Blueknight Energy Partners, L.P. (NASDAQ:BKEP)
Q2 2014 Results Earnings Conference Call
August 06, 2014 03:00 PM ET
Brent Gooden - Media Relations
Alex Stallings - Chief Financial Officer
Mark Hurley - Chief Executive Officer
Brian Melton - VP of Business Development
Michael Blum - Wells Fargo
Michael Tanzer - DG Capital
Good day and welcome to the Blueknight Energy Partners Second Quarter 2014 Financial Results Conference Call and Webcast. All participants will be in a listen only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. And I would now like to turn the conference over to Brent Gooden, Media Relations. Please go ahead.
Thank you and good afternoon. It is my pleasure to welcome you to today’s conference call where we will discuss Blueknight’s financial and operating results for the second quarter ended June 30, 2014. Alex Stallings our Chief Financial Officer will discuss our financial results for the three and six months ended June 30, 2014. Mark Hurley, our Chief Executive Officer will update you on our operational performance, projects and opportunities as well as external factors influencing our business. He will also be discussing in more detail Blueknight's announcement this morning regarding the Knight Warrior Pipeline project. After prepared remarks, Mark and Alex will take your questions.
Before we begin, I would like to remind everyone that information on this call may contain certain forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated, including uncertainties relating to Blueknight’s future cash flows and operations, future market conditions, current and future governmental regulations, and future taxation.
Please refer to the Blueknight’s SEC filings for a description of these and other risks and uncertainties that could affect our actual results. Blueknight undertakes no obligation to update or revise any forward-looking statements contained in this call, whether as a result of new information, future events or otherwise.
Blueknight Partners L.P. is public traded limited partnership with operations in 21 states. We provide integrated terminalling, storage, gathering, and transportation services for companies engaged in production, distribution and marketing of crude oil, asphalt and other petroleum products. We manage our operations through four operating segments; crude oil, terminalling and storage services, crude oil pipeline services, crude oil trucking and producer field services, and asphalt services.
Now, I’m pleased to turn the call over to CFO, Alex Stallings. Alex?
Thanks Brent. As we announced last night, we reported adjusted EBITDA of $13.7 million for the second quarter of 2014 as compared to $15.5 million for the same period in 2013 which is a decrease of about $1.8 million. Adjusted EBITDA for the first six months of 2014 was $26.2 million which compares to $30.4 million for the six months ended June 30, 2013.
Partnership reported net income of $3.6 million on total revenues of $45.8 million for the three months ended June 30, 2014, compared to net income of $6.25 million on total revenues of $45.7 million for the three months ended June 30, 2013. For the six months ended June 30 of 2014, the Partnership reported net income of $7.5 million on total revenues of $92.2 million compared to net income of $12.2 million on total revenues of $90.2 million for the first six months of 2013. Partnership previously announced the second quarter cash distribution of $0.1325 per common unit which is 1.9% increase over the previous quarter’s distribution and 10.4% increase over the second quarter of 2013, as well as $0.17875 distribution per preferred unit, both of which will be paid on August 14th. A few highlights for each of the segments.
First, crude oil terminalling and storage. For the quarter ended June 30, 2014, we reported operating margin of $4.4 million excluding depreciation and amortization which is a decrease of $2.2 million for the quarter ended June 30, 2014 as compared to 2013. For the six months ended June 30, 2014, we reported operating margin of $10.8 million excluding depreciation and amortization which is a decrease of $3.3 million as compared to the same period in 2013. The reason for decrease is due to the current backwardated market conditions at Cushing which has led to an increase in renegotiated storage -- which has led to the decrease in renegotiated storage rates as compared to the same period of the prior year. However, we have been able to keep our Cushing facility fully contracted even during the down market.
As of August 1, 2014, we had approximately 5.5 million barrels of crude oil storage under service contracts with remaining terms ranging from two months to 27 months and we are in negotiations to either extend contracts with existing customers or find additional customers for expiring contracts.
Crude oil pipeline segment. We reported operating margin of $1.6 million for the second quarter of 2014 excluding depreciation and amortization which is an increase of $1 million as compared to the same period in 2013. For the six months ended June 30, 2014, we reported operating margin up $2.3 million which is an increase of $0.8 million or about 54% as compared to the same period in 2013. Increases are primarily related to an overall 15% increase in volumes on our pipeline systems, partially offset by increased employment and repair and maintenance expenses.
