Genesis Energy, L.P. (GEL) CEO Grant Sims on Q2 2018 Results - Earnings Call Transcript

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About: Genesis Energy, L.P. (GEL)
by: SA Transcripts

Genesis Energy, L.P. (NYSE:GEL) Q2 2018 Earnings Conference Call August 8, 2018 10:00 AM ET

Executives

Grant Sims - Chief Executive Officer

Robert Deere - Chief Financial Officer

Analysts

Shneur Gershuni - UBS

TJ Schultz - RBC Capital Markets

Theresa Chen - Barclays PLC

George Wang - Citigroup

Barrett Blaschke - MUFG Securities Americas Inc.

Patrick Wang - Robert W. Baird & Co.

Operator

Welcome to the 2018 Second Quarter Conference Call for Genesis Energy. Genesis has four business segments: The Offshore Pipeline Transportation Division is engaged in providing critical infrastructure to move oil produced from the long-lived world-class reservoirs from the Deepwater Gulf of Mexico to Onshore Refining Centers. The Sodium Minerals and Sulfur Services Division includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities, as well as the processing of sour gas streams to remove sulfur and refining operations.

The Onshore Facilities and Transportation Division is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation Division is engaged in the maritime transportation of primarily refined petroleum products. Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

During this conference call, management may be 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 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 L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Karen Pape, Chief Accounting Officer.

Grant Sims

Good morning. As mentioned in this morning's earnings release we have entered into an option agreement to sell certain non-core assets. In return for the option and we were received a $30 million upfront option payment which would ultimately be applied to the final purchase price subject to certain terms and conditions.

We were in a position at this point to announce the option is for Powder River Basin assets and the option holder is Silver Creek Midstream in conjunction with Tailwater Capital and the Energy and Minerals Group to large sophisticated and respected energy focused investment shots.

Whether it can be no guarantees that we ultimately consummate and close a transaction we currently expect to sign and close in the third quarter. Proceeds from the sale would be used to paydown outstandings under our revolving credit facility and for general corporate purposes.

On a pro forma basis we would expect us to reduce our bank compliance leverage by more than 3/10s return and meaningfully contribute to our ultimate long-term goal of around four times or less on our leverage calculation.

Turning to our quarterly results, our businesses in the quarter continue to perform well and delivered financial results have provided 1.55 times coverage or sequentially increased quarterly distribution. Something that we're focused on is performance below our expectations in our offshore business.

Three particular major fields have underperformed our expectations over the last two or three quarters. One field we believe is underperforming as a result of reservoir quality degradation and not due to mechanical factors.

Offsetting this in future years are two subsea tie-backs to the same dedicated in-field production facility scheduled to come online; one in early 2019 and one later in 2019. Between now and then, however, our segment margin will be around $5 million a quarter less than what we had previously anticipated.

The other two large underperforming fields we think are predominantly timing related. To maximize reserve recoveries, the operator appears to be producing at a slower rate than communicated to us just last year. This lower current level, and yet consistent longer-term production, nonetheless has negatively affected our reasonably anticipated segment margin by approximately $5 million a quarter.

Longer term we are quite bullish on, and pleased with, the activity in and around our substantial footprint of assets in the Gulf of Mexico. Additionally, we are currently seeing increasing demand for our assets from production that is currently dedicated to third-party pipelines but is unable to get to shore due to such competitive pipelines being, in our estimation, oversubscribed.

Given our excess capacity and connectivity on certain of our systems, we expect to benefit from this takeaway capacity constraint in future periods. There are certain scenarios where we could benefit from this market dynamic by as much as $7 million a quarter for at least the next couple of years. Stay tuned as things unfold until the end of the year.

Our recently acquired soda ash operations have continued to exceed expectations. We believe we are on track to produce $165 million to $175 million in margin for 2018, up from the previously discussed range of $155 million to $165 million. This is primarily driven by higher than expected ANSAC export pricing pushed by higher than expected Chinese domestic pricing influenced that continued environmental inspections resulting in tighten export supply.

Increase supply from Turkey and Kazan continues to ramp slower than expected and therefore has been unable to backfill the reduced and higher priced exports out of China. Worldwide demand for soda ash continues to be strong. As these market factors that have led to our increase in expected margin of some $10 million for the full-year even with a long-wall move negatively affecting the third quarter about $3 million to $4 million.

Our historical refinery services business continues to perform well and benefits from many of the macro factors and worldwide economic activity that also positively affects soda ash.

