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Dakota Plains Holdings, Inc. (NYSEMKT:DAKP)

Q2 2014 Earnings Conference Call

August 11, 2014 12:00 PM ET

Executives

Craig McKenzie – Chairman and Chief Executive Officer

Nick Dillon – Vice President of Finance

Gabe Claypool – President and Chief Operating Officer

Tim Brady – Chief Financial Officer and Treasurer

Analysts

Reed Anderson – Northland Securities

Steve Berman – Canaccord Genuity

Operator

Good day, ladies and gentlemen, welcome to the Dakota Plains Second Quarter 2014 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

Before we begin, I will review the Safe Harbor statements. This conference call may contain forward looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts that address the company’s expectations of future or expected performance, business prospects, developments strategies and similar matters can be identified as forward-looking statements. These forward-looking statements are based on assumptions that are subject to significant known and unknown risks, uncertainties and other unpredictable factors many of which are described in the Company’s periodic report and registration statement filed with the SEC and are beyond the Company’s control.

These risks could cause the Company’s actual performance to differ materially from the results predicated by these forward-looking statements. We caution listeners that these forward-looking statements are expected only as of the date hereof.

The company hereby expressly disclaims any obligation or undertaking to release publicly the updates or revisions to any such statements that will reflect any change in the company's expectations or any change in events, conditions or circumstances on which those statements are based.

With that, I’d like to now turn the call over to Craig McKenzie, Chairman and Chief Executive Officer for opening comments.

Craig McKenzie

Thank you, Emily and welcome everyone to the Dakota Plains second quarter 2014 financial results conference call. I’ll be hosting today's call along with Gabe Claypool our President and COO, our CFO Tim Brady is out of the office for family emergency. He is dialed in however and we will available for the Q&A.

The financial section of the prepared remarks will be presented by Nick Dillon, our Vice President of Finance. The second quarter was our first full quarter of operations for the expanded Pioneer Terminal and we’re very pleased with its performance. Transloading volumes continued to grow despite another quarter of logistics delays on the part of our rail provider. Gabe will expand on these points in a moment.

Our transloading volumes for the quarter were 3.9 million barrels of oil compared with 2.3 million barrels of oil for the same period in 2013 and 2.8 million barrels of oil in the first quarter of this year. Gabe and his team continue to focus on efficiencies and I am very proud of the job they’ve done in a few short months.

Cost per barrel and transloading was down 42% sequentially and 45% year-over-year driven by the increased efficiency at the expanded terminal. We believe we have developed the best-in-class asset and as validation of this comment interest by third-parties only continues to increase.

Indeed, we just signed another gathering pipeline system to pioneer that further expands the opportunities for third-party volumes. We’re not in a position to provide full details today, but we will do so shortly. The frac sand business that we’ve all just started out on the right foot. Operations at the UNIMIN Corp frac sand storage and transloading facility commenced in June. And we entered into an agreement with Rail Link, Inc., to operate and maintain the facility.

In our first full month of operations the facility is already running at plan at 400,000 tons per year pace as UNIMIN response to the producers expanded frac programs. The marketing joint venture continues to negatively impact earnings losing more than $0.75 a barrel in the quarter the marketing JV has sustained losses inline with the last 12 months and that is simply not acceptable.

We’re keenly aware that resolving the issues at our marketing JV is critical to the company’s future. This also includes managing our rail car fleet in light as the new regulations on tank cars. We’re aggressively working with our partner to address these issues. We have invoked our rights under the partner agreements and now we’re awaiting further cooperation from our operating partner which is a subsidiary of World Fuel Services to make a determination of the way forward.

The trucking JV generated earnings of $303,000 for the quarter that was a nice sequential improvement on roughly the same volumes. This JV remains more of a source of supply securities and long-term value creation but it’s nice to see that’s performing better. On holding company overhead I think its worth noting that our G&A expenses down year-over-year from $2.5 million to $1.9 million or almost 25% reduction not withstanding our expanded business and increase staffing, of the $1.9 million of holding company G&A about $1.6 million was cash for the quarter.

