Shell Midstream Partners, LP (SHLX) CEO Kevin Nichols on Q4 2018 Results - Earnings Call Transcript

About: Shell Midstream Partners, L.P. (SHLX)
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Earning Call Audio

Shell Midstream Partners, LP (NYSE:SHLX) Q4 2018 Earnings Conference Call February 21, 2018 10:00 AM ET

Company Participants

Jamie Parker – Investor Relations Officer

Kevin Nichols – Chief Executive Officer

Shawn Carsten – Chief Financial Officer, Vice President and Director

Conference Call Participants

Spiro Dounis – Credit Suisse

Derek walker – Bank of America

Jeremy Tonet – JPMorgan

Shneur Gershuni – UBS


Good morning. My name is Jiji and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Shell Midstream Partners Earnings Call. Later we will conduct a question-and-session and instructions will follow at that time [Operator Instructions]

I will now turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.

Jamie Parker

Thank you. Welcome to the fourth quarter earnings conference call for Shell Midstream Partners. With me today are Kevin Nichols, CEO and Shawn Carsten, CFO.

Slide two contains our Safe Harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here, as well as in this morning’s press release and under Risk Factors in our filings with the SEC.

Today’s call also contains certain non-GAAP financial measures. Please refer to the earnings press release and appendix one of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation.

With that, I’ll turn the call over to Kevin Nichols.

Kevin Nichols

Thank you, Jamie. Good morning, everyone and thank you for joining Shell Midstream Partners fourth quarter earnings webcast.

Before I begin, I want to give a special recognition to our operating company, Shell Pipeline, which as of this year in 2019 has been safely delivering America’s energy for 100 years. This is an impressive milestone and it represents a strong legacy of operational excellence.

Now in today's call I will take you through fourth quarter performance. Then offer some full year 2018 highlights and finish by looking ahead to 2019, providing a brief operational outlook, discussing both opportunities and challenges that we see ahead. I’ll then pass the call over to Sean, who will walk you through the fourth quarter financials.

Three common themes that I'll reiterate today, which I hope you have realized throughout the year. We have delivered against our promises. Our Gulf of Mexico corridor strategy is working and we continue to capture organic growth.

Now beginning with the fourth quarter performance, we had another solid quarter, generating some $141 million of net income and around $179 million of adjusted EBITDA. Quarter-over-quarter, we saw an overall increase in volumes across the onshore and offshore system.

Looking first at the onshore, results were largely driven by the Zydeco system where volumes again were strong in the fourth quarter. The remaining on shore pipelines and terminals continue to deliver in line with prior quarter.

A highlight for the quarter was growing our investment in the Permian in December. We approved the project to extend the Novellus Systems system to provide gathering and processing services for Halcon Resources Company. The Halcon opportunity provides an accretive expansion of the Novellus Systems to secure third party business as we continue to grow in the Permian.

Moving the offshore, volumes were slightly higher quarter-over-quarter and results were driven by organic growth that we continue to capture in the Gulf of Mexico and that's growth with little to no capital required. On Amberjack, we received first oil from Big Foot in November and in December, the Claiborne tieback came online. This new production continues to drive volume and growth into the system.

And on Proteus and Endymion, we saw an increase of 56,000 barrels per day, a 19% increase over the prior quarter. This increase was driven by two new wells from the Thunder Horse platform. And finally, in our eastern corridor, we continue to see strong activity around our footprint. With two new tie-backs coming into the system in the fourth quarter alone.

Now some of this growth was partially offset by temporary operational impacts that we saw in the quarter. As you will recall, Hurricane Michael came through the Gulf of Mexico in October. And while we didn't shut down any of our operations, the storm impacted the eastern corridor for two weeks and producers reduced production, causing an impact of approximately $2.5 million. We also saw temporary production impacts on Amberjack and Mars, both systems saw slightly lower volumes quarter-on-quarter as existing fields encountered temporary well performance issues, which was partially offset by the new fields coming online, I spoke about just earlier.

And along the Auger system, we saw unplanned maintenance from producers, which slightly impacted volumes. All of these operational issues are temporary in nature and we expect the volumes to return.

As I turn from the fourth quarter performance and summarize the year. 2018 was another year that Shell Midstream Partners delivered on its promises. We set the expectation that we would deliver between $2.5 billion and $2.9 billion of acquisitions over the 2017 and 2018 timeframe. And with Amberjack in May, we met that acquisition guidance, delivering 2.7 billion of drops and setting the partnership up for continued success with a diverse set of assets.

