NuStar Energy's (NS) CEO Brad Barron on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: NuStar Energy (NS)

NuStar Energy L.P. (NYSE:NS)

Q2 2014 Results Earnings Conference Call

July 25, 2014, 10:00 a.m. ET

Executives

Chris Russell - Treasurer and Vice President, IR

Brad Barron - President and CEO

Tom Shoaf - Executive Vice President and CFO

Analysts

Steve Sherowski - Goldman Sachs

Jeremey Tonet - J.P. Morgan

Brian Zarahn - Barclays

Brian Lasky - Morgan Stanley

Cory Garcia - Raymond James

Mohit Bhardwaj - Citigroup.

Matt Niblack - HITE Hedge Asset Management.

Selman Akyol - Stifel

John Edwards, Credit Suisse

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the -- our Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Chris Russell, Treasurer and Vice President of Investor Relations with NuStar Energy you may begin your conference.

Chris Russell

Thank you. Good morning, everyone and welcome to today’s call. On the call today are NuStar Energy L.P. and NuStar GP Holdings, LLC’s President and CEO, Brad Barron; Executive Vice President and CFO, Tom Shoaf; and other members of our management team.

Before I get started, I would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements within the meaning of the federal securities laws.

These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission and will not be updated to conform to actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliation of these non-GAAP financial measures to U.S. GAAP maybe found either in our earnings press release or on our website.

Now let me turn the call over to Brad.

Brad Barron

Thanks, Chris. Good morning and thanks for joining us today. I’m happy to report that as a result of our ongoing strategic redirection our second quarter results were strong as we reported in quite some time. For the first time since the third quarter of 2011, we have covered our quarterly distribution and our coverage ratio for the quarter was 1.1 times. In addition, we fully covered the distribution for the six months ended June 30, 2014.

Higher than expected throughput volumes and our pipeline and storage segments as well as some maintenance expenses and liability capital spending that slipped to the back half of 2014 caused our earning per unit and distributable cash flow containing operations to exceed our initial second quarter expectations. Throughputs were higher than we anticipated primarily as a result of stronger than expected crude activity on our Eagle Ford system.

Our newly constructed dock in Corpus Christi that became operational back in February, the completion of phase 1 of our South Texas crude oil pipeline expansion in May and increased volumes on our [indiscernible] line that we completed in the third quarter of last year all contributed to the increased throughputs during the quarter.

The higher than expected throughputs obviously had a positive impact on pipeline segment but they also benefited our storage segment results via the increased volumes at our Corpus Christi North Beach Terminal.

As I have mentioned before, at the beginning of the year, I made it clear to our employees that we have the opportunity and the ability to return to full distribution coverage in 2014 and I asked them to focus on that goal. And with these exceptional second quarter results and year-to-date results we are well positioned to cover our distribution for the full year 2014.

While we are pleased with our results to date and the outlook for the remainder of the year, we continue to work diligently on identifying and developing the next set of internal growth project that will allow us to continue to increase our earnings and cash flows into 2015 and beyond.

We continue to explore additional growth opportunities in the Eagle Ford Shale as well as opportunities in other shale regions that could be synergistic with our existing assets. In addition, we are currently working on developing projects at several of our terminal facilities. These projects include new tank construction and rail car offloading projects. Hopefully over the next couple of months, we’ll be able to share some additional details also on these projects. Now, I’m going to turn the call over to Tom Shoaf, NuStar’s CFO and he can provide you with some additional details on the second quarter results.

Tom Shoaf

Thanks, Brad, and good morning, everyone. This morning we announced that EPU for the second quarter was $0.56 per unit higher than the $0.28 per unit earned in the second quarter of 2013 and exceeding our guidance range of $0.35 to $0.45 per unit. In addition, DCF from continuing operations available to the limited partners for the quarter was $1.20 per unit and again higher than $0.73 per unit generated in the second quarter of 2013 and our guidance range of $0.85 to $0.95 per unit.