Volumes through our onshore terminals and in our pipelines have increased from the year earlier period and sequentially, although to date not at the levels we had previously anticipated. However, based upon July and known nominations for the rest of the quarter, we would expect to see meaningful growth in future quarters, especially at our Scenic Station facility servicing the ExxonMobil Baton Rouge refinery in Louisiana.

Rail road capacity out of Canada has been expanded and we are now seeing the benefits and volumes landed at Scenic Station which we expect to continue to ramp through the end of 2018 and into 2019 and beyond. We would anticipate volumes to increase later this year and into 2019 in Texas as integrity work is completed on a downstream pipeline which currently has constrained physical flows to under the minimum volume commitment of our customer.

Turning to marine. Margin actually increased slightly on a sequential quarterly basis for the second quarter in a row. While we are reasonably hopeful we've put in a bottom for the quarterly segment margin from our entire fleet of assets, we have no expectation of the fundamentals for marine transportation showing any significant improvement over at least the next several years. We certainly have significant operational leverage if things improve sooner.

In summary, the net effect of the financial performance is slightly lower quarterly, and cumulative, EBITDA than we had expected when we announced our capital reallocation plan last fall. While the coverage of our distribution is strong, the pace of our natural de-levering is slower. We will continue to target and ultimately move to around four times or less on our leverage calculation, but it could take a little longer than we had originally anticipated. The transaction assuming at close will meaningfully help us achieve that goal.

We intend to be prudent and diligent in maintaining financial flexibility to allow the partnership to opportunistically build long-term value for all our stakeholders. As always we would like to recognize the efforts and commitment of all those with whom we are fortunate to work.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Shneur Gershuni from UBS. Your line is open.

Shneur Gershuni

Hi. Good morning, guys. Maybe we can just start off with the challenges that you highlighted in the offshore segment. Given the fact that there was an actual - you even shared with us what your expectations were before versus now, but you've given us the delta on it.

At the same time you've said that if field is been underperforming for the last several quarters, are we to understand that the $10 million a quarter effectively that was called out or at least $5 million on the ongoing basis would suggest that this quarter would have been $5 million higher? Or are we saying that it's going to degrade further by $5 million on a go forward basis from where you are today? I'm trying to understand what's been baked in and continuing verses degrading further?

Grant Sims

The $5 million is already baked in, but we don't see that coming back although not in consequential portion of that will be made up, if not exceeded when the two subsea tie-backs to the same field or consummated by the end of 2019.

Shneur Gershuni

So is the way to look at it, you look at today's results, it would have been $5 million higher affectively? So why you have exceeded expectations, what you would have implied higher than that?

Grant Sims

Exactly.

Shneur Gershuni

Okay. Just wanted to clarify that, secondly with the asset sale, I just wanted to understand some of the mechanics with respect to it. You've already received a $30 million non-refundable payment that you get to keep no matter what happens with this outcome and in sort of trying to triangulate and obviously we're missing some components here. But you talked about a point three times leverage improvement with asset sale. Are we talking something in the $400 million to $500 million range in terms of a valuation number?

Grant Sims

I'm not in a position at this point to devolves that, but we would anticipate as - we said we anticipate the option being exercised in fairly short order and so more information around the overall transaction will be forthcoming shortly.

Shneur Gershuni

Okay and two more quick follow-ups. Your goal in terms of the leveraged goals that you had laid out, there was actually a range, but like for example you said you'd be approaching 4.75 times to less than five. Are those targets still valid at this point right now it's just towards the middle or higher end of that range or do those targets get revised?

Grant Sims

I think that we - earlier whether or not as the fourth quarter or as the first quarter we had said that getting all the way to five at the end of 2018 was going to be probably difficult, primarily because of we were continuing to spend in Wyoming. But so not only we still think that that's going to be a little difficult to do on a TTM basis or an LTM basis at 12/31.

Although with an annualized fourth quarter, we think that we will be on top of it. But we do think if we continue to believe that the 2019 and 2020 targets are still reasonably achievable. Although there may be pushed out a little bit as we kind of got it just because we're missing a little bit of the anticipated EBITDA that we just talked about.

Shneur Gershuni

And one final question, Onshore segment did well. It looks like the long awaited ramp of Baton Rouge is finally happening, when we think about the maximum capacity of what that can do the volumes during the quarter. What percentage utilization does that sort of represent at this stage right now because you sort of suggest by the meaningful upside that we're not quite near full-year?

