Genesis Energy's (GEL) CEO Grant Sims on Q2 2016 Results - Earnings Call Transcript

| About: Genesis Energy, (GEL)

Genesis Energy, L.P. (NYSE:GEL)

Q2 2016 Earnings Conference Call

August 3, 2016 14:00 ET

Executives

Grant Sims - Chief Executive Officer

Bob Deere - Chief Financial Officer

Karen Pape - Chief Accounting Officer

Analysts

Gabe Moreen - Bank of America-Merrill Lynch

Eric Genco - Citi

Jeff Birnbaum - Wunderlich

John Edwards - Credit Suisse

Michael Blum - Wells Fargo

Poe Fratt - D.A. Davidson

Barrett Blaschke - MUFG Securities

Operator

Welcome to the 2016 Second Quarter Conference Call for Genesis Energy. Genesis has five business segments. The Offshore Pipeline Transportation division is engaged in providing the critical infrastructure to move oil produced from the long-lived, world class reservoirs from the deepwater Gulf of Mexico to onshore refining centers. The Onshore Pipeline Transportation division is principally engaged in the pipeline transportation of crude oil. The Refinery Services division primarily processes sour gas streams to remove sulfur at refining operations. The Marine Transportation division is engaged in the maritime transportation of primarily refined petroleum products. The Supply and Logistics division is engaged in the transportation, handling, blending, storage and energy and supply of energy products, including crude oil and refined products. Genesis’ operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

During this conference call, management maybe making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Bob Deere, Chief Financial Officer and Karen Pape, Chief Accounting Officer.

Grant Sims

Good afternoon and welcome to everyone. Our diversified yet increasingly integrated businesses continue to perform in the second quarter within acceptable range in spite of the ongoing dislocations in the energy sector, uncertainties in capital markets in the midstream space and specific challenges at the margin on certain of our operations. Even if this challenging backdrop continue in future quarters, we would expect to see sequentially higher net income and available cash before reserves due to a variety of factors, including increasing volumes out of the Deepwater Gulf of Mexico, the end of certain refinery turnarounds and the initiation of service and the anticipated ramp-up of volumes between now and the end of 2017 from some of our recent organic projects. In the aggregate, we believe our commercial operations are relatively stable in this challenging environment and we believe we have a reasonably clear line of sight of volume growth over the next four to six quarters. As a result, we feel comfortable that our financial results and condition will continue to strengthen in future periods.

Our primary objective has always been to deliver the best value to our unitholders while never wavering from our commitment to safe and responsible operations. Obviously, a lot has changed we recognized and how the market apparently values unit prices for MLPs or other midstream entities over the last 1.5 year to 2 years. Although the move to eliminate our IDR is almost 6 years ago and continue to deliver double-digit growth in distributions on a year-over-year basis, we are rewarded historically. We believe the metrics demanded by the markets have changed during these recent tumultuous times. We now believe the best way to promote unit price appreciation under current conditions is to exercise strong financial discipline designed primarily to maintain and enhance our financial flexibility across the business cycle.

Although we believe we would otherwise naturally restore our financial flexibility with cash flows from operations, we felt we could accelerate that process by issuing additional equity, lowering the future growth rate of quarterly distributions or pursuing a combination of the two. Consequently on July 27, we closed a public offering of 8 million common units generating net proceeds to the partnership of approximately $298 million. As a practical matter, we would have issued such additional equity a year ago at this time at the time of closing the enterprise acquisitions had markets been stronger at that point. This 2016 equity raise instantly improved our liquidity and credit metrics.

We believe our increased liquidity and even stronger balance sheet resulting from such actions should combine to give us the flexibility to continue to pursue acquisitions and/or organic projects that we feel are consistent with delivering long-term value to all of our stakeholders. We also believe that our improved credit profile will significantly lower the future cost of refinancing our public debt, with such issued tranches become due beginning in 2021 or callable beginning in 2017.

With that, I will turn it over to Bob to discuss our operating results in more detail.

Bob Deere

Thank you, Grant. In the second quarter of 2016, we generated total available cash before reserves of $96 million, representing an increase of $27.2 million or 40% over the second quarter of 2015. Adjusted EBITDA increased $46.2 million over the prior year quarter to $133.5 million, representing a 53% year-over-year growth.

