Dakota Plains Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Dakota Plains (DAKP)

Dakota Plains Holdings, Inc. (NYSEMKT:DAKP)

Q4 2013 Results Earnings Conference Call

March 14, 2014 11:00 AM ET


Craig McKenzie - Chairman and CEO

Tim Brady - Chief Financial Officer

Gabe Claypool - President and COO


Jared Lewis - Northland Securities

Nick Shermeta - Northland Capital Markets


Good day, ladies and gentlemen, and thank you for waiting. Welcome to the Dakota Plains 2013 Fourth Quarter and Full Year Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

Before we begin, I will review the Safe Harbor statements. 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 and in reports that the company has filed with the SEC.

All statements other than statements of historical facts which address the company’s expectations of future and expected financial performance, business prospects, developments strategies and similar matters can be identified as forward-looking statement. As a result, there can be no assurance that some of these will result 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 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, I’d like to now turn the call over to Craig McKenzie, Chairman and Chief Executive Officer for opening comments.

Craig McKenzie

Okay. Thank you Emily and welcome everyone to the Dakota Plains fourth quarter and full year 2013 financial results conference call. I'll be hosting today's call along with my colleagues, Tim Brady, our CFO and Gabe Claypool our President and COO.

Today's call will begin with an overview followed by discussions of our financials and operations and then we’ll spend time taking your questions.

2013 was a transformative year for Dakota Plains; also it was a significant build out year for the company. Now still need to keep that in mind when reviewing our financial results. I want to say upfront that I am proud of what our team of only 8 employees along with our Board of Directors has done to position Dakota Plains for the future.

In 2013, we set out to improve the company by; one, authorizing the construction of Pioneer; two, strengthening our balance sheet; three, launching our inbound business; and four transforming from a passive holding company to a company that provides direct oversight of our transloading joint venture operations, which we consider to be the heart of our business.

I am proud to say we accomplished all four of these goals. We delivered the $50 million Pioneer project on-time safely and under budget against the adverse weather conditions for much of the year, and Gabe, welcome back. We reduced our senior notes by $19 million to strengthen our balance sheet. We secured UNIMIN as an anchor tenant in our inbound business. And last, we became the managing partner for our transloading operations which enabled us to consolidate transloading’s financial reporting. As a result, we now have over $80 million of assets on our balance sheet and are providing greater transparency for investors. We accomplished these goals amidst challenging market conditions, so let’s talk about that.

Our marketing joint venture suffered from narrow spread between Brent and WTI. The average monthly spread peaked at about $21 a barrel in February 2013 and collapsed to a low of about $3 a barrel in July. The spread slowly recovered to about $13 a barrel by the middle of the fourth quarter. The Brent to WTI spread is a key factor and the ability of our marketing joint venture to not only cover the costs of crude by rail but turn to profit. For much of last year the spread was narrow and our marketing joint venture struggled to achieve profitability.

Let’s turn our attention to the future, coming off of a transformative year we have established a strong platform for future growth and look forward to generating sustainable value for shareholders in the months and years to come. For 2014 and beyond we have four objectives, first is to increase the throughput at Pioneer at present we are running at about 34,000 barrels a day and that we have line of sight on achieving our goal of 45,000 barrels a day on average for the year. Gabe will have more to say about this in a moment.

Second, we are going to consider further expansion at Pioneer, as we have shared before we are developing our inbound business beyond the UNIMIN frac sand terminal and in addition we are also evaluating ways to leverage the Pioneer Terminal for further expansion such as additional tank storage to sustain higher throughput volumes.

Third, improve the financial framework of the company, this objective encompasses several items, we are focused on improving earnings commensurate with filling out the Pioneer complex, this includes working with our partner to improve predictability and profitability of our marketing joint venture. We are preparing to list on a national exchange we think this will improve the trading and liquidity of the stock and hope to have this done by the middle of the second quarter. And we would like to refinance our existing debt and also set up a credit facility inside our transloading joint venture.