Grant Sims

Yes, I mean I think that we realistically we can do two trains a day from a capacity point of view. But that's not where we're - we haven't seen that yet, but we do see some ramping coming up and I think that we anticipate that based upon what we've seen in the capacity expansions on the CP and the CN that coming out of Canada that the market dynamics are certainly there to see meaningful volume ramps in the third quarter. We're seeing those and continuing on into the fourth.

Shneur Gershuni

Great, thank you very much. Appreciate all the color today.

Grant Sims

Thank you.

Operator

Your next question is from the line TJ Schultz from RBC Capital Markets. Your line is open.

TJ Schultz

Hi, great. Thanks. I guess just first a quick follow-up on that last point. On the Canadian rail capacity expansions, is there - has this opened up enough or do you have a line of sight to get two trains per day at Scenic Station?

Grant Sims

Again that's a capacity situation. I would say that we've seen nominations that would indicate on average at least 1.5 trains a day on average.

TJ Schultz

Okay. And then back on offshore volumes. Those volumes that you are expecting to get from dedications away that will or may need to use your pipes. What's trigger the hurdles for you to get those volumes and I think you said that could have an impact of $7 million per quarter for you all?

Grant Sims

The trigger for it is basically is competing pipeline and ramps to its capacity and therefore it have no other way to go except to be dropped off. There are some other means there are some interesting plumbing with some interconnectivity elsewhere, but we have seen nominations starting in August which we - for prospective periods and producers are interested in entering into 12-month to 24month contracts to provide the capacity that is going to be required to move their production, because it can't move on the pipelines dedicated to.

TJ Schultz

Okay. And the assets sale are you able to give the current run rate EBITDA associated with the PRB assets you're looking to sell?

Grant Sims

No, we're not in a position to do that, but our calculation of the overall effect on our calculated ratio is basically a round term that included the net proceeds from the overall assuming that the transaction closes as well as backing out the LTM EBITDA.

TJ Schultz

Yes, okay understood. Just lastly on leverage and distribution I certainly understand you have plenty of coverage on the distribution and I just want to confirm or get your view if there's any plan on reevaluating distribution policy again just to get that leverage down sooner or is this just something that you think you have time to kind of wait out?

Grant Sims

I think that we - as we discussed almost a year-ago when we at the cap reallocation that we will evaluate on a go forward basis what the ash value use of our capital and but it does point we see nothing that would deviate from what we laid out back in October.

TJ Schultz

Okay. Thanks Grant.

Operator

Your next question is from the line of Theresa Chen from Barclays. Your line is open.

Theresa Chen

Hi, on the soda ash business is that $10 million guidance sustainable for 2019 as well or does it know if they have to do with competitor facilities abroad facing issues today?

Grant Sims

We feel that the market fundamentals in the dynamics are such that it's sustainable into 2019.

Theresa Chen

Got it. On offshore can just give us a bit of history on how you came to adjust our estimates for the reservoir quality for the field in decoration and how like comfortable what do you feel about the rest of the estimates in the near term for the other fields?

Grant Sims

Well we saw a continued precipitous decline and we don't have the inside and direct knowledge and kind of reservoir engineering data that we came to the conclusion that this was not something that was going to snapback. So we did an evaluation kind of the 12 months ending 6/30/2017 versus 12 months ending 2018 on that. And that was the Genesis no pun intended over the $5 million a quarter of underperformance that we did not expect. So we are making the assumption that is not coming back.

And on the other fields basically, again as we said, we rely upon a good place, the estimates of the production coming from the fields to put into our forecast both for financial purposes as well as capacity and in physical operation purposes. What they have certainly not met, what they told us to expect even last year. So we've kind of recalibrated our expectations that's not coming as rapidly as what we had anticipated or not be where we thought it would.

Theresa Chen

Got it. Thank you very much.

Operator

Your next question is from the line of George Wang from Citigroup. Your line is open.

George Wang

Hey guys. Good morning.

Grant Sims

Good morning.

George Wang

Just a couple quick questions. Firstly, just in terms of unit buyback versus debt payment, any thoughts on kind of when that the Board may or may not eventually approve the unit buyback just considering the Genesis still trading at a substantial discount versus peers?