As Brad mentioned earlier, the main drivers for our improved results were strong throughput volumes in our pipeline and storage segments as well as maintenance and expenses and the liability capital that swept into the back half of 2014.

EBITDA in our pipeline segment increased to $80 million, $12 million higher than the second quarter of 2013. Overall, we experienced a 17% increase in our total throughout and a 21% increase in total revenues for the pipeline segment.

Throughputs on all of our crude oil pipeline system increased 22% to 427,000 barrels per day as the segment continued to benefit from increased Eagle Ford throughput and decreased turnaround activity at on of our customer’s refinery.

Throughputs on our Eagle Ford crude oil pipeline systems increased 24% from about 175,000 barrels per day in the second quarter of 2013 to around 218,000 barrels per day in the second quarter of 2014, primarily due to the May completion of Phase 1 of our South Texas crude oil pipeline inspection, expansion which added approximately 35,000 barrels per day of capacity to the system and also the third quarter of 2013 completion of our [Poni] to Oakville line.

Throughputs on our refined products pipeline increased 13% to 521,000 barrels per day also due to increased turnaround activity at one of our customer’s refineries and pipeline due to more favorable weather conditions.

For the second quarter, the storage segment generated $76 million of EBITDA, up $5 million from last year. Throughput volumes increased 10% while throughput revenues were up 17% due to increased activity at our Corpus Christi North Beach Terminal which continues to benefit from the increased Eagle Ford crude volumes shipped on our pipeline system.

Storage lease revenues were down slightly compared to last year’s second quarter due to a reduced demand for Westcoast storage and the narrowing of LLS to WTI spread which impacted both our profit sharing benefits and unit train demand at our St. James terminal.

Our fuels oil marketing segment earned $5 million of EBITDA during the quarter, slightly higher than the $3 million of EBITDA generated in last year’s second quarter. Higher gross margins and lower operating expenses in our bunkering operations were the main drivers for the segments improvement.

Equity and earnings and joint ventures were $3 million for the quarter versus the negative $10 million recognized in the second quarter of 2013. Equity and earnings and joint ventures now relate solely to our 50% interest in the Linden, New Jersey storage terminal. If you recall we as I said our 50% of the asphalt joint venture back in February of 2014 which accounted for the majority of our negative equity and earnings and joint ventures in the second quarter of 2013.

NuStar’s G&A expenses were $23 million, or $3 million higher than the second quarter of 2013, primarily due to the accounting compensation related cost as a result of higher average unit requirement.

Our interest expense net of interest income was $33 million, up $4 million from last year’s second quarter. This increase was mainly due to the higher borrowing costs associated with the August 2013 issuance of $300 million senior notes. NuStar’s year end debt balance was $2.7 billion, while our debt-to-EBITDA ratio was at 4 times.

In regard to the second quarter 2014 distributions, NuStar Energy’s Board of Directors declared a distribution of $1.095 per unit and the distribution will be paid on August 11. NuStar GP Holdings Board declared a second quarter distribution of $0.545 per unit which will be paid on August 14.

Now, let me spend a few minutes talking about our projections for the third quarter of 2014. Our third quarter EPU, EBITDA and DCF results should exceed the results from the same quarter last year.

At the segment level, third quarter EBITDA results in the pipeline and storage segment are projected to be higher than last year’s third quarter. Continued increases and throughputs in the Eagle Ford shale as a result of the May completion of Phase 1 of the South Texas crude oil pipeline expansion should contribute to higher EBITDA on our pipeline segment as well as increased storage segment throughput revenue as a result of Corpus Christi North Beach Terminal.

Results in our fuels marketing segment should be higher than the third quarter of last year due to stronger performance from our bunkering operations. During the third quarter, we expect G&A expenses to be in the range of $26 million to $27 million, depreciation and amortization expense around $46 million to $47 million and interest expense in the range of $32 million to $33 million. Based on these projections, third quarter earnings per unit should be $0.55 to $0.65 per unit while distributable cash flow from continuing operations per limited partner unit should be in the range of $1.05 to $1.15 per unit.

