Genesis Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: Genesis Energy, (GEL)

Genesis Energy, L.P. (NYSE:GEL)

Q1 2014 Earnings Conference Call

May 1, 2013 09:30 AM ET

Executives

Grant Sims - CEO

Bob Deere - CFO

Analyst

Dave Morin - Bank of America

Ethan Bellamy - Robert W. Baird & Co.

TJ Schultz - RBC Capital Markets

Cory Garcia - Raymond James

John Edwards - Credit Suisse

Michael Blum - Wells Fargo

Unidentified Company Representative

Welcome to the 2014 First Quarter Conference Call for Genesis Energy.

Genesis has three business segments. The Pipeline Transportation Division is engaged in the pipeline transportation of crude oil and carbon dioxide. The Refinery Services Division primarily processes sour gas streams to remove sulfur at refining operations. The Supply and Logistics Division is engaged in the transportation, blending, storage and supply of energy products including crude oil, refined products, and CO2. Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

During this conference call management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at www.genesisenergy.com where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Karen Paper, Chief Accounting Officer.

Grant Sims

Good morning and welcome to everyone. This morning we reported available cash before reserves of $53.4 million providing 1.1 times coverage of the distribution we will pay May 15th of this year. A distribution of $0.55 per unit represents the 35th consecutive increase in the quarterly distribution 30 of which have been greater than 10% over the prior year’s quarter and none of which have been less than 8.7%.

From an operational point of view we’re pleased with our overall performance. We continue to see increased activity in the Gulf of Mexico which benefits our offshore pipelines and our NaHS sales volumes exceeded 40,000 gross standard tons. While negative for the third quarter in a row we believe based upon our most recent performance we have transitioned our operations and our heavy fuel oil business in terms of cost structure size and scope to operate profitably in future periods regardless of the current market conditions.

In March we completed and commissioned our pipeline connecting our Port Hudson Terminal on the Mississippi River to the ExxonMobil Baton Rouge Refinery. We continued construction on related facilities at Scenic Station, a unit train crude oil unloading facility, which will be connected to that pipeline and should become operational late June or early July or early July.

We also continue to move forward on our other projects in south Louisiana. Our unit train unloading facility at Raceland, scheduled for completion in early 2015, and our new crude oil, intermediates and refined products import/export terminal that will be pipeline-connected to existing deepwater docks at the Port of Greater Baton Rouge, scheduled for completion in mid-2015. The SEKCO pipeline in the deepwater Gulf of Mexico, a joint venture with Enterprise Products, should be mechanically complete by July 1st and contribute financially in the third quarter. Going into the second quarter of 2014 we know we will have to deal with a couple of one time negatives. Two of our England marine barges recently were grounded on a sand bar in the Mississippi River about a 100 miles south of St. Louise. There were no injuries and absolutely no spill or other environmental impact.

However, our cost insurance deductibles and loss revenue opportunities will negatively impact our second quarter margin by upwards of $750,000. We also will incur tank repair expenses at cost of approximately $500,000 to repair a sodium hydrosulfide tank at one of our facilities that was damaged during operations. Again there were no injuries or environmental impact associated with this event.

Additionally one of the major fields dedicated to our Cameron Highway Pipeline has just gone into a 45 to 60 day turnaround. While we believe this is the last turnaround of such deepwater production facility before resumption of development drilling, we would expect it to negatively impact our second quarter by up to $0.5 million.

The expected ramp in volumes from our other growth initiatives in Texas, Wyoming, Mississippi and Florida which are in various stages of startup should be increasingly recognized in our financial performance in the second half of 2014 and cumulatively accelerate our performance into 2015. As a result we believe we are well positioned to continue to achieve our goals of delivering low double digit growth and distributions, maintaining a better than investment grade leverage ratio and delivering an increasing coverage ratio, all without ever loosing focus on our absolute commitments of safe, responsible and reliable operations.

With that, I’ll turn it over to Bob.

Bob Deere

Thank you, Grant. In the first quarter of 2014 we generated total available cash before reserves of $53.4 million representing an increase of $4.7 million or 9.7% over the first quarter of 2013. Adjusted EBITDA increased $5.8 million over the prior year quarter to $66.6 million. Net income for the quarter was $29.8 million or $0.34 per unit compared to $22.8 million or $0.28 per unit for the same period in 2013.

