NuStar Energy's (NS) CEO Brad Barron on Q2 2016 Results - Earnings Call Transcript

| About: NuStar Energy (NS)

NuStar Energy L.P. (NYSE:NS)

Q2 2016 Earnings Conference Call

August 02, 2016 10:00 A.M. ET

Executives

Chris Russell - Treasurer and VP, IR

Brad Barron - President and CEO

Tom Shoaf - EVP and CFO

Analysts

Selman Akyol - Stifel Nicolaus & Company

Brian Gamble - Simmons & Company

Theresa Chen - Barclays Capital

Gabe Moreen - Bank of America Merrill Lynch

Ryan Levine - Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the NuStar Energy L.P. and NuStar GP Holdings LLC Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Mr. Chris Russell, Treasurer and Vice President of Investor Relations. Sir, please begin.

Chris Russell

Thank you, Lisa. Good morning everybody and welcome to today’s call. On the call today are Brad Barron, NuStar Energy LP and NuStar GP Holdings LLC’s President and CEO; and Tom Shoaf, Executive Vice President and CFO, along with other members of our management team.

Before we get started, we’d like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

During the course of this call, we will also make reference to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release, with additional reconciliations located on the financials page of the investors section of our website at nustarenergy.com and nustargpholdings.com.

Now, I’m going to turn the call over to Brad.

Brad Barron

Good morning and thanks for joining us today. This morning I am happy to report that in the second quarter we covered our distribution about 1.09 times marking the ninth consecutive quarter that NuStar has exceeded one times coverage ratio. Strong refined products, pipeline throughputs, the benefits from the 1.1 million barrels of storage leased at our Piney Point, Maryland facility, along with lower than expected operating expenses, contributed to better than expected second quarter results.

It is significant quarter for NuStar in a tough energy market environment and as we said in last quarter's call our ability to deliver strong earnings and cash flows continues to reflect the resilience of our business model and the strength and diversity of our stable asset base. The fact that we are able to report these solid results with throughputs on our South Texas crude oil systems coming slightly above contract minimums further demonstrates this resilience. Our remaining fee based pipeline and storage operations continued to deliver strong and consistent results in a continued weak crude oil price environment.

The positive second quarter earnings impact from increased refined products pipeline volumes and leasing out some out of storage at our Piney Point storage facility are just two examples of our NuStar benefits from a high diversified asset base. Our second quarter results were stronger than expected, as I told you on our last call we expect our third quarter results to be lower, turn around activity at one of our customers refineries, and heavy seasonal maintenance should contribute to lower third quarter results. While these factors could push our third quarter coverage ratio below one times, we still expect our full-year 2016 coverage ratio to exceed one time.

Before I turn the call over to Tom, let me provide a quick update on our 2016 strategic capital spending program. We continue to expect to spend between $180 million and $200 million on strategic capital during 2016. We plan to spend about $35 million to complete construction and $1 million of storage that will benefit both our East pipeline system in our St. James, Louisiana storage facility. Some of this tankage construction has already been completed and is generating cash flow. We expect the remaining tankage to be completed and online by the end of 2016. In addition we are involved in expansion projects of our Linden terminal facility and a couple of our West Coast terminal facilities. These projects should be online by the end of 2017.

Our team continues to work closely with PEMEX management in developing a pipeline project to supply in Northern Mexico and over the past month or so we have made several trips to Mexico to discuss the project. We are making good progress and we remain confident about the project prospects, the final agreement is yet to be signed. With that I am going to turn the call over to Tom Shoaf, NuStar’s Executive Vice President and CFO, to provide you with some additional detail on our second quarter results and 2016 projections. Tom.

Tom Shoaf

Thanks, Brad, and good morning, everyone. As Brad mentioned earlier, we experienced another solid quarter of operating results that allowed us to cover our distribution by 1.09 times marking the ninth consecutive quarter that we produced above the one times coverage ratio. Year-to-date we have covered the distribution by 1.11 times.

EBITDA from continuing operations was $145 million, while DCF from continuing operations available to limited partners was $93 million. For the second quarter of 2016, we reported EPU of $0.52 per unit, which exceeded both our second quarter earnings guidance and consequent quarter [ph]. Second quarter EPU came in higher than we expected due primarily to lower than expected operating expenses.

Turning to our segment performance, second quarter 2016 EBITDA in our pipeline segment was $85 million, basically in line with the second quarter of 2015. Throughputs on our crude oil pipeline assets were down around 15% or 69,000 barrels per day when compared to the second quarter of 2015. During the quarter, our total South Texas crude oil pipeline systems physical volumes averaged slightly below our contract minimums of 133,500 barrels per day. However due to the fact that some of our customers shipped above their respective contract minimums, the recorded revenue of course went to approximately 142,000 barrels per day, down from 193,000 barrels per day in the second quarter of 2015.

