Western Refining Logistics' (WNRL) CEO Jeff Stevens on Q2 2016 Results - Earnings Call Transcript

| About: Western Refining (WNRL)

Western Refining Logistics, LP (NYSE:WNRL)

Q2 2016 Earnings Conference Call

August 02, 2016 04:00 PM ET

Executives

Michelle Clemente - IR

Jeff Stevens - President & CEO

Gary Dalke - CFO

Matt Yoder - SVP of Operations

Analysts

Justin Jenkins - Raymond James

Bhavesh Lodaya - Credit Suisse

Operator

Good day ladies and gentlemen and welcome to the Western Refining Logistics Second Quarter 2016 Conference Call. At this time all participants are on 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 call is being recorded.

I would now like to introduce your host for today's conference, Ms. Michelle Clemente, Manager of Investor Relations. Ma'am, please go ahead.

Michelle Clemente

Thank you, Crystal. Good afternoon. Thank you for joining us today for the Earnings Conference Call for Western Refining Logistics. My name is Michelle Clemente and I'm the Manager of Investor Relations. Joining me for today's call are Jeff Stevens, our President and CEO; Gary Dalke, our CFO; Matt Yoder, our Senior Vice President of Operations and other members of our senior management team.

As a reminder, today's presentation will contain forward-looking statements for both WNRL and our sponsor, Western Refining. I'll refer you to the forward-looking statements section and recent filings with the SEC of both WNRL and WNR. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP we report certain non-GAAP financial results.

Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results which can be found in the press release which is posted on the investor relations section of our website.

I'll now turn the call over to Jeff Stevens.

Jeff Stevens

Thanks Michelle, and welcome to WNRL's earnings call. After my opening remarks Gary will review our Q2 results in more detail, then we will open up the call for your questions. For the second quarter we reported record EBITDA of $31.8 million an increase of 18% versus a year ago. Our performance was driven primarily by mainline pipeline volume which averaged a 124,000 barrels day up 26% versus the second quarter of last year. Distributable cash flow was a record $25.1 million a 44% increase from a year ago. On July 26th our board approved a second quarter distribution of $0.4125 per limited partner unit an increase of 13% over Q2 2015. It was our tenth consecutive quarterly distribution increase since going public in 2013. Turning to the second quarter operations crude pipeline throughput and gathering in our Delaware basin continued to increase averaging approximately 74,000 barrels per day.

During the quarter we completed construction of two crude oil storage tanks with a combined shelf capacity of a 130,000 barrels. In addition we recently completed two gathering lines in Delaware which connect two of our large producers enabling us to capture additional production of high quality crude oil. These gathering lines should add five to seven thousand barrels per day in our pipeline volumes. We remain confident about increasing Delaware basin production despite the volatility in crude prices. The Delaware remains one of the few growing crude basins. Producers have improved their balance sheets recently and several transactions have resulted in stronger producers controlling more acreage. We believe that attractive Delaware basin economics combined with the increasing strength of our producers will result in continued crude production growth. In the Four Corners the TexNew Mex average 10,000 barrels per day during the quarter. In addition we completed a pipeline project to add a new segment to our main line Libruck area of the Four Corners which will allow us to gather and ship additional volumes of crude oil. Our wholesale business performed well in field volumes of approximately 80,000 barrels per day. We expect volumes to remain strong during Q3 given the low crude price environment and demand strength in the southwest.

Crude trucking volumes averaged 42,000 barrels per day in Q2 up about 17% compared to Q1. Our recently launched asphalt trucking business continues to grow with volumes averaging almost 5000 barrels per day in Q2. In May WNRL issued 4.3 million units resulting in proceeds of about $92 million. The proceeds were used to reduce revolver borrowing and leverage is now about 2.8 times. During the third quarter we expect to acquire some of NTI's logistics assets from our sponsor Western Refining, which could add approximately $25 million in annual EBITDA. We have the financial flexibility to complete this acquisition without going to the capital markets.

