Sunoco Logistics Partners' (SXL) CEO Michael Hennigan on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Sunoco Logistics (SXL)

Sunoco Logistics Partners, L.P. (NYSE:SXL)

Q2 2014 Results Earnings Conference Call

August 07, 2014, 08:30 AM ET

Executives

Michael J. Hennigan – President and Chief Executive Officer

Analysts

Bradley Olsen - Tudor, Pickering, Holt & Co.

Steve Sherowski - Goldman Sachs

Abhiram Rajendran – Credit Suisse Securities LLC

Michael Blum- Wells Fargo

Operator

Welcome to Sunoco Logistics Q2 2014 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and answer-session. Today's call is being recorded. If anyone has any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Mike Hennigan, President and CEO. You may now begin.

Michael J. Hennigan

Thank you, Eisha. Good morning, everyone. Welcome to Sunoco Logistics Partners conference call to discuss our second quarter 2014 results. I’m Mike Hennigan, President and Chief Executive Officer for the General Partner. Joining me today is Pete Gvazdauskas, Vice President of Finance and also on the call are Martin Salinas and Mackie McCrea.

In the course of our remarks and in the subsequent Q&A, we’ll be referring to slides that have been posted on our website entitled Second Quarter 2014 Earnings Conference Call, and we may be making some forward-looking statements. In that regard for the purpose of facilitating the discussion, I refer you to slide two.

With regard to our financial results we are pleased to report second quarter EBITDA of $280 million and distributable cash flow of $223 million. These are new records for our partnership, bringing our first half EBITDA to $488 million and our first half DCF to $381 million. Our crude oil and pipeline segment led the way in the quarter and our terminal segment had a record quarter anchored by the seasonal strength of our growing butane business. As we've noted in the past the second quarter is a very strong quarter for our butane business and we've continued to experience that strength. Although, the butane business doesn't continue into the summer months we've been pleased with the growth in the business on a year-over-year basis. Our lease acquisition and marketing business recovered the timing and inventory noise that we discussed last quarter with our first half results looking similar to our second half 2013 results as we have previously guided.

In the second quarter, our Partnership added to our lease acquisition business by acquiring a 20,000 barrel per day crude oil acquisition and marketing business from EDF Trading North America for $57 million in cash plus inventory. The acquisition also included a majority interest in the [Price] River terminal, a rail facility in Wellington Utah. As we continue to execute our growth plan new projects are generating increasing ratable long-term cash flow. Many of these projects are coming to fruition in the coming months. So let me give you an update on those organic projects.

The Nederland Access project, which connects the Exxon Mobil Pegasus pipeline commenced operations in July. This project had been delayed due to Exxon Mobil’s line being down but is now operational on the Southern portion. Our Mariner West pipeline is up and running as we continue to add additional pumps to the system. We expect to be at the approximately 50,000 barrel per day range by the fourth quarter. We've added two additional crude projects that we expect to come online in the fourth quarter of 2014. The Eaglebine Express project and the Granite Wash expansion projects. Both projects are providing key takeaway service in the growing production areas.

On the refined product pipeline side, our Alleghany Access pipeline will provide Midwest refiners with new product outlets and will also provide Eastern Ohio and Western Pennsylvania marketers with access to Midwestern products. This pipeline is designed for 85,000 barrels per day and is also expect to commence operations in the fourth quarter of 2014. Our Gulf Coast NGL project called Mariner South, which is a joint project with Lonestar demonstrate synergies within our family of partnerships and will export propane and butane from our Nederland terminal on the Gulf Coast. This project is still on track to be operational by Q1 2015.

Progress continues following our successful open season for our Permian Express 2 project, which will increase the takeaway capacity out of the Permian basin by approximately 200,000 barrels per day providing access to more markets. Permian Express 2 is expected to be operational by mid-2015. Our Mariner East 1 pipeline with a capacity of approximately 70,000 barrels per day is expected to be able to deliver both ethane and propane by mid-2015. We are targeting to start propane ahead of schedule by the end of 2015 at about 20,000 barrels per day. We also remain confident in our Mariner East 2 project, the second phase of the company’s broader plans to provide critically needed pipeline transportation from the Marseilles and Utica Shales.

Mariner East Phase 2 would expand the Mariner East service and deliver natural gas liquids from the liquid rich Marcellus and Utica Shale areas in western Pennsylvania, West Virginia and Eastern Ohio to Marcus Hook Industrial Complex on the Delaware River in Pennsylvania where it will be stored and distributed to various local, domestic and water-borne markets. Although we are unable to elaborate further today we’ve closed the open season and are working through the feedback and specific details. We hope to be able to share them with the market in the near future. Until then I would ask everyone to be patient and we will provide further information as soon as we can.