Reported results from our pipeline transportation segment increased $2.9 million or 11% between the first quarter periods. The increase was primarily the result of higher volumes transported in our offshore pipelines as a result of additional wells being connected to the pipeline in the existing fields that they serve. In the first quarter of 2014 crude oil tariff revenues of onshore crude oil pipelines increased primarily due to upward tariff indexing of approximately 4.6% for our FERC regulated pipelines effective in July 2013.

In addition, our Louisiana pipeline system, which consists of our new 18-mile 24-inch diameter crude oil pipeline connecting Port Hudson to the Baton Rouge Scenic Station and continuing downstream to the Anchorage Tank Farm began operations in the latter part of the first quarter of 2014. Those increases were somewhat offset by a decrease in volumes on our Texas pipeline system.

Refinery services segment margin increased $2.9 million or 16% between the first quarter periods as a result of a 12% increase in NaHS sales volumes to a total of 40,900 dry short tons for the quarter. NaHS sales revenues increased primarily as a result of the increase in the NaHS sales volumes. Such an increase was partially offset by a decrease in the average index price for caustic soda which is a component of our sales price and other components as follows.

The pricing in our sales contracts for NaHS includes adjustments for fluctuations in commodity benchmarks, freight, labor, energy costs and government indexes. The frequency at which these adjustments are applied varies by contract, geographic region and supply point. The mix of NaHS sales volumes to which these adjustments applied reduce NaHS revenues in the first quarter of 2014.

Supply and logistics segment margin increased by $500,000 or 2% between the first quarter periods. In the first quarter of 2014, we continued to experience negative impacts as we worked through the dislocations in the prices and margins for the underlying commodities in our refined products business. We have transitioned our operations to a level and structure designed to operate within current market conditions in terms of costs, size and type of activity.

Interest cost, corporate general and administrative expenses, maintenance capital reserve and income taxes to be paid in cash effect available cash before reserves. Interest cost for the first quarter of 2014 increased by $1.4 million from the first quarter of 2013 primarily as a result of increased borrowings for acquisitions and other growth projects, a portion of which were financed with our issuance in the first quarter of 2013 of $350 of senior unsecured notes bearing interest at 5.75% per annum. This increase was net of capitalized interest costs attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate, general and administrative expenses were comparable between the two quarters decreasing by $200,000. In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense which increased $4.2 million between the quarterly periods primarily as a result of our acquisition of our offshore marine transportation assets and recently completed internal growth projects. In the 2014 quarter, our derivative positions resulted in a $3.9 million non-cash unrealized gain compared to a $100,000 non-cash unrealized gain in the 2013 quarter.

Grant will now provide some concluding remarks to our prepared comments.

Grant Sims

Thanks Bob. Our underlying business fundamentals remain solid although not without a few challenges here and there. Going forward we expect to realize an increasing contribution from our organic projects [indiscernible] operational experienced increasing volumes. Our two largest projects scheduled for completion in 2014 are SECKO joint venture with Enterprise Products and our project around ExxonMobil’s Baton Rouge refinery complex will contribute in 2014 and accelerate into 2015.

We believe we are well positioned given the current available capacity in our offshore oil pipelines to benefit in the latter part of this decade from the dramatically increasing level of development activity in the deepwater Gulf of Mexico.

And finally we believe that there is still opportunities arising from the changing fundamentals in North American crude oil production and refining. As a result we are well positioned to continue to achieve our goals of; one, delivering low double digit growth and distributions which we have increased for 35 consecutive quarters, 30 of which have been 10% or greater over the prior year period and none less than 8.7%; two, maintaining a better than investment grade leverage ratio; and three, delivering an increasing coverage ratio, all without ever losing sight of our absolute commitment to safe, reliable and responsible operations.

With that I’ll turn it back to the moderator for any questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question and answer session. (Operator Instructions) Thank you. Our first question comes from the line of Dave Morin with Bank of America. Please proceed with your question

Dave Morin - Bank of America

Hi, good morning everyone. Couple of questions, one I guess on Longhorn, I was wondering if you can talk a little bit more about that announcement in terms of what the next steps are there, is there sort of an open season and give or take by which you'll -- if you could be making a decision or not and then I know the CapEx likely depends on what customers come back with, are there any I guess ballpark CapEx numbers you can talk about for that project potentially?