Throughputs on our refined product pipelines increased 8% or 40,000 barrels per day mainly due to increased volumes on several lines with some of our refinery customers in the Central West and Central East regions. Second quarter 2016 EBITDA in our storage segment was 81 million, 3 million lower than second quarter of 2015. The combination of increased storage rates, increased throughput and handling fees, and lower operating expenses at several of our terminals nearly offset the impact of lower crude oil throughput volumes at our crude storage facilities.

Our fuels marketing segment earned approximately $1 million of EBITDA during the second quarter of 2016, approximately 1 million lower than the second quarter of 2015 due primarily to lower margins in our crude and fuel oil trading operations. Our June 30th debt balance was 3.2 billion while our debt-to-EBITDA ratio was 4.6 times. On July 29th NuStar Energy's Board of Directors declared a second quarter distribution of $1.095 per unit which will be paid on August 12th. NuStar's GP Holdings Board also declared a second quarter distribution of $0.545 per unit which we paid on August 16th.

Now let me spend a few minutes talking about our projections for the third quarter and full year 2016. We expect third quarter 2016 EBITDA results in our pipeline segment to be lower than our third quarter 2015 EBITDA results due to a decrease in Eagle Ford throughputs on our South Texas crude oil pipeline system as well as increased seasonal maintenance in the second quarter -- I am sorry, in the quarter.

Third quarter 2016 EBITDA results for our storage segment should also be lower in third quarter's 2015 EBITDA results. Even though we just increased our amount of storage leased at our Piney Point, Maryland facility to 1.8 million barrels, we expect increased seasonal maintenance expenses as well as the continued impact of lower crude throughputs at our Corpus Christi, North Beach facility to weigh heavily on segment during the third quarter.

Third quarter 2016 EBITDA results for the fuels marketing segment should be slightly higher than the third quarter of 2015 results due primarily to include bunkering margins when compared to last year's third quarter. Based on these projections third quarter 2016 earnings per unit should be $0.30 to $0.40 per unit. As Brad mentioned earlier turnaround activity at one of our customers refinery as well as $15 million increase in maintenance and other operating expenses from 2Q to 3Q should contribute to our lower estimated third quarter results. Based on these projections we expect the third quarter coverage ratio that maybe below one time. However, we still expect our full year coverage ratio to exceed one time.

Now turning to full year 2016 EBITDA guidance. Our full year 2016 pipeline segment EBITDA guidance remains unchanged to $335 million to $355 million as we continued to forecast crude oil throughputs on our 2016 South Texas crude oil pipeline system at contractual minimums. As a reminder since we have forecasted TMV minimums for the remainder of 2016 on our South Texas crude oil pipeline system any barrels in excess of that clearly would serve to improve our actual results in the second half of the year.

Our 2016 storage segment EBITDA guidance also remains unchanged and is predicted to stay in the range of $310 million to $330 million as we continue to expect the benefit from higher renewal rates and increased utilization [ph] across the segment. To most we offset lower expected South Texas crude throughput volumes moving into our Corpus Christi, North Beach terminal.

2016 segment EBITDA guidance for our fuels marketing segment has been decreased to reflect changing market conditions that is now expected to be in the range of $5 million to $20 million. 2016 strategic capital spending program remains in the $180 million to $200 million range but we continue to expect hydrated [ph] capital spending of $35 million to $45 million. Based on our expectations we remain confident that we will cover our distribution this year for the third consecutive year.

Lastly before I turn over the call to Brad, I would like to quickly mention a few housekeeping items. As you have noticed in this morning's release we made some subtle changes related to the disclosure and inclusion of certain non-GAAP information based on recent SEC guidance. In combination with this recent SEC guidance related to non-GAAP measures we have also begun to evaluate the current level of quarterly and annual guidance we provide to the Street on a recurring basis.

To better align our forward-looking information with the SEC guidance related to non-GAAP metrics, management's long-term objective and our peer's processes beginning next quarter's earnings call we plan to change the level of guidance we provide. What you can expect for 2017 guidance is a focus on the company wide full year metrics and less emphasis on quarterly guidance information. And with that I will turn the call back over to Brad for any closing remarks.

Brad Barron

Thanks Tom. The second quarter was another great quarter for NuStar. We exceeded our own earnings expectations as well as consensus estimates and we covered our distribution for ninth consecutive quarter. I am proud that NuStar has continued to achieve strong results during a challenging time in the energy industry. Even though as Tom and I both mentioned, we expect increased operating expenses due to heavily seasonal maintenance next quarter will mean weaker third quarter results than what we reported today, we are confident that we will cover our distribution for full year 2016 for the third consecutive year in a row.

