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Dakota Plains Holdings Inc. (NYSEMKT:DAKP)

Q3 2013 Earnings Conference Call

November 12, 2013 04:30 PM ET

Executives

Peter Seltzberg - IR

Craig McKenzie - CEO

Tim Brady - CFO

Gabe Claypool - President and COO

Analysts

Jared Lewis - Northland Securities

Frank Smith - Whitman

Jon Gruber - Gruber & McBaine

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Dakota Plains Holdings Incorporated 2013 Earnings Conference Call for the Third Quarter. 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 would now like to turn the conference over to Peter Seltzberg, Investor Relations with Dakota Plains Holdings Incorporated. Please go ahead, sir.

Peter Seltzberg

Thank you and good day. We’d like to thank everyone for joining us today for Dakota Plains Holdings third 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 open to 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 of future and expected financial performance, business prospects, development strategies and similar matters can be identified as forward-looking statement. As a result, there can be no assurance that some of these results will not be materially different from those described here-in. We caution listeners that these forward-looking statements are expected only as of the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements that will reflect any change in the Company's expectations 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.

Craig McKenzie

Okay, thanks Peter and welcome everyone, good afternoon from Wayzata, Minnesota. I want to start with an overview and then I'm going to turn over the call to Tim to discuss financials and Gabe to discuss the operations, and then we’re going to take questions from the listening audience.

We reported our third quarter and first nine months of 2013 today and as you can the compression of the Brent to WTI pricing differential or spread as we know it, continued to have a negative impact on our business. Despite these conditions we remain focused on our long term strategy.

In the first and second quarter calls, I laid out three strategic objectives for 2013. Number one, operational execution, number two, completion of the Pioneer Terminal expansion, number three, diversifying into new businesses. I'm proud of our team's performance towards these stated objectives. Even though I don’t think our profitability over the last two quarters captures all that we have accomplished.

2013's a build out or investment year and it's very difficult to grow the business at the same time as harvesting it. I remain confident that we are building a solid platform from which we will generate significant profits for the benefit of our stockholders in the years to come.

While our marketing segment has been a large driver of our historic performance, we view ourselves as a diversified, logistic service provider and to that end we have been working hard to grow fee based and more predictable businesses. That is why we've focused so much time and capital on our Pioneer expansion and leveraging that asset to include new services such as UNIMIN sand.

Let me just step back from the business a bit and talk about sustainability of crude by rail as an industry. I'd like to remind everyone that there are two primary ways to get crude oil to market from the Williston basin. The first is by pipeline and of course the second is by rail. Pipelines offer lower transportation costs but the oil movements are slower, have fixed destinations and have a limited capacity that totals about half of the Williston basin production. Rail by default provides the other half.

Crude by rail results in a higher transportation cost, but provides access to premium price markets, offers destination flexibility and reduces the travel time to market by up to several weeks. Also rail offers scalability, shorter contract terms and less regulatory risk if present.

You will hear us reference several times in our discussions how the Brent to WTI spread impacts our business. Simplistically, when Brent or coastal pricing exceeds the WTI or continental pricing by more than the incremental rail cost, which is about $7 to $9 a barrel, then rail is preferred over pipeline.

Less than $7 or so a barrel, then pipelines are preferred for the half of the basin that actually have a choice. For the other half, again as I stated earlier rail is the only choice. The Brent to WTI spread monthly average peaked in February of this year at about $21 and narrowed continuously until it reached its lowest point of about $3 in July. Our volumes and margins suffered as a result as you’ve been able to track in our quarterly filing.

This July, the spread has widened meaningfully but didn’t surpass the marginal cost of rail versus pipe until October. The spread has continued to widen and volumes are on the rebound. Assuming the current spread holds, in Q4 we expect marketing volumes and profitability to return to more favorable levels. We’re in the process of working through our 2014 budget and hope to have more color for you in the weeks to come. In the meantime, it’s interesting to see that several notable banks are optimistic about spreads over the long term. All this speaks in support of our business.

I’ll now turn over the call to Tim and I’ll speak you again in a moment. Thank you very much.

Tim Brady

Thank you, Craig. I will start with quarter results and I’ll provide segment metric. The company reported net loss of approximately $2.1 million for the third quarter, compared to a net loss of $600,000 sequentially and net income of $172,000 year-over-year.