Fourth, we’d like to consider external opportunities; on a regular basis we consider external opportunities. Some pertain to project at other locations external to Pioneer, so this is inorganic growth and some pertain to proposals being made by third parties for Pioneers specifically. We have an active screening process in place and will make any material disclosures as wanted.

Market fundamentals continue to underpin our view that crude by rail is a long term proposition. And the futures based Brent WTI spreads suggest that rail to be advantaged over pipelines in 2014. It is our view that as a Bakken Three Forks production increases, there will be an even greater demand for rail services. And this like, I am grateful to you our stockholders, for your belief in our vision and your ongoing support of the growth of our enterprise.

With that, I will turn over the call to Tim to discuss the financial results, Tim.

Tim Brady

Thank you, Craig. I will start with a brief discussion of our December debt restructuring balance sheet. Now I am going to provide financial results for both the fourth quarter and full year including some joint venture operating metrics. In the fourth quarter, we completed $50 million equity offering and reduced the company’s senior notes outstanding from $26.6 million down to $7.7 million.

And those restructuring consisted the following; repayment of $7 million of senior notes, conversion of $10 million of senior notes in equity resulting in the issuance of 4.66 million shares, the [surrendering] by senior note holders of $1.2 million of equity or 304,732 shares and a (inaudible) by senior note holders of $1.9 million of senior notes.

Total debt as of December 31st was $15.2 million, which is all long-term. Cash at the holding company level was approximately $6.1 million as of December 31st, up from $2.3 million at December 31, 2012.

As of December 31st, Dakota Plains’ share restricted cash held at the joint venture level was approximately $12.5 million. Fully diluted shares outstanding were 57 million as of December 31, 2013.

Now before I begin discussing operating results, it should be noted that we utilize the equity method of accounting for joint ventures. As a result, all income generated is reflected below the line in other income. As we have previously announced, we have taken over management of the transloading joint venture effective December 31, 2013, consolidated balance sheet immediately with the remaining financial statements being consolidated effective January 1st of this year.

The company reported net income of $337,000 for the fourth quarter compared to net income of $10.3 million for the fourth quarter of 2012. We should note that the net income for the fourth quarter of 2012 includes a $14.7 million gain on the extension of debt related to the November 2012 debt restructuring.

Income from the company’s indirect investment to transloading joint venture was $900,000 in the fourth quarter of 2013, flat compared to 2012. The total volume transloaded increased to $2.3 million barrels of crude oil compared to $2.1 million barrels of crude oil for the fourth quarter of 2012.

Income from the company’s indirect investment in the marketing joint venture was $1.4 million for the fourth quarter 2013, also flat compared to the fourth quarter of 2012. The total volumes sold increased to 2.4 million barrels of crude oil compared to 2 million barrels of crude oil for the fourth quarter of 2012. The increase in barrels sold was offset by the narrowing of the spread between Brent and WTI compared to the fourth quarter of 2012.

Loss from the company’s indirect investment in the trucking joint venture was $82,000 for the fourth quarter of 2013. Year-over-year comparisons are not meaningful as the trucking joint venture did not commence operations until late September 2012.

The trucking joint venture hauled 1.7 million barrels of crude oil for the fourth quarter 2013. The loss reflects the financing of 27 trucks and 55 drivers employed, the joint venture more than tripled the number of trucks in operation during 2013.

The company recognized rental income of $78,000 for the fourth quarter of 2013 compared to $57,000 for the fourth quarter of 2012, the results of the company having secured additional acreage at the end of 2012.

Adjusted EBITDA for the quarter was $97,000 compared to $1.8 million for the fourth quarter of 2012. The difference was primarily driven by the increase in general and administrative expenses which were $2.5 million for the quarter compared to $800,000 for the same period in 2012. This was due to the additional expenses related to employees hired in 2013 and an increase in professional fees. The increased headcounts associated with our transition to providing oversize of the transloading joint venture effective January 1 of 2014.

