Dakota Plains Holdings, Inc. (NYSEMKT:DAKP)
Q4 2015 Earnings Conference Call
March 11, 2016 12:00 PM ET
Craig McKenzie - CEO
Gabe Claypool - President and COO
Tim Brady - CFO
Joshua Mann - Platts
Good day, ladies and gentlemen. Welcome to the Dakota Plains Fourth Quarter and Full Year 2015 Earnings Conference Call. [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 reports and registration statements 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 such changes 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, Chief Executive Officer, for opening comments.
Thank you, Emily and welcome everyone. Joining me on the call today are Gabe Claypool, our President and COO and Tim Brady, our CFO.
We had a solid year in 2015 with tangible year-on-year gain in the face of an undeniably challenging year for the industry as a whole. We all witnessed a tremendous challenge and no one was immune to the issues regardless of size.
Tim will discuss our end year performance, so will limit my remarks to how we are taking the company forward. Each and every month, we are fighting to gain market share and volumes, while also finding the right balance of oil transloading tariffs to maximize revenue. As rail terminals in the Bakken rationalized, we believe we are well positioned to emerge as one of the strongest terminals remaining.
We are focused on maintaining safety and operational integrity at our Pioneer Terminal, while we continue to take meaningful measures to streamline the operations and to reduce operating costs. Gabe will cover all of this in more detail in a moment.
We are rigorously changing the way we manage our cash and we are managing liquidity with laser focus ensuring that we keep a tight control on all cost, including overhead, while we also undertake selective growth initiatives.
Beyond the base business and beyond Pioneer, we are pursuing strategic alternatives. We are spending a good part of everyday working to create new sources of income and value for our stockholders. This effort, which was formalized a year ago has included the pursuit of certain transactions that in the end were not right for the company and its stockholders. However, that has not deterred us from identifying additional opportunities.
To this end, I am pleased to introduce that we are pursuing a greenfield oil storage project in Cushing, Oklahoma, the premier strategic storage hub in North America. We are also offering storage at our Pioneer Terminal, both in our existing infrastructure and through the development of additional capacity. We are well into the development stages at both locations, but Cushing is more material and the outlook is very promising. We will have more to report on these efforts in the coming months and quarters.
While we are forward-looking, we are still attending to legacy issues. In last quarter’s webcast, we summarized the legal actions that we took against our former JV partners. Today, I am pleased to say that we are having a constructive dialog in an effort to resolve these legal matters. We are well positioned to reach an interim agreement, which I hope will pave the way to a final and favorable settlement by mid-year.
Now, I will turn over the call to Tim to review our financial results.
Thanks, Craig. I would like to begin with a discussion of our fourth quarter results and then I will proceed to discuss our full year results. The company reported net loss of $3.4 million in the fourth quarter of 2015 compared to a net loss of $900,000 for the same period 2014. The net loss was primarily driven by the decrease in revenue as a result of lower crude oil transloading fees, which was partially offset by improved operating efficiencies and increased crude oil and frac sand transloading volumes.
Revenue from crude oil transloading was $3.7 million for the fourth quarter compared to $7.7 million for the same period of 2014. The company transloaded 4.4 million barrels of crude oil during the quarter compared to 4 million barrels during the same period of 2014. The decrease in revenue was driven by a 55% decrease in the average transloading fee charge in the fourth quarter of 2015 compared to fourth quarter of 2014.
Cost of revenue for crude oil transloading was $1.2 million for the fourth quarter of 2015 compared to $2.1 million during the same period of 2014. This reduction was primarily due to bringing the transloading operations in-house during the second quarter of 2015.
Revenue from frac sand transloading was $1.1 million for the fourth quarter of 2015 compared to $600,000 for the fourth quarter of 2014. The increase in revenue was driven by volume as the company transloaded approximately 159,000 tons of frac sand during the fourth quarter of 2015 compared to approximately 81,000 tons during the same period of 2014. This was a 97% increase.
Cost of revenue for frac sand transloading was $147,000 compared to $300,000 for the fourth quarter of 2014. The decrease was due to improved efficiency as a result of bringing the transloading operations in-house during the second quarter of 2015.
General and administrative expenses were $3.2 million for the fourth quarter which was flat compared to same period of 2014. Interest expense was $2 million for the fourth quarter of 2015 compared to $1.3 million for the fourth quarter of 2014. The increase is primarily driven by the interest expense related to the operational override liability and the additional debt resulting from the acquisition of 50% of the outstanding interest in the transloading and marketing joint ventures in the fourth quarter of 2014.