The net loss for the third quarter was driven by the loss in the Company’s indirect ownership interest and the marketing joint venture, primarily due to reduced volumes and a lower per barrel margin as a result of the significant narrowing of the price spread between Brent and WTI. The loss was further increased with the legal insurance deductible expenses but the marketing joint venture incurred related to the Lac-Mégantic railroad incidence. Future material joint venture legal expenses are expected to be covered by insurance.

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 revenue consists of what we charge transloading joint venture utilize ability. The company recognized rail income of $77,000, compared to a $100,000 sequentially and $51,000 year-over-year. The increase in revenue year-over-year was due to the renegotiation of a lease agreement with our transloading joint venture which included additional land.

General and administrative expenses were $1.9 million compared to $2.5 million sequentially and $800,000 year-over-year. The decrease sequentially was a result of lower non-cash expenses with share based compensation. The year-over-year increase was due to recognition of approximately $600,000 in non-cash expenses, related to share issuances to board of directors and new employees, additional expenses related to employees hired in 2013 and an increase in professional fees.

The Company’s adjusted EBTIDA was a loss of $1.7 million compared to positive adjusted EBITDA of $1.5 million sequentially and positive adjusted EBITDA of $1.4million for the third quarter of 2012.The decrease was due to a reduction in marketing’s per barrel margin as a result of lower volumes and margin and the legal and insurance expenses related to the Lac-Mégantic incident.

Total debt as of September 30th was $26.6 million, of which $4.6 million is currently classified as short term. Cash at the holding company level is approximately $440,000 as of September 30, 2013, down from $2.3 million at December 31, 2012. As of September 30th, Dakota Plains Holdings shares to restricted cash held at the joint venture level was approximately $11.5 million.

Now I’ll provide segment information. Income from our assessment to transloading joint venture was $644,000, compared to $1.4 million sequentially and $535,000 year-over-year. The total volume transloaded in the third quarter decreased to 1.7 million barrels of oil, compared to 2.3 million barrels sequentially and 2.1 million barrels of oil for the three months ended September 30, 2012.

Sequentially our cost of revenue was higher in the quarter due to higher fees per barrel as we maintained the same staff count while transloading fewer barrels. However this was partially offset by the reduction in general and administrative expenses, in particular professional fees.

Year-over-year income from our transloading joint venture was up slightly, despite nearly 20% lower volume. This was largely attributable to operating efficiencies gained since we transitioned to our current facility operator beginning in last year’s third quarter.

Loss from the company’s investment to marketing joint venture was $1.1 million, compared to income of $900,000 sequentially and income of $1.4 million year-over-year. As explained earlier, the joint venture experienced lower volumes due to the narrowing of the spread between Brent and WTI oil pricing, which has also negatively impacted our per barrel margin. The margins were eroded further by the legal and insurance deductible expenses associated with the Lac-Mégantic railroad incident. Future material joint venture legal expenses are expected to be covered by insurance. Total barrels sold at third quarter of 2013 was 1.9 million barrels, compared to 2.6 million barrels sequentially, and 2.3 million barrels year-over-year.

Income from the Company’s investment in the trucking joint venture was $14,000 for the three months ended September 30, 2013, compared to $136,000 sequentially. Year-over-year comparisons are not meaningful if the trucking joint venture does not commence operation until late September 2012. The trucking joint venture holds 1.5 million barrels of oil, compared to 1.3 million barrels from the second quarter 2013.

The net income reflects the financing of 23 trucks and 56 drivers employed, as the joint venture continues to increase its amount of crude oil hauled. In July 2013, trucking secured four additional clients and began hauling oil to destinations other than New Town, North Dakota.

In closing, I would like to provide a brief update on matters relating to the July railroad incident and Lac-Mégantic with that. Our connection with this incident stems from the one, the owner of 50% of joint venture that marketed crude oil and subleased rail cars involved in incident; and two, the owner of 50% of the joint venture that transload the oil into the tanker. These two joint ventures were managed by our joint venture partner and the operations are conducted by affiliates of our partner and third party contractors.

At the time of derailment, the crude oil in the subleased tankers were under the care, custody and control of the transporting railway. As described in our Form 10-Q, we were subject to pending litigation in Illinois and in Quebec. These lawsuits are at very early stages making it impossible to estimate any potential liability. We continue to believe the claims against us are without merit and we intend to vigorously defend ourselves against these actions. At the same time we are accessing claims we have may have again certain third parties [ph].