As we continue to add to our list of projects we are also pleased to announce an open season related to the growing production in the Permian Basin called Permian Long View and Louisiana Extension. This project will enable us to provide take away capacity for approximately 100,000 barrels of additional per day out of the basin at Midland and be transported to the Long View area as well as destinations in Louisiana utilizing a combination of our proprietary crude oil system as well as third party pipelines.

We now expect our 2014 organic growth to be approximately $2 billion. This increase from our previous guidance reflects additional non major projects that we have developed to expand our existing asset platform in addition to capital spend timing updates on our previously announced projects. This growth in capital expenditures is a direct reflection of our goal to grow our long term ratable cash flow with our blue-bar driven projects.

As per distribution growth we increased our quarterly distribution by 5% to $1.46 per common unit on an annualized basis which represents the 9th consecutive time we raised our quarterly distribution by at least 5% and our 37th consecutive increase overall. This also represents a 22% year-over-year increase compared to the second quarter of 2013. While we finished the first half of the year with a 1.65 times distribution coverage ratio, as we’ve discussed in the past, our long term business model of 80% blue-bar and 20% red-bar will generate an approximate 1.25 times coverage ratio. To the extent our red-bar coverage is a higher percentage than we will enjoy cash flexibility as a source of equity for funding future growth.

We also continue to have a strong balance sheet capacity to fund our ongoing capital expansion programs. Our debt to EBITDA ratio with 3.7 times as of June 30th and on a pro forma basis was 3.2 times. As such we will look to fund our base 2014 organic capital program in a manner that maximizes our distributable cash flow while maintaining our investment grade credit ratings. We have launched our aftermarket, our ATM equity program which is performing extremely well selling approximately $170 million to-date. Since our organic growth capital will be spent over time we believe a program to issue equity over a period of time will be more efficient and help minimize the negative carry of issuing units without the associated cash flows until our projects come online.

As we continue to implement our plans we remain committed to sustainable competitive distribution growth. We are confident concentrate our strategies on track and we are committed to growing our cash flows over the near and long term. With that I will ask the moderator to open the lines for any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Steve Sherowski from Goldman Sachs, and your line is open.

Steve Sherowski - Goldman Sachs

Hi, good morning. On your Permian Long View Project can you disclose how much of that pipeline will be newbuild.

Michael J. Hennigan

Yeah, sure Steve. Let me give a little bit more color on the project. So it starts in the Midland area and it starts with our relationship with [inaudible], the Sunday program that comes across Midland over the Garden City. Then it’s going to connect to our proprietary line that moves itself all the way up towards the Corsicana. And then in direct answer to your question there is a piece of pipe from basically from Corsicana over to the Tyler area which is about 75 miles in new pipe. And then it continues on existing pipe over in the Long View where it's going to connect to Exxon Mobil’s North Line and continue on down to Louisiana. Hopefully that gives you a little more color on it.

Steve Sherowski – Goldman Sachs

Yeah, that does I appreciate that. And on the marketing side, how much of it was -- how much of the performance was generated from a catch up from the first quarter.

Michael J. Hennigan

Yeah we are not going to disclose the specifics on it Steve. What we've mentioned last quarter was there was some inventory noise and some timing. And that's why our first quarter results in that area were a little bit a lower. And we tried to guide everybody to -- we expect that our results in the first half of the year to be similar to the second half, just trying to take some of that noise out. And that's kind of what's happened, pretty much here. We made about $50 million in the second half of 2013 and just a little bit above that in the first half of 2014. So I think we're out of that noise thing and we're back in to a normal pattern, but that's why I gave a little bit more detail on the first quarter.

Steve Sherowski – Goldman Sachs

Any comments on the second half of the year and how that's shaping up?

Michael J. Hennigan

Steve it's always the toughest question we get. I mean who knows what the market is going to do. It's kind of being going a little bit sideways from where it's been in the first half. So that plays out. We'll some similar stuff, but one of the things I've learned in the business is it's so hard to predict where that's spread is going to be. So I say all the time is I don't have real good idea where it's going to be and we're just going to take whatever opportunity is there for us.

Steve Sherowski – Goldman Sachs

And then just a final quick one, if you could just comment on the M&A market considering your second quarter transactions, just how that's looking and the potential opportunities you're seeing.