This also provides a new platform for organic growth for WNRL as we expand crude oil gathering capabilities and storage and term line facilities in the upper Midwest similar to what we've done in the Delaware Basin. Over the next three years we expect the Western Refining will have logistics assets generating a $100 million of EBITDA to sell to WNRL. We expect we'll use a combination of revolver borrowing and debt or equity capital markets to fund these acquisitions. This expected growth in EBITDA and distributable cash flow allows us to continue to be comfortable with our mid to high teens distribution guidance through 2018 while keeping a minimum of 1 times 1 coverage ratio and 3 to 4 times leverage ratio.

Wrapping up we believe the location of our assets in some of the strongest crude oil basins combined with our current slate of organic growth projects, strategic acquisitions and Western sponsorship positions us well for continued growth in the current crude price environment. I will turn the call over to Gary who will go through our second quarter financials in more detail.

Gary Dalke

Thank you, Jeff. For Q2 2016 the company reported net income attributable to limited partner of 17.9 million or $0.33 per diluted common unit. Cash available for distribution in Q2 was $25.1 million, this compares to cash available for distribution of 17.4 million in Q2 2015. EBITDA for Q2 was 31.8 million an increase of 18% compared to Q2 2015 driven by growth in volumes and the acquisition of the TexNew Mex pipeline.

Maintenance CapEx was 2.1 million for the quarter, cash received form contract minimum shortfall payments is reflected in the change in deferred revenue and was 1.4 million for the second quarter. This is not reflected in revenue or EBITDA but is included in cash available for distribution. On July 26th our Board of Directors declared a cash distribution for Q2 of $0.4125 per unit or a $1.65 per unit on an annualized basis. This distribution represents a 13% increase over the Q2 2015 distribution and since our IPO annual distribution growth has averaged approximately 16%. As of June 30th our cash balance was $17.6 million. I'll now turn the call back over the Jeff.

Jeff Stevens

Thanks, Gary. I’d like to thank our employees for all their hard work and we continue to be focused on executing our plan in growing the business. Crystal with that we'll open up the call for any questions.

Question-and-Answer Session

Operator

Thank you, [Operator Instructions] and our first question comes from Justin Jenkins from Raymond James, your line is now open.

Justin Jenkins

Thanks and good afternoon everyone. I guess I'll start with maybe a more strategic question, so it’s pretty clear that the top priority at WNR is to delever the balance sheet and certainly Jeff with your comments on the expected 3Q drop down and targets over the next couple of years WNRL can play a pretty big role in that deleveraging and still create some win win scenarios, do you think that's the best way to think about it here even that WNR has a bit higher leverage than is typical that if the MLP market begins to struggle again that the refining company is still going to be able to support the MLP.

Jeff Stevens

Absolutely, you know based on the liquidity and the cash generation and cash on balance sheet at WNR, we feel comfortable that we can execute on this. You know the markets can kind of open and close at times though we have to be strategic and thoughtful with our timing but bottom line is we have good assets to drop down over the next two to three years and we'll be very thoughtful about it and we'll be strategic and you know I think that the thing that we'll continue to look at are these projects that we can still develop at WNR that have a high capital return and because of the basins we're in particular the Delaware Basin and the Bakken we think there's going to be some good opportunities so I think we'll still continue to be strategic about filling the pipeline back up so we can continue the growth and continue the process that's worked so well so far.

Justin Jenkins

Sounds good, would agree with you there. And I guess staying on the drop line of thinking, Jeff you mentioned the 100 plus million dollars of EBITDA at Western that you'd hope to get into WNRL over the next two to three years, can you remind us of any contribution from retail assets whether it's at Western or legacy northern in those EBITDA figures.

Jeff Stevens

No, there is some NTI wholesale EBITDA but at this point we haven't contemplated any of the retail being dropped, that could be in addition to that $100 million.

Justin Jenkins

Okay great and then last one from me if I could, it sounded like volumes on the Bobcat line at WNR started to ramp pretty well here. Just curious about how you think that evolves in the coming quarters and then maybe how you're thinking about TexNew Mex expectations going forward as well and I’ll leave it there, thanks.