Adjusted EBITDA for the fourth quarter was $300,000 compared to $1.9 million for the same period of 2014. The difference is primarily driven by lower crude oil transloading fees.
And now I will discuss full year results. The company experienced a net loss of $25 million in 2015 compared to a net loss of $3.3 million in 2014. The 2015 net loss was driven by a non-cash valuation allowance on the company’s deferred tax assets of approximately $27.4 million which was partially offset by an $11 million gain from a revaluation of the operational override liability. In addition, record high crude oil and frac sand transloading throughput, revenues from railcar storage and bringing the transloading operations in-house partially offset the valuation allowance. The net loss in 2014 was driven by a significant decrease in income from the company’s indirect investment as marketing joint venture.
Revenue from crude oil transloading was $23.2 million in 2015 compared to $26.8 million in 2014. The decrease in revenue was driven by a 28% drop in average transloading fees. The impact of lower fees was partially offset by volume as 16.8 million barrels of crude oil were transloaded during 2015 compared to 14.2 million barrels of crude oil during 2014. This was a 19% increase.
Cost of revenue related to crude oil transloading for 2015 is $6 million compared to $7.9 million for 2014. The reduction was primarily due to bringing the transloading operations in-house during the second quarter of 2015.
Revenue from frac sand transloading was $4.5 million in 2015 compared to $1.4 million in 2014. Cost of revenue related to frac sand transloading was $1.2 million compared to $600,000 in 2014. The company transloaded 605,000 tons of frac sand during 2015 compared to 172,000 tons of frac sand during 2014. As a reminder, frac sand transloading operations did not commence till June of 2014.
General and administrative expenses for 2015 was $10.3 million compared to $9.1 million in 2014, a 13% increase. The increase is primarily due to $1.1 million in fee related to the strategic alternative process.
Interest expense was $8.1 million in 2015 compared to $2.8 million in 2014. The increase is primarily driven by the interest expense related to the operational override liability and additional debt from the acquisition of 50% of the outstanding interest of the transloading and marketing joint ventures in the fourth quarter of 2014. The operational override liability was reduced to $11 million in 2015 due to a decrease in the long-term estimated daily crude oil transloading volume used to calculate liability.
The company believes that third quarter of 2015 was an appropriate time to adjust the long term volume forecast due to the continued downward pressure on the crude oil market. In addition, at that time, the company applied a non-cash valuation allowance of $26.2 million to deferred tax assets. As directed by accounting standards, the Company regularly evaluates the potential need for evaluation allowance for deferred tax asset.
During the third quarter valuation, the Company placed lower weight on the prospect of future earnings due to the continued volatility in crude oil prices and more weight on the results over the recent three-year period. It is important to note that this is a non-cash adjustment that can be returned if the Company realizes its future earnings. Also, the application to valuation allowance was not necessarily indicator of poor future performance but rather the authoritative guidance simply applies more weight to past results. The provision for income tax was $29.3 million in 2015 compared to a benefit from income tax of $900,000 at 2014. The increase in effective tax rate was primarily due to the valuation allowance placed on the net deferred tax assets in 2015. Adjusted EBITDA was $8.7 million in 2015 compared to $3.4 million in 2014, 151% increase. The increase in adjusted EBITDA was primarily driven by record high crude oil and frac sand transloading throughput, revenues from rail car storage and improved operating efficiencies in both the crude oil and frac sand transloading operations.
And now, I’ll turn the call over to Gabe to speak about our operations. Gabe?
Thanks Tim, good morning everyone. The crude oil industry in the Bakken were both hit hard over the last 16 plus months. We’re going to highlight some various data from 2015 specific to the Bakken but we will end on some bullish data for our pioneer operations. From December 2014 to 2015, Bakken production including Eastern Montana went from 1.3 million barrels per day to 1.2 million barrels per day, a drop of 8%. The rig count went from 137 active drilling rigs to 41, a drop of 70%. Wells awaiting completion went from 750 to 954, an increase of 27% and WTI went from roughly $59 per barrel to $37 per barrel, a drop of 37%. The WTI to Brent price differential a key factor in driving the shipper’s decisions between crude by rail or pipeline utilization has compressed in the last 12 months having 270,000 barrels per day to shift in crude by rail to the pipeline. That is 3 plus trains per day of market share our crude by rail industry has lost.
