Phillips 66 Partners LP (PSXP) Q3 2018 Results - Earnings Call Transcript

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About: Phillips 66 Partners LP (PSXP)
by: SA Transcripts

Phillips 66 Partners LP (NYSE:PSXP) Q3 2018 Results Conference Call October 26, 2018 2:00 PM ET

Executives

Jeff Dietert - Vice President, Investor Relations

Kevin Mitchell - Vice President and Chief Financial Officer

Tom Liberti - Vice President and Chief Operating Officer

Analysts

Jerren Holder - Goldman Sachs

Spiro Dounis - Credit Suisse

Dennis Coleman - Bank of America and Merrill Lynch

Barrett Blaschke - MUFG Securities

Jeremy Tonet - JP Morgan

Tom Abrams - Morgan Stanley

Chris Sighinolfi - Jefferies

Operator

Welcome to the Third Quarter 2018 Phillips 66 Partners Earnings Conference Call. My name is Julie, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Jeff Dietert

Good afternoon. And welcome to the Phillips 66 Partners third quarter earnings conference call. Participants on today's call will include Kevin Mitchell, Vice President and CFO and Tom Liberti, Vice President and Chief Operating Officer. The presentation materials we will be using during the call can be found on the Events section of the Phillips 66 Partners Web site, along with supplemental financial and operating information.

Slide 2 contains our Safe Harbor Statement. It's a reminder that we will be making forward-looking statements during the presentation and the Q&A session. Actual results may differ materially from what we present today. Factors that could cause actual results to differ are included here as well as in our SEC filings.

With that, I will turn the call over to Kevin Mitchell.

Kevin Mitchell

Thank you, Jeff and good afternoon, everyone. The Partnership reported record net income of $217 million, an increase of $31 million from the previous quarter. We also achieved record adjusted EBITDA of $305 million. We delivered a great quarter with strong performance from our operated assets, as well as record volumes on the Bakken and Sand Hills pipelines. We achieved our $1.1 billion run rate adjusted EBITDA target ahead of schedule. Our Board of directors approved a third quarter distribution of $0.792 per common unit, a 5.3% increase from the previous quarter. Our distribution coverage ratio is 1.36 times.

Moving onto Slide 4, the Partnerships' substantial growth since its 2013 IPO has enabled 20 consecutive quarters of distribution increases. We will achieve our five year annual distribution growth target next quarter.

Onto Slide 5, the third quarter adjusted EBITDA of $305 million is an increase of $29 million from the previous quarter. Our joint venture contributed higher earnings from increased volumes, including the Bakken, Explorer and Sand Hills pipelines. Third quarter throughput on the Bakken pipeline exceeded 500,000 barrels per day. Earnings from our wholly owned assets increased as a result of high utilization at the Phillips 66 operating refineries in the mid content region. Third quarter distributable cash flow was $218 million, an increase of $14 million from the prior quarter. Increased adjusted EBITDA was partially offset by higher maintenance capital. As expected, maintenance capital was higher in the third quarter than in the first two quarters of the year.

Slide 6 highlights our financial flexibility and liquidity. We ended the third quarter with $100 million of cash and no outstanding borrowings under our $750 million revolving credit facility. Our debt to EBITDA ratio on our revolver covenant basis was 2.8 times. Long term, we expect leverage to be around 3.5 times. The Partnerships' strong financial position enables funding of the 2018 capital program with cash on hand, debt capacity and selective use of the ATM program.

Before I turn the call over to Tom, I’d like to make some comments about our capital program. We intentionally grew at a rapid pace during our first five years. With our scale, financial strength and the opportunities ahead of us, we are well-positioned to fund and sustain a significant organic capital program. As we have previously announced, our 2018 capital program is approximately $750 million, an increase of $150 million from the original budget due to the Gray Oak pipeline. For 2019 with the robust portfolio of projects that we are progressing, we expect our capital budget to be approximately $1.2 billion. We will provide more information on our 2019 capital program in December.

Now, Tom will provide an update on our growth projects.