Net income attributable to Genesis for the quarter was $23.7 million or $0.22 per unit compared to $11.7 million or $0.12 per unit for the same period in 2015. Segment margin from our Offshore Pipeline Transportation segment increased $59.2 million or 236% between the second quarter periods. This increase is primarily due to our acquisition of the offshore pipeline business of Enterprise, which closed in July 2015. As a result of our Enterprise acquisition, we obtained approximately 2,350 miles of additional offshore natural gas and crude oil pipelines, including increasing our ownership interest in each of the Poseidon, SEKCO and CHOPS pipelines and 6 offshore hub platforms. The operating results of that business continued to exceed our expectations with sequential increases in volumes compared to the first quarter of 2016 in the most significant offshore crude oil pipelines in which we acquired as well as those in which we previously owned an interest.

Onshore Pipeline Transportation segment margin decreased $2.3 million or 16% between the second quarter periods. Volumes decreased on our Texas pipeline system, particularly delivery volumes to the Texas City refining market. Such lower volumes on our Texas system to historical customers will likely continue in future periods as we complete the repurposing of our Houston area crude oil pipeline and terminal infrastructure. This includes making the necessary upgrades on our existing 18-inch Webster to Texas City pipeline to allow for northerly flow of crude oil. We anticipate this repurposing as well as the other components of our Houston area crude oil pipeline and terminal infrastructure project to be completed prior to the end of 2016. Additionally, margin was negatively affected by lowered levels of tertiary crude oil activities in Mississippi. Volumes on our Louisiana system were sequentially down primarily as a result of a protracted turnaround at our primary customers refining complex. We anticipate volumes on our Louisiana system to ramp back up starting in the third quarter upon the completion of this turnaround.

Refinery Services segment margin for the 2016 quarter decreased $400,000 or 2%. This decrease was primarily the result of the decrease in NaHS sales volumes due to lower demand from pulp and paper customers during the scheduled downtime these customers typically exhibit in the spring compared to the 2015 quarter. We were able to realize benefits from our favorable management of the purchasing, including economies of scale and utilization of caustic soda in our operations and our logistics management capabilities, which somewhat offset the effects on segment margin of decreased NaHS sales volumes.

Segment margin from our Marine Transportation segment decreased $9.1 million or 34% between the second quarter periods. This decrease in segment margin in the 2016 quarter is primarily due to pressure on rates and utilization of our blue water, offshore barges. The impacts of the negative factors and pressures on our offshore barge performance, which we have previously discussed, have been consistent with our expectations with regards to both timing and scale. Additionally, we face certain challenges on the utilization and rates for our inland barges in large part attributable to fewer long voyages from the Midwest of the Gulf Coast than we have historically experienced. We believe these conditions maybe reflective of certain aspects of the changing dynamics in refining operations which we must continue to monitor in future periods.

Supply and Logistics segment margin decreased by $3.5 million or 30% between the second quarter periods. In the 2016 quarter as compared to the 2015 quarter, the decrease in our segment margin is primarily due to lower demand for our services in our historical back to back or by sale crude oil marketing business, associating with aggregating and trucking crude oil from producers’ leases to local or regional resale points. We have found it difficult to compete with certain persons in the market who are willing to lose money on such local gathering, because they are attempting to minimize their losses from minimum volume or take or pay commitments they previously made in anticipation of new production that is not yet and is unlikely to come online. In addition, a portion of this decrease can be attributable to decreased rail volumes as a major refinery customer supported by our Louisiana facilities was experiencing a refinery turnaround during the 2016 quarter. We anticipate such rail volumes related to our Louisiana facilities to begin ramping back up starting in the third quarter upon the completion of this turnaround.

In addition to the overall net increase in segment margin, as impacting both net income and available cash before reserves, depreciation and amortization expense increased $27.7 million between the quarterly periods, primarily as a result of the effect of placing recently acquired and constructed assets in service, including the offshore pipeline assets acquired as a result of our Enterprise acquisition. Other income also increased $19.2 million between the quarterly periods, due to the loss on debt extinguishment, recognized in the second quarter in 2015 relating to the early retirement of our $350 million 7.875% senior unsecured notes due 2018.

Interest costs for the 2016 quarter increased by $17.6 million from the 2015 quarter primarily due to an increase in our average outstanding indebtedness from recently acquired and constructed assets, principally from additional debt outstanding as a result of financing our Enterprise acquisition. Interest costs on an ongoing basis are net of capitalized interest costs attributable to our growth capital expenditures. Corporate, general and administrative expenses included in net income decreased by $3.5 million. This decrease is primarily related to a decrease in expenses related to our annual bonus program relative to the 2015 quarter.

Grant will now provide some concluding remarks to our prepared comments.