Jeff Stevens

Sure Justin, so when we think about Bobcat we're thinking that that’s just really phase one of Bobcat it's the connection of Delaware to Wink then onto Midland. We've got some storage tanks, we're finishing up at both terminals, we've got two different pipeline connections that will add additional volumes and we'll be able to blend crude both at Delaware and Wink and that's the time that I think you'll really see the volume ramp up. You know we believe we'll be in a better position to do that kind of end of Q3 beginning of Q4 and probably be one or two phases of that but I think that's really when you're going to see the asset be able to perform at its highest peak.

Justin Jenkins

Perfect, thanks for the time guys.

Jeff Stevens

Thanks, Justin.

Operator

Thank you, and our next question comes from Bhavesh Lodaya from Credit Suisse, your line is now open.

Bhavesh Lodaya

Hi, good afternoon everyone.

Jeff Stevens

Good afternoon.

Bhavesh Lodaya

So staying on dropdown, you mentioned three years as a potential time line for drops, so what are the factors that could impact the pace of dropdowns, maybe make it two years or you make it four years, is that a distribution through a target or is it going to be predicated just by deleveraging effort at the parent or would it be just like assets to capital markets, if you have the access you will do it as soon as possible.

Jeff Stevens

Well, obviously access to the capital markets will impact how quickly the drops come, but I think we were pretty thoughtful in our high teens over the next 2018, and you know it depends upon you know hitting those marks that will be part of the strategic goal. Some of it is making sure that the assets are fully developed and they're you know at the right time to be dropped and obviously you know the price of crude oil and the production curve and how that all looks could impact it too. But I feel like for this100 million that we've kind of signaled out to the market that you know that's a realistic expectation to drop that in the next two to three years.

Bhavesh Lodaya

Right, and then so visualizing that scenario where all of the remaining billion dollars of logistics assets lie at MLP, how should we think about the kind of contracts that we'll have longer term. Is it fair to assume most of them will continue to have some kind of minimum volume commitments, long term contracts or would that be too much of a burden for the parent.

Jeff Stevens

Well you know obviously as they're being dropped we're signing you know long term commitments but I think the way to think about this, these assets are high quality assets that have our very valuable uses to WNR and our third parties that we have on them and you know I think that keeping the assets you know moving forward and keeping them utilized at a high rate, I just don’t see it an issue particularly so many that are associated with the three refining assets it's as we talked about on the WNRL our WNR call today these three refineries performed very-very well in what is considered a challenging refining market and they just for the most part have gross margin to run full most of the time. So I really think WNR is positioned very well around these assets to take advantage of these three refineries and them running full.

Bhavesh Lodaya

And finally just on the growth CapEx at the MLP, if you think about the next few years like is there a sense of what kind of annual number we could be looking at for growth projects.

Jeff Stevens

Well, you know the goal is to do the smaller projects at WNRL, and a lot's going to depend upon our partners in the Delaware Basin because you know they are going to require, if their growth production continues on the trajectory it is now, we're going to need additional gathering lines, additional crude oil storage tanks, and other items like truck stations and those types of things that are kind of a sweet spot at WNRL. I would look at it somewhere in that, you know hopefully in that 20 to 25, maybe even 30 million a year notionally of growth CapEx, Now this could be higher over the next two to three years because of the footprint of Northern Tier and as we develop projects that make sense to add value to that system as we grow that system it might be a little bit higher than that but you know like I said, it's those smaller projects that we'll continue to develop at WNRL.

Bhavesh Lodaya

Great color, thank you so much.

Jeff Stevens

Thank you.

Operator

Thank you, and I would now like to turn the conference back over to Jeff Stevens for any closing remarks.

Jeff Stevens

Thanks Crystal, and thank you for your participation in today's call and your interest in Western Refining Logistics, have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program and you may all disconnect. Everyone have a wonderful day.

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