Grant Sims

Thanks. Once we get comfortably under [$5 million] it certainly something that we could evaluate as a Board in terms of - if we still think that if the point the unit share undervalued, but getting our financial flex - maintaining our financial flexibility we think that we have a number of opportunities that we have good places to deploy our capital. Again, if we think that that's the best use of the capital, buying back units will certainly be on the radar screen.

George Wang

Gotcha. And secondly just in terms of deal flow and beside this coming PRB asset sale, are there any more sorts of non-core assets chopping blocks, you guys are looking at?

Grant Sims

I don't know that I'm saying the blocks or anything, but there's other - we have other pockets of assets which I would say are non-core, but we have nothing pending or any kind of processes or anything else. But we are continuing to sharpen our focus on where we have dominant and quality market positions. We think that's a good place to focus.

George Wang

Gotcha. And lastly, but just in terms of Marine segment, you guys guided by the next few years it's going to stay depressed. So is there any kind of catalyst like you guys can see for a stronger recovery beyond expectation? I just wonder what it can sort of cost the segment to perform much better with the expectation going forward.

Grant Sims

I mean I think that the best thing that could happen would be domestic differentials blowing out to the point that it would absorb some of the marine capacity that move crude oil from point A to point B and that primarily mean Gulf Coast destinations to eastern West Coast which would soak up a lot of marine transportation assets. With all of the March moving the bottleneck from the Permian to Corpus Christi Houston area that's a potential likely outcome.

And so from an overall industry point of view, Houston or Corpus starts trading in a significant discount which it might once you just kind of debottlenecking get the stuff down then those differentials would support marine transportation to pad one, pad five. But when that occurs, I'm not exactly sure. But that's an illustrative of what could more near-term kind of probably provides some overall relief for the marine transportation sector.

George Wang

Okay. Thanks so much.

Operator

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

Barrett Blaschke

Hey, guys. A lot of mine have been asked, but just to kind of housekeeping here. On the $5 million from basically slower production - is that the same $5 million from degradation of the other field or is that [$5 million and $5 million]?

Grant Sims

$5 million and $5 million.

Barrett Blaschke

$5 million and $5 million, okay. So $5 million sort of expected to come back and $5 million sort of staying offline, okay. That helps. And then just notice the Free State volume seem to be sort of slowly on the uptick. Is that just a function of commodity price today or what's driving that?

Grant Sims

Well, as you're probably aware, Denbury is the primary shipper to the extent that our prices support additional - we would expect and if that's what is occurring and we would expect volumes of Free State to ensure way.

Barrett Blaschke

Okay, thank you.

Operator

Your next question is from the line of Patrick Wang of Baird. Your line is open.

Patrick Wang

Hey, good morning everyone. Looking at the soda ash business results there continue to impress. But can you comment on the current spot market with the recent softening in Chinese prices and what if any implications you have at this point on contract renewals heading into year end?

Grant Sims

It's reasonably sensitive at this point, but again I think that everything else the same as we said that export prices in the first half of the year have exceeded at our expectations as we entered the year and we believe those market fundamentals are in place to continue exceeding our expectations for the remainder of the year. As I've answered in earlier question, we don't see a lot of changes in fundamentals that would back off in 2019.

Patrick Wang

Okay, thanks for that. And then my last question, on your some $750 million in preferred equity, could you remind us if you have the option to continue to paying kind of those units beyond the first on 18-month period or those become fully cash pay in 2019?

Grant Sims

For summit to the original terms and conditions, the pick period was for 18 months.

Patrick Wang

All right, thank you very much.

Operator

[Operator Instructions] Again your next question is from the line of Shneur Gershuni from UBS. Your line is open.

Shneur Gershuni

Hi, guys. Just one last follow-up question, do you happen to have the CapEx for the quarter and is it still 122 for the year as an expectation?

Grant Sims

I believe is that expectation is somewhat [indiscernible] up on what happens in Wyoming and if we close the transaction then it will relieve some of the estimated capital expenditures.

Robert Deere

Yes, order of magnitude at the transaction close prospective CapEx for the year would be down $15 million to $20 million.

Shneur Gershuni

And do you having to have what was spent during 2Q?

Robert Deere

$20.5 million in Q2.

Shneur Gershuni

Perfect. All right, thank you very much guys. Really appreciate that.

Operator

[Operator Instructions] There are no further questions at this time. Please continue.

Grant Sims

Okay. Well, that concludes the quarterly call, and we appreciate everyone's attendance. Thanks.

Operator

Thank you. This concludes today's conference call. You may now disconnect.