Grant Sims

Thanks Bob. As discussed, our businesses are performing reasonably well and we would expect them to continue to do so in spite of the challenges we have laid out. Our primary objective continues to be to deliver the best value to our unit holders while never wavering from our commitment to safe and responsible operations. We expect to continue to be well served by our business strategies, including being primarily refinery centric, after all the only consumer of crude oil is our refinery and supporting long lived, world class oil developments of integrated in large independent companies that have been around for decades and gone through and survived many commodity cycles. As always, we would like to recognize the efforts and commitments of all of those with whom we are fortune enough to work, including their commitments to providing safe, responsible and reliable services.

With that, I will turn it back to the moderator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Gabe Moreen from Bank of America-Merrill Lynch. Your line is open.

Gabe Moreen

Good afternoon guys. Just in terms of the change of approach here potentially on distribution growth, can you talk about, I guess more how you are thinking about what level of targeting now and are you targeting any specific I guess distribution coverage going forward?

Grant Sims

Gabe, I think that we continued to evaluate it on a quarter-by-quarter basis as well as our updated view of the operating environment the partnership has in front of it. I think that 10% to 11% is good. But given that we are trading at 7% or whatever, that’s I am not sure that it’s adequately being reflected. And we are very serious about maintaining our flexibility. And as you know that we have in the aggregate about $1.8 billion of senior unsecured notes issued across four different tranches. And if we move our way up the ratings chain, having the ability in the future to refinance that at a couple of hundred basis points tighter than we otherwise would, we think it creates good long-term value for everybody in the capital structure. So we will evaluate it and I am not sure that we ever had an official policy. But as I said, we will evaluate on it as time goes on.

Gabe Moreen

Thanks Grant. And then I guess as a follow-up to that has agencies told you what it would take to move up that chain or are you just targeting BB metrics at this point?

Grant Sims

I don’t think that I can speak for the rating agencies, other than I think I would point everybody to go look at the recent updates we have had. And I think that there is certainly some indications that there is the possibility of moving up. I think we set out a long time ago to ultimately get to the 6B or investment grade level. And that’s certainly still a continuing goal, financial goal, for us.

Gabe Moreen

Thanks. And then last one for me, just on the Marine segment, you mentioned monitoring continuing changing conditions in that business, anything you would view on the kind of cost savings front until maybe things normalize a bit more, just how are you thinking about that segment going forward?

Grant Sims

I don’t think that we view that we have any – we attempt to run a very efficient and safe operations, so I don’t think that we have a lot of cost savings to ring out of it. We have a very young fleet, so retirements are not really something that we would take a look at as people that have older fleets might, which ultimately would help rationalize the overall capacity situation. But I think that we are – it’s challenging. There is a lot of – it’s an excess capacity situation that probably isn’t going to get solved by oil prices going back to $60 or $70. It’s going to take a little bit of time to as it does to work through excess capacity situation.

Gabe Moreen

And do you think your competitors with older tonnage will be the first to kind of blink in that market?

Bob Deere

I mean it’s we have recognized since we have entered the marine transportation business, it’s very cyclical. It’s never been a substantial part of our business. It has typically I think, I mean it’s a significant, but it’s great to be diversified. But having said that, I think that at least our perception is that does require rationalization of capacity which given that there is, continues to be some new things coming in that there needs to be net retirement to rationalize the capacity given the realities North American and in specific the U.S. marine markets require.

Gabe Moreen

Got it. Thanks.

Operator

Your next question comes from Eric Genco from Citi. Your line is open.

Eric Genco

Hi, you guys talked in the past about the challenges in the supply and logistics business in the back to back, I was just interested in the press release, you kind of added a line that said, for production that was anticipated to come online. But this time you said that may not come back online. So I was just curious, is there a change in your thinking there and if we were to see pipeline capacity tighten up out of the Permian, is that a business that comes back in your view or is there something different going on?

Grant Sims

I think it – I don’t know that we really met, intimate all that much to it other than the fact that based upon activity levels we are not sure that we are ever going to see a return, much less a near-term return to activity levels that would dry up the capacity out of a number of regions. Maybe the Permian might be the one exception to that rule, although I am not comfortable with that either, that would change things. Now, I think the more interesting question is whether or not once the original terms of the take-or-pay or minimum volume commitments that people have made to certain infrastructure objects once they expire are they going to be willing to lose money in the gathering function in order to manage that downstream liability. I don’t know if that’s the case, then that would probably take a little pressure off those of us that have tried to do nothing more than provide a service, cover our trucking costs or make a little bit of money at the end of the day.

Eric Genco

Okay, thank you.

Operator

Your next question comes from Jeff Birnbaum from Wunderlich. Your line is open.

