USD Partners' (USDP) CEO Dan Borgen on Q2 2016 Results - Earnings Call Transcript

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USD Partners LP (NYSE:USDP)

Q2 2016 Earnings Conference Call

August 04, 2016 11:00 AM ET

Executives

Ashley Means - Director, Finance and IR

Dan Borgen - CEO

Adam Altsuler - CFO

Brad Sanders - Chief Commercial Officer

Analysts

Derek Walker - Bank of America

Mike Gyure - Janney

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the USD Partners LP Second Quarter 2016 Results Conference Call. At this time all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. [Operator Instructions]

It is now my pleasure to turn the call over to Ashley Means, Director of Finance and Investor Relations for opening remarks. Please go ahead.

Ashley Means

Good morning and thank you for joining us. Welcome to our second quarter 2016 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer, as well as several other members of our senior management team. Yesterday evening we issued a press release announcing the results for the three and six months ended June 30, 2016. If you’d like a copy of the press release, you can find one on our website at usdpartners.com. Before Dan and Adam proceed with the prepared remarks, please note that the Safe Harbor disclosure statement regarding forward-looking statements and last night’s press release applies to the statements of management on this call. Also please note that information presented on today’s call speaks only as of today, August 4, 2016. Any time sensitive information provided may no longer be accurate at the time of any webcast, replay, or reading of the transcript. Finally today’s call will include discussion of non-GAAP financial measures. Please see last night’s press release for reconciliation to the most comparable GAAP financial measures.

And with that, I’ll turn the call over to Dan Borgen.

Dan Borgen

Good morning and thanks, everybody, for being with us. Let me start with safety as I always like to do. We are proud to report another successful quarter without incident at any of our terminals and a total recordable injury rate of zero this year-to-date.

Turning to the partnership second quarter financial results, net cash provided by operating activities of $13.4 million represents 45% growth over the first quarter and 36% growth relative to last year. Adjusted EBITDA of $16.3 million represents 13% growth over the first quarter and 64% growth relative to last year. Similarly, distributable cash flow of $12.6 million represents 16% growth over the first quarter and 45% growth relative to last year. These results were driven in part by the contributions from our Casper terminal which is performing as expected, as well as continued efforts from our team to manage costs across the entire business.

For the second quarter, 96% of the partnership’s adjusted EBITDA before corporate expenses were attributable to high quality, mostly take or pay agreements that underpin our business and allow us to deliver on our stated plans to increase distributions to our unit holders. Last week, consistent with management’s guidance, the partnership declared its fifth consecutive quarterly distribution increase to $0.315 per unit, or $1.26 on an annualized basis. This represents an increase of 2.4% over last quarter and a year-over-year increase of 8.6%.

With over 1.7 times coverage and less than 3.5 net leverage, we continue to believe that delivering on our growth plans is consistent with the long-term interest of the partnership and our unit holders. Recent industry reports support our long-standing view that logistics companies like ours will continue to play an important role in meeting dynamic North American infrastructure needs particularly related to the transportation of heavy crude oil from Western Canada, and marine terminal capabilities on the U.S. Gulf Coast.

The recent Cap report highlighted that more than 850,000 additional barrels per day of oil sands supply will be available by year 2021. That Canada’s oil supply will soon greatly exceed its current pipeline capacity. And that rail will continue to complement pipeline transportation. This information is consistent with our own analysis. In addition, our analysis shows that approximately 350,000 to 400,000 barrels per day will be gathered and arriving at the Hardisty Hub by year 2017. Additionally, the EIA and others have highlighted the fact that utilization of Gulf Coast crude oil storage capacity has continued to trend higher despite meaningful additions to capacity, suggesting increasing demand for infrastructure.

Consistent with this outlook, our commercial team is actively engaged on a daily basis with both current and potential new customers to find creative ways to utilize the USD network and our expertise to meet their upcoming logistics needs. Our assets are completely positioned, given the competitively positioned, given the scalability and connectivity of our Hardisty terminal, capacity at the Casper terminal and developable water access on the Houston ship Channel. Additionally our partner in Canada, Gibson Energy, has confirmed that they are expanding their Hardisty terminal by nearly 50%, with 2.9 million barrels of new storage capacity due online next year. So we like the positioning of our terminal network and expect to be able to offer our customers flexible and timely logistics solutions that uniquely can preserve value relative to other transportation alternatives when product quality matters.