With regard to segment EBITDA guidance for the full year 2014, we expect to continue our pipeline segment EBITDA to be around $40 million to $60 million, higher than 2013 and our storage segment EBITDA to be comparable to 2013 storage segment adjusted EBITDA.

2014 EBITDA results in our fuels marketing segment are now expected to be in the range of $20 million to $30 million. Our 2014 strategic capital spending has been updated to reflect the deferral of spending from some of our key growth projects into 2015 and is now expected to be in a range of $330 million to $350 million.

Our 2014 reliability capital spending guidance is still projected to be in the range of $35 million to $45 million, although based on actual expenditures today we anticipate our full year spending will be at the lower end of that range.

Our quarterly coverage ratios for the remainder of the year should be at lower levels than those reported in the second quarter, however, let me reiterate we remain on track to cover the distribution for the full year 2014.

And now, I’’ turn it back over to Brad.

Brad Barron

Thanks, Tom. Let me just add as most of you know we had a lot of great news over the past couple of quarters and I’m extremely pleased that the market has taken notice with both NS and NSH units recently closing at some of the highest levels in our history.

Our employees have taken the heart to message from management that obtaining a one time cover is our number one priority; with their hard work and dedication we as a company are working to make that a reality. Let me turn it back to Chris and the operator, so that we can open it up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steve Sherowski. Your line is open.

Steve Sherowski - Goldman Sachs

Hi good morning. With all this talk about [condensate] exports and just given your strong position in the Eagle Ford and also atleast my view that you have the most condensate ready export facility at your Corpus Christi dock. Would you just mind talking a little bit about potential opportunities going forward and how you could leverage the existing strong position that you have?

Brad Baron

Sure, Danny – he’s our Senior Vice President of Business Development and Danny you know.

Danny Oliver

Sure. We are actually working at a couple of specific opportunities in that regard. We are pleased that we decided from the very beginning to design a segregated system so that we can handle several different segregations of crude oil in our system. Well the projects that we are working through now or just to add basically another segregation for lets call is process crude and we are working some specific projects with customers to do that. They will take a little bit of time to only to add some extra storage to keep all of that segregated that is moving forward as quick as we can.

Steve Sherowski - Goldman Sachs

Okay. Thanks for that. And then just jumping over to your storage segment. It looks like your OpEx came down atleast relative to previous quarters. How sustainable is that going forward and how should we really be thinking about that over next several quarters?

Tom Shoaf

I think it will pick back up Steve as we go through the last half of the year. And as Brad mentioned some project just got pushed back into the last half of the year and you know I think it will probably, I think the historical levels volumes were reasonable level going forward.

Steve Sherowski - Goldman Sachs

As per -- short segment in operating expenses?

Tom Shoaf

Yes.

Steve Sherowski - Goldman Sachs

And a final quick question. Is there an increased charter out there about the potential of the region of the Niobrara project, would you mind just talking about that and just what your plans are to that pipeline.

Brad Baron

Sure as you are aware we were involved in an open seasonal project around two years ago, about two years ago. And at the time the Niobrara it was just not far enough or long in development to generate sufficient interest. We have revived a project and we are working on that diligently and we hope that’s one of the projects we hope you know atleast by the next earnings call we hope to have a lot more to talk about, but it’s still in the development stage.

Steve Sherowski - Goldman Sachs

That’s great. That’s it from me. Thank you.

Operator

Your next question comes from the line of Jeremey Tonet. Your line is open.

Jeremey Tonet - JPMorgan

Congratulations on a very strong quarter.

Brad Barron

Thank you.

Jeremey Tonet – JPMorgan

I was just wondering if you could remind us of any seasonality in the fuels business. It seems like you are tracking towards the top end of that guidance so far. So I just wondering if there’s anything you see in the back half of the year that make you think that may not be as strong as first half of the year?

Tom Shoaf

The most seasonal piece of that business is our -- we think lending operations which the majority of that occurs in the fourth quarter. But it’s a pretty -- that’s probably the most reliable piece of that segment. Everything else is pretty much -- there is not a lot of seasonality to it on the bunk think.