Net loss for the full year of 2013 was $1.7 million or $0.04 per diluted share compared to a net loss of $2 million or $0.05 per diluted share for the full year of 2012. This was driven primarily by the 72% reduction in the company’s indirect ownership investment in the marketing joint venture.

The 2012 net loss was mainly driven by the expense related to embedded derivative, a charge was partially offset by the $14.7 million reported as a gain on extinguishment of debt and by higher income from the company’s indirect ownership interest in its marketing joint venture.

Income from the company’s indirect investment in the transloading joint venture was $4.3 million for 2013 compared to $3.5 million for 2012. This represents a 22% increase in net income compared to 2012 and an increase of only 13% in barrels transloaded which increased from 7 million to 8.6 million barrels.

Income from the company’s indirect investment in the marketing joint venture was $3 million for 2013 compared to $10.4 million for the full year 2012, a 72% decrease. The marketing joint venture experienced a 22% increase in volumes sold during 2013, 9.4 million barrels of crude oil compared to volumes sold during 2012 to 7.7 million barrels of crude oil.

The increase in volumes sold was offset by lower per barrel margin as a result of significant contraction and the price spread between Brent and WTI in addition to increased legal and insurance expenses.

Income from the company’s indirect investment in the trucking joint venture was a $130,000 for the full year ended 2013. And our joint venture hauled 5.7 million barrels of crude oil, but we increased our trucking fleet to 27 trucks. The trucking joint venture continues to haul crude oil for the marketing joint venture, as well as for several third parties.

The trucking joint venture commenced operations September 2012 and ended 2012 with 8 trucks and 10 drivers. The company recognized rental income of $349,000 for the full year 2013 compared to $266,000 for the full year of 2012 as a result of the company having secured additional acreage at the end of 2012.

Adjusted EBITDA for the full year ended 2013 was $2.4 million compared to $11.8 million in 2012, a decrease primarily due to the decrease in income from the company’s indirect investment in the marketing joint venture, as well as the increase in general and administrative expenses.

General and administrative expenses were higher due to recognition of non-cash expenses related to share issuances to employees and to Board of Directors, additional expenses related to employees hired in 2003 and an increase in professional fees. Our 2014 G&A is expected to be $6 million compared to $8.5 million from 2013. The 2014 G&A includes $1 million legal contingent fee.

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

Gabe Claypool

Thank you, Tim and good morning everyone. At this time I’d like to provide an overview of Dakota Plains’ operations and update everyone on the Pioneer Terminal projects, trucking and the Bakken competitive landscape. To start, we have increased the nameplate capacity from 30,000 barrels per day to 80,000 at year-end. And the company now offers a rail terminal that employs the highest standards of safety and technology for the benefits of our customers. With throughput volumes at the highest rates to-date and our UNIMIN operations underway, we are generating strong momentum and have a platform for growth heading into 2014.

As Craig mentioned, we repositioned Dakota Plains from a path of holding company to an organization with active oversight of operations at the newly completed Pioneer Terminal. The Pioneer Terminal broke ground in March of 2013 and operations came on line in December of 2013. I am very, very proud of the entire team to deliver this safely, on time and under the $50 million budget.

This expansion will allow us to exploit long-term demand for crude by rail of the Williston Basin. The Pioneer Terminal, a 192 acre site with two 83,000 foot loop tracks each capable of 120 car unit trains, 180,000 barrels of crude oil storage, a high speed loading facility that can accommodate 10 railcars simultaneously and transfer stations to receive crude oil from gathering pipelines and trucks. It usually takes us about three hours to deploy tank car now we can do it in little over an hour.

In October, our first gathering pipeline in the Pioneer Terminal went live and is clearly providing approximately 5,000 barrels per day of crude oil. Our track record of safety and compliance at the Pioneer Terminal remains strong which is a true testament to our talented team of professionals on the ground.