Trucking and producer field services segment. We reported operating margin of $1.6 million which is a decrease of $1 million for the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013. For the six months ended June 30, 2014, we reported operating margin of $4 million excluding depreciation and amortization, which is a decrease of $0.7 million as compared to the same period in 2013. Even though volumes continued to increase 16% quarter-over-quarter and 19% six months to six months, operating margin declined. The decline was due to decrease in the average distance barrels are hauled and increased cost associated with retaining driver. We are currently evaluating our overall rate structure and expect to implement some changes in the upcoming quarters to improve margins.
Asphalt services segment. We reported operating margin of $10.1 million exclusive of depreciation and amortization which is an increase of $0.3 million or about 3% for the quarter ended June 30, 2014 as compared to the quarter ended June 30th of ‘13. For the six months ended June 30, 2014, we reported operating margin of $18 million excluding depreciation and amortization, which is a very slight decrease as compared to the same period in 2013. Operating expenses increased for the six-month period primarily due to the timing of some taken, and inspection and maintenance expenses.
G&A expenses remained very consistent at $4.4 million for the three months ended June 30, 2014 compared to about $4.5 million for the three months ended June 30, 2013 and $8.9 million for the six months ended June 30, 2013 compared to $9.2 million for the six months ended June 30, 2013. We do not anticipate material changes in G&A expenses for the remainder of 2014.
A couple of other items that I wanted to highlight, we had gain on sale of assets of 0.6 million for the three months ended June 30, 2014 compared to about 0.3 million for the same period in 2013. Gain on sale of assets was a $1 million for the six months June 30, 2014 compared to about 0.1 million for the six months ended June 30, 2013.
Gain in 2014 is from the sale of surplus used property and equipment and $0.3 million recognized in relation to reimbursable capital projects. Gain in 2013 is from the sale of surplus used property and equipment and a gain on sale of gathering system.
Equity earnings and unconsolidated affiliate, this relates to our 30% investment in Advantage Pipeline we have losses in 2013 and as a result of expenses which were incurred during the construction phase of the Pecos River Pipeline. During the three and six months ended June 30, 2014, we actually had equity earnings were realized as a result of the pipeline coming into service; and in late 2013 with the completion of Phase I, our Phase II is expected to be operational a little bit later this month and Mark will talk to that in a few minutes.
From a liquidity perspective, our leverage ratio at June 30, 2014 was 3.75 times and as of August 1, we aggregated unused commitments under our revolving credit facility of approximately $116.5 million, subject to financial covenant limits.
Capital investment perspective, expansion capital for the first six month of 2014 totaled $14.6 million as compared to $24.8 million in the second quarter of 2013. We are currently estimating expansion capital expenditures of $20 million to $25 million for 2014 prior to any of the projects that Mark will be discussing next primarily related to the Wood Bind project.
Our maintenance capital expenditures for the six months ended June 30, 2014 totaled $2.9 million, net of $0.7 million of reimbursable expenditures. We expect maintenance capital to be in the $12 million to $14 million range and net of reimbursable expenditures in 2014.
With that I’ll now turn it over to Mark . Mark?
Thank you very much Alex. I am going to spend a few minutes discussing our quarterly results from operations and we'll then focus on updating you on our plans going forward.
Overall our second quarter of 2014 was impacted by the downward pressure related to Cushing. While our contracted volumes of Cushing remained in line with prior periods, we did experience declines in rates as contracts were renewed which is reflective of the current market condition for Cushing storage.
As we have discussed in previous quarters, rates for Cushing storage are down as compared to prior years as a result of the current supply demand situation, largely due to the backwardated crude oil market. In fact total volume stored in Cushing across the industry reached to 6 year low in July at approximately 19 million barrels. But even in a challenging market we still look to capture value with our Cushing storage facility.
The key to achieving this is to focus on services, mainly blending capability and connectivity. As such last year we embarked on $8 million multiple phase optimization program that will add additional connectivity and capabilities to our terminal and this project is near in completion. We believe that when coupled with our experienced operational employees our terminal will be more competitive in buying customers that will be seeking new to renew contracts in the next couple of years. In fact we signed a contract for new volume in the first half of the year and we’re very closed to sign a contract with another new customer, which should happen by the end of the third quarter. Given the current market for storage we’re quite pleased with these new deals.