Chris Russell

Okay. There’s probably not a lot of upside or downside as the guidance that we put out there from a seasonality standpoint.

Jeremey Tonet – JPMorgan

Got you. Thank you. And I was just -- I want to follow-up on process cadency, potentially opportunity that you guys are speaking about. And I just wondering, if you might be able to talk a little bit on what type of CapEx spend or what type of profit this could generate? Is there chances could be pretty more sizeable going forward as far as the opportunities are here?

Tom Shoaf

I think it’s a significant opportunity. I mean, capital -- we’ve got the system -- the pipelines in place. There maybe some expansions, but it mostly just adding some storage for an extra segregation which won’t be that significant relative to the opportunity. I don’t think.

Jeremey Tonet – JPMorgan

Okay. Great. And then, as far as the…

Tom Shoaf

I don’t want to comment on the profitability in EBITDA.

Jeremey Tonet – JPMorgan

That makes sense. Fair enough. And then as far as South Texas Phase 2, I just wondering if you could maybe be able to update us as far as our customer interest there and filling up all the capacity that you have come on line?

Tom Shoaf

We have strong interest on that. We’ve signed portion of that second phase already. I think we’re very close in our negotiations as to signing up the remaining balance of that expansion. And we’re still anticipating that coming into service about second quarter of next year.

So, between now and then, I think you’ll see us in the third quarter ramp up, continue to ramp up on volumes until we get near or at our current capacity. And then we’ll hop in, the next step change will be when that second phase goes in the service next year.

Jeremey Tonet – JPMorgan

Okay. And then pivoting over to the storage side, I just wondering if you had any thoughts as far as other expansion opportunities with the terminals out there, specifically Vancouver as well, if you see any opportunities there?

Tom Shoaf

We do. We see -- we’re working couple of opportunities both on the East Coast, actually up in Canada at our Tupper facility and in Vancouver for some crude by rail projects. We’re working them very hard. They’re real opportunities. But again in the development stage, so not a lot we can say in terms of detail.

Jeremey Tonet – JPMorgan

Okay. That’s helpful. And then last one from me, just wondering about the maintenance CapEx just wondering what’s driven the variance that you see now versus original plan, is it just timing or is there something else in play?

Tom Shoaf

It’s just timing.

Jeremey Tonet – JPMorgan

That does it for me. Thank you very much.

Operator

Your next question comes from the line Brian Zarahn. Your line is open.

Brian Zarahn - Barclays

Good morning.

Brad Barron

Good morning.

Brian Zarahn - Barclays

In the storage business is that -- are lease revenues down year-over-year. They are up from the first quarter. How should we think about the -- is that a reasonable run rate, in other words re-contracting in first quarter, but is the second quarter a reasonable run rate for the storage lease revenues?

Chris Russell

Yeah, Brian, this is Chris Russell. Yeah. I think it is. It’s down year-over-year largely due to the fact we had the profit-sharing benefit in the second quarter last year, same change, and we didn’t have much of that all in the second quarter this year. But I think yeah, I think your run rate going forwards should be pretty good with second quarter this year -- pretty consistent with the second quarter this year, I would say.

Brian Zarahn - Barclays

And then also on volumes on the storage segment, approximately how much of throughput was from Corpus Christi?

Tom Shoaf

Of the total throughput or the increase?

Brian Zarahn - Barclays

Total throughput.

Tom Shoaf

It should be close to just under 200,000 barrels I believe.

Brian Zarahn - Barclays

Okay. That’s helpful. And then just on the T&D payments and DCF reconciliation, is there additional adjustments you expect for the remainder of the year or is it more of second quarter then?

Tom Shoaf

For the T&D that goes on each quarter. The reservation fee goes on each quarter for the rest of the year. The T&D just depend on the volume that the customers putting through the facility, right. We expect them -- we’re forecasting that they will meet their minimum throughput.

