VTTI Energy Partners LP (NYSE:VTTI)
Q4 2015 Earnings Conference Call
February 09, 2016, 09:00 AM ET
Robert Abbott - Chief Financial Officer
Robert Nijst - Chief Executive Officer
Jeremy Tonet - JPMorgan
Praneeth Satish - Wells Fargo
John Edwards - Credit Suisse
Barrett Blaschke - MUFG Securities
Lin Shen - Hite Hedge Asset Management
Matthew Phillips - Clarksons Platou
Derek Walker - Bank of America
Good day, ladies and gentlemen. Welcome to the VTTI Energy Partners fourth quarter 2015 earnings conference call. [Operator Instructions] At this time, I will turn the call over to Rob Abbot, Chief Financial Officer of VTTI. Please go ahead, sir.
Good day and thank you all for joining the VTTI Energy Partners Q4 2015 earnings call. Please note that the press release announcing our financial results and related slides are available on our website at vttienergypartners.com.
I would also like to remind you that certain declarations made by management during the conference call will include the use of statements that are forward-looking in nature and will not be based on historical fact. Accordingly, we direct you to the risks and uncertainties disclosure included in the company's latest filings with the SEC.
With that, I will introduce Rob Nijst, our Chief Executive Officer.
Thank you, Rob. And welcome, everyone, to our earnings call for the fourth quarter of 2015. Let me take you to Slide 3. On Slide 3, we have our usual slide, reiterating why we believe VTTI is a truly differentiated company. Today, I will only highlight a few themes, then I will return to on the subsequent pages.
VTTI provides cash flow stability with long-term take-or-pay contracts with no direct commodity price exposure and no material volume risk. This has been reflected in the excellent cash flow performance since IPO that we highlighted in our last call.
Secondly, we offer attractive growth characteristics, driven by our existing dropdown inventory of approximately three times the current capacity and differentiated M&A growth strategy, focused on the fragmented international terminal market. Our stated mid-teen distribution growth target remains in place.
And finally, the demand for storage capacity outside North America is driven by long-term structural trends. Our growth portfolio of highly flexible and efficient terminals and strategic hub locations have proved themselves to be highly profitable in a variety of different pricing environments.
Turning now to Slide number 4. We wanted to emphasize that demand for storage outside North America is primarily driven by two long-term trends that are structural in nature. Firstly, as you can see, in the charts to the left, global oil demand growth has been very strong historically with 55% increase since 1984.
Secondly, and more importantly, the intra-regional flows have increased faster than global demand, i.e., 125% over the same period, as you can see in the central chart. This is due to the growing regional imbalances we see as consumption patterns and global refinery fees change over time.
For example, as new world-scale refineries are constructed in non-OECD countries, all the less competitive refineries in developed markets are being forced to close. In addition to this, we see different quality specifications from country-to-country. For example, in Asia, these dynamics leads to growing intra-regional flows. This trend has been further accelerated by the major [ph] NOCs move away from vertically integrated model and the expansion of trading companies who act as intermediates in the global system.
If you look to the future and the chart on the right, global demand growth is expected to increase further, driven largely by higher car penetration in emerging market economies. Forecast of oil trade flows are not produced by the industry, but as you can see from the two left-hand charts, flows have written well above the overall growth historically and we would expect that pattern to continue.
Turning to Page 5. We have set out our historical performance in terms of storage rates and utilization to demonstrate the resilience of our business model in different price environments. Over the period shown, the spot oil price has shrunk from $150 per barrel in 2008, down to $35 per barrel, and then up to about $120, and finally falling to the $30 or so we have today. You can see this in the shaded grey area on the chart.
In terms of price structure, shown at the orange line here, we are seeing similar volatility, with a period of so called super contango moving to a longer period of backwardation before switching to the current contago pricing environment. Throughout this period, our contractual utilization levels have remained consistently high at the levels around 95% or higher.
Note 2010 and 2011 were impacted by the acquisition and upgrade of a new brownfield terminal, and the rest of the portfolio excluding this asset was approximately 97% utilized. Similarly, the rental rates shown in the green line increased steadily throughout the period at a rate around or above inflation.
In the current price environment, despite the general stress in the global energy market, the international storage market remains in good health, with our utilization level to date, excluding maintenance, at close to 100%.