Despite the challenge at cushioning we’ve been successful on achieving a slight increase to the company’s top-line as revenues were up during both periods primarily driven by growth in our pipeline segment. In fact our pipeline segment when including volumes from the West Texas Pecos River Pipeline experienced record volumes in the second quarter. Further we continue to experience strong demand for our trucking services and volumes remained consistently strong as compared to the first quarter. We do experienced a dip in volume late in the second quarter due to natural decline on some of the leases we serve, as well as some of our trucking volume moving to pipelines as new gathering systems were brought on line.
No matter how efficient we can make our trucking operations, producers and marketers will always prefer to move volume on pipelines when available. This is part of a natural turnover in the business and when it occurs we must find new volume to replace it. Fortunately we have numerous opportunities we’re exploring. And in fact volumes have started to bounce back here in July and August. In addition we also experienced changes in our revenue mix due to the length of holes. Again this is one of the natural dynamics in the business that creates some volatility. We do expect to make adjustments in our rate structure and we will relocate some equipment during the upcoming quarters to increase operating margins.
From an operating cost perspective, we continued to experience heavy load of routine plant maintenance expense and operating costs were up as a result. Our maintenance expense is expected to moderate over the rest of the year and will be replaced by additional maintenance capital as we approach the end of the year.
Going forward, we continue to execute three point strategy we outlined at the end of 2012; that is, number one, improve the efficiency of our trucking business and then grow it; number two, expand our pipeline business in the fast growing shale areas; and number three, grow our asphalt business through acquisitions.
Now, let me say a few words about the progress we are making on each element of our strategy. In our trucking operation we have made excellent progress in improving the efficiency of our business. While our volumes have increased over the last year we have been able to execute this business with fewer drivers and fewer trucks due to improvements in asset utilization. This was freed equipment that we will now move into two new operating areas East Texas and Wyoming. These other moves have allowed us to achieve additional growth in this segment.
The second element of our strategy is to expand our crude pipeline business in the high growth shale areas. And as most of you know, we took a major step forward in this regard earlier today with the announcement of our (inaudible) pipeline project in East Texas. This is a 160 mile pipeline from Madison County to the Houston ship channel. This will be 16 inch pipeline with capacity up to 200,000 barrels a day serving to producers in the fast growing Eaglebine/Woodbine area. Construction of this pipeline will begin immediately and is expected to be complete in March 2016. This pipeline is estimated to cost approximately $300 million and is backed by long term shipper commitments. As I stated in the news release earlier today, this is a transformative project for our company. I want to say thank you to all of the team at Blueknight who have worked so hard to make this project a reality. It is obviously a very exciting time for us. But East Texas is not the only area where we are growing our pipeline business.
And I will now turn it over to Brian Melton who is our Vice President of Business Development. Brian joined us in December of last year and he has been a great asset to our team. Brian?
Thank you, Mark. Starting with our Oklahoma pipeline assets, as you might recall the southern Oklahoma Arbuckle pipeline expansion project which became operational in the third quarter of last year. The system is running at or near capacity currently we continue to get good interest from potential shippers to bring additional volumes to the system.
We're also working on a number of smaller projects that we believe should have our Oklahoma system running at or essentially near a 100% capacity by year-end 2014. Relative to our development projects in Oklahoma. Our Oklahoma joint venture project, condensate project continues to make good progress during the quarter. We made good progress on our stabilizer design. We had initial compensations with several large producers in the Southern Oklahoma area. We continue to monitor recent developments at the regulatory level with regards to the Europe industry and security. Department of Commerce is recent approval of pioneer enterprises approval for the export condensate out of the U.S. Gulf Coast as well as the recent temporary moratorium on future export permanents.
We are encouraged that our stabilizer design as part of our (inaudible) project would receive favorable export regulatory approval and that our preliminary stabilizer design is very similar to what others are doing in the Eagle Ford today.
In West Texas, during the second phase. The second phase of our Pecos River pipeline stared up in the fourth quarter of 2013 and we continue to see a ramp of volume. We expect the second phase of our Pecos River pipeline extension to be operational later this month, during month of August. August volumes are continuing to go rapidly as we see increases month-over-month, we have build this project based on the strong fundamentals in the Permian Basin and is the continuing to prove true as we see increasing interest from shippers to continue to bring additional volumes to the system. The Pecos River pipelines are great platform for future growth opportunities and we see significant potential opportunities ahead of us, one of which being our extension project which would take our Pecos River pipeline north, possibly into the new Mexico area where number of E&P companies are expanding their existing footprint. The expansion would consistent of 110 mile pipeline that would tie into our existing Pecos River pipeline. It would continue to serve the emerging production areas of Far West Texas and Southern New Mexico. This project continues to gain traction and we recently hired a new business development manager to focus exclusively on West Texas and continue to have numerous commercial discussions relative to the project.