Grant Sims

We filed what we call the (cash risk brass) [ph] open season which is from the Express Tank Farm in outside of Casper to our facility at Longhorn as I recall the open season expires on May 30th. We have -- based upon the feedback from the customers we will kind of size things if you will, associated with that (same units) [ph] successfully accepted by the marketplace. Order of magnitude is approximately plus or minus 60 miles pipeline, so it could be in the order of magnitude of plus or minus 75 million to 100 million again depending upon a number of different factors. So we would anticipate wrapping that up again assuming adequate customer demand responding to the open season hopefully by the end of this quarter.

Dave Morin - Bank of America

Great, thanks Grant. And then on the SECKO financial contribution for the third quarter, is the expectation that it’s really just going to be demand fees at that point? Are you actually expecting a volumetric component to kick in third quarter as well?

Grant Sims

Obviously it’s a function of when the operator and working interest owners initiate production. We would anticipate as we know it right now that we would see actual volumes flow in the third quarter but because of the nature of the contractual arrangements and the fact that in essence what we count and we reconcile to in essence our non-GAAP measures and EBITDA and available cash it’s a distribution out of the joint venture. So any throughput that would occur as for instance in September, we would not have the cash at either the SECKO level or the Poseidon level to distribute out by September 30th.

Dave Morin - Bank of America

Got it, and then last question from me just on heavy fuel oil business. I am just wondering in terms of the improvement you’re expecting there does is that lesser or more on the margin line being less of a drag or is that something that (is going to) [ph] show up in OpEx or both?

Grant Sims

We addressed our cost structure as we said but basically we would anticipate and we referenced it for three quarters in a row, it was actually a negative margin contributor. So -- and again based upon recent performance, we believe that it will flip over to -- and of course in breakeven and historically a positive contributor.

Operator

And the next question comes from the line of Ethan Bellamy with Robert W. Baird. Please proceed with your question.

Ethan Bellamy - Robert W. Baird & Co.

Good morning gentlemen. It looks like (shops) [ph] has been kicking butt out every quarter in the last year but still it just, it’s like about 38% utilization. Is that trend of growth and volumes going to continue and what should we be thinking about in terms of utilization on that asset?

Grant Sims

So again, I think we referenced in our prepared remarks that we just recently are aware of a 45 to 60 day turnaround at one of the fields attached to it but after that we believe that that is the last significant turnaround and there’d be a resumption of development drilling.

It’s a fairly lumpy process in the offshore. I mean you can -- if you have existing production facility installed in the deepwater, then you bring on a development well that can be 15,000 to 20,000 barrels kind of all at once, but have significant incremental 100,000 barrels throughput capabilities requires in all likelihood the installation and contracting of additional deepwater production facility. So we would think that based upon what we know now that we would see a slight decrease in second quarter volumes and then a reasonably steady ramp over the next couple of years up to order of magnitude 250 KBD to 300 KBD in over the next six to eight quarters as the development activities just fill up the installed existing capacity.

Ethan Bellamy - Robert W. Baird & Co.

And just in terms of the second quarter impact on the turnaround, is that -- I mean just in terms of modeling the quarter right, is that going to take out half the volumes despite the quarter?

Grant Sims

No, it wouldn’t do that, it would probably a quarter of magnitude and perhaps is 20% or so.

Operator

Our next question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed with your question.

TJ Schultz - RBC Capital Markets

Good morning. Just first on the Jay System down sequentially, I thought we may see some tick up after the refinery turnaround in the fourth quarter, so maybe just color around activity in the Walnut Hill and expectation for volumes into Jay System as we move through the year?

Grant Sims

Really the sequential year over year drop was and I think we talked about a little bit on the fourth quarter call that we expected few recurrings to be unloaded at Walnut Hill and therefore moved on the Florida System, we would expect as we go through the year that we are hopeful that that would increase and not only have a contribution to supply and logistics margin but also throughput by virtue if that’s where we report the rail unload as well as increase we put on the Jay System.