Jeff Birnbaum

Afternoon guys. Couple of questions from me. First, there were a number of just sort of one-off that you kind of called out in the release turnaround perhaps seasonal differences relative to what you normally expect. Can you kind of quantify roughly how much the impact quite similarly was in the quarter?

Bob Deere

I don’t think that we have gotten that specific. I mean, really the kind of a combination of refinery turnaround and fires in Alberta affected sequential and probably year-over-year comparisons on both supply and logistics from real barrels handled as well as throughput on the Louisiana system. So, I don’t think we break it down much beyond that, but we try to provide the public, the operating statistics that they can draw their own financial conclusions to it.

Jeff Birnbaum

We will take that. Thanks. And then just kind of one more follow-up for me just on the marine kind of following up on Gabe’s question, you called out in the release, the inland barges, which I don’t think you have talked about as much the last couple of releases and some of the pressure you have seen there on utilization and rates. Just wondering if there was a specific customer change in the quarter that’s where it drove that commentary. You mentioned some of the changing dynamics in the market. Just wondering if that was something broader or more sort of one or two relationships that were changing? Thanks.

Bob Deere

I don’t know. I don’t foresee that there is any relationship changing. I mean, we kind of globally addressed it by refinery dynamics. But I think as our perception and this maybe hard to follow, but it’s our perception somewhat that the wildfires in Alberta, especially in the second quarter, reduced the amount of heavy Canadian that was run in Pad II refineries and therefore the bottoms, which typically we would transport and that’s our reference to long-haul from the Midwest down to the Pad III refineries to get those bottoms down to either [indiscernible] or coker capacity and we saw a lot less of that. We are seeing some return to some of that, but there is certainly, I would say, utilization and rate pressures as a result of some of those discrete things as well as some changing dynamics that we are going to have to deal with and we are dealing with them.

Jeff Birnbaum

Okay. And then just one last one for me, Bob, do you have the 2Q growth CapEx figure?

Bob Deere

I do. In the 2Q, we will report that growth CapEx will be $105 million for the quarter.

Jeff Birnbaum

Thanks, guys.

Operator

Your next question comes from John Edwards from Credit Suisse. Your line is open.

John Edwards

Yes, good afternoon. Grant, could you just comment on the offshore volume ramp expectations there? I mean, volumes were obviously quite strong, certainly beat our expectations. And so I am just wondering going forward, are you expecting sort of this continued trajectory or maybe a little better, maybe a little slower? Any color on that will be great.

Grant Sims

Okay. Well, I think I mean sequentially and at least how we reported, I think we were up about 5.3% from first quarter – second quarter over first quarter. That’s reasonably robust. But we have reason to believe that we should see – I think we referenced this in general, I mean we believe that we will see a sequential increase in volumes in at least the next four to six quarters coming out of the Gulf of Mexico based upon our view of the continuing development activities. Now notwithstanding whether or not there are significant turnarounds and we are aware of a couple that kind of extended turnarounds or a magnitude of maybe 30 days to 35 days in the third quarter and any kind of temporary shut-ins associated with any kind of inclement weather in the Gulf of Mexico. But – so you have to take a little bit of that noise. But the net-net we view quite positively of continuing to see sequential growth coming out of the Gulf.

John Edwards

Okay, that’s helpful. And then obviously, I mean you have got some comments in the release and you made some comments in your remarks regarding the onshore volumes were soft relative to probably what you would like, but just in terms of re-ramping those for some of these turnarounds and other activities, what’s your expectation in that regard?

Grant Sims

I think that, again, we would see the growth, the re-ramping coming-out of Louisiana. I think that’s going to – as we have repurposed our Texas system, primarily as Bob referenced to flow North and not South into the Texas City refining areas that historically those volumes will probably – that we have moved south or probably in large part going to go to zero. And we are going to replace them with hopefully increasing volumes at a better economic situation to the partnership moving to the north. So again, that’s going to – it’s going to require us to get fully up and operational, which in the case of Louisiana’s, really towards the end of the third quarter if not early fourth quarter and in the case of Texas, probably realistically in the fourth quarter.

John Edwards

And by that, you are referencing the growth projects that are coming online?

Grant Sims

Correct, to be fully kind of in-service and operational. And yet we will still have a period of ramping under all of that and that’s kind of why we referenced starting – we will start to see some of it in the third quarter but ramping up through the end of 2017.

John Edwards

Okay, that’s helpful. Thanks. That’s it for me.

Operator

Your next question comes from Michael Blum from Wells Fargo. Your line is open.