Subsequent to our last earnings call Dakota Plains was listed on the New York stock exchange MKT our exchange. We have already seen trading volumes increased and the future – and in the future this should enable broader variety of institutional investors to consider Dakota Plains.

One example is Lone Star Value Management’s accumulated large stake in the company which is the clear signal of the support and the value potential we have available to us. Finally, on the legal front on June 18, the petitioners in the Canadian class action related to the Lac-Mégantic train incident dismissed Dakota Plains Holdings and its wholly owned subsidiaries. The U.S. litigation is a separate matter, but a Canadian ruling is a favorable President for the company.

For more information I’ll refer you to our 10-Q. I’ll close out by saying that we continue to believe the crude by rail is a vital long-term solution to transporting crude oil to market from the Williston Basin. As such our corporate strategy has not changed we’ll focus on Pioneer as an operated core asset and aim to growth further including inbound businesses beyond UNIMIN. To facilitate this growth we’ll continue to strengthen our balance sheet by taking steps in the near-term to reduce our cost of capital and to mitigate risks associated with Lac-Megantic litigation.

With that I’ll turn over the call to Nick to address our financial results. Nick?

Nick Dillon

Thank you, Craig, our service per value and the financial results for the second quarter of 2014 including some joint venture operating metrics. Before I begin discussing the operating results I would like to make sure everyone understand some changes in our current practices compared to prior period. As we have previously announced, we have taken over management of the transloading joint venture effective December 31, 2013.

As a result, we consolidated the balance sheet immediately and reflected the assets and liabilities of transloading joint venture in our 2013 year end results. The income statement and the statement of cash flows were consolidated effective January 1, 2014.

It should also be noted that we managed the sand joint venture and as a result, having consolidating its financial statements since inception in June 2014. We continue to account for our marketing and trucking joint ventures using the equity method of accounting.

The company reported a net loss of approximately $1 million for the second quarter of 2014, compared to a net loss of $1.3 million sequentially, and a net loss of $600,000 for the same period in 2013.

Adjusted EBITDA for the quarter was a loss of $237,000, compared to a positive adjusted EBITDA of $322,000 sequentially and a positive adjusted EBITDA of $1.5 million for the second quarter of 2013. The decline was driven almost entirely by the loss from our marketing joint venture.

Net income of the transloading joint venture was $3.9 million for the three months ended June 30, 2014, compared to $1.8 million sequentially a 121% increase and $3.5 million year-over-year a 56% increase.

The increase in net income was driven by a combination of top-line revenue growth and effective cost management. Revenue from the transloading joint venture was $7.3 million for the three months ended June 30, 2014, compared to $5.5 million sequentially and $4.6 million year-over-year. The increase was driven by volume as a joint venture transloaded 3.9 million barrels of oil in the second quarter of 2014, compared to 2.8 million barrels of oil sequentially or 39% increase and 2.3 million barrels of oil year-over-year or 73% increase.

Cost of revenue was down 6% year-over-year on an absolute basis and cost per barrel for the three months ended June 30, 2014 decreased by 42% sequentially and 45% year-over-year. This was primarily the result of improved efficiency at the Pioneer Terminal.

Revenue from our sand joint venture was $176,000, with net income of $94,000 for the three months ended June 30, 2014. The sand joint venture initiated operations on June 12, 2014.

Loss from our indirect investment in the marketing joint venture was $1.7 million for the three months ended June 30, 2014 compared to income of $87,000 sequentially and income of $900,000 year-over-year.

The marketing joint venture sold 2.2 million barrels of crude oil in the second quarter of 2014, which was flat sequentially in down year-over-year compared to 2.6 million barrels of crude oil sold during Q2 2013.

The marketing joint venture continued to experience competitive margin pressures, which resulted in a net loss was $0.76 per barrel for the three months ended June 30, 2014, compared to net income of $0.04 per barrel sequentially and $0.35 per barrel year-over-year.

