, we anticipate we will have additional throughput on those pipelines and have plenty of excess capacity. As we stated on 24 to 36 inch of the Crossroads, we are building both of those pipelines with excess capacity to make sure we meet our customers' needs. But I think, just in general, as the oil starts to flow into the Houston market, it is coming in slow and it is time picked, as the barrels start to pick up, they will probably be less efficiencies in the marketplace and we are trying to stay ahead of that by adding additional capacity.

Operator

Thank you, and our next question comes from the line of Matthew Phillips from Clarkson Capital. Please go ahead.

Matthew Phillips - Clarkson Capital

Continuing on the margin sharing theme, the Enterprise's facility really didn't ramp up until late April or so, if I remember correctly, and you had mentioned that for this year, you are only getting margin sharing on a partial selection of the vessels and January 2014 you get all of them. How should we look at that going forward because basically this quarter, if you look at it that way, it is just a fraction of the fraction of what you could be getting in 1Q '14. Is that the right way to look at it?

Anne-Marie Ainsworth

Yes. Again, Matthew, that each vessel carries its own set of economics. So it is difficult for us right now to predict what 2014 is going to look like on a per vessel. Although we will have margin sharing on all of the vessels, we cannot say exactly what that's going to be on each vessel.

Matthew Phillips - Clarkson Capital

No, I understand that, on a per vessel basis. But how many more vessels will you be participating in, in 1Q '14 versus, say, this past quarter?

Robert McCall

Well, we can't go into a lot of detail on that, Matt, but I would say, as we stated, we will be able to participate in all the vessels starting January 15, 2014 but I think a good explanation would probably be, given the fact that we have six deepwater docks, provide a lot of flexibility to all of our customers, and Enterprise in particular. We have been to match up the capacity that Enterprise has of their facility. So we have been able to really juice the system and get a lot of throughput and I have seen really the performance from us and them over the last couple of quarters. So we feel like, moving forward, we will be able to maintain that level of service and again, January 15, 2014, we will be available to participate on all vessels.

Matthew Phillips - Clarkson Capital

Okay, great. On the splitter, or just really on the Beaumont market in general, is the Ho-Ho reversal going to be big enough to carry enough volumes over there or do you think you need to see more of those tankage or do you need further, a twin of the Ho-Ho? How do you view that market?

Robert McCall

Yes, that's a good question. One thing, there are several pipelines that are coming into that market. You have the Ho-Ho reversal. From Houston to Beaumont, I think is 200,000 to 250,000 barrels a day. You have the Seaway Pipeline from Echo into Beaumont so that they can swing barrels over there. You have the Marketlink coming online. You have the contemplated Westward Ho project and you have existing pipelines like Cameron Highway and then the Sunoco announcements. So you have a lot of barrels besides Ho-Ho delivering barrels into this marketplace.

I think that's where we see is an opportunity for additional tankage to handle the amount of volume coming through there. I kind of see the swing pipeline will probably be the Seaway Pipeline depending upon the demand and also the ability of TransCanada to get their approval from the state department to get their project going in full swing.

Matthew Phillips - Clarkson Capital

Okay, that makes sense. You had mentioned the Eagle Ford concept before and I don't know if it would be specific to that project or take offshore volumes as well? Then the last question, the net income allocated to GP was much higher this quarter sequentially, closing up on $6 million versus $1.3 million last quarter. That's a lot higher than my GP model splitting out and much higher sequentially. Am I missing something there?

Jonathan Ackerman

No, we use the two class method and we do it under the partnership agreement method and the best fee allocation that you get under that method when you look at the overall waterfall that's contained for how the IDRs work. So, again, that's just simply a function of being up in the higher split in the way that the two class method works.

Matthew Phillips - Clarkson Capital

Okay, great. So that's a baseline, at least going forward then?