Tom Liberti

Thanks Kevin, hello everyone. Slide 7 highlights the projects mentioned by Kevin that will drive our EBITDA through 2020. Our scale and financial position have enabled us to fund and sustain this larger capital program. We continued to advance these projects during the quarter. The Gray Oak pipeline is our largest organic project to-date and expands our footprint into the high-growth Permian basin. We are seeing strong customer demand for crude oil takeaway for the Gulf Coast. Supported by customer commitments, capacity of the pipeline will be 900,000 barrels per day. Total cost was anticipated to be $2.2 billion and we remain on schedule for completion by the end of 2019. Phillips 66 Partners will be the largest owner in the pipeline.

In Corpus Christi the Gray Oak pipeline will connect to the South Texas Gateway terminal that is being developed by Buckeye Partners. We have a 25% ownership in the terminal, which allows us to offer a complete logistic solution to our Gray Oak customers. In connection with the Phillips 66 project to add NGL fractionation at the Sweeny hub, the Partnership is increasing storage at Clemens Caverns from 9 million to 15 million barrels. Project completion is expected in late 2020. This is another great example of how integration with our sponsor provides accretive growth projects for the MLP.

The Sand Hills pipeline is increasing capacity to meet growing NGL takeaway demand in the Permian basin. Sand Hills reached 440,000 barrels per day of capacity at the end of the third quarter, and is expected to be at 485,000 barrels per day by the end of this year. We own a one-third interest in Sand Hills and it has been a strong contributor to our EBITDA growth.

Commercial operations on the Bayou Bridge pipeline extension from Lake Charles to St. James, Louisiana are expected to begin by the end of this year. This crude pipeline currently operates from Nederland, Texas to Lake Charles, and we have a 40% ownership interest. At the Phillips 66 Lake Charles refinery, the Partnership is adding product export capability for our Clifton Ridge Marine Terminal. Partners is developing a new pipeline that will connect clean product storage in Lake Charles for the terminal and provide up to 50,000 barrels per day of product export capacity to meet growing demand. This $25 million project is expected to be completed in mid-2019.

We have a long-term agreement with Phillips 66 that includes minimum volume commitments for the pipeline and the Marine dock. We are further expanding our footprint of the Phillips 66 Lake Charles refinery with the construction of a new 25,000 barrel per day isomerization unit. The unit will increase production of higher octane gasoline blend components. We have a long-term agreement with Phillips 66 for processing services, including a minimum volume commitment. The project is expected to be completed in the third quarter of 2019.

This concludes our prepared remarks. We will now open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Jerren Holder from Goldman Sachs, please go ahead, your line is open.

Jerren Holder

Maybe I'll start with just the CapEx outlook here. Thanks for providing some -- the granular detail on the capital projects. Can you give us a sense of the projects coming online in 2019 and 2020? What's been spent already in 2018, just to get a sense of what those projects, the CapEx outlook is for 2019 at the moment?

Tom Liberti

If you look at the slide that we provided, and some of this capital obviously has been spent in 2018. I won't give you the specifics on each project. But the 750 is the budget that we've looked at for as we increase for 2018. And then 2019, Kevin gave you an approximation of where we're looking at 2019. There is a small amount that spills over then into 2020 -- the year 2020 also. So, you can look at where are the projects are and when they come online to see where the bulk of the spend I think would be. Now in addition to that, there is other projects that will have that we'll have 2019 spend for that we haven't announced that haven't been read at this point in time.

Jerren Holder

Maybe going back to your original 600 to 750 guidance, so that 150 we should assume is your 42% of Gray Oakis. Is that fair?

Kevin Mitchell

That's right. The primary reason for that increase was Gray Oak, and the original budget was set.

Jerren Holder

And then on Gray Oak, looks like you guys are -- are you guys set on the 900,000 barrels per day number. Can that be expanded by adding pumps or DRAs or anything like that if you guys were to receive more commitments?

Tom Liberti

Everything can be expanded. But at this point in time, we might be able to get a little bit of volume with a little bit of CapEx. But to get any significant increase on that line, it would be larger CapEx investment.

Jerren Holder

And then maybe lastly, on your operating and maintenance CapEx or net CapEx expense, looks like we started the year off a little bit high at $97 million and then the last couple of quarters have been around $85 million. Is that a decent run rate to continue going forward for the business, the $85 million range?