Income from the company’s indirect investment in the trucking joint venture was $303,000 for the second quarter of 2014, compared to $121,000 sequentially and $136,000 year-over-year. The trucking joint venture hauled 1.6 million barrels of crude oil during the second quarter of 2014, which was flat sequentially and a 20% increase when compared to 1.3 million barrels of crude oil hauled during the second quarter 2013.

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

Gabe Claypool

Thank you, Nick. Well, it’s finally happened. As of through April 2014 productions finally drop, the impressive 1 million barrels per day from North Dakota. Major milestone back in 2011, some of the industry predicted, we wouldn’t achieve until 2025.

At July, 2014, North Dakota Industrial Commission directed report shows May production continuing to grow. Final production for May was 1,39,000 barrels per day up about 36,000 barrels per day from April. Last statement report indicates 610 wells waiting on completion crude up 10 from April 2014 and a strong indication of production on the horizon.

May volume show the pipeline delivering 34%, Tesoro’s Refinery consuming 6% and crude by rail is hauling 59% of the Bakken volumes. While the percentages have shifted a little largely due to the continued margin pressure, it was still in average of 9 unit trains per day within the Bakken.

As already highlighted, this is our first full quarter of crude oil operations in the new terminal. It was also the first full quarter of third-party trends overtime. The Pioneer Terminal performed well as that our team on the ground. Our goal is to launch up to a 120 car unit trains and lasts for the 24 hour terminal.

During Q2, we safely averaged just under 20 hours per train. As highlighted earlier, our Q2 volumes were highest ever, April was 44,000, May was 46,000 and June was 40,000 averaging 43.4 thousand barrels per day.

Again that is up from Q1 2014 volumes of 2.8 million barrels or an average of 31,000 barrels per day our previous record. We’re all reading about continued stockholder property in the entire rail industry, refiners have been well (indiscernible) concerned about moving both trains and fertilizer.

More recently the power industry is starting to pressure the government to get more coal trends moving or you’re going to start being sort on electricity.

Specific to our operations, we have multiple trains, let’s look from April to May to June to July as of the result of the network issues. We have been actively engaging with the Canadian Pacific leadership and should deepen fundamental improvements starting in late August. Again, our Terminal can do more with its current tank volumes.

As you heard us articulate on our Q1 earnings call, we want to increase trends and volumes by adding a third storage tank. That tank will take our throughput capability from 50,000 to 80,000 barrels per day. Unfortunately, we did not reach our concerns with our partner World Fuel Services, and subsequently put the project on hold.

We are confident in the future with Canadian Pacific and third party volume demand and are determined to push that project forward. I would like to take some time to address the regulatory landscape.

On July 23, the Pipeline and Hazardous Materials Safety Administration a division of the department of transportation released a notice of proposed rule making. This proposal outline various audience of what they are now calling high hazardous flammable train specifically trained in excess of 20 cars in the flammable liquids class or hazard Class III.

The proposal outlines several options and it’s seeking feedback on the direction of the tank car design. In all three design options outlined it will be a fundamentally new car and both the 1011 and 1232 car types will be transitioned out.

The proposal sales are the timeline on exciting B31011 tank cars with the transportation of light suite crude oil on high hazardous flammable train ending in October 2017. Bottom line will remain focused on moving crude oil in a safe and efficient manner and welcome sensible improvements.

Sand operations commenced throughout on June 12 sort of much operating history to comment on. I would say, we were pleased with the new relationship with the Rail Link, Inc and UNIMIN plant love the efficiency of our terminal. Sand volumes for July exceeded our contractual commitment despite some short fall and logistics on behalf of the rail service provider.

Lastly, I’d like to highlight some great updates in recent weeks. We secured a new contract with PBF holding company as of August 1. PBF is a well known and respected company, with its own crude by rail terminal in Delaware.