Our agreement with UNIMIN Corporation for construction of our frac sand facility remains on schedule for completion in May of 2014. UNIMIN is the largest coated proppant supplier in the world. This project will connect with largest frac sand mine in Tunnel City, Wisconsin with Bakken ENP activity. The facility will comprise 8,000 tons of sand storage, four new ladder tracks and the capacity for 17 loaded railcars, with Dakota Plains providing management oversight of the operation.

Importantly, with outbound oil moving to the Pioneer double loop track, the existing ladder track infrastructure on the north side of the assets will likely be used for inbound commodity logistics. UNIMIN frac inventor will become the anchored tenant for this new set of businesses. Our JV of trucking fleet expanded to 27 trucks from only 8 in 2012 to meet the additional third-party demand. We finished the year with a very safe track record with over 25,000 loads delivered, a strong testament why we added four new shipping clients.

Regarding the competitive landscape crude oil production from North Dakota was 926,687 barrels a day in December that was up more than 25% from January 2013 production of 737,000 barrels per day. We peaked out in November with 976,000 barrels per day. I’m sorry to remind everyone but the months of December and January of 2014 were some of the (inaudible) records for the entire country.

January 2014 production did bounce back a little to 933,000 barrels a day but not to the November peak. As you can see, the entire industry felt the direct impact of the days that literally hit windshields of negative 50. December volumes again stayed strong for crude by rails with 73% of the take away riding the rails.

In the state pipeline utilization, i.e. volumes headed for Clearbrook Minnesota or Guernsey Wyoming, took 20% of the Bakken volume which means of the 515,000 barrels a day capacity, only 185,000 barrels a day were transported. Tesoro’s Refinery in Mandan stayed pretty consistent consuming the other 6%.

We see a couple of crude by rails terminals coming on line or being pursued on the BNSF for 2014, one on the Montana border and the other one at west of Dickinson. It would be interesting to see what happens this year as these are the only two we officially announced.

As for new pipelines, the primary headline grabber is Enbridge’s Sandpiper which has now had a successful open season, (inaudible) of the Enbridge’s projects would offer about 225,000 barrels a day and could go live in 2016.

(Inaudible) pipeline is going live later in the year and will be capable upon 50,000 to 100,000 barrels a day from Dore, North Dakota to Guernsey. As referenced above the existing pipeline outlook to Clearbrook and Guernsey are in 36% of capacity in December of 2013. Bottom-line, we see strong fundamentals for continued Bakken production growth and that crude by rail remains a key component of takeaway, even if new pipeline capacity comes on line.

Now, I’ll turn the call back over to Craig.

Craig McKenzie

Okay, thank you Gabe. So, before I turn the call over to questions from the audience, I’d like to just briefly address the current regulatory environment. Last month, federal regulators issued an emergency order requiring extensive tests on crude oil moving by rail. And while the DOT was aimed at the Bakken crude, the order covered shipments from anywhere.

Importantly, the emergency order has no material impact on our day-to-day operations as our joint venture already tests each crude oil shipment. It continues to be our view that crude oil by rail is a critical component of Bakken’s infrastructure and the nation’s oil economy.

We welcome sensible oversight and regulation to advanced safety. And this is a value that we share at Dakota Plains.

So with that, I just wanted to now turn over the floor to the audience to ask questions. Over to you Emily, or operator.

Question-and-Answer Session


CEO Craig McKenzie finished his prepared remarks by saying we welcome sensible oversight and regulation to advance safety, and shared value of Dakota Plains. And now, we’d be happy to take your questions. The operator then will just… (Operator Instructions). And we have a question from Jared Lewis with Northland Securities. Please go ahead.

Jared Lewis - Northland Securities

I was wondering if you could walk me through just on the visibility of the business. You had a presentation in November that had guidance for the year of $5 million to $9 million on EBITDA and the year came in at $2.4. So, kind of walk me through on just kind of what happened there and then the comfort kind of going forward on the guidance?