With that I will turn it back over to Mark to talk about our asphalt business.
Thank you, Brian. For a company the size of ours, we are very excited to have a number of pipeline opportunities in front of us and we look forward to executing on those just as we have on the East Texas project.
Finally, the third element of our strategy is to grow our asphalt business and this will most likely be by the way of acquisition. We have explored a number of possible acquisitions, we continue to do so. We have one particular opportunity, we are working now on an asset in the Midwest, don’t know if it will pan out or not but these are the kind of opportunities that we will continue to go after.
Those are our prepared comments. Operator, I will turn the call back over to you to open it up for questions.
Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Michael Blum of Wells Fargo. Please go ahead.
Michael Blum - Wells Fargo
Hi, good afternoon everybody. I just had a few questions on this Knight Warrior Pipeline. Can you talk about kind of the pace of capital spend and how you are planning to fund that?
Yes, I’ll take care of the pace and Alex will talk about the funding mechanism part. As far as pace is concerned, we see this year spending in the neighborhood of $20 million to $40 million possibly, so not much expenditure this year as we’re in the early developmental phases of the project. Most of that expenditure, most of that $300 million expenditure will come probably in the second half of 2015 when construction is really underway in earnest. And then as we said in the press release the targeted startup of March 2016. As far as the financing, I’ll turn that question over to Alex.
Yes Michael, it’s really as kind of we’ve been discussing for several months now. I mean we’re going to use of some combination of debt and equity. I mean typically we modeled just like every other MLP models to use probably about 50-50 debt and equity. Probably on this project, we’ll use just a little bit more equity than that than maybe to 50%. But we're really going to keep in mind, I mean we're not going to go out and raise tremendous amount of equity up front, I think what we'll do is raise a very minimal amount of equity initially. And then as Mark said, as we better identify kind of the capital trend sometime later next year, we’ll probably come back for another tranche of equity. But that right now is how we're thinking about it. Because again from what Mark said, we really don’t anticipate much more than maybe $20 million to I’d say maybe $30 million spend this year but the bulk of it will be spent kind of during the second half of ‘15. So that’s really the way we’re thinking about it today.
Michael Blum - Wells Fargo
Okay. That’s very helpful. And then just in terms of you’ve got the initial capacity of 100,000 barrels per day, how much of that is currently contracted? Can you talk about the term; I think you just used the term long-term in the press release and just remind us kind of how we should think about returns for this type of project?
Yes. I wish I could take those because I can’t remember all those questions, Michael. In terms of the terms, there are different terms at play with different shippers. But I’ll leave it at that saying that for by pipeline industry standards, these are very much long-term deals and really secure a revenue stream for us. I think we’d indicated in previous discussions that we’re targeting about a 15% return on expenditures of this size or in a multiple of 8 to 10, multiple on the EBITDA. And so that’s what we anticipate. What was your other -- I am sorry, what was your other question?
Michael Blum - Wells Fargo
What volumes are actually committed today?
It is consistent with what we had indicated before. We were targeting to get base volumes in the 40,000 barrel to 60,000 barrel a day kind of range and we were able to achieve that. I won’t get much more specific than that. But that’s what we’ve been able to achieve.
Michael Blum - Wells Fargo
Okay. And then just last question from me on this project, what's going to get you from the initial capacity up to the expanded capacity and can you accomplish that just with them basically?
Yeah. It's – the pipeline size obviously will be set from the beginning and then increasing capacity is simply a matter of additional pumping capacity and some additional storage capacity.
Michael Blum - Wells Fargo
Great. Thank you very much.
(Operator Instructions) And our next question comes from (inaudible). Please go ahead.
Hi. It's actually James, James (inaudible) could you talk a little bit more about the situation in Cushing the 5.5 million barrels of storage and some contracts coming up for the renewal quite soon, some as soon as two months, how do you guys look at the -- with the run rate of Cushing might be if current market conditions continue I mean how much more revenue is there that might have to be given up.