Tom Liberti

Yes, I think the last two quarters, you got to remember too in the [Technical Difficulty] in the first quarter, we had some expense from Merey Sweeny with the turnaround expense there. So, the last two quarters are more of a run rate.

Operator

Spiro Dounis from Credit Suisse, please go ahead, your line is open.

Spiro Dounis

Just want to start up on the Bakken pipeline, if I could. We're seeing a pretty large bump there in performance. And I guess we're hearing is that it's running pretty much full at this point. And I see that there's an open season out there, so just curious on your perspective. Is there an expansion in the works there beyond what it's currently running? Or do you think that you're just looking to firm up the current capacity there?

Tom Liberti

The third quarter, it ran about 508,000 barrels a day. So you are right, we did have a bump in the second to third quarter. The open season is actually looking at expansion capacity up to about 570,000 barrels a day. That would come with minimal to no capital expense. If we would go beyond that and ETP could give you more specifics on this, obviously, is the operator. But if we go beyond that then we'd be looking at more significant capital expenditures.

Spiro Dounis

And then as far as Gray Oak goes, I think you guys have talked about that in a typical 6 to 8 times return type range. Does this upsizing to 900 moves that needle closer to six? Or is that really more depended getting the walk-up rates on any of the open capacity?

Kevin Mitchell

I think the way to look that is, you're probably still in that range. As you upsize the capacity as we have done, the incremental return continues to look better. So from an overall return standpoint, it continues to improve.

Spiro Dounis

And last one, if you don’t mind, just on Bayou Bridge and Sand Hills coming in the fourth quarter. Should we expect much of an impact at all and 4Q results are really not that much?

Tom Liberti

Sand Hills has been ramping as its going along, so that's just -- that's increased on an every quarter basis, so we'd get to that final end capacity of 485. Bayou Bridge, I would expect really minor impact in the fourth quarter and more of that impact then coming in the first quarter, and then a full effect of Sand Hills in the first quarter of next year also.

Operator

Dennis Coleman from Bank of America and Merrill Lynch, please go ahead your line is open.

Dennis Coleman

I know there were some questions on the parent call this morning, or I guess early this afternoon, about some of the issues that have also come up. One of your major competitors just rolled up their MLP. And I think there were some comments about why Philip 66 use the PSXP a little differently. I wondered if I might just take you to run through a little bit of that, again.

Kevin Mitchell

This is Kevin, just to reiterate the comments from this morning. You look at where PSXP sets, we have grown it rapidly over this five year period, so 1.1 billion of EBITDA from -- I think we -- at IPO, it was 70 something in that order, so really rapid growth. And to-date it's been a combination of drop things and organic. And as you look ahead, we're transitioning to being more organic growth. And it all aligns with the PSX strategy of investing and then growing the midstream business and PSXP is very integral to that overall strategy.

So, we're really in a very different place than those MLPs out there that were purely drop-down. Obviously, there still is a portfolio of assets at the parent company that could still come down to the MLP. And that provides great optionality for PSXP and PSX from that standpoint. But at this point in time, we've got some great projects ahead of us that we're investing in organically and will continue to provide growth for the MLP.

Dennis Coleman

And I wonder, any updates or updated thoughts on the IDR, you are up in the high 30s take now that does start to be level where people are -- just broadly across the industry. Obviously, people are scrutinizing IDRs [Multiple Speakers] so any update there.

Kevin Mitchell

That's right, and I reiterate my -- the comments I just made around. The MLP has grown very successfully and with that has been growth in the distribution, growth in the IDR take. And so we know the way this works. We know the way math works. And we see how this plays out. So from a PSX standpoint, obviously, acknowledge that we will get right into to doing the IDR restructuring at some point. And I'd just again reiterate one of the great comments that as we do that, it's got to make sense but transaction has to make sense for the LP holders, as well as for the PSX shareholders. So, we have to be able to strike that balance to where it works for everyone.

Dennis Coleman

Anything with regard to project completion or anything with regard to the budget that might tie into that decision or make it little more logical to do?