To summarize, we have got a great set of diverse fee based assets, we are committed to our stable MLT business model, and we fully expect to continue to deliver strong, stable results to our unit holders. At this time I will turn it over to operator, we can open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from the line of Selman Akyol from Stifel. Your line is open.

Selman Akyol

Hello, good morning. Couple of quick ones from me, first of all, can you guys talk about crude for real what is the contribution, what is your outlook for that?

Brad Barron

It is pretty minimal in 2016 certainly relative to what we saw couple of years ago. When we look into 2017 we are expecting more of the same, maybe some slight decreases but it is not very significant in our storage segment any more.

Selman Akyol

Okay, and as I look at your storage revenues and just kind of going back over the last several quarters, seems like we have had a very positive pricing environment, relatively flat over the last several quarters, can you talk about that a little bit please?

Brad Barron

We have seen basically across the system, we are renewing it at higher rates and across the system we see increases. But those continue to be offset by the decreases in the crude oil system. So, the Eagle Ford volumes falling off those go through a storage segment as well and of course those that have fallen they have offset any increase in renewals.

Selman Akyol

Okay, sure. And then just going out to Piney Point, can you just remind us how large that facility is, I know it was in the container markets but how much of it remains to be leased?

Brad Barron

So, we have got about 2.3 million or 2.4 million barrels of refined products storage that is leasable there. But the rest is really out of service tanks that used to be in heavy oil service. We have leased 1.8 million of that 2.3 million and are in discussions on the last 500,000 barrels at this point. So we hope to have the whole 2.3 million leased up before the end of the year but the 1.8 million is a pretty good start. That facility was marked up right up until about May or so --.

Selman Akyol

And then I think I heard you say you are kind of expecting the operating expenses to increase going up into the next quarter but what about the G&A, is that a good run rate here on a go forward basis?

Tom Shoaf

Yeah, for the most part it is.

Selman Akyol

Okay, alright that does it for me. Thank you very much.

Brad Barron

Thank you.

Operator

Thank you. Our next question will come from the line of Brian Gamble from Simmons & Company, your line is open.

Brian Gamble

Good morning guys.

Brad Barron

Good morning.

Brian Gamble

Maybe just jump on that Piney Point piece real quick, so 1.8 million leased now, 500,000 coming, I think you said the impact on second quarter was 1.1 million barrels as we continue to ratchet that up what is that EBITDA benefit or rough numbers, what is the 1.1 million versus the full 2.3 million mean from a EBITDA impact for you?

Tom Shoaf

Well, for this year these are one year contracts, about half of the contract this year and half next year. We did have some OPEX associated with getting those lease, we had to clean the tanks and put some more lines and things like that. So, the EBITDA this year has been muted quite a bit by those initial startup costs. The majority of that benefit for us is going to come in 2016 when we don’t have any of the associated OPEX for the startup. I am sorry, 2017.

Brian Gamble

No, I got you. Anyway to quantify that piece of it or maybe you could just say what your costs have been this year?

Tom Shoaf

Yes, it is -- you are looking at $2.5 million to $3 million of benefit in 2017 versus this year. Since very little benefit this year was mostly eaten up by the OPEX on the startup costs.

Brian Gamble

Okay, and then you mentioned the refined product throughput strength year-over-year was based on some Central West and Central East benefits on the refining side, are those benefits as far as what you are expecting from those particular refineries expected to continue in the second half of the year or is that with the seasonality vein in the second quarter based on some I guess some scrap margins and that is not necessarily a model moving forward?

Tom Shoaf

We have had no significant changes in the nominations or our customers forecast going into the second half of the year yet.

Brian Gamble

Great, and then Brad you mentioned the PEMEX project still ongoing, some conversations have been had, I guess any other details there, any -- you continue to be positive on it and I think that is fair and obviously dealing with them is likely still a challenge. But any other color you want to provide around how those conversations have been progressing?

Brad Barron

No, what I would say is that the conversations have been good. We have teams down there almost every week and we have met with the Director General in person twice on this project and so, I think the outlook for this project is good.

Brian Gamble

Great, and then last thing from me, the Linden in West Coast expansion plans you are talking about online buy here in 2017, can you remind us kind of what the scope of those expansions could be, what the cost could be now that EBITDA could trend?

Brad Barron

I think we have actually said about this project to date and it is probably a little bit early until we get those under contract. But we are confident that those are going to be in the contract soon.