We also said that we would deliver 20% annual distribution growth through 2018. With the $0.40 per unit distribution we recently declared, we achieved this 20% annual growth rate and we grew distribution some 146% over the previous 16 consecutive quarters since we've launched the company. This continued delivery is underpinned by the strength of the Gulf of Mexico and capturing organic growth opportunities. Examples of this growth for the year include Amberjack, which has grown in the short time since we've acquired the system has grown volume by around 40,000 barrels per day. The Mars system, which also has grown throughput some 30% year-over-year, driven by new wells and the shell [indiscernible] tieback.

And the eastern corridor, which had an impressive eight new tiebacks come online in 2018. And as we move into 2019 and beyond, I am confident in the future ahead for Shell Midstream Partners. We will continue to be anchored by three strategic pillars. A resilient framework with strong sponsor support, continued diversification across the portfolio and sustainable growth via strong cash flows and access to Shell’s high quality asset base.

Before I close, let me give you a few 2019 operational updates and Shawn will provide more detail on anticipated financial impacts in his section. Fourth quarter as you know marked the last quarter with all four contracts on our Zydeco system in place. Two contracts expired at the end of 2018, and the third contract will expire in the second quarter of 2019.

As I explained in our last webcast, the market dynamics between Texas and Louisiana continue to evolve and evolving. And while we continue our discussions with new and existing shippers, we will run the system on spot shipments for non-contracted capacity.

During this time, our volumes will be less predictable versus the take or pay contract structure we have previously had in place. It is worth noting that in the first half of 2019, previously contracted shippers will have the ability to ship on earned credits. As such, we will recognize revenue for these movements, however, the cash was recorded in previous and prior periods. We expect that the majority of these earned credits will be utilized in the first quarter.

And switching to the offshore, we expect to have a number of producer planned turnarounds and connected system maintenance that'll primarily impact us in the second and third quarters. With that said, our goal for Mexico outlook has not changed and we remain bullish on our organic growth opportunities both now and into the future. In fact, the Energy Information Administration, EIA, has reported that 2018 was the third consecutive year for record production in the Gulf of Mexico and they are forecasting this to continue into the future.

As proof points of this growth, we continue to see increased producer activity around our footprint. Much of this growth is driven by industry-wide efficiency gains, reducing breakeven pricing. Examples of this growth include Chevron, which anticipates the second Big Foot well coming online, with continued ramp up and flow into the Amberjack system.

And further out, B announced the discovery of an additional 1 billion barrels of oil in the Thunder Horse field, which is directly connected to the Proteus and Endymion system. And bringing it closer to home, Shell anticipates first oil from emphamatics [ph] in the third quarter of 2019, expecting to produce around 175,000 barrels of oil per day at full ramp up. And this production will flow through the newly constructed Mattox pipeline, which is connected into the Proteus and Endymion system. All of this continues to drive our confidence in the Gulf of Mexico and the growth that we see on the horizon and that's growth for the partnership and growth for our unitholders.

With that, on I'll turn the call over to Shawn to walk you through the financial performance for the quarter and the 2019 outlook, Shawn.

Shawn Carsten

Thanks, Kevin and good morning everyone. As shown in today's press release, the fourth quarter was a solid quarter for Shell Midstream Partners. Our business continues to perform well, supported by our diversified offshore and onshore at the base. Now let me cover a few of our key financial metrics for the quarter.

Our revenue was about 142 million, down roughly 11 million from the prior quarter, which is primarily related to lower allowance oil sales in the fourth quarter. Operating expenses were approximately at 70 million, an improvement of about 6 million from the prior quarter, driven by a lower cost of sales allowance oil, less projects win on Zydeco, and a revision in our estimate of our asset retirement obligations. Partially offset by our net realizable value judgment on allowance oil inventory. Income from equity investments was about $34 million, roughly even to the prior quarter. Dividend and other income was about $22 million, down slightly, due to a decreased quarterly dividend from Colonial and [indiscernible].

In total, adjusted EBITDA attributable to the partnership was around and $179 million, down approximately $8 million from the prior quarter. After interest expense, maintenance capital and other adjustments totaled cash available distribution was about $156 million. Our partnership declared a distribution of $0.40 per LP unit, representing a 4.7% increase over the prior quarter and a 20% increase over the fourth quarter of 2017. All this resulted in a very healthy coverage ratio for the quarter of 1.2x.

So, now looking ahead to 2019 and related to the expired contract on Zydeco that Kevin discussed earlier, we expect the impact to our first quarter net income and CAFD to each be in the range of $15 million to $25 million.

In the offshore, we expect to have several producer turnarounds during the year. Now these turnarounds are expected to impact net income and cash available from distribution by approximately $20 million. Based on the current turnaround schedules, we anticipate this to breakout roughly $10 million in the second quarter and a further $10 million in the third quarter.

Finally in the CapEx space, we plan to spend about $48 million