We also continue to evaluate a number of M&A opportunities. And we are ready to execute to the extent opportunities are accretive, complementary to our network and consistent with our strategy of operating industry solutions for high quality and primarily investment-grade customers. Lastly, and important in this market, both the partnership and the parent company have the financial flexibility to pursue these opportunities with the support of our bank group’s and our partner, Energy Capital Partners.

With that I’ll turn the call over to Adam to review our financial results.

Adam Altsuler

Thank you, Dan, and thank you for joining us on the call this morning. Please note that we issued our second-quarter earnings release yesterday afternoon, along with our second-quarter 10-Q, which can be found on the SEC’s website, at www.SEC.gov. Actually the 10-Q will be issued today after this call.

As Dan mentioned for the second quarter, we reported net cash provided by operating activities of 13.4 million, adjusted EBITDA of 16.3 million and distributable cash flow of 12.6 million. Our results reflect the stable and predictable nature of our cash flows from primarily investment grade customers with approximately 96% of our adjusted EBITDA before corporate expenses generated from take or pay contract.

In addition, the Casper terminal has been fully integrated into our logistics network and is performing in line with our initial guidance and expectations. The partnership achieved substantial growth during the second quarter of 2016 relative to the second quarter of 2015. Specifically, net income and net cash provided by operating activities increased by 97% and 36% respectively, while adjusted EBITDA and distributable cash flow increased by 64% and 45% respectively. This growth was primarily attributable to the acquisition of the Casper terminal in November of 2015 and was partially offset by higher interest expense on additional borrowings used to fund the acquisition and additional G&A costs incurred over the past 12 months.

With regard to cash taxes paid during the quarter, we continue to work with the Big Four accounting firm to optimize our income tax position. We expect to conclude our work on this in the third quarter of 2016 and we anticipate the results of this analysis will favorably affect our 2015 foreign income tax returns as well as our income tax expense for 2016 and future periods. On July 28, the partnership declared a quarterly cash distribution of $0.00315 per unit, or $1.26 on an annualized basis, which represents an increase of $0.0075 per unit, representing 2.4% growth relative to the first quarter of 2016 and 8.6% growth relative to the second quarter of 2015. The distribution is payable on August 12 to unit holders of record as of August 8. For the quarter, the partnership generated approximately 1.7 times distribution coverage.

As of June 30, 2016 the partnership had net leverage of 3.4 times trailing 12 month adjusted EBITDA pro forma for the Casper acquisition and available liquidity of approximately $173 million, including approximately $10 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $163 million on its $400 million senior secured credit facility, subject to continued compliance with financial covenants. The partnership had approximately $237 million of total debt outstanding as of June 30, $206 million on the revolver and approximately $31 million remaining on the Canadian term loan.

In summary, we are pleased with our strong liquidity position and strong distribution coverage for the quarter and believe we have flexibility to pursue growth opportunities as they may arise in the future. And with that I would now like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Derek Walker of Bank of America.

Derek Walker

Good morning, gentlemen. Just a couple questions. First, I guess, you mentioned that commercial activity still ongoing. I guess just any color there as far as how those discussions are progressing and is there any specific data point that we should be looking for that you’re looking for as far as trying to firm some of those agreements up?

Dan Borgen

Brad, why don’t you address that?

Brad Sanders

Good question. We continue to focus on a couple of things. One is when you mentioned what the data point might be. First, there is a, the current production schedule shows that new production comes on second half 2016-2017. So that will dictate to some extent the timing and the effectiveness of our commercialization discussions.

Additionally, the price of the WCS specifically will be a motivator for producers and current prices today are consistent with current production relative to takeaway capacity, so trading somewhere at $13 to $15 under WTI. So at this point in time, from a price standpoint they are not motivated. As new production comes on we expect that price to weaken and that will be part of the motivation. So it’s both the timing of the production and the price action that will likely motivate and drive when commercialization happens.

Derek Walker

Got it, appreciate that. I guess, Dan, in your formal remarks you mentioned you’re taking a look at some M&A opportunities. I guess to the extent you can provide some color there, anything particular that you’re looking at?