Brian Zarahn - Barclays

Well, of the $4 million, is that primarily T&D payments?

Chris Russell

The $4 million its reservation fee with OXY and the T&D payment.

Brian Zarahn - Barclays

Okay.

Chris Russell

And then your question on Corpus, Brian, it’s actually 150,000 barrel a day.

Brian Zarahn - Barclays

150,000. Okay. Thank you. And then on -- you make great progress in covering your distribution and you’re seeing now good visibility for the remainder of the year. How do you think about potential distribution growth medium and longer term?

Brad Barron

You know, what we have always said is, like I said, our number one priority is covering the distribution for this year. So once we achieve that, and then probably second priority on that is securing distribution going forward. So I’d like to see several quarters of covering a distribution before even begin to look at increasing it.

Brian Zarahn - Barclays

Thanks for the color.

Operator

Your next question comes from the line of Brian Lasky. Your line is open.

Brian Lasky - Morgan Stanley

Hi. Good morning, I was wondering if you can just provide a quick update on the 12-inch line and if you made any progress contracting the remaining portion?

Tom Shoaf

Nothing new contracted. We are working with some customers on doing just that, but nothing completed yet. And just a reminder, we’ve got about two-thirds of that line guaranteed with our base customer. So that remaining one-third we’re pursuing as quickly as we can.

Brian Lasky - Morgan Stanley

And then this quarter your storage and pipeline obviously came in a little bit above where you guys expect yet you kind of maintain your full year guidance. Is that just kind of conservatism? Is it kind of more kind of some of the transitory stuff that you guys mentioned before or there’s some other type of offset that we should be thinking about there?

Tom Shoaf

No. I mean, yeah, it was a little bit higher as we’ve said before. We had some throughputs, higher throughputs coming from Eagle Ford, which helped out the second quarter. And then we had some costs that just slipped in to the back half of the year. So, I think it’s just really a lot of it is timing and all that, so I think that’s why we’re keeping our full year guidance where it is.

Right now I don’t think we’re trying to be overly conservative, but I think we just have some timing dips there that are kind of moving around quarter-to-quarter.

Brian Lasky - Morgan Stanley

Got it. Thank you.

Operator

Your next question comes from the line of Cory Garcia. Your line is open.

Cory Garcia - Raymond James

Good morning, I appreciate the incremental color. Quick question I guess on the push out that we’ve seen in the organic CapEx budget. Is it fair to say that its really more of sort of redefining or maybe some reengineering of your 2015 project or is it maybe some natural growing paints within the Eagle Ford that you guys are seeing. Just any color that you guys will be able to provide would be helpful?

Tom Shoaf

None of that, I mean, it’s absolutely just the timing of getting things done. The work schedules and things like that. So there’s really no change in what we’re doing or how we’re doing. It is just basically it just the ability to get things done in the timing of those projects.

Cory Garcia - Raymond James

Got it. And when do you guys expect to sort of announce a better view on what 2015 budget to look like?

Brad Barron

We typically do that after at the third quarter call.

Cory Garcia - Raymond James

Yeah. Appreciate it. Great quarter, guys.

Tom Shoaf

Thank you.

Brad Barron

Thanks.

Operator

Your next question comes from the line of Mohit Bhardwaj. Your line is open.

Mohit Bhardwaj - Citigroup.

Hi. Thanks for taking my taking my question. This is Mohit Bhardwaj from Citigroup. Brad, I had a question on St. James, so as you see the volumes are dropping over there and as you also mentioned the profit sharing is not visible once [LLSDI] is below $7, your facilities contracted till 2016. But then at the same time the pipeline solutions from Bakken into St. James will also come along.

So how you’re thinking about their project going forward and what you’re expectations are to maintain that $50 million to $60 million in EBITDA that you generate from that facility right now?

Brad Barron

We’re working other projects there with our shale plays. We’re starting to see more crude come into that facility from the Permian, which has offset a little bit of some of the declines we’ve seen in coming out of the Bakken.