Tim Brady

Well Jared, this is Tim Brady. Regarding the EBITDA you stated and the EBITDA that we saw, as we previously discussed, we saw marketing, we saw the spreads between Brent and WTI significantly contract from March through October. We began as a result of seeing the spread widen, we saw, if you look at our month in December, we ended the year in marketing at $2.7 million, just for the month of December, which equated to a net income per barrel of $3.34 to us which was our highest net income per barrel since April of 2012. So really what drove that decrease in expected EBITDA was mainly the contraction on the marketing side and then also an increase in G&A that I mentioned, partially due to the expenses related to increased employees; we started the year with 3 we ended with 8 and increased legal fees and professional fees.

Craig McKenzie

Hey Jared, this is Craig. Just wanted to just echo something that Tim said. And also, it builds on some previous conversations. You brought up the forecast that was included in November. I just wanted us to bear in mind that in November at that time, we had barely even received October’s results. The nature of our marketing business is that it clears in the months subsequent to the month where the crude oil was traded. And we don’t actually get the results till actually about the last week of that following month.

So, it’s an unfortunate aspect of the crude oil trading business, but here we stand today on what’s this, March 14th, and we will know February results in about another 10 days or so. So notwithstanding we are very close to the end of Q1, I still have two thirds of performance of marketing yet to come. And so, it’s an uncomfortable part for us in telling our story. And all I can share with you is that we are on top of this because it’s a complicated business but it’s one that we are trying to simplify for both just our ability to manage it but also for the understanding of our shareholders, so you can predict our performance and then obviously respond accordingly in the market. And so therefore, while we have this volatility in marketing itself, there is also another aspect which is just the fact that it clears in the months following.

So, I’ll leave it right there, in case you have any follow up remarks, but I just wanted to at least make sure that we don’t lose sight of that.

Jared Lewis - Northland Securities

No, that’s helpful. So then I understand kind of -- so obviously the spreads bottom the beginning in the quarter, widened out significantly and continued in the January, you will get some I guess tailwinds from Q4 into Q1; in Q4, you had some headwinds essentially from Q3, is that kind of what is happening given this lag?

Craig McKenzie

Yes. There is a lag affect. So I can’t state it any more clearly than that. It’s -- since the contracts are done in advance, but the actual clearing is not done until arrears, there is a couple of months there where we are trying to piece together the exact impact of that business. But even though spreads by middle of October were starting to widen. We didn’t start to feel any effect of that until into our November, December business.

So as Tim, said in December, we had -- I guess I could call it a banner month, and it practically carried the whole year, because last year it was just a year of poor margins where our net income from operations for the marketing business, net to Dakota Plains has trailed with $1.80 or so in 2011, just $1.80 per barrel; 2012 $1.35 per barrel; and 2013 it was about $0.31 a barrel. So that is about a quarter of what it was in 2014 -- excuse me, 2012 that’s what I meant to say.

Jared Lewis - Northland Securities

Okay. And I have couple more, you are looking to average 45,000 for ‘14, do you have an estimate on what your exit rate might be at the end of this year?

Craig McKenzie

Gabe, you want to ponder on what the exit rate might be or….?

Gabe Claypool

You are asking for EBITDA exit rate or..?

Jared Lewis - Northland Securities

No, no, just on the barrel. Obviously you got 80,000 throughput capacity. I think it’s going to average 45 for the year just wondering if you might have an exit rate for the year just on the throughput?

Craig McKenzie

So, we can sustain at about 50,000 barrels a day right now, based on our tank storage. We always have to have buffer storage to allow for any operational offsets such as trains not arriving because of adverse weather. So we limit ourselves to about 50,000 barrels a day based on today’s storage, so outright that would be close to what our exit rate would be unless we choose to go ahead and expand our storage, which could take us that closure to our nameplate of 80,000 barrels a day.