Michael J. Hennigan

Yeah I mean we're very active in the market. We continue to look. I mean the acquisition that we talked about was a very small one. So that just is a complement to our existing business. So little bit of an add-on. But we continue to be active in it, we continue to look for opportunities. We hope to be a successful, but we have been on some of the other opportunities that have been out there. But we want to be and we'll continue to be active and hopefully we will be able to share something with you when we're more successful.

Steve Sherowski – Goldman Sachs

Okay, that's it from me. Thank you.

Michael J. Hennigan

You are welcome, Steve.

Operator

The next question comes from Brad Olsen with TPH. And your line is now open.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Hey good morning Mike.

Michael J. Hennigan

Good morning Brad.

Bradley Olsen - Tudor, Pickering, Holt & Co.

I realize you can't comment on any of the commercial agreements that are pending on Mariner East 2. But as you move through Mariner East 1 and you kind of deal with the some of the local concerns about building a pipe across the state of Pennsylvania, do you think it puts you in a better position to kind of anticipate some of the local and older concerns as you think about potentially doing a new pipeline along that same right of way.

Michael J. Hennigan

Yeah it’s a good question Brad. I mean first of all I will tell you with respect to Mariner 2, first of all it's always good to know we respect landowner rights, council rights, municipal rights on all of our projects, not just this one. We've been successful to-date executing many projects start-ups. And we anticipate being successful here. And I mean the important point to which you're asking is that it is always and I stress always, our goal to work with landowners and townships on an individual basis to achieve a satisfactory outcome for everyone. So I mean that's the way we approach this project. It's the way we approach every project and I don't see it a whole lot different.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Got it, I guess just to dig a little bit deeper, it's kind of notable that most of the projects in the North East have really been based on existing right of way and existing pipelines. To the extent that there is some new build pipeline on Mariner East 2, do you think that creates challenges that are significantly different than the challenges maybe that you faced on Mariner East phase 1.

Michael J. Hennigan

Not really Brad as I said not to repeat myself but we obviously need to work with all the people that are involved, landowner’s municipalities. There is an awful of permitting that comes in with that project as well as existing. So we'll be working with agencies and the regulatory bodies. So it's similar to the other projects and we'll approach it the same way. We want everybody to feel good at the outcome. We think it's a great project and it's in the public interest. So we look forward to it being a successful project at some point. But like I said we're not in a position to talk about the details of it at this time.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Great I appreciate that color. My second question is on the terminal segment, I realized there is a decent amount of seasonality in that segment, but there is also just really strong year-over-year comparison there and I really was just trying to understand a little bit how much of that growth was from the butane side of things or and I think more importantly how much of it was more kind of secular growth from increased volumes moving through Nederland related to barging activity coming out of either the Permian or out of the Eagle Ford.

Michael J. Hennigan

Yeah Brad. You hit it right on the head. Obviously we don't disclose the specifics but you hit it perfectly. The majority of the uplift in that area is our butane business and we've been very happy with the way we've been growing it. And your point was right on it is seasonal. So the third quarter won't show the same thing as the second quarter does. And then you hit the second highest driver as well, our Nederland facility. We continue to try and position that facility to be more successful. As you know the Keystone pipe is coming into that facility, some other pipes are starting up into it. We continue to build out tanks. But you basically hit it on the head without giving you the specific numbers. You hit the two main drivers that are driving that segment.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Okay perfect. And just a final one and if Warren’s on the phone maybe this is a good one for him to pitch in on too. But Energy Transfer’s had a lot of success developing both the Bakken pipeline and the truckline conversion, which together could generate hundreds and hundreds of millions of dollars of EBITDA. Seems like with the project that large, especially on the crude side of things that it’s somewhat of a no brainer that Sonoco would be involved and today I don't really think in my opinion you haven't really gotten any credit from the market for potentially participating as a major owner of that transcontinental crude system. And so when you think about the Bakken pipeline and the trunkline conversion and what's Sonoco's participation might look like, do you expect it to look maybe more like a JV partnership or a potential dropdown opportunity in the future. Or will it remain in Energy Transfer.

Michael J. Hennigan

That's a great question Brad. First of all let me say that we are so pleased that Energy Transfer’s received the commitments necessary to move the project for you. It's a great project for our family. We at SXL continue to have interest in equity in the project and we're in discussions, are ongoing. We want to do to make sense for SXL and for Energy Transfer. So those are ongoing within our family, but we don't have anything that we're going to elaborate on at this point.