Kevin Mitchell

We will have projects coming online now but we have so many, projects in the hopper now and in flight. We'll have projects coming on any point in time. So, the way we would structure it, I don’t think it would be a major influence on the way we would structure it when we make a decision.

Operator

Barrett Blaschke from MUFG Securities, please go ahead your line is open.

Barrett Blaschke

I think, I probably know the answer to this one. But could you give us any color around what you're thinking as far as 2019, it seems like the capital budget played out. Do we have some more clarity on what distribution growth might look like?

Kevin Mitchell

No. Obviously, we've given very specific guidance through the end of 2018 on the distribution growth. At this point, we're not going to go beyond saying that we're investing in a robust suite of projects; the underlying EBITDA on DCF will continue to grow; the Partnership will have the ability to continue to grow distributions at a very -- at a healthy level; certainly, very competitive, probably top cortile, I would expect. But we're not giving specific guidance at this point.

Barrett Blaschke

And as we look into next year, also, one of the things that's still obviously out there is there are asset that could continuing to come down to PSXPs from PSX. With the equity markets still relatively lock up, are you less likely to do that and more toward to lien on your organic budget. Do you feel like at this point or does that influence the decision?

Kevin Mitchell

The way I look at that, we have a suite of organic projects that will continue to drive very healthy growth at the MLP. And so, the assets that's still resides up at PSX just remain options for some point in the future when that makes sense. So we're not compelled to have to go to those. But at the same time, there will be a point in time where it probably does make sense to do so. So, I think it's a really nice position to be in that we've got that optionality of the drop-down assets but we don’t have to, because we've got a great set of organic projects underway.

Tom Liberti

At this point in time, Barrett, PSXP has got an organic program, PSX has an organic midstream program too, so that portfolio of the assets continues to grow as an option. But PSXPs you can see from Slide 7 and things the number of projects is pretty significant.

Kevin Mitchell

And that table on Slide 7 really gives you the tools you need for projecting.

Operator

Jeremy Tonet from JP Morgan, please go ahead your line is open.

Jeremy Tonet

Just wanted to start off with the results here this quarter, you guys passed the medium street EBITDA estimate by about 10%. And so it seems like there is a bit more operating leverage to some of the volume increases we're seeing in the U.S. here. And just wondering if you could expand on that a bit more as far as -- is this just seasonal in nature or is this recurring in nature? How should we think about the run rate potential that you guys can go, granted 4Q is generally the best quarter of the year but maybe if you could just help us calibrate that?

Tom Liberti

Jeremy if you look at where the volumes were increased and where the revenues increase. DAPL Sand Hills pipeline are -- I mean, DAPLs running about a capacity. So we would expect that to continue as long as the crude situation stays where it. Sand Hills has been expanding and that NGL offtakes in the Permian, it continues. So again, we would expect fourth quarter and into next year, those numbers to continue to meet capacity. On a wholly owned asset basis, as I think we mentioned on the call this morning, the mid refineries ran at very high levels. Don’t know whether that can keep up past that third quarter and into fourth quarter of next year.

So, those high levels really contributed to a lot of that pipeline -- that extra pipeline volume. So, as we would look forward into fourth quarter, we don’t give guidance, obviously. But if you look at something between the second quarter EBITDA of 2.76 number and the third quarter 3.05, we would expect that run rate in between those two numbers.

Jeremy Tonet

And into the Bakken, while you noted an expansion potential of $50,000 barrels a day, given what we are already seeing some bottlenecks there and growth potential in the basin. It seems like there could be need for a significantly more takeaway than that. And just wondering how you think that gets resolved? Is this just a real situation? Is there more upsizing of your pipe? Would you look to build another pipe for takeaway from the Bakken. Just seems like there is a structural shortage of previewed a bit earlier with some of the refinery turnaround?

Kevin Mitchell

Yes, I think you are right, Jeremy. There are infrastructure constraints in crude over the Bakken. And in the near term, the solution would be rail as more compliant railcars become available, and we expect to see that pickup. I don’t have a view at this point on whether there's additional new pipeline investment that will be sufficient demand for to justify that. But it does so many potential for some future opportunities, whether it's expansion of existing assets or incremental, or additional.