Brian Gamble

Alright, appreciate it guys.

Operator

Thank you. Our next question will come from the line of Theresa Chen from Barclays, your line is open.

Theresa Chen

Good morning. Following up on the last question on CAPEX, I understand that you haven’t given any quantitative guidance on EBITDA, can you just tell us directionally if there is multiples and the terms have changed since the environment has changed so much?

Tom Shoaf

No, I don’t think they have changed significantly. No, I think the range of multiple that we have been giving you guys on our internal growth projects still holds true.

Theresa Chen

Okay, great. And then on your storage segment, can you just talk a little bit about the contract terms that are in play with the renewal rate increases, are customers looking for shorter contract durations potentially to capture that part of the contained goal but still wanting to maintain certain flexibility going forward or are they -- the terms and durations still pretty much consistent with historic patterns?

Tom Shoaf

I think the terms are pretty consistent with historic patterns other than Piney Point. These are one year contracts because it is really just a [indiscernible] only. So, we have some significant volumes of storage coming up for renewal here in the back half of this year. Some of larger marine terminals lack space here and we expect to see those renewed again at the old terms which are three to five years.

Theresa Chen

Okay, on Piney Point then would it not be economic at all for you to convert some of the old tank assets that used to hold fuel oil if there was demand?

Brad Barron

If the demand was strong enough, the problem is that Piney Point the nature of that container facility is far away from any major hub markets. So, storage isn't very expensive there and the cost associated with extra fitting those fuel oil tanks to refined products would be most likely prohibited.

Theresa Chen

Understood and lastly on your Eagle Ford system, if I am not mistaken I think previously you talked about walk up volumes on supplementing any and portentously from a volume metric perspective is that still happening or with the recent decline in pricing we are seeing less of that?

Brad Barron

It is still happening. We continue to build out more than the actual inputs into the system.

Theresa Chen

Okay, thank you very much.

Operator

Thank you. Our next question will come from Gabe Moreen from Bank of America. Your line is open.

Gabe Moreen

Hey, good morning guys. I don’t know if this was asked already but [indiscernible] pipeline litigation, was this addressed on your comments?

Brad Barron

No, I mean we are still in the continuing litigation mode so there is really nothing we can say about it.

Gabe Moreen

Any timing as to when resolution there may happen?

Brad Barron

No. Not really.

Gabe Moreen

Okay, and then most of my questions were asked but in terms of the Eagle Ford at minimum volumes, do you have any thoughts to discuss on some of the counter party there about extending some of those contracts for possibly lower minimum volume increments that go beyond 2018, is that something you entertain so far or that hasn’t come up?

Brad Barron

No, it hasn’t. We really haven’t had that conversation and we expect to have those type of conversations eventually. But, we have some of our earliest renewals don’t come up until August of 2018 and then we have got in our second open season those come up in summer of 2019 and then we have some other commitments that don’t end until 2021. So, I think it is a little early right now but we are starting to have some conversations with parties that aren't on our pipeline about their renewals. So we are just going to busy in 2017 and 2018 I think in that regard.

Gabe Moreen

I will stay tuned, thanks guys.

Brad Barron

Thank you.

Operator

Thank you. [Operator Instructions]. Your next question will come from the line of Ryan Levine, Citigroup. Your line is open.

Ryan Levine

Good morning. Just to follow-up on the volumes in terms of refined product volume, what drove the increase in the quarter, was any of it attributable to outages or challenges at other competitive pipelines?

Brad Barron

Some of it is related to turnarounds we had last year. I think that was a lot of it and then there was some other lines that just had increased volumes shipped on them. And we did benefit some from the CHS projects that we completed in November [ph] in the West that helped some too.

Ryan Levine

Okay, great. And then in terms of the ammonia project that you are working on, is there any update around this CAPEX or contribution that there could be?

Brad Barron

I am not sure what you are talking, ammonia project. The only projects going is in the Central East region but they are not on the ammonia line. Nothing on the ammonia line, it is not already in service. We had an ammonia project a year or so ago connecting to a new ammonia plant there. That is still serviced but we are waiting on the ammonia plant to come online which should happen I think in the third quarter here.

Ryan Levine

Okay, great. Thank you.

Operator

Thank you. At this time I am showing no further questions. I would like to turn the conference back over to Mr. Chris Russell, the Treasurer and Vice President of Investor Relations for any closing remarks.

Chris Russell

Okay, thanks Lisa. I would like to thank everybody again for joining us on the call today. If anybody has any questions please feel free to talk to Investor Relations. Thank you.

Operator

Ladies and gentlemen thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.

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