Turning to Slide 6, we have our corporate and operating review for the quarter. The VIP acquisition of MISC that we notified to you all in the previous quarter is now closed. The U.S. PP transaction, where we raised $445 million at 3.9% also closed June Q4.
Now we have completed a full year of quarterly reporting. We wanted to highlight that we have achieved the targeted mid-teen annual distribution growth that we stated at the time of the IPO, with 15% year-on-year increases when comparing Q4 2015 with Q4 2014. Our progress ratio for the fourth quarter was also right in line with our target levels of 1.1x.
In terms of operating highlights, as previously mentioned, commercial utilization levels were very high with a supportive market backdrop and goods trading levels across the group with a solid throughput and ancillary services performance.
However, throughput volumes were distributed more evenly across the customer contract base, which meant the access throughput revenue was actually down last year, despite higher overall volumes. You will remember that we notified you of the likelihood in the last quarter earnings call.
Next, we turn to Slide 7 and our development projects. As noted previously, the expansion projects of VTTI B.V. in Fujariah and Malaysia are within budget and schedule. Malaysia Phase 2 was operational for its first full quarter in Q4 2015. We have now started construction at our greenfield Cape Town project of 0.8 million barrels of capacity. As noted before, these projects are at the VTTI B.V. level and will add to our future dropdown asset inventory.
I will now hand you over to our CFO, Rob Abbot, to take you through the financial results for the quarter.
Thanks, Rob. With regards to the financial highlight, adjusted EBITDA for Q4 was $48 million, $2 million lower than Q4 2014, due primarily to the access throughput revenue impact described by Bob earlier. We also raised our dividend this quarter by 3.1% to $0.3015 per unit, representing a 15% increase year-on-year with the Q4 of 2014, in line with our mid-teen annual distribution growth target and this was our fourth successive increase of around this level.
Net debt to EBITDA fell slightly to 2.6x, well below our target range of 3x to 3.5x. And please note that following the yearend we took the decision to reduce the RCF signed to €300 million to avoid paying unnecessary commitment fees.
I'll now turn to the financials in more details on Slide 8. In terms of headline numbers, again, adjusted EBITDA was $47.6 million. As previously mentioned, a slight fall on last year due to reduction in excess throughput revenues of around $2 million. Q3 2015 was approximately $9 million higher than Q4, but you'll recall that this included a $9 million final lump sum receipt for that terminal in Rotterdam, which we've highlighted last quarter.
Interest costs of $4.9 million and maintenance CapEx of $4.7 million were in line with the overall run rate level, with total maintenance CapEx for 2015 of approximately $20 million. This is somewhat below our previous market guidance for the year of $25 million. We expect 2016 maintenance CapEx to be approximately $25 million, in line with our prior guidance. Post-NCI, distributable cash flow was $13.7 million, giving a coverage ratio of 1.10x on our increased distribution, as Rob mentioned, exactly in line with our stated target.
On Slide number 9, you will see an update on our balance sheet and hedging position. Our RCF related net debt was $486 million and our gearing level was 2.6x the adjusted EBITDA on an annualized basis. The fall in net debt was partially due to the timing of certain working capital items, which led to an elevated cash position.
I'll now update you on an extension to our foreign exchange hedging program. You will recall that our existing U.S. dollar/euro foreign exchange hedging program was in place to mid-2019. We have recently extended this to the end of 2020 at a similar level of over $1.3 to the euro. The cash flow coverage level for this extension period was approximately 50%.
With that, I'll turn back to Rob Nijst to talk about the company outlook.
Thanks, Rob. Turning to our final slide, on Page number 10. We have set out our views on the market and the prospect for the business going forward. As discussed at the start of the call, we believe that regional product imbalances and product demand growth will continue to drive the increasing requirement for storage outside of North America.
We are not dependent on a certain oil price or upstream investment level to sustain our growth. As you can see, VTTI's operating performance and outlook has remained strong, despite the recent commodity price fluctuations and we currently see contango market structure with a resulting further positive impact on capacity demand.
In terms of acquisitions, the fragmented global market provide us with a great opportunity set to make acquisitions at accretive multiples. We are in active discussions around a number of ongoing projects and liquidity is available to finance further growth. In near-term, our primary source of growth at the MLP level will continue to be derived from further dropdowns of equity in VTTI operating.