With respect to insurance, railway systems [ph] value towards carrier and to date it is been very cooperative. Dakota Plains and the joint venture affiliate maintain insurance covering the activities which they’re engaged. We expect that most expense cost incurred in defending the pending litigation will be covered by insurance.

While you may have remaining questions regarding this incident, it is our policy not provide any additional comments during pending litigation beyond what I just shared and what is included in our Form 10-Q disclosure.

Now I’ll turn it over to Gabe for some comments on operation. Gabe?

Gabe Claypool

Thanks, Tim. Good afternoon everyone. I’m going to give a quick overview of the Pioneer Terminal project, trucking and then the Bakken competitive landscape. The Pioneer Terminal expansion which begin in March of 2013, around time for December 2013 completion and under the $50 million budget despite a very challenging weather over the last seven months. This expansion will allow us to exploit long term demand for crude by rail out of the Bakken.

In October we begin expecting oil in one of our two 90,000 barrels storage tanks, both from trucks and our first gathering system pipeline. The rail infrastructure is now complete, our load out building has been closed and the second tank is at engineered height. Our project continues to have a safe track record. It’s a true testament to the professionals on the ground.

James Tate, our new Vice President of Operations has been hired in developing operating procedures for the completed facility. [Indiscernible] facility within the Pioneer Terminal will deliver 8,000 funds of fixed stores or high speed truck loadout, track capacity for 70 loaded railcars and an annual throughput of 750,000 tons per year. As a quick reference, a single fan railcar is a 100 ton product.

Construction is progressing well with rail infrastructure going into the suite and through the floor -- with rail infrastructure going into the suite and two of the four [indiscernible] going vertical last week. Although we have been dealing with significant rain, commissioning of the permanent facility is on track for next April and May. As outlined our Q2 call, we are working towards an interim phase agreement to enable [indiscernible] be transloaded on our existing water track infrastructure once we have moved our crude operations to [indiscernible].

We are also pursuing other projects to diversify our business going forward. Pioneers Terminal locations is extremely favorable for new developments in the heart of the Williston Basin. This provides producers access to a ready, reliable and optimally priced market via Pioneer. Roughly 2,000 wells are forecasted to be in the nearby South [ph] Creek Peninsula alone and any time within our service geography.

As a reference, current well completions consume about 40 railroad cars of bound commodities per well. In addition, Pioneer is the terminus for the Canadian specific line and thus the closest to the source for many wells. With so much activity nearby, we believe creating an inbound business will provide valuable service to the ENP operators.

We have grown our truck fleet to 23 trucks and trailers as of September 30 to capture additional third party volumes and plan to add two more by year end. In Q3, we trucked approximately 16,000 barrels per day and expect that to increase to approximately 19,000 barrels per day in Q4.

Now let me shift to the competitive landscape. In July 2011 production from North Dakota was roughly 675,000 barrels a day. At that time the North Dakota Pipeline Authority Reports, a reliable industry resource forecasted the Bakken production would hit 900,000 barrels a day production in late 2018 and peak at 1 million barrels a day in 2025.

In August of 2013 the North Dakota production was already 911,000 barrels a day. The Goldman Sachs reports in September of 2013 now forecasts the North Dakota peak at 2 million barrels a day in 2025 for just Bakken and Three Forks production. Based on these forecasts, we continue to see a long term fundamental need for crude by rail and pipeline.

As we have previously highlighted there are 15 crude by rail focused terminals in North Dakota, during 2013. Two of them were commissioned and six went through expansion. Of the sixth expansion, that included additional storage tank and car loading stations, truck loads, truck unloads and there were two including us who are building entirely new terminals next to their existing operation. We do not see any Greenfield activity as of today.

Regarding pipeline growth, it is important to distinguish between gathering system pipelines and interstate trunk pipeline. We have seen an enormous amount of gathering system infrastructure being built. These pipelines deliver volumes to crude by rail terminals, interest base from pipeline or to the Tesoro Refinery in Mandan. This is exactly the type of solution to proposed paradigm projects that we announced earlier this year, will offer and we remain excited by its potential.