Despite this, Dakota Plains grew volumes by almost 20% in 2015 taking market share from some of our competition. To be specific, Dakota Plains handled roughly 6% of the Bakken crude by rail volumes in December 2014. In December of 2015, we handled 11%. The Bakken sand market has also faced some obstacles but just like crude oil, our stand operations had increased absolute volumes as well as market share. Bottom line growing market share in both segments has not been easy, especially in the declining market. Several terminals have idled operations and none of the remaining terminals are running at capacity for crude oil or sand. Our state of belief that our terminals proximity to the core of activity and our team's availability to execute are supported by actual market metrics.
With pipeline capacity almost full, as term contracts at other facilities continue to roll off, we think we are well positioned to capture more market share and emerge as one of the stronger players in growth returns for the basins.
I get a lot of questions about our near-term outlook for activity in the Bakken. While a great deal of focus is often placed on the rig count as a leading indicator, a more appropriate indication of future crude production is well completion. The number of Bakken wells awaiting completion is almost 1,000 compared to the 1,250 wells completed in all of 2015. So while the rig count is down drastically, the backlog of uncompleted wells is enough to drive growth in both our businesses for close to a year.
Recent sound bites from the E&C companies have clearly been negative, with some notable players talking about reining in completion for the foreseeable future. But the simple fact is, it's all about returns. As oil prices continue to stabilize and turn, we don't expect E&P companies to sit on the sidelines for too long. The first thing to come back will be shut-in wells, then drilled but uncompleted wells, and then rig activity will return. Very few E&P companies can afford to sit on the sidelines when there are acceptable returns to be had. A nice aspect of our business is that our sand operations serve as a unique leading indicator for crude production.
I'd like to take a few minutes to discuss operations and costs at the Pioneer Terminal. As you've heard us say numerous times on this call, we brought all of our transloading operations in house in 2015. I think our fourth quarter results showed how significant an impact this move had. Those are significant improvements, but we continue to focus on reducing costs without compromising capabilities. In the last few months, we have further streamlined our Pioneer team largely due to the merging of our legacy frac sands fans in crude oil operation in to one cohesive team. As I mentioned a minute ago, our sand business is a good indicator of future activity and this now would allow ample time to react to market demand and manage Pioneer operations as efficiently as possible.
In closing, I'd like to take a moment to highlight our safety record. In the last few years, our Pioneer team has handled over 50,000 rail cars and 140,000 trucks with 200,000 man-hours worked and only had 1 OSHA recordable. While one is too many, it's a strong indication of our commitment to safety, and efficiency.
Craig, back to you.
Okay. Thanks, Gabe. Operator, we'll turn the call over to questions from the audience please?
Thank you. [Operator Instructions] And we'll take our first question from Joshua Mann with Platts.
Hey, guys. I was looking back over my notes from your last earnings call, and you mentioned that you're expecting your fourth quarter volumes to go up a bit, as you took some volumes that were rolling off of competing contracts. I was wondering if you could talk a little bit about how that went and then maybe I guess some color on the balance between spot and contracted volumes through your system?
Yeah. Hi. Good morning, Josh. It’s Gabe Claypool. It went pretty well. We actually did pretty well in the fourth quarter compared to third quarter and again had a big year on a growth perspective as mentioned with a 19% year-over-year increase. A lot of those contracts that were falling off in the Q4 timeframe, well, they continue to roll off I should say in the Q1 timeframe. So we're continuing to see incremental volumes, even in the category of production declining. So it's a nice position for us to be in and as these other contracts with other terminals fall off, and you can see it if you look at some of these analyst reports, we're still pretty well positioned.
Sorry, what was the second part of your question?
I wanted to maybe get some color on the balance between spot and contracted volumes in your system?
Sorry, yeah, okay. I would say today's environment is, well, as an industry, is largely, largely moved to a spot based environment. There are a few players Tesoro and P66 who have entered in a big way that are buying oil and taking it to the refinery. So that's a little bit different than the market that we're in, but in the competition that we have and the people that we're competing against, it’s largely a spot market. That said, we're probably still in the category of 30% of our volumes are on a longer term contract, not a spot basis.
Awesome. Thanks, Gabe.
[Operator Instructions] Thank you. Those are all the questions that we have for today. I will now turn the call back over to Craig McKenzie for final remarks.
Okay. Well, thank you and I appreciate everyone taking the time today to participate in the call. Short question-and-answer session. So everyone must be satisfied. So thank you, appreciate your time and your interest and your support. And we will be back to you shortly with more news here in the future. Thank you very much. Have a good day.
And that concludes today's conference. Thank you for your participation. You may now disconnect.
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