Our next dropdown will likely be in mid-2016. And as highlighted in our previous call, we are investigating alternative sources of funding, including debt, in case the equity markets remain stressed. The size of the dropdown will be designed to meet our near-term distribution growth targets.
Our stated target of mid-teens annual distribution growth remains in place. This is in line with the distribution increases delivered since our IPO in Q3 2014. Our ability to sustain this growth level into long-term will of course be dependent upon equity capital market access in line with a number of our MLP peers.
With that, I will turn to the question-and-answer session and the first question.
[Operator Instructions] The first question comes from Jeremy Tonet of JPMorgan.
Just want to follow-up on the topic of dropdowns, as you have mentioned there and as you were discussing, there is some stress in the capital markets right now, and it seems like you have a few different alternatives to finance the next dropdown, especially given your low leverage level. But I was just curious as far as the parents' appetite to take that unit as partial consideration for dropdown, if that's a lever that you guys can pull, should market conditions continue to be stressed?
Yes, Jeremy, and that certainly is a level we could call, as we mentioned in our last call and again today. And we're not too concerned, we feel like we have multiple options including debt. And we do have the lever, as you say, of going to the sponsor, the parent, and a new unit whose consideration is on the dropdown, but that still doesn't avoid the valuation problem. And I think those transactions are typically done at market.
And even if that gets over the problem and the capital market is being closed, but it still doesn't avoid the problem that if the valuation is lower than we would like it to be. Obviously, if we do a transaction there, we avoid the whole valuation question. But, yes, you are right. Hopefully, if our valuation would be better than it is today, then absolutely we can pull.
And then just wondering if you maybe able to expand a little bit more on contract renewals? And what's up next, is there much in 2016? Where do you see rates going in? Are any of these contracts third-party?
Well, Jeremy, in 2016, all our contracts, the whole year is covered.
There are some small, very small contracts, which expire in 2016. But I think we're approximately 95% contracted for the full year within the MLP terminals.
And in any case, it was a contract for renewal in this year that will be having a positive effect on the rates, because of contango structure.
And then just one last one. I know you touched a bit on it as far as acquisition opportunities of, globally speaking, I'm wondering if you can expand a bit more as far as to this stress conditions in energy make smaller players or family operations more willing to transact in this environment or any changes on that front?
Well, what we experienced that has been throughout the cycles is that a lot of the, what you call, the family or businesses, they are keenly interested to link themselves to global operators. And that is not only because of the environment in which we currently are with the oil price, because in general, so these guys should also be well, but it's more because of the investments they need to be making as a family business in regulatory CapEx.
And for them its way better to link up to a company that can provide more support and expertise in all this kind of investments. And link to a network that also can help them under commercial front and that has not really anything to do with the structure of the market today. We have seen that in the last few years as well.
Let me add one thing, and that is not the family companies, but that's a different firm that we see, because of the oil environment in which we're in and that is a one positive for businesses like us. With the 30-40 oil requirements, you do see and you have been able to read it yourself guys is that, you do see a lot of NOCs really looking for divestment of their midstream portfolios.
And that's going to be an interested segment for us, because in general you tend to see that these guys they want an operator as a party to acquire assets, but also that needs to be run going forward. So they want to have sole operators, who are going to be their partners in not only buying it, but also running at parties with their commercial contracts still underlying that asset going forward.
So you see greater opportunity on that front in the current environment there. Is that fair to say?
Yes. I see opportunities. It will take time, because bigger companies do take time in their divestment process. But it's absolutely a positive development for companies like us.
And then you could put the integrated, the major companies into that category as well [indiscernible].
The next question comes from Praneeth Satish of Wells Fargo.
Just a few couple of questions. I guess, first, can you just remind us how much of the revenue is derived from Vitol and how much is from third-parties? And then for the third-party component, do you have maybe kind of a breakdown at all of credit ratings or credit quality?
The revenue split with that, 70% Vitol and 30% third-parties. I can't give you a specific split, but what I can say is it's made up primarily by the oil majors, which obviously have a very good quality credit rating or other sort of, what we call, system traders such Glencore similar companies to Vitol, it will similarly have good credit quality.