Michael Blum

Thank you. Grant, I want to just come back to the distribution growth question that Gabe brought up before, so you have been at about 10% to 11% for at least back-to-back 2010, I was just looking at our model, it sounds like you don’t want to provide a point estimate, but can you give us kind of a rough idea of what neighborhood you are thinking, high single-digit, mid single-digit, low single-digit and then kind of what parameters you are going to use to guide that decision, are you looking at a certain comp group, are you targeting a certain coverage ratio, just trying to get a little bit of sense of how that – what that’s going to look like going forward? Thanks.

Grant Sims

Well, the first point I would make is that the – in excess of 10% started in 2005. So it’s been 11 years that we have done that. We don’t intend on cutting our distribution in absolute sense to increase our coverage ratio which seems to remain acceptable today. I would think that we would look into something dial back to the mid to high single-digits. But again, I think we haven’t necessarily led on that. And we have never had an official policy, although we had 11 years and 44 consecutive quarters of delivering 10% to 11% with a few exceptions and never less than 8.7%. But we will evaluate that as we go forward. So that’s about all I can say at this point.

Michael Blum

Thank you. That’s helpful.

Operator

[Operator Instructions] Your next question comes from Poe Fratt from D.A. Davidson. Your line is open.

Poe Fratt

Hi, Bob, can you give us the growth CapEx for the year?

Bob Deere

For looking – Poe, looking at the remainder of the year, we think that we will probably anticipate that we will spend another $125 million.

Poe Fratt

And then Grant, not to beat a dead horse, but why wasn’t the second quarter distribution evaluated, you announced it and then came out two weeks later and said that your target about changing the potential growth targets?

Grant Sims

Because I think that typically we don’t have the opportunity to have a public discussion around it when we announced our distribution. We are typically fairly early announcer because, in some respects, we earned it in the first two quarters of – I mean in the first two months of the quarter preceding given our coverage ratios. So we are capable of announcing it very early. But I think in the context of kind of evaluating the overall capital structure that we wanted to go ahead and have the ability to discuss it and discuss our thoughts around why we are doing it. And I think a lot of that came out in the 8-Ks and process associated with equity offering and now today having the ability to discuss it.

Poe Fratt

Yes. And then just – your 11-year track record, can we assume you want to set the bar low enough to sustain a similar track record at the new level, Grant?

Grant Sims

Well, I think that it’s our perception that there must be a – some kind of premium built-in, or risk premium associated with the risk of having the distribution cut, which has occurred. And I get that, but it hasn’t occurred with us and we never intend for it to occur. So I mean and don’t take it totally out of context, but it’s easier to not grow than it is to grow 10% to 11%. You can do that for a lot longer. But again, I think that given that we believe we have always been in it for the long-term and creating as much value and having a clear runway of growth and certainly no risk or removing or attempting to remove that risk that anybody would ever have to be concerned about a cut in absolute level of the distribution. Those are the types of things that we are trying to evaluate and managing the overall capital structure. And as I said, hopefully that benefits everybody in the capital structure.

Poe Fratt

And then looking at the marine transportation, can you remind us of your contract cover, how much tonnage you have roll in over the next two quarters and then over the next year?

Grant Sims

I don’t know that we could get into that specificity. I mean I think that we have said that obviously the 1MR that we have, the American Phoenix is under contract with an investment grade counterparty through September of 2020. And then varying levels on either coastwise our ocean-going blue water vessels or whatever, I would say that relative to the experience that we have had over the last, call it 5 years to 7 years, we have more. And I don’t think this is unusual, that we have more operating in spot business than we do have under any kind of term arrangements.

Poe Fratt

Great. Thanks for your time.

Operator

Your next question comes from Barrett Blaschke from MUFG Securities. Your line is open.

Barrett Blaschke

Hi guys. One of the things that appears to me is as you would bring down the I guess the long-term target for distribution growth, it does free up on your capital structure that you were talking about, are you seeing a lot of opportunities now for projects or acquisitions or has that slowed down?

Grant Sims

I mean it’s our perception that the opportunity set is going to grow over the next 6 months to 18 months. And taking the affirmative steps to rebuild our financial flexibility at this moment. And it’s probably wise and positions us to be able to take advantage of what we believe to be a larger opportunity set that will occur, given operating fundamentals over the next as I said 6 months to 18 months.

Barrett Blaschke

Okay. Thank you.

Operator

[Operator Instructions] We do not have any questions at this time. I will turn the call over to the presenters.

Grant Sims

Thank you very much. And we will talk in another three months or so. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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