Bradley Olsen - Tudor, Pickering, Holt & Co.

Okay, great that's all from me. Thanks Mike.

Michael J. Hennigan

You are welcome Brad.

Operator

The next question comes from Abhi Rajendran with Credit Suisse. Your line is now open.

Abhiram Rajendran – Credit Suisse Securities LLC

Hi good morning Mike. How are you?

Michael J. Hennigan

Good morning Abhi, how are you?

Abhiram Rajendran – Credit Suisse Securities LLC

Good. Just a couple of quick questions. It seems like we're getting every week additional announcements on the ethane export side. Could you maybe just give us a little bit of color on where you think, I guess the potential size of this overall opportunity is looking out. I don’t know maybe 2017, ‘18 or even little bit longer by the end of the decade.

Michael J. Hennigan

Yeah sure, Abhi. I guess we probably been the most vocal that the NGL balance in the U.S. will be out of whack for longer than most people are thinking. Our view is that ethane exports are needed and kind of well beyond what the export consultants are saying is, our fundamental view is that we believe that the supply push will continue to exceed the demand. I mean we certainly recognize the pick and growth that’s going to occur in the next couple of years, but we are a believer that ethane exports are going to be needed well beyond where the consultants thinking. So my personal view is you're gone see ethane exports continue out past ‘17, ‘18, ‘19. And we don't have a crystal ball out that far. I don't know that anybody does, but I think the trend continues to suggest that ethane is gone be challenged in the U.S. for quite some time.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, got. And then just a quick follow-up on that. I mean so this morning Navigator announced that they're entering into a charter to take ethane from Marcus Hook out to Borealis’ Cracker. So we've seen a couple of these announcements, obviously recently and just to add on to the original [Inios] announcement. I mean do you think more European Crackers are kind of coming around to flexing to take more ethane or just to generally open to taking more U.S. ethane?

Michael J. Hennigan

Yeah Abhi I do. I mean that's been our whole premise behind the Mariner strategy somewhat is I do think and I give Inios a lot of credit to be the first European company to start that trend. And as you mentioned I think there is gone be a second and the third. I think that trend is going to continue as the European community sees the opportunity with U.S. ethane. I also think that the U.S. producers of ethane are in a good position as they start to get more diversification outlets for their product. So obviously everybody knows the U.S. Gulf Coast is a strong PetChem market. But I think you're starting to see this evolve more into a global situation which is what our whole premise was when we started into this concept.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, got it. And then just another quick one, obviously it's hard to ignore your distribution coverage and then where that’s gotten. Looking ahead, I mean how are you kind a thinking about distribution growth. Would you ever consider just kind of one-time step up in the distribution or are you still kind of thinking about it as sort of smooth strong sustainable growth. Any color there would be helpful.

Michael J. Hennigan

Yeah Abhi. We definitely lean towards the latter, where you describe. Our goal is long-term sustainable. So our philosophy has always been we're gone distribute our blue-bar. As you mentioned our excess coverage, we continue to be fortunate in the red-bar area. The first half of 2014 we were running kind about 70-30 ish, 70% blue bar, 30% red bar. And that's a little different from the first half of 2013 was closer to 60-40. So I think you're seeing two trends there. One you're seeing our project start to come online which is increasing our blue-bar and that's always been our goal and at the same time you seeing the markets provide red-bar opportunity and we're gone trying and capture as much as we can.

But as far as distribution philosophy we continue to think long-term sustainable is much more the way to go and then pulling a long-term philosophy we think 80% blue-bar, 20% red-bar is kind of our business model if you want to call it that.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, great. Thanks very much.

Michael J. Hennigan

You are welcome.

Operator

The next question comes from [Shenea Goseini] with UBS. And your line is now open.

Unidentified Analyst

Hi good morning everyone.

Michael J. Hennigan

Good morning Shenea.

Unidentified Analyst

Most of actually all of my questions have been asked and answered. But maybe if I can do a couple of quick follow-ups. The first one just with respect to your original comments to Steve with respect to the marketing business, with one month out of the third quarter out of the way at this point right now, is there a sense that you can give on how we're trending relative to the second quarter, versus the first quarter and so forth. And are there any specific basins or basis spreads that we should be targeting in particular whether it's LLSTI or Midland and so forth. Just wondering if you can just sort of give me a little bit of extended color without giving away the secret sauce.