But just to give you one more data point and Gabe I think mentioned it, but we just had a day, yesterday we moved 47,000 barrels a day.

Gabe Claypool


Craig McKenzie

So that gives some underpinning to the kind of rates we can’t move at present. Notwithstanding our average for the month was about 34,000 barrels a day.

Gabe Claypool

Jared this is Gabe, the only thing I would add to that is every time what Craig has referenced on the 47,000 that’s inbound, every time we load a train which is up to 120 car train, we do it in 24 hours. So when we load our train, we're loading 80,000 barrels in a single day, all day, everyday right now.

What we're talking about is the inbound logistical side of what we're comfortable with. But every train now that there is loaded another 24 hours.

Jared Lewis - Northland Securities

Okay. And then just real quick, I guess it's for you Tim on the G&A, on the legal and insurance. Were they one-time charges? I take it given you think it's going to be $6 million going forward?

Tim Brady

That's correct. Those are one-time.

Jared Lewis - Northland Securities


Tim Brady

Those were insurance deductible and the legal expense.

Jared Lewis - Northland Securities

Okay, that's right. I just want to clarify. Okay, thanks guys. I appreciate the color.

Tim Brady

You’re welcome.


And our next question is from the line of Nick Shermeta with Northland Capital Market. Please go ahead.

Nick Shermeta - Northland Capital Markets

Good morning guys. Just wanted to appreciate Gabe's hard work on the Pioneer project for everyone and the ability they had at the regulatory changes planning by the government. I have two questions; one out of the three business lines, my question is ultimately on the trucking. I mean JV as my understanding is financing the trucking and yet continuing to lose money, yet hauling in effect of four times more oil. Is the trucking demand up just being sort of a breakeven proposition at best as a compliment to the greater degree of service of the entire entity or is that possible that there be incremental income on that?

And then the second question is really something it's, articulating from numerous calls from shareholders that trying to understand the rational justification for the several million stock options given what can (inaudible) described as a meaning performance for the company’s share.

So, those questions could be addressed, I appreciate it. Thank you.

Gabe Claypool

So, Nick I'll start with the trucking side of it, Tim keeping on from those earnings and I want him get in so let you (inaudible) financing. But the 2013 we had a big year from a growth perspective and with that growth there was a lot of investments that went into the assets themselves, but is it a profitable business, yes, it was, was it where we expected, no it wasn’t is it an enabler, we don’t hope so.

I mean what we’ve learnt in the last year is that we have needed to readjust our rates, needed to adjust some of our scheduling practices and become more of an efficient operation and we’ve now done that. So we’ve learnt greatly in 2013, now I would say that we learned greatly on top of an incredibly safe year. So, being a new trucking company that has a track record that we did was very impressive. Now focusing on some of the profitability aspects is absolutely something we’ve been seeing on since late last 2013 and we’ll continue to focus on going into 2014 with something as simple as adjusting our rate structure.

So as far as so the timing I don’t know, Tim, you want to talk about.

Tim Brady

Well I can just say that we (inaudible) Nick this is Tim Brady, on the financing of trucks, you’re right regarding our joint venture partner putting the initial capital contribution in the joint venture. The trucks, 27 trucks 2 of them were capital leases the remaining balance was operating leases, putting 25% down and then 48 month leases.

Craig McKenzie

Does that answer your question, Nick?

Nick Shermeta - Northland Capital Markets

Yes. I just the trucks fleet has grown, which is phenomenal and you’re moving a lot more oil, I mean I just want to understand that this is a business where we’re going to see income given the fact that the volatility on the marketing side is constant. So we need to have two business lines transloading and trucking in my opinion that have targeted growth rates, not breakeven scenario. So, you have answered the question, I appreciate that. Just maybe I could speak to the stock options and then, of the $6 million is SG&A for 2014, is that additional stock option for officers of the Board and for officers of the company? Thank you.