I know, you've seen issue with certain traders in the markets, but they tend to be the ones that have large upstream or physical asset positions, the ones like Vitol and Glencore who are more -- just move their commodities from one part of the world to another have not experienced the same issues.
And I just want to go back to the Vitol's decision to acquire MISC's 50% interest in VTTI B. V. I guess just going back to some of the factors that led to this transaction, I'm just curious if this would indirectly benefit the MLP in anyway? Could it result kind of an increase in CapEx spending and increased dropdown potential?
No. I think as we highlighted in the last call, no change to strategy discontinuation of the past strategy.
And then just last question. You mentioned that if the equity markets, if you can't raise equity at reasonable terms, if that's not an option, you could issue debt to fund the next dropdown. I guess, just in terms of the leverage ratio, where is kind of the maximum in terms of where you could take that too? I think you said, 3.5x is the target. Could you go over that when transacting for the next dropdown or is that kind of a limit there?
So 3.5x is actually the limit under our RCF and U.S. private placement, but we do have the ability to go above that in the Q, so we can borrow one level above those basis of VTTI MLP B.V, so we could actually go one level above, which was how we funded our first dropdown and put in debt to the Energy Partners level.
But I think the 3.5x is a level that we sort of feel comfortable with. If necessary we could go above there at 4x, and you'll note that a number of our peers are at much high leverage levels than that. So I think 3.5x is a level we feel comfortable with. If necessary, we can go up, say, another half a term.
The next question comes from John Edwards of Credit Suisse.
Just following-up Jeremy's questions. Just can you remind us the existing duration of contracts, how much is coming up for renewal this year?
I think it's around 5% in 2016. It's a very small number. You'll remember, as part of the MIC exit, the Vitol took the option to expand a number of their contracts. And we had a table on our last earnings presentation, which we summarized and you'll see that the contracts we extended by typically something evidenced by the four years, so that's pushed out a very large chunk of that of our capacity over four years.
So on average, it's over four years, is that correct?
It's around to the level, yes.
And then in terms of -- you're indicating in your discussions on a number of M&A fronts. I mean, can you indicate kind of the range of multiples that you're seeing and how much does that vary by product?
I think, John, it's quite hard to generalize given the transactions are case specific. I think historically what we've seen is anywhere between sort of 6x and 10x EBITDA is the usual range of transactions depending on the asset quality. There have been some transactions done in Northwest Europe recently in higher multiple, but there tended to require a specific situation where very large assets able to take on lot leverage and say, you've seen infrastructure funds in particular coming to the market and pay high multiples.
But in most situations, we fear in the niche of our experience, historically we've been around the 6x to 10x. In terms of product variations, not really, I'd say, the difference between crude and products -- again, it depends on the location and sort of [multiple speakers].
Look, John, it's more the location that might make a difference in the most of those parts than then product globally. And like Bob said, maybe it could, but you also know that we are mostly a refined product terminal company, we do limited crude globally.
And then I'm just wondering given your position, we always fear how there is crude oil storage builds around the world and that's obviously continuing to pressure prices, a lot of the excess supplies finding its way into the U.S. market. I mean just from where you said in terms of how much storage do you see available globally?
I mean any insights you can provide regarding perhaps when you think the supply and demand balance might come into -- be achieved. I mean there is obviously a lot of use with regard to this and when the market may return to a more balanced market as well.
Well, I wish I had that answer, John, but if you look at availability of tanks in this structure and certainly in locations that we are working, that you can't get a decent tank nowadays, because of the contango structure of the market.
It's also good to know that in locations where we operate and we have stressed that every time we are in an earnings call, we are not dependent on either contango or backwardation, and we are really in a system, we are really part of the supply chain in the sub-locations, so also in different structures of market you see how utilization, and that's what we tried in one of the slides to show you.
So for us, it's independent of what the market does, we see high utilization rates. It's only in the secondary locations, say, which always required double handling before you go to your final markets that some times sees empty capacity in a backwardated market, but also today they are full. And for us it's also -- I mean there is no data published on that and there is no global database on terminals worldwide, so it's very tough to answer your question on that one.
The next question comes from Barrett Blaschke of MUFG Securities.
Just a one quick question and that is, now the revolver capacity down a bit here, given the state of the capital markets and kind of just the future uncertainty, how easy do you think it's going to be to bring the capacity back up if you should need it, assuming equity markets don't really come back and you want to put some more leverage on?