Jeremy Tonet

And maybe we could just touch-base lastly real quick on Bayou Bridge and how that is progressing?

Tom Liberti

We would expect Bayou Bridge to start up by the end of this year. We're still in line for that estimate.

Operator

Tom Abrams from Morgan Stanley, please go ahead your line is open.

Tom Abrams

First, when the parent sponsor announces storage couple of million dollars of storage. Is that something that could come to the PSXP level as a construction project, or is it more future dropdown inventory?

Kevin Mitchell

So, I think you're you referring to the Beaumont terminal?

Tom Abrams

Yes, expenses…

Kevin Mitchell

That that's all at that asset Beaumont one terminal, which sits at PSX and so, I don't think you would see a incremental storage being storage being added at Beaumont going to the MLP. I think that we view it and look at the entire asset and at some point in the future that could be a drop down certainly, a dropping candidate in that portfolio of options for future drop down.

Tom Liberti

I mean, if you're asking, Tom, could we do it. Could PSXP construct a tank on PSX property? I mean, contractually, it could be done. It would be one of those. We've got a separate organic loss that's pretty long at this point though.

Tom Abrams

Sure. And I just wanted to know how that worked internally. The second thing is about the LLCs off of Corpus. And just going back as soon as the time when the port was wanted to build one, and then I think Buckeye has mentioned it or South Texas gateway has mentioned as well. So first off, is that something that we have competing projects or were they all talking about the same one? And secondly, when you think about the gating items, which I should think fixing the permitting side. What new things do we have to think about new agencies that have to get involved for offshore projects like that? And once it is permitted, how rapidly can those things be built?

Tom Liberti

I think there are couple of things. I don’t know that we're totally familiar with all the permitting that would be needed. But as far as competing projects, as there is more crude exported out of Corpus Christi, there is need for obviously for more terminal capacity and obviously, it's easier the larger ship that you can load. So, I think people are talking about a couple of different projects down there. So that will be going. The timing of things is just simply is working with the port and working all over the permitting that would be needed.

Kevin Mitchell

We don’t have any specific comments on what it takes to do an offshore VLCCs loading facility.

Operator

Chris Sighinolfi with Jefferies, please go ahead your line is open.

ChrisSighinolfi

Just given the ramp I guess in CapEx with the organic expansions you have in flight and maybe some of these more elongated construction profiles that you'll face. Just curious how you guys are thinking now that distribution coverage gets closer to 2019 and as more of an intermediate or long range target?

Kevin Mitchell

As we look at the -- so you've got the EBITDA DCF growth that's coming as new projects are coming online. And as you can tell from that slide that we put out there it is placed. We've got some new assets coming up at the end of this year with some coming up next year and some into 2020. So, you've got a phased-in growth of DCF we've got ability to finance with using the balance sheet. So, the balance sheet is in really strong shape. So we've plenty of debt capacity to help to fund growth.

And so, we're triangulating around distribution growth, leverage metrics and then funding the capital program. And it all works reasonably well at very respectable -- I'd say very respectable coverage ratios, so north of 1.1 to 1.2 plus like coverage ratios the way we model it.

ChrisSighinolfi

And then I guess follow up from me would be, and I lied there, I had a follow up. I guess what should we be thinking about in terms of Gray Oak for opportunities to project finance as that’s what you close in construction. Is this where -- I guess as I'm thinking about and I don’t want to get too far ahead of myself. But if 2019 CapEx involves spend on the projects. Do you get some cash back on 2020 to lead to spend on other projects? So if you can put some financing actually on the asset itself.

Kevin Mitchell

Gray Oak could lend itself to doing some degree of project financing. It's not something we've made any definitive decisions around at this point, but there is certainly a possibility that that could happen. But we haven’t, like I say, we haven’t made any firm decisions on that yet.

Operator

We have no further questions at this time. I will now turn the call back over to you Jeff.

Jeff Dietert

Thank for your interest in Phillips 66 Partners. Any further questions, please call Rosie or me. Have a good weekend.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.