TJ Schultz - RBC Capital Markets

Okay. What are you seeing right now during activity in the Walnut Hill?

Grant Sims

At this point it’s generally consistent with the average activity in the first quarter.

TJ Schultz - RBC Capital Markets

Okay. South Louisiana, what’s your exposure to this [indiscernible] range shale, I mean we’re seeing good producer wells, seems like things are picking up quite a bit. I know you handled some of the early TMS volumes in the Hudson but just thoughts around continuing the cash system in those volumes whether trucking or into the terminal in place?

Grant Sims

We are obviously keenly interested in the TMS, we have three logical facilities kind of equidistance from kind of what I would call the fairway which is both our truck station at Liberty and Mississippi or our Mississippi Pipeline System ties into the cap line system, are activities that matches which is basically associated with bringing in very heavy [indiscernible] products out of Canada that need a good blend material like crude oil blend material and then obviously Port Hudson. So, we’re very keenly interested in keeping an eye on it and being very active in terms of commercial discussions and providing near term services for the operators in that area.

Operator

Our next question comes from the line of Cory Garcia with Raymond James. Please proceed with your question.

Cory Garcia - Raymond James

Good morning fellows, thanks for the time. If we take into consideration sort of the discounts we've seen out in Midland this last quarter which I guess it’s really a blowout in late February, but would you guys be able to provide any color regarding the anticipated step up in volumes if any out of Wink and I recognize that you go and just recently scaled up that facility to handle unit trend capacity. But any color surrounding volumes out of that facility today would be helpful.

Grant Sims

We’ve just -- as you pointed out Cory, we've just kind of lined out the -- at least the full capabilities in terms of accepting truck volumes at this Wink station and putting those in tank and loading unit trains. You are correct that we are seeing given the differentials and the need to get to growing production and [indiscernible] the kind of what I would recall the western part of the Permian play out of the basing. So we are seeing increased activity in and around an increased interest at Wink that will probably show up in the second quarter.

Cory Garcia - Raymond James

Any specifics for the volumetric even on a percentage basis maybe.

Grant Sims

Well, anything on a percentage basis from zero is a big growth.

Cory Garcia - Raymond James

That’s a fair point.

Grant Sims

So no, I think we’ll probably discuss this in the second quarter.

Cory Garcia - Raymond James

Okay, great. And I guess if we switch over to NaHS, given the improved line of sight or I guess [indiscernible] rather up in loading capacity, up in Canada, I was curious if you guys have seen any customers coming to you in terms of opportunities to backhaul fill you in. Is it still little too early to really talk about how that process is going. We haven’t heard about it much yet. I am just wondering if the conversations get started.

Grant Sims

The conversation is occurring, but to-date we’ve not done anything, any backhauls from that just.

Operator

Our next question comes from the line of John Edwards with Credit Suisse. Please proceed with your question.

John Edwards - Credit Suisse

Good morning everybody. I’m just curious Grant, you're talking about the transitioning of the fuel oil business and you should be in a position to make it at least break even or profitable. If you could maybe just mention about how much you’ve had to spend on that and maybe how much of that is showing up in the quarterly numbers?

Grant Sims

We really didn’t break it out but as we said, it was a drag in the third quarter of ’13 and the fourth quarter of ’13. And that it probably -- it was a little bigger drag in the first quarter that included just dealing with some stuff and some cost associated with rightsizing to put it into a position where on prospective basis we think it will be a positive contributor.

John Edwards - Credit Suisse

Okay. Well, I’m just trying to get an idea sort of for modeling what kind of potential margin improvement we might be looking at, just kind of ballpark magnitude of the drag?

Grant Sims

Nothing that we’ve ever released.

John Edwards - Credit Suisse

Okay, fair enough. All right. And then I am just curious, a lot of other companies have been talking about weather impacts, to what extend were you impacted by weather during the quarter?

Grant Sims

We saw a little bit of reduced trucking activity out in West Texas Southern Eastern New Mexico in the kind of in Wyoming and in the late January-February timeframe, that’s really over the quarter, it wasn’t any kind of material impact whatsoever.

John Edwards - Credit Suisse

All right. And then you mentioned in the disclosure on maintenance capital spend versus utilize and but noted that and I am just -- how should we -- I mean you didn’t put the spend amount in the DCF calculation, but I am just a little confused on that.