Interstate trunk pipelines represent crude by rail’s most direct competition, transporting crude from a field to a market. We are aware of only one new project or expansion that is in the definitive planning stages and if successful, this expansion would not be in service until 2016. Give us some perspective, again if this expansion is successful, it would add 225,000 barrels of pipeline, 20,000 to 25,000 barrels a day of pipeline capacity for the Williston Basin in 2016.

Over the same time Goldman Sachs forecasted production from the basin to be increasing by 400,000 to 500,000 barrels a day. So even if the only project we know about is successful, we expect the net demand for crude by rail to increase.

Thanks. And now I will turn it back to Craig.

Craig McKenzie

Thank you Gabe. That concludes our prepared remarks and we'll open the lines to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jared Lewis with Northland Securities. Please go ahead.

Jared Lewis - Northland Securities

I was wondering if you could give a little more detail on just how the volume ramp was during the quarter. How you took it down relative to your 30,000 day capacity, and if you can, kind of where we are at right now, just kind of get a sense?

Craig McKenzie

So where we are right now, what we can say, we were ramping towards the end of Q2. I can’t really go into great detail but I can say that we're definitely back to a number equal to or greater than where we were in the Q2 time frame. What we saw with Q3, the start especially was the margins got pinched to a level that anybody that could hold that volume from the rail and sent into the pipeline infrastructure. So that's what we were talking about a little bit in some of the prepared remarks.

Jared Lewis - Northland Securities

So kind of, given the results and net loss and where the cash position is, is going to effect the completion of the Pioneer project at all or securing additional rail cars once the project is done?

Gabe Claypool

I'll answer the second one first our tank car fleet has secured most of our long term leases through 2018 and beyond. So we're not concerned at all about the tank car fleet. And as far as the funding for the project goes, no we have announced that actually in the Q2 timeframe is definitive but there is no additional need for incremental money and Timmy could probably expand on that. But it's secured.

Tim Brady

As explained by Gabe, as we mentioned in the second quarter, the Pioneer project is on target and is currently fully funded.

Jared Lewis - Northland Securities

Just finally, and then I will jump back in with some other folks. Tim, I guess this is to you, on legal cost this quarter, maybe quantify what maybe the one-time were and then going forward if I understand all additional expenses should be covered by insurance. Is that correct?

Tim Brady

That's correct.

Jared Lewis - Northland Securities

So then the size or the fees this quarter relative?

Tim Brady

Yes, the legal fees that I mentioned in my prepared remarks was almost $800,000. And what that made up, a portion of it was deductible and then a portion was true legal fees.

Jared Lewis - Northland Securities

Okay so the $1.1 million lost in JV included this $800,000 in legal fees, correct?

Tim Brady

That’s correct.

Operator

And our next question comes from line of Frank Smith with Whitman. Please go ahead.

Frank Smith - Whitman

I have got a few questions here. I guess I will ask few and then maybe drop off and come back, but on the trucking segment, what percentage of that volume is actually taking into New Town versus taking to other transloaders?

Gabe Claypool

Frank, its Gabe. I would say it’s probably in the 60% range coming to New Town and the other 40% going to our other clients to various destinations.

Frank Smith - Whitman

Okay. And then on the actual Pioneer project, the two tanks, as I recall, when I was out there, is there certain amount of crude similar in the neighborhood of 30,000 barrels, right, have to be in each tank?

Gabe Claypool

Are you talking about the low level?

Frank Smith - Whitman

Yes, certain amount to hold its structure and I was just wondering, has that already been built into the cost of the project?

Gabe Claypool

That’s actually an incremental. That would be more of an operating expense but in our part of the budget that we talk about from a $50 million budget, the 30,000 barrels, remembering which is good memory, includes the volume that goes into both tanks and also as in what they called line fill. So the pipelines themselves are constantly holding crude oil. So between tank one and two in all the feeds of pipes that are within the terminal that turns into about 30,000 barrels of volume.

Frank Smith - Whitman

Okay and then one last question; on the pipeline that is recently; it sounds like it’s been connected to the Pioneer. What type of volume would that potentially bring to the Pioneer?

Gabe Claypool

Well, the first one is -- potential capacity is 20,000 barrels a day. I won’t go into specifics to what we’re shipping in today’s environment but I’ll say they’re very good clients and our volumes are substantial but the pipeline itself, the infrastructure could handle between 20,000 to 25,000 on daily basis.