Craig McKenzie

Sure Nick, I’ll let talk you through. So first of all, I’d just reiterate that it was a build out year for 2013, a build out year for the company. And so, you can translate that into we’re in growth mode. If we wanted to just take over the business the way it was, in our steady 20,000 something barrels a day, we could have actually turned in higher profit and not go Pioneer and show better results. I don’t think that’s a better proposition for shareholders. That’s why the Board authorized expanding our workforce and constructing Pioneer and going which has then enabled us to go after UNIMIN and so on and so forth. It builds on itself and we are not done yet, there is still plenty of running room.

So that’s just the nature of a growth business and we are still in the investment stage. And it’s not going to run itself, so we’ve had to go build up on our organizational capabilities. So, I wouldn’t say the company is anemic, as you described it. I would say it…

Nick Shermeta - Northland Capital Markets

I didn’t say the company was anemic; I said the stock performance was anemic which clearly is, but….

Craig McKenzie

Okay. Fair enough. The stock is doing what it’s doing for a number of factors. And I am hoping part of that will be resolved once we are listed on a national exchange and have a look at more trading efficiency. As you would know, our stock currently trades by appointment and it’s just not the most liquid stock, but that aside, we have not issued any options.

So, we took a view at the Board that restricted shares would be granted as part of the compensation, which is a normal part of the compensation to retain the talent. And so, we think restricted shares are better aligned to management and the Board with shareholders as opposed to options who just benefit from the upside. So if our stock goes down, we feel the pain also. And as far as the quantum, then -- that’s I guess we would say is market based, based on our external consultancy based on our general experience.

Again, this is building a company for the future and it’s not going to do it on its own. So, we’re proud of what we have done and I think we’ve got the right talent on board, just as you congratulated Gabe for what he did last year. That was building out Pioneer in those conditions when many other terminals have gotten it wrong, I think it stands to what we are trying to do as a company.

Nick Shermeta - Northland Capital Markets

Well, thanks for that and I do want to say that I fully understand it’s a transformative year with the Pioneer project and terrible weather. But I do want to echo what Jared said and I completely understand the nature of the business worth of 30 to 60 day overlap in terms of really not -- you’re sort of 60 days behind all the time. So, it’s very difficult for you to truly know where you’re at, and I understand that. But I do want to echo what Jared said and I think it would really help the stock especially when it is uplifted hopefully in terms of managing the expectations of the investors. So that said, I do appreciate you answering all my calls and wish you guys a good day.

Craig McKenzie

Thank you. Nick. And at risk of going on too long, I didn’t respond the part of your questions, the G&A. We are expecting to have a run rate of $5 million to $6 million this year that is both cash and non-cash and also have some provisions in it for our additional legal expense that we anticipate as part of [Lac-Mégantic].

So it’s not true of our real underlying overhead if that’s proper characterization because it does have what we consider to be some one-offs, just like 2013 had some one-off charges associated with the debt restructuring and with the hiring of the personnel in which some of it was in the form of start-up equity grants as part of their contracts.

So, I won’t elaborate, I just want to add that as well Nick. And thank you very much for your questions. I appreciate it.


And our next question is from line Richard [Dorling], a private investor. Please go ahead.

Unidentified Analyst

Yes. Hello guys.

Craig McKenzie

Hey there.

Unidentified Analyst

I had a question here that Nick brought up and on the trucking also and evidently, we just set the rate too low. And so could you just tell me who sets those rates and are you resetting those rates at a higher level now, is that our decision to go to plans or whose decision is that?

Tim Brady

Yes. This is Tim Brady. That’s a combination of us with our joint venture partner Prairie Field. And we have reset the rates effective January, a higher rates. And another thing too I wanted based Nick’s question, we’re at the point down the trucking in January repurchase, two more trucks were at 29. Now we finished the growth stage, we’re focusing on the process, we’re looking truly at efficiencies, so on sort of drivers, where we’re implementing our performance dashboards. So, we’re looking for our drivers instead of picking up 2.25 loads a day to 3.25 loads a day which will ultimately better our bottom line. So we’re looking truly for profit this year in 2014.