Bob Deere

John, beginning in this quarter we have changed our method for including maintenance capital in calculating available cash, on a go forward basis we’ll include maintenance capital as utilized and as we’ve disclosed in our press release and our 10-Q, we believe that kind of the most useful kind of quarterly maintenance capital utilized amount is really that amount of previously incurred maintenance capital expenditures that we realized or utilized during the relevant quarter and that which would also be equal to the sum of the maintenance capital expenditures that we’ve incurred for each project to our component in previous quarters basically allocated ratably over the useful life of those projects or components.

Grant Sims

Bob I’ll give a kind of a real world example is the rationale for it and it really became evident in the -- when we significantly expanded our marine operations, if we spent $500,000 or $600,000 in essence completely repowering an (inland push boat) [ph] if we do that, then basically we change the oil and the filters for 35,000 to 40,000 hours of run time which is basically on average about a five year result that it made more sense for us recognize that 500,000 or 600,000 over subsequent quarters in which we would realize the benefit of having expended that capital, so that’s kind of an example of the rationale. So as Bob was saying, I mean we will present it on the more equivalent of the cash expense and the reconciliation of available cash but over the useful life of the major capital expenditure.

John Edwards - Credit Suisse

Okay, great. And then just kind of following up Dave’s question on SECKO, do you have a line of sight on what you think the volume ramp up will be after that goes into service, kind of going forward like I guess into ‘15?

Grant Sims

It would be not atypical that as part of the development cycle that a number of development wells have been predrilled, so it would be reasonable to assume a fairly rapid, once it comes on, a reasonably rapid within a quarter or two of getting up to close to design capacity of 80KBD.

Operator

(Operator Instructions) Our next question comes from the line Michael Blum with Wells Fargo. Please proceed with your question.

Michael Blum - Wells Fargo

Thanks. Good morning everybody. I wonder if you could just comment or give us your thoughts on given all the sort of announced regulation and coming regulation around crude by rail kind of how you’re thinking about that if you’re seeing any direct impact to your business and how you think about perspective crude by rail terminal projects given what seems to be a slightly changing environment?

Grant Sims

I think that we believe that the rail is a long term solution of getting the right barrel to the right location. We think it’s incumbent upon all players to as we say at least two or three times in these deals that we’re committed absolutely to safe responsible operations that we will as an industry figure it out whether or not its operating conditions on railroads or the design of tank cars that it’s something that’s going to be here for a long time and that there is incentive in for everyone to figure out how to do it as safe and responsibly as possible. From our perspective we just -- we’re typically not involved in the trade if you will, we clip a coupon for loading railcars and unloading railcars and that’s kind of how we participate in it and similar to a pipeline operator while the crude is in transit it’s a practical matter, it’s in the possession of the transporter i.e. the railroad, just like it would be in the pipeline and the railroads will figure out how to do it safely.

Michael Blum - Wells Fargo

Okay, thanks that’s helpful. And then just if you can just tell a little bit more about the trends that you’re seeing in your onshore crude oil pipeline business and what’s driving that, I mean particularly I guess Texas was up pretty meaningfully sequentially but still down year over year, Mississippi is sort of down both sequentially and year over year, just talk about kind of what the dynamics are there right now?

Grant Sims

Texas is -- we’ve been integrating some new facilities which are being constructed and with a turnaround that two of the refineries that turnarounds that kind of contribute to those in the first quarter and we are seeing in the second quarter increased volumes as everything kind of gets lined out. So that one Texas should continue to sequentially and then prospectively see increased throughputs. The Jay System we talked a little about, that’s really driven on a period over period comp basis by activity of rail barrels, the local production is hanging in there, so that’s really what’s driving that and the Mississippi system is really just the gathering system inside we’re seeing a slight declines in the total production at the dedicated [indiscernible] there, it’s not material in the overall scheme of things.

Operator

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Grant Sims

Well, thanks everybody for joining and we’ll talk to you in another three months or so if not sooner. Thanks.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Genesis Energy (GEL): Q1 EPS of $0.34 misses by $0.01. Revenue of $1.02B (+1% Y/Y) misses by $340M.