We haven't put a specific number on it as far as how much revenue will be given out. First of all, our contracts are typically two to five year kind of contracts and so and they staggered so that every year we have some contracts really coming to an end and up for renewal. We do two things, number one, we obviously look to renew with the existing customers that we have. We also look to further diversify our customer base and specifically we look for customers who have a need for some of those services that we provide. And so, we more and more move to customers who have need for a lot of barrels through the facility. And so there really the two revenue streams in a storage contract, you get the flag rate itself that comes in just driven by the amount of storage that our customer reasons. And then you get revenue that comes in for barrels that are blended or barrels that go through the facility and we look to target customers, who have a need for a lot of barrels through because that obviously gets a small revenue in time to time.
And so yes, we have some contracts that are coming up later this year. But that's pretty typical every year we have contracts to come up for renewal. And so like I said we work hard at existing renewals and bringing in new customers. I’ve mentioned in my prepared remarks that we have added some new volume meaningful volume that’s going to new customers and customers who are adding additional volume.
And we feel particularly good about that, because those yields are hard to come by in this kind of market. But so far, we've been able to keep essentially all of our tanks at least except for one or three tanks, they are always up for storage, I'm sorry for maintenance. And so it's just something we just have to work very, very hard at. And we obviously have already seen a decline in those rates as you seen in our results due to contracts coming up for tax, coming up at tax expirations and those adding then renew that at lower rates.
Okay, thank you. And turning now to Asphalt, about what size EBITDA acquisition kind of would be appealing to in that segment?
Well, typically the acquisitions that you would do in this market are going to be an acquisition of a facility or an acquisition of a company who may have multiple facilities say four to six terminals. And we would and of course the earnings from a particular terminal will range from $1 million a year to $3 million or $4 million a year. And so acquisition in the Asphalt space are likely to be somewhere in the $10 million to $50 million range as far as the capital outlay and depending on whether you are buying one facility or multiple facilities.
Okay, thank you. And lastly on the Oklahoma condensate pipeline JV what kind of timeline do you see there for a go no go?
This is Brian we are working this hard commercially, we have got a little more work to do on the permitting, particularly around our stabilizer design but we would anticipate a late third quarter, early fourth quarter marketing effort on that. So we would hope to have more news around our third quarter, fourth quarter announcements.
When you say marketing effort, does that mean that customers would be signed up, are contracts committed or I am not sure what you mean by that?
We intend on marketing this to a combination of producers and marketers, and primarily targeting folks that are either producers in the Southern Oklahoma region and or marketers that are active in the Alberta Diluent market and so we have been having discussion with both of those parties, we’ll continue to have those discussions as we finalize our final capital cost and get our preliminary costs finalized will be able to do a more formal process to be able to go out with a more formal marketing effort.
And then it might take another quarter or so to get resolution?
I would think -- we’re having some of those discussions today, so I would anticipate that we can act pretty quickly assuming we can come to terms. But we are probably at least a couple of quarters on it…
Okay. Thank you.
Our next question is from Michael Tanzer of DG Capital. Please go ahead.
Michael Tanzer - DG Capital
Hey, Mark and Alex. This is Michael. Thanks for taking my question.
Michael Tanzer - DG Capital
With respect to the Knight Warrior project, when you talk about the capacity of 100,000 barrels per day, expandable up to 200,000.
Michael Tanzer - DG Capital
Just the $300 million I guess budgets entail 100,000 or the total expansion to 200,000?
It is. That gets us part way between 100,000 and 200,000. 300,000 would get us a little more than 100,000 barrels a day, not quite to 200,000. So, we’re anticipating that we will get some additional commitments and some additional demand over the course of the next 18 months or so. And so we would expect to have to add some of that capacity before we get to the start up phase.
Michael Tanzer - DG Capital
Got you. So prospectively, this could be a project that in excess of $300 million.
Yes, but not much. I mean not much.
Michael Tanzer - DG Capital
So the incremental capacity is just not that capital intensive to bring on?
No, no that’s exactly right.
Michael Tanzer - DG Capital
Got you. Okay. That’s all I had for now. Thanks.
And this concludes our question-and-answer session. I’d like to turn the conference back over to Mark Hurley for any closing remarks.
Well thank you very much. We again can’t say enough about how excited we are about the announcement we made today and how much we look forward to work on that project. I might add about that project we have already engaged with a very experienced pipeline construction firm who’ve done many projects in the Houston area in particular.
We’ve already engaged with a land management firm, who again have a very strong presence in this market. So we feel very good about our ability to execute this. And like I said we have already started and we see this being a real milestone in the history of our company. And so again thank you all for calling in and look forward to talking to you in the future.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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