Tim Brady

On the trucking side.

Unidentified Analyst

Good, thank you for that. We had on the model that you’re doing the joint venture with World Fuel, the reason that their earnings were low is that that spread narrows. But I think most people think that that spread between WTI and Brent is going to remain very close. If it is a narrow spread, are we going to be able to make money? And what are you doing to change the model, or…?

Craig McKenzie

Well, anyone of us could speak to that. This is Craig, and I appreciate the question. To one part of what you just stated, the futures contracts which of course are consensus of the market view, and I’m not saying they can get it right all the time, because it changes every day. But the futures contracts are calling for about a $9 spread through July and then taking up to about $11 per barrel spread by the end of the year; I think December was $10.81 as memory serves. And then for next year, going from $11 to $13 a barrel.

So, we see that is bullish for rail, because in general terms, we think about $7 to $9 of spread being where it’s better than breakeven for the producers to go by rail over pipeline. There is a lot of dynamics that actually change that on a month-to-month basis. What we’re playing on is one aspect which is for at least half the basin for half of the producers, there is no substitute to crude by rail. So, the pipeline capacity is near 600,000 barrels a day and as Gabe outlined is set to increase in the coming years, based on construction projects that have been announced but that still leaves a large gap given that the Bakken production itself is also going up at a pace and therefore leaves a big gap between the total production from the Bakken and of course now the Three Forks relative to what the infrastructure allows for pipelines that are locked into WTI pricing.

So we’re still offering the largest access to the coastal markets. We’re still providing flexibility to go changing shipment based on market conditions. And it looks like based on the features that we’re underpinning these spreads so that we have a profitable business. But, and then I’ll go and say but, the but is that the crude by rail is still like young industry and so we’re just trying to stay on top of all the changes as they happen. And so, we couldn’t have predicted 2013’s gross margins but at the same time it looks like we’ve done everything we can such that we don’t have any regret for anything that occurred last year. And we think going forward, it will be a better business especially when we have higher throughput.

Unidentified Analyst

Okay. Last question is there is so much oil out there and certainly through that facility, there is a lot more business than 45,000 barrels a day and you might be turning away business because you are limited there. So what’s the plan to ramp that up or create more storage or be able to handle more volume through our facility?

Gabe Claypool

Yes Dick, this is Gabe. Like I mentioned before, our facility has a run rate or a throughput capacity of about 50,000 barrels a day and that’s specifically around inbound volume deliveries. We can load and do load and have to load frankly there 120 car trains in a day. So, the caveat that we would need to or the one component that we need to work on to get the higher throughput is a third storage tank. So if we want to go beyond 50,000 barrels a day, all we need to do beyond securing the volumes is build the third storage tank at the facility.

Unidentified Analyst

Are you thinking about that?

Gabe Claypool

Yes, we are thinking about it. As a matter of fact one thing we did with the first round of construction is permitted it. And the reason that’s such a big deal is because we are on federal land as all you guys know and that takes a long time to get things done. So the third 90,000 barrel storage tank was already designed into the facility, so it was engineered, at the same time we engineered tanks one and two. The permit was there so we can go and literally start building those things once the [thought] is out if we as a collective joint venture agree to go do that. And I can say that we are definitely getting a lot of market requests to want going that direction.

Unidentified Analyst

Okay. Alright, that’s the questions I have. Thank you very much.

Craig McKenzie

Thanks Dick.


And that is all the time that we have for questions today. Thank you. And I will turn the call back over to Craig.

Craig McKenzie

Okay. Well, thank you very much. I appreciate everyone’s attention today and the questions that were posed. And so this concludes our phone call. And we are looking forward to our next installment which will be the Q1 reporting if not sooner than that. Thank you very much. Have a good day.


Ladies and gentlemen, that does conclude our call for today. Thank you for your participation. And you may now disconnect.

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