Barrett, there is a lot of spare capacity now in that facility, given the USPP refused to pay down existing debts. So we feel that's the very large amount of spare capacity and that's why we took a decision to take down the total capacity and not paying necessary commitment fee.
But although the public capital market are indeed stressed, the banking liquidity market is still liquid, and we feel that if we did need to extend that and go back into the RCF market, that wouldn't be a problem. In fact, the current process, the debt people are paying in the current banking market are someway below than what will occur in RCF in doing that so. So that's something we are thinking about the current time.
The next question comes from Lin Shen of Hite Hedge Asset Management.
For the dropdown, we should expect sometime May this year, how should we think about the size and also the multiple?
I think as we pointed out in the call and the script, the size, given the state of the markets, we're looking at tailoring, we say, tailoring the size, by which we really mean I think reducing the size to a level that's sufficient to allow us to pay our target distribution growth, but not more.
So I think depending on what your expectation was previously or our own internal expectation is, it's likely to be somewhat smaller than we thought maybe six to nine months ago. But it will be of a scale that's sufficient to allow us to continue to pay a growing distribution in line with our target.
And just a follow-up to that. How should we think about multiple of the dropdown? And also when you talk about the cost of capital, I know fuel market is really weak, but if you look at VTTI unit price, your price performance did pretty well versus other, so how should we think about the cost of capital at a current yield?
Yes, I think you're probably aware, we did our first dropdown around 9x EBITDA, and I can't obviously prejudge the conflict committee prices. But I think what we would do at the time as we did with our first dropdown is look at what the comparable transactions are being done in the market.
And if we see that and move down, I think there aren't that many precedents given the state of the market. So what we've seen from the precedents is that there has been indeed a trend downwards, and I think we reflect that in the valuation that we would propose the conflict committee that we just have to see how the market evolves over the next three months or so. And then as I said, I can't be prejudge to the conflict committee process, so it will also need to get to that before we have a completion on what the exact multiple is.
The next question comes from Matthew Phillips of Clarksons Platou.
You had answered it before, I believe John Edwards' question, that that 95% roughly contract coverage for '16. Could you share those figures for '17 and '18?
I don't have those numbers with us. I'll think, Matthew, whether or not that's something we want to share going forward in terms of correct and commercial concerns that if we give too much disclosure around our contract books, then we operate in a competitive market and our peers will then have access to that information. So let's take a while and think about that.
And then what percentage of your underlying contracts are held by non-investment grade entities?
It was very small.
Yes. It must be below 10%. I mean, if you take the Vitol at 70%, and then you add in the [multiple speakers].
I wouldn't know.
We'd have to check, but it's certainly below 10%, probably below 5%.
And we have a question from Derek Walker of Bank of America.
Most of my questions have been answered, so I'll just ask some quick modeling questions here. So on the OpEx side, I think 2015 came in around $77 million, is that a fair run rate for '16, '17 kind of going forward?
Yes, I think just when inflationary increase is signed.
And then just on the excess throughput, I know it might be a little bit tough to kind of get a feel for how that plays out throughout the year, but I think remind me, is that roughly 5% or 10% of sort of total revenue? And I guess what's the fee associated with the excess throughput?
No, it's actually less. So you remember, we showed and point to our feed times, where we shared 90% of the revenue is take-or-pay. And then the remaining 10% is split into two categories, one is the ancillary services, like blending and heating, which is about 8% of that 10%. So it's only way to that remaining 2%, which is the excess throughput.
The reasons why I feel it's a bit immaterial this quarter and previous quarter is because it nearly all falls in Q4. So it's only 2% of revenue. It is almost dropped straight down to the bottomline, so that amplified the effect as well than it will falls in Q4.
So we won't really known until we get to about another six months, how our Q4 2016 is shaping up, but I think it's fair to say that the 2015 was certainly lower than we've seen on average for the last, say, five years. So I wouldn't take that a new normal, I think 2014 is probably a better guide to a sort of neutral assumptions to 2016.
This concludes our question-and-answer session. I would like to turn the conference over to Rob Abbott for any closing remarks.
End of Q&A
No closing remarks. Thank you very much, everyone, for joining the Q4 call. And we'll look forward to speaking again soon. Thank you, guys.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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