Operator

(Operator Instructions). And our next question comes from the line of Jon Gruber with Gruber & McBaine. Please go ahead.

Jon Gruber - Gruber & McBaine

I don’t know if anyone else had the problem but the number you’ve listed at least didn’t work from California. I had to get in on the international line but I dialed five times and it says not a working number every single time. Just to make sure you know that. My question is, with the Brent spread up so high now, can you be little more specific on how [indiscernible] we’re going to be in sort of taking, capitalizing on the spread, now that is good?

Craig McKenzie

This is Craig and thank you, we will look into the phone number problem. Appreciate your patience on that. Concerning your question, you are right. We are enjoying larger spreads. Right now it’s $13 and so it’s been both steady and steadily increasing. All this speaks well to our business getting back into being profitable and as such it’s to our interest to increase the volume as much as possible. Our JV Partner is increasing volumes throughout Q4. Volumes this month are up to about 27,000 barrels a day, which is the highest number in recent quarters and it’s back the levels at the beginning of the year.

We are hopeful that with Pioneer up and running in December, that after we get through all the commissioning and just work all the bugs out of new equipment, that we’ll be in a position early next year to increase the volumes to the highest we’ve ever seen, certainly hopeful that the volumes will be in the 30s, if not low 40,000. So it remains to be seen, we have work to do. We work hand-in-hand with our joint venture partner. They have the lead on the crude oil trading and so we are in close touch with them and like you we are cheering them on to get more volumes.

Jon Gruber - Gruber & McBaine

And my second question was asked earlier but you didn’t really answer it; the cash at September 30 was roughly $450,000. Are you generating cash now with the spreads where they are? And if so how much and if not then what are you going to do about replenishing the cash position?

Tim Brady

Hey John, this is Tim Brady. As Craig mentioned we do plan. With the spreads widening, one of the things that I've mentioned in my statement was when we pull volume back, we maintained the same staff level of our contractor, boots on the ground. Our issue was, we didn't want to let people go, it would be difficult to bring them back. As mentioned our professional fees are down as a part of their efficiency. But the reason we kept the staff flat is because we knew into the fourth quarter we would be ramping up our volume and taking advantage of the spread and ultimately making income on the barrel.

Craig McKenzie

And John, this is Craig. I would echo that Pioneer is going, sending production, throughput, through the loop track system is much more cost efficient than our present ladder track setup, as you saw when you were visiting the facilities. So it’s going to be less direct cost of goods. With a higher volume, the less unit cost, and the higher spreads, absolutely it all speaks for us being profitable and generating cash. We haven't put out guidance for 2014 yet but we're working on that right now and hope to have something positive to say here in the coming weeks.

Jon Gruber - Gruber & McBaine

And my last, it’s not a question but it; you just did the multiplication, the oil you need to keep for the pipes and for the tanks, to make it easier at a $100 a barrel that's $3 million, that's part of the $50 million. Is that correct or that's not part of the $50 million for the,…

Gabe Claypool

No, John this is Gabe. That's not part of the $50 million. The $50 million is the CapEx going into some assets on the ground, not the product. Tim could maybe speak to the capitalization of the $3 million but you're a 100% correct, its $3 million of crude oil to $100 per barrel. That’s a part of the initial bill that we bought.

Craig McKenzie

Well I would just add, this is Craig, that the $3 million that you have calculated, that's an inventory and so it's not a capitalized expenditure as part of…..

Jon Gruber - Gruber & McBaine

But you still have to buy it.

Craig McKenzie

Yes. Eventually when everything is said and done it will be sold and it’s certainly in our best interest to minimize that volume mechanically, as we operate the floating roof.

Operator

And our next question is a follow up from the line of Jared Lewis with Northland Securities. Please go ahead.

Jared Lewis - Northland Securities

Kind of following on what John just asked. How do you see the volume progress through '14? What other color you can give us now, from the 30,000 kind of max throughput to the ultimate 80,000 that Pioneer project can do?

Craig McKenzie

Well Jared, as you just heard me saying, we're finalizing those numbers now and we’re doing that as a joint effort with our JV partners. So I don't have numbers for you today. They will be coming out here shortly. You can certainly expect them to increase. We built the Pioneer terminal to handle higher throughput, and you’ve heard us say in the past that we don’t have enough rail cars for more than about 45,000 barrels a day. So that is a limitation, even though we’ll have the capacity for 80,000 barrels a day in the asset themselves.