This contract shipped for the near self composed capacity through much 2015. As Greg highlighted while I can’t give a specific name and end throughout the report that we have signed a new interconnection agreement with another pipeline gathering system, which will be the second pipeline connecting into pioneer and will substantially expand our service area. Keep an eye on our third process [indiscernible] on this one in the very new future. Back to you Craig

Craig McKenzie

Okay, thanks Gabe. With that I’ll open up the floor for questions from our listening audience. Over to you, Emily.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first Reed Anderson Northland Securities.

Reed Anderson – Northland Securities

Good morning. Thanks for taking my questions. Let me start with Gabe, since you finished up Gabe and it’s fresh in mind. You gave the monthly volumes and June was down from both. It was up a little bit in May, and down in June and I think the logic follows kind of explanation and that was just due to some rail related stuff, can you just elaborate just clarify that is the case and that was just sort of kind of a unique situation.

Gabe Claypool

I think Reed, it was a rail logistics scenarios the oil was there the terminal was there, it was simply a inability to get a throughput facility which is direct correlation to the performance of railroad.

Reed Anderson – Northland Securities

And then you had also said that you had discussions obviously you feel sounds like reasonably confident that the timing the reliability where we want to call is going to better kind of I think you said towards end of August through this month. I mean how confident are you, how much better can it get because even I remember, my last visit out there, I mean it was you got the capacity, but you are really at the Mercy of kind of won the train show often. So I was just trying to sense of how much better you think that’s going to be and one information you have today that gives you confidence.

Gabe Claypool

Well, so that we think it’s going to get a lot better than predominant problem we are dealing with is people headcount wise. The CPU committed the hiring about a dozen new operators or conductors and those folks are starting for us on that line in that New Town, operations if you will mid August, so literally like next couple of weeks. So when we see that kind of fundamental increase in headcount and is a direct correlation to what we think will become important on the operation.

Reed Anderson – Northland Securities

Okay, that makes good. Craig I know and its really audio control, so don’t definitely not take this is a negative. But in the marketing side, its sort of just kind of capture at this point, but when I look at everything else use to be doing what should, what you can control a service but if I focus back on the marketing can you just provide a little more color or granularity of how you get to that kind of a loss in a quarter, in a business that even if its very competitive, it still seems like a big number just help me understand how we get to that kind of number, please, thanks.

Craig McKenzie

Hey, Reed and I actually welcome the question and the dialog on the marketing losses. It’s a troubling aspect of our business as you heard me articulate in my prepared remarks and also you heard me say this before in previous phone calls. If we are working diligently, if we possibly can with internal and external council to try and remedy or stop the hemorrhaging of the losses in that business.

Unfortunately, we are a passive partner in that business and we are trading partner has a lot more control over how that business is managed. I can’t speak for World Fuel Services with respect to what the remedy is going to be. They are actually engaging on this matter right now real time and we have certain appointment to have a collaborative workshop later this week in the coming weeks.

The point is there’s not an easy solution, because there are also implications with respect to the railcar fleet, you could just drop volumes and not move the oil, but then you have issues with respect to storing the railcars that you’re not using. So, the loss is still occur. The fact is we have an operating lease that is taking a long with – I have dozen railcar contracts, where we have monthly obligations and none of those contracts are set to expire here real time.

So, therefore as imperative that we keep moving oil or we could forego the marketing aspect, the trading aspect and incur the operating lease losses and forego our transloading fees. We remember that we divide at the business doing marketing and transloading. So, even though we are making no money on marketing, it is propping up some of the income for the transloading business.

Reed Anderson – Northland Securities

Sure.

Craig McKenzie

Now going back to your question, the model that has been employed here to far is a spot market model. We’ve seen the industry trending more towards term based trading contracts we Dakota Plains, I think there is merit to that we don’t see evidence that our competition is losing the same sort of money. However, it’s a fairly OPEC business arrangement, with there is not a lot of transparent benchmarking for us to really engaged how our business is doing vis-à-vis the competition.