It’s a Bakken sensitive to that WTI LLS spreads and it’s been come lately so. We don’t forecast any of that profit sharing. But if it comes back it helps both volumes by rail and also on the profit sharing at the time. But we are currently working some significant projects in another shale play that would be directed at St. James.

Again it’s very early in the stage of the developments so we can’t discuss a lot of details, but I think St. James is and continues to be hub location that’s advantages for a lot of these shale plays.

Mohit Bhardwaj - Citigroup.

Thanks for that. And just on Eagle Ford you mentioned some of the throughputs were higher than what you were expecting and I think the number that you guys have provided before for Eagle Ford was 220,000 barrels per day for the second quarter? Do you have a revised number what the actual throughput was?

Chris Russell

Brad said 218 in his remark, so, Tom did – it was right on that 220 number on the second quarter.

Mohit Bhardwaj - Citigroup.

Great. Appreciate the color guys. Thank you.

Operator

Your next question comes from the line of Matt Niblack. Your line is open.

Matt Niblack - HITE Hedge Asset Management.

My questions were answered. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Selman Akyol. Your line is open.

Selman Akyol - Stifel

Thank you. Congratulations on a nice quarter.

Chris Russell

Thank you.

Selman Akyol - Stifel

I just have one quick question. On the G&A line, I guess in the first quarter close to the 21, 22, now 23 and if I heard your guidance correctly, 26 to 27 going into the third quarter. Can you just talk a little about what’s going on there and why we’re seeing it continue to grow?

Brad Barron

Yeah. There’s couple of things going on there. One is we have service agreement with the asphalt JV that we spun off. We sold the last 50% of that as we said earlier in our comments. And there’s a service agreement there. And now we’re not providing those services to them. So you’re going to see a drop.

We were getting revenue from them on that services agreement. We’re no longer providing those, so you’re going to see a decline from that. That’s driving that and then it’s also, just to some of our expenses are based on unit price and as the unit price goes up, so does the expense, so that’s also a driver for that.

Selman Akyol - Stifel

All right. Thank you very much.

Brad Barron

You’re welcome.

Operator

Your next question comes from the line John Edwards. Your line is open.

John Edwards, Credit Suisse

Yeah. Good morning everybody. Nice quarter. Just in light of the fact you’re pushing some growth projects into 2015. I’m wondering if you could talk a little bit about the backlog of opportunities you’re looking at. Are they kind of holding stable, rising, fallen off a bit maybe you could comment on that will be great?

Tom Shoaf

Let me clarify something, the growth projects are not being pushed out. Some of spending -- spending profile straddles 2014 and 2015, so some of more of spending is going to occur in 2015 than in 2014 than we originally expected. But the growth projects are still on track. So we’ll get that out of the way.

In terms of other opportunities and we’re looking it over a $1 billion set of opportunities and that’s higher than its been in our history and we’re continue adding to that pipeline and evaluating opportunities that are increasing pace.

John Edwards, Credit Suisse

Okay. And then, I mean, any kind of sense for potential timing on that. I mean, is that over a say, a three-year period, five-year period or any kind of additional color there would be helpful?

Tom Shoaf

The way that really work is at any given time you have between $1 billion and $2 billion worth of opportunities you’re looking at, obviously not all of those come to fruition. We’ve historically spend around $300 million a year in strategic CapEx and our plan is to spend more than. And that’s every year going forward in history.

So I think you can -- what you can expect to see is that number to increase. How much it’s going to increase? I can’t tell you with precision at this time, but it will be higher in the future.

John Edwards, Credit Suisse

Okay. Great. All right. Thank you.

Operator

There are no further questions at this time. I return the call to the presenters.

Chris Russell

Thank you, operator. We once again like to thank everybody for joining us on the call today. If anybody has any additional questions, please feel to call the Investor Relations Group at NuStar.

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NuStar (NYSE:NS): Q2 EPS of $0.58 beats by $0.13. Revenue of $749.74M (-16.9% Y/Y) misses by $93.3M.