Of course what you can think about as we are doing every day is opportunity to bring in third party rail cars through the facility to augment or complement our own fleet. Also obviously we have the option to expand our rail fleet to increase the production rate. I’d hate to build up any expectations today that all that's been done, but it is a priority for us, we are working on it and we are hopeful that something can come together in 2014 with that regard.

Jared Lewis - Northland Securities

Okay, and just final, just how do kind of secure the crude from the well head? Obviously you're able to limit it. So is it just a spot purchase that you guys do when you have, maybe just run through the mechanics on how that all works?

Craig McKenzie

Jared, to your question, it is a spot.

Jared Lewis - Northland Securities

So if it's not advantageous you just don’t enter the market.

Craig McKenzie

Well, that's not 100% accurate. Most of our contracts are based on a pretty static volume. The purchase price is spot, but the volumes don't fluctuate very often, unless the market like we did in July goes to the point where it’s just uninteresting for us; then we get out of it.

Tim Brady

That was just talking pricing.

Operator

And our next question is a follow up from the line of Frank Smith with Whitman. Please go ahead.

Frank Smith - Whitman

Just have a couple more questions here. Do you guys have any idea of what is the cost take crude oil from the Middle East per barrel to U.S. refineries from somewhere like New Town to the refineries?

Craig McKenzie

I don’t know the answer to that from an official perspective I do know that the appetite for Bakken and crude oil and for crude by rail as a whole is very strong on the East Coast, Gulf Coast, West Coast because the logistical expense and consistency from the United States make it much more appealing than counting on that shipment from the Middle East. I couldn’t give you an exact dollar amount but that’s why you’re seeing these folks on the coastal side, the refineries and the terminals investing in the crude by rail, because they’re trying to get away from their dependence on the buyers. So I can’t give you a definitive number. I can tell you the logistics of it are being supported by the investments that these people are putting in.

Frank Smith - Whitman

But how about from a time standpoint, how much time is a barrel of crude sitting in the ocean on its way versus by rail? What's the differential there?

Craig McKenzie

You’re stumping me again. What I can tell you on the pipeline environment, United States pipeline or North American pipeline, what takes a rail car seven to eight days to deliver will take a pipeline a 30. So I couldn’t tell you what the logistics are from a timing perspective on that international aspect.

Frank Smith - Whitman

But you said seven or eight days to get it from like say New Town to Philadelphia?

Craig McKenzie

Correct, that’s an -- industry average is about a week for railroad car to get from A to Z in United States and North America. The same volume shipments in a pipeline takes about 30 days, through the markets that can take pipeline. Again the East Coast and West Coast can’t get oil by pipeline from the Mid Continent.

Frank Smith - Whitman

Okay, and then my last question is this, just the Pioneer project, the business model that you all created at some juncture, is there a scenario where the spread is flat and it’s still a viable business?

Gabe Claypool

Well, right now, I mean Craig kind of highlighted it. Again the fundamentals of the crude by rail started when WTI was created at a premium to Brent. So in an environment where WTI and Brent are flat, as long as there is a capacity that’s produced -- produced volume that exceeds pipeline capacity, then you still need rail or you’ve got to turn those volumes off. So we passed the pipeline capacity in Q2 2011. We’re producing 911,000 barrels a day in the August report. So we’re already probably 950,000 better. And the current pipeline capacity out of North Dakota or the Williston Basin is 580,000. So using rough math, we’re almost doubled the produced volume versus today’s pipeline capacity.

Frank Smith - Whitman

Okay, just that you guys had mentioned that because the spread was shrinking, it sounds like you guys were just going to do less last volume or turn away business. Maybe I misinterpreted that?

Gabe Claypool

You didn’t it’s just there is a lot of nuance here and we’re talking about generalities and also long term versus short term. What you can see from our financials over the last two quarters is in a collapsing market, with the spreads collapsing as it did in the first half of the year, it’s not stable and it is tweezing us, because even though where spot pricing, at least part of the equation is relatively fixed on a monthly basis. And as the spread collapses in the month, it does impact us.