But what we do know is based on the trading abilities of our partner, and this is what they do for living. They have not been able to move oil at a profit. And that is shown here in recent months, when both the purchase and the sale contracts have been WTI based and the margin between those two contracts has not been enough to offset the cost.

Reed Anderson – Northland Securities

Okay. And suffice to say about I think let me saw on this quarter, when you’re going to– you’ll mitigate as best you can by minimizing volumes through marketing, but obviously you need to do that because you’ve got fixed costs recover at this point?

Craig McKenzie

That’s right. And we’re looking at this with no paradigm. We are looking at the business from one end to the other turning at upside down. And we’re considering all alternatives including up to winding it up and terminating the business is just both partners need to agree to do that. It’s problematic for one partner just to exit the business there will be cost incurred.

Reed Anderson – Northland Securities

Okay, all right. I let somebody else jump in and then I come back in a bit after that. Thanks, guys, good luck.

Operator

(Operator Instructions) We will go next to Steve Berman with Canaccord Genuity.

Steve Berman – Canaccord Genuity

Thanks. Hi guys, Gabe or Craig can you tell us what July volumes were relative to that 40 in June, give us a sense where we are today?

Gabe Claypool

Yes, if I can, give me one second to follow-up, it was right around 41,000 give me an exact few seconds call 41,000 for July.

Steve Berman – Canaccord Genuity.

Okay. And that – as we move through the rest of this quarter you expect that to get back up more towards capacity?

Craig McKenzie

Yes, we do, again we see the improvements coming from CP side of the equation. So we think the volumes will catch back up. And again 45,000 of our soft and close kind of goal, but we can do 50,000, if we get the railroads on the same page. So, we hope to get closer to that 50 for the trending quarter remainder of the last two quarters.

Steve Berman – Canaccord Genuity

Okay. And do you have maybe in cashes that the revenue per barrel for the oil transloading for the second quarter could probably calculate on myself, but if you have that would be helpful?

Craig McKenzie

Revenue per barrel?

Steve Berman – Canaccord Genuity.

Yes.

Tim Brady

Steve, it is Tim Brady. You well continue with our forecast, in our forecast that we shared was approximately $0.50 per barrel on the net income side. So $1 for the entire joint venture, but we’re still on track with $0.50

Steve Berman – Canaccord Genuity.

Right, okay. I’m sorry that if I said revenue, I’m sorry I mean that’s what I mean.

Tim Brady

I know it’s not.

Steve Berman – Canaccord Genuity.

Can you elaborate on what’s the difference between waiting for approval from World Fuel for that third storage tank and now that was on hold, I mean what’s can you tie that together for me what the significance of putting in on hold as suppose it is trying to get their approval?

Tim Brady

Well, no lets be clear it’s the same thing, we Dakota Plains have approved that project and wish to proceed immediately with the construction of that and getting it online as soon as possible, because we line of sight on the volumes that would underpin that additional $5 million of capital expenditure, its on hold because our partner has not approve that project.

Steve Berman – Canaccord Genuity

Got it, so nothing has changed then.

Tim Brady

Fundamentally with the business nothing has changed for underpinning the construction is just we have a different perspective than our partner.

Steve Berman – Canaccord Genuity

Got it all right thanks guys.

Tim Brady

Thanks Steve.

Operator

Thank you. That is all the time we have today for questions I’ll turn the call back over to Craig McKenzie before we conclude today’s conference call.

Craig McKenzie

Well, thank you everyone. This year continued to be sort of a gain of four quarters with transloading performing well for both first and second quarter. And we’re working on curving the losses from marketing through intervention. So that’s all we have today, but we look forward to speaking to you in the future next schedule time will be the Q3 earnings later in the call. Good bye for now. Thank you.

Operator

Thank you. That will conclude our call for today. Thank you all for your participation. You may now disconnect.

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Source: Dakota Plains Holdings' (DAKP) CEO Craig McKenzie on Q2 2014 Results - Earnings Call Transcript

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