Jonathan Ackerman

Yes. Keep in mind that the net income allocation that you are doing based on the waterfall, it will affect the balance sheet but overall you continue to look at the cash distribution waterfall as well. I think if you compare the two, you can look at the calculations and see how that's working.

Operator

(Operator Instructions) Our next question comes from the line of Cory Garcia from Raymond James. Please go ahead.

Cory Garcia - Raymond James

Good morning, fellows. Congrats on the great results this quarter. Keeping with this LPG as toward opportunity theme, you mentioned some ability to try and add some incremental infrastructure to your existing docks. This is before the year end '14 expansion. I was hoping to get any sort of granularity in terms of exactly how much you guys think you can push through existing docks? I believe the latest figure from Enterprise was somewhere around 7.5 million barrels per month. I just wanted to gauge sort of where that can trend over the next 18 months.

Anne-Marie Ainsworth

Yes. Primarily, the additional infrastructure is really to gain us flexibility at the docks to be able to accommodate all of our customers. We are able to move through the volumes that Enterprise asking of us. We will be able to continue to so.

Robert McCall

Yes, Cory, a part of the project is to get LPG service through two of our docks, dock six and dock seven and then the middle dock will be dock nine. So the infrastructure of dock six, seven will probably come into service after the first year. Regardless of that, we are meeting Enterprises as essentially throughput requests on the existing infrastructure that we have in existing docks. So when we additional capacity availability at dock six and seven, we feel very comfortable that we will be able to maintain Enterprise's throughput requests.

Cory Garcia - Raymond James

Okay, that's great. I guess, looking further towards the East in your Beaumont facility, I know you guys briefly mentioned it in your prepared remarks but frame, maybe, the LPG opportunity there. Would you be looking to take a similar sort of structure that we see in the Houston market today?

Robert McCall

Well, I think that you have seen quite a few projects be announced in the LPG space. Obviously, there is only five or six that are currently on the fleet. The important thing for us is, we have had a fantastic relationship with Enterprise and continue to have a fantastic relationship with them. They have been delivering barrels of LPG through us for over 25 years. We feel like they have a very competitive market. They are very competitive in the market. At the same time, we can't really stop competition or control what others are doing. If there is going to be additional facilities which we anticipate one, possibility two additional LPG facilities will probably get built in the Gulf coast, potential in the East Cost. If that happens, we have the opportunity to participate. I think it's a fair play and that's something we look at.

Cory Garcia - Raymond James

Okay. Thanks for the color. One more, if I could.

Ken Owen

Cory, real quick. Just one point to make on the Houston. This is Ken. You asked where you thought that the rates could get up to on a monthly basis? What the customers indicated when we made our amended agreement, back in February, March time, when we were talking around the current capacity of around 7.5 million barrels a month. We are currently near that current capacity and the customer has also indicated that they felt like they were looking at expansion opportunities up to somewhere around 10 million barrels per month. That could come through tweaking the system a little bit to get a higher per hour delivery rate and providing additional dock days to get those monthly volumes.

Cory Garcia - Raymond James

Okay, great, that's perfect. Changing focus a bit, you guys mentioned also the opportunities out in the field and at the well head. Would that be largely crude by rail? Should we be thinking about that sort of opportunity? Or is it more of on a fixed pipeline gathering type of system? Or really, take any sort of opportunity that you can get the fee-based customer commitments?

Anne-Marie Ainsworth

Yes. We are looking at a number of different opportunities. So we are just exploring those a this point in time and formulating what our path forward is going to look like.

Robert McCall

I think, Cory, specifically, when you look at the pipelines, we are delivering barrels out of West Texas into the Gulf Coast. We feel like we have a lot of good producer distribution relationships and be able to provide the synergies to bring the barrel from the wellhead into our facilities. It is a good avenue for a geographical footprint and to get us a little bit of a new view closer to the wellhead.

Cory Garcia - Raymond James

Great. Clearly a ton of opportunities on your guys' plate. So I appreciate the time.