Michael J. Hennigan

Yeah Shenea. Two comments I’ll give you if you're right on, the start of the third quarter looks similar to the second quarter, but we still got a ways to go. So we'll see how it plays out. And I think you hit it on the head what we try and tell people is there are many markets that are involved in what sets up your results. But the best overall indicator for our business is looking at Midland LLS, that kind of gives you the best indication. When you go into the sub modes you look at Midland to Cushing, Cushing LLS. But then there is also a whole lot of other markets. As you know along the Gulf Coast there is markets, there are West Texas and towards Houston and towards Nederland, all the way over the Louisiana. So there is a lot of sub activity that's occurring. But I think you hit it on the head, the best indicator that I can advise people to look at is the macro market and where is WTI relative to LLS. That's kind of the best indicator.

Unidentified Analyst

Okay, if we can shift over to Mariner East 2. And I promise I won’t ask how much it cost and what's your commercial agreements are. But I kind of have two questions. One is if we can sort of talk about the producers mindset. For the last six to nine months the producers seem to been highly focused on the natural gas basis issue. And I think that's the problem that they were looking to resolve most. The fact that it seems that we're moving finally moving forward with the process, is it a function of the fact that they think that they have enough options on the table that they can now pivot their interests towards resolving the upcoming NGL problem for them, or is it more a function of the fact that they had delayed giving you a commitment which means the in service date is moving out beyond what they would like to see and so forth.

I was wondering if you can sort of talk about the producer mind set and how we've kind of a arrived at where we are.

Michael J. Hennigan

Yeah Shenea, I can't really speak for everything that they think about strategically. What I can tell you is they are a great group of people to work with. I mean each of these companies are terrific professional and they're going about their business in a great way. And I think they're doing a great job of taking advantage of this resource. The only thing that I can tell you is with respect to our projects is we meet with them, we tell them what we think are the advantages of our project over the competition. We try and stress what we can do for them as a company being a good service provider.

At the end of the day we've been successful so far with the Mariner west starting up and Mariner East getting very close. So we have a good relationship with them. I think they're very good people, well thought out, running their business extremely well. And our goal at the end of the day is hopefully we're successful while they're successful. That’s just the name of the game for both of us. We're a service provider and if we can provide service that helps our business be better that's what we are all about.

Unidentified Analyst

Hey great. Thank you very much. That's all from me.

Michael J. Hennigan

Okay thanks Shenea.

Operator

The final question comes from Michael Blum. And your line is now open.

Michael Blum- Wells Fargo

Hi thanks, good morning everybody. Just can you talk a little bit more about this little marketing acquisition that you did. Just trying to get a sense, I guess why did you do it, I mean is it expanding geographically, you’re getting into different markets. Are you taking people on, just trying to understand little bit more about that.

Michael J. Hennigan

Yeah Michael good question. It's exactly what you just said. It gives us a little diversification, it’s a small business. So we are taking on some marketing folks. But the main interest was to get ourselves a little bit more exposed out into that Utah area and the way into the basin. We think there is crude that's out there, it’s a growing area and we wanted to get more involved in it from a diversification standpoint. As I mentioned it's a small addition to our business. Our overall lease business is a 800,000 barrels per day, roughly about 400,000 barrels per day at the least. So this is a pretty small add on. But we think it's a nice strategic add on that gets us a little diversification and a little exposure further west than we are predominantly.

Michael Blum- Wells Fargo

Okay. And do you have physical gathering presence there from a truck et cetera perspective today.

Michael J. Hennigan

Yeah what we've acquired is the marketing business. So there is trucking activity, there is no physical pipelines but the main interest has been our interest in the rail facility there. So the Price River Terminal as we've acquired the majority interest in that unit train activity there. So you're going to see that be more of a train type truck and train type activity, like you see in other parts of the country. So that's been our main interest to have that activity be on the train side and kind of complement our pipeline activities in Oklahoma and Texas et cetera.

Michael Blum- Wells Fargo

Okay, great. Thank you very much.

Michael J. Hennigan

You are welcome, Michael.

Operator

There are no further questions at this time.

Michael J. Hennigan

Okay, I’d like to thank everybody for joining us this morning. And as usual we’ll be available for follow-up questions. Thank you.

Operator

Thank you for your participation in today's conference. Your call has ended. And you may now disconnect. Once again your conference has ended and you may now disconnect. Thank you for your participation.

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Sunoco Logistics (NYSE:SXL): Q2 EPS of $0.53 beats by $0.17. Revenue of $4.82B (+11.8% Y/Y) beats by $80M. Shares +0.7%.