Dan Borgen

Let me say this. We are in second round on a couple of different acquisition opportunities, and we are looking forward to being conservatively aggressive, I’ll call it that. We think those assets might fit as well, we are certainly not the only game in town on those two assets or group of assets but we are excited about those. We are looking at other opportunities that are more venture-related, where they are not just standalone asset purchases but I will say off the market opportunities where we can grow value together with key customers and our new partners on opportunities there. So we are aggressive out there, if it fits our network, if we would’ve built it ourselves, and if it offers additional services to our customers. So we are continuing to focus on that. We got a group of folks dedicated to that and working very hard.

Derek Walker

And I guess depending on the size of the transaction, but I guess would that be at the USD level or the MLP level?

Dan Borgen

It could be one or both. And just depending upon how it fits and the size of it.

Derek Walker

Got it, that makes sense. Last one from me, the express pipeline has an expansion coming on later this year, did that impact Casper at all?

Dan Borgen

Brad, do want to take first crack at that?

Brad Sanders

That would be a positive impact to, Casper, as you know or don’t know, that its Express exclusively feeds Casper pipe pipelines. So that would be positive for Express, and therefore positive for us, because we are looking to grow Casper, we have the ability to grow Casper, and given the current production profile that Dan talked about, then the new production would naturally seek that pipeline takeaway capacity into Casper. So we are excited about that.

Dan Borgen

A reminder about Casper. Casper is, as you know, Express is connected into the Hardisty hub. It’s a takeaway for Hardisty, it’s not a Bakken. Some have possibly suggested that it is a Bakken-type related asset. It is not a Bakken related asset, it is a blended heavy takeaway opportunity with also local blend capability and obviously 900,000 barrels of tankage on the ground with some of the best refining customers in the country. So, we feel very good about that asset and the ability to grow that, but it’s distinctly different than a Bakken terminal.

Operator

[Operator Instructions] Your next question comes from the line of Mike Gyure of Janney.

Mike Gyure

Good morning, guys. Can you talk a little bit about what’s going with your Houston development plans and what’s going on down there in the ship channel?

Dan Borgen

You bet. I’ll take first crack at that Mike. So we are really encouraged about what’s going on down there and obviously a lot of activity in the Houston ship channel relative to not only crude, inbound crude storage, connectivity there, but also on export, I’ll call it of refined products as well as export for crude. So we are finding, I would say, equal demand for both crude and refined products out of that facility. We are very encouraged with folks that are at the table with us, we have ongoing discussions and negotiations relative to sizing, timing and pricing, but we feel very confident about that asset and a reminder that is at the parent level. But our intent would be to develop that and then when the market is right, drop it down into the MLP at a future date. Brad, anything else off there?

Brad Sanders

No, I think that’s a good summary. The one point that is key to differentiate at the Houston ship channel is that quality matters and so, when quality matters to a refiner or a producer, even to a refined products distribution system, then that creates unique demand for infrastructure. And though we are in an environment of low prices and new crude production and or volumes coming online are challenged, the demand differentiation in the Houston ship channel is actually quite high and that’s driving new and unique demand for infrastructure.

Dan Borgen

And to further add to that, the mix of customers are producer, infrastructure and refiners. As three distinguished groups in terms of the folks at the table with us today.

Operator

And at this time there are no further questions. I would now like to turn the call back over to management for any closing remarks.

Dan Borgen

Thank you. So in closing let me just say we are pleased that our successful acquisition and integration of the Casper terminal which has provided a platform for growth in a market that has otherwise been slow to advance major development projects, we will continue to be conservative with partnerships balance sheet to be prepared for growth at the right time, whether through drop down acquisitions or third-party M&A opportunities. And in the meantime we look forward to continue to deliver stable cash flows and increasing distribution stellar unit holders. We are confident in our assets and pleased with the customers’ participation, both existing customers and new potential customers that are at the table with us across all aspects within the partnership.

So, with that I will close. And we appreciate everybody’s attendance today. Have a great weekend. And we look forward to communicating with you again soon. Thanks again.

Operator

Thank you for participating in today’s conference. You may now disconnect and have a wonderful day.

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