Operator

Thank you, and our next question comes from the line of Selman Akyol from Stifel. Please go ahead.

Selman Akyol - Stifel

A couple of quick questions, if I may. First of all, with all of the future dock expansions going on that you have and the potential to add tankage, et cetera, I am just wondering about, would you be insisting on some other form of margin sharing with other customers to sign up or is this just probably going to be with Enterprise?

Robert McCall

I think the view on that is, our business model, our history has been focused on long-term fixed fee rates and having the stability and steady growth of that. As it relates to the relationship with one of our customers, I think we were, in structuring that agreement, there was a little bit economic sharing that might be a little bit different than how we have done things in the past. Clearly, based on this quarter performance, we have liked the performance. We have been pleased with the positive variance that we saw. But I do think, going forward, that we will look at projects that are probably closer to how we have done our expansion or how we have run our assets in the past. That is to have something that is long-term fixed fee and something that is steady growth that we can have that mixes in with our financial profile.

Jonathan Ackerman

Another point to add to that is, when you look historically the last several years and going back even further, our storage service fee segment has been 70% to 75%, that kind of take or pay contract structure. We don't anticipate that changing. I think it was higher obviously this quarter, but with the projects that we have announced and the projects that we are working on and that we believe will come to fruition, we think over the medium term that that is a very good approximation for what the take or pay structure contracts will be of our business around the 70% mark.

Anne-Marie Ainsworth

And that's a number we clearly feel good with, going forward.

Selman Akyol - Stifel

Great, and I appreciate the insight there. With all the growth that you have outlined and certainly as we start going into 2014, in terms the increase in the fixed fee charges, would we expect to see those again coming or is there any insight you can give to how those discussions happen or when does that kind of get reset? What gets taken into account, et cetera?

Robert McCall

Yes, the majority, if not all of our contracts, have CPI escalators. So we will be able to benefit from that. Obviously with the demand and tankage in the Gulf Coast, when contracts do come off of their initial term or evergreen term and we look at trying to rationalize and potentially bring those rates us, if applicable. So I think we will continue to see rates increasing, specifically with the CPI and then opportunities to retrade.

Selman Akyol - Stifel

I appreciate that but I guess I was really talking about under your services agreement.

Robert McCall

On our services agreement, going forward, we put the request in for the Conflicts Committee that looked at a steady base of SG&A cost that we have got and we are predicting that that will be not only through the end of this year but into next year as well. We are going to continue to look at that, particularly as we bring online expansion projects also to the extent that we look at external acquisitions. If they have SG&A burden that's involved with those projects, we would go back to the Conflicts Committee and ask for an increase. But we think that the $18.8 million level that we are looking at, it's going to be where we are from a reimbursed fee amount through the end of next year.

Anne-Marie Ainsworth

We had mentioned that the services agreement fee was prompted by the capital on 2013 but it also was a bit of catch-up from 2012 as well.

Selman Akyol - Stifel

Okay, great, and I guess it's also a nice segue into my next and last question. Anne-Marie highlighted in her intro comments Jon's transaction experience. So I guess, is there more of a look or a thinking in terms of looking at outside opportunities? Maybe doing acquisitions, et cetera?

Anne-Marie Ainsworth

Yes, we are continuing to look at and acquisitions. Various opportunities. We are looking very hard at everything that comes our way that we are aware of.

Operator

Thank you, and Ms. Ainsworth, there are no further questions at this time. Please continue.

Anne-Marie Ainsworth

Thank you. My thanks to each of you for joining us on the call today. I appreciate your questions and the interest in the partnership. We would look forward to our next quarterly update and have a great day today. Thank you so much.

Operator

Ladies and gentlemen, this concludes the Oiltanking Partners' second quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303 590-3030 and use the access code 4630323. AT&T would like to thank your participation. You may now disconnect.

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Source: Oiltanking Partners' CEO Discusses Q2 2013 Results - Earnings Call Transcript

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