I took your question to mean does a zero differential or zero spread business survive for the long term. The answer is absolutely yes. What I mean by that is in a stable environment, when something is not collapsing kind of real time by the day, what happens is all the forces in the value chain kind of level out and ultimately the producer at least has to -- producers in the Bakken have a start choice; either except the detriment of pricing by rail or shut in their well. And what we’re trying to do is provide a viable solution for them to get their crude to market. It’s not perfect because it is more expensive than pipeline but it offers a lot of freedom and I covered a lot of those points in my prepared remarks. So over the long term, in a stable environment it’s absolutely viable but in a very short time frame, when it’s collapsing it’s not to say we can’t get tweezed as we just have experienced.

Frank Smith - Whitman

Okay, all right. But the bottom line is, I mean I’m assuming they can’t get a -- just taking a stab here they can’t get a barrel of crude oil from Saudi Arabia to Philadelphia quicker than you can rail in a week. So the rail is the absolute quickest way to get a barrel of oil to majority of the refinery in United States?

Gabe Claypool

Yes, depending on the resonation my experience was just that the water borne barrels going to East Coast would take anywhere from 10 days to upwards of two weeks, depending on how far away we’re talking about. Ultimately, the refinery on the East Coast has a choice of the CD barrels by rail that are competing against water borne barrels by the various originations and what we have experienced historically at that point is sort of a Brent, flat or straight upside or Brent plus 1, Brent plus 2 or minus 1 in that ballpark, the refinery is always going to be weighing his or her options of water borne versus continental. What’s been very beneficial and seems to be sustainable for the long term is that the Continental sourced barrels by rail are absolutely straight up competitive with the water borne sourcing from either South America, Middle East or Europe Brent wise.

Operator

(Operator Instructions). And our next question comes from the line of [indiscernible] with Northland Capital. Please go ahead.

Unidentified Analyst

Gabe, can you just address sort how your capacity in New Town change with Jim Tate coming on and sort of maybe an overhead view who is going to really be in-charge all the logistics which UNIMIN and double loop track and the inbound commodities, which seem to be somewhat of the daunting challenge.

Gabe Claypool

So Jim Tate’s is a local guy, which is the big piece of the equation. He lives in Mienhoff [ph]. He’s going to be focused predominantly on the crude oil operation. His background is extensive in pump and valves and pipelines and tank. So, he is very, very familiar and very confident in that regard. So, we’re looking for him to play big role on keeping the crude oil side of the Pioneer terminal, some are long and very spaced and very organized.

But to your point, the UNIMIN fund, a lot of people will have their own terminal manager for just the sand people [ph]. So there is a lot of work there to be done. We’ve got three Dakota Plains employees that are permanent now and we see that growing. We haven’t really talked much about the imbalance side as far as these four pipes we’re in or the aggregate bill of things that will become of the existing ladder track infrastructure or the industrial yard with 70 acres of space on the inside of that. My role specifically will keep focused on the big picture of the business development side. I guess I do a lot of speaking at a lot of these conferences, kind of keeping a post of where the industry is going and hopefully I will take this out of the Bakken, the organizational order. So I see a lot of key pieces being acquired from the entire team, from the operation side with Jim definitely being the point guy for us in North Dakota.

Operator

And at this time there are no additional questions. I’d like to hand the conference back to Craig McKenzie for closing remarks.

Craig McKenzie

Okay well thank you very much and thank you all for spending time with us here this afternoon. What I’ll say here is that we went through a couple of challenging quarters in which spreads worked against us. That is not to say that we don’t have a long term viable business that’s absolutely on the upswing and we think that we are building positive momentum on a number of fronts.

As the crude-by-rail matures our focus on moving Dakota Plains ahead operationally will become even more apparent to those who follow our company. We will soon be putting forward our operational and financial goals for 2014, which will include higher throughput volumes through Pioneer and expanding our operations to include other services. We are working on those real time to expand beyond the UNIMIN venture for the service logistics.

Our focus this year has been to prepare for ’14 and beyond. As you heard me saying, in short 2013 is a build out year. It’s been significant investment and execution. The joint venture in the last year spent about $70 million building out this asset. So for those of who have been out there, it’s a remarkable thing to see and we hope to provide more information so that everyone could get more color as to what this asset is all about, but it’s absolutely a flagship in the basin and stands on its own merit. So, you’ll hear more from us here shortly, but for now I’ll go ahead and sign off and again, thank you all for your time. Bye for now.

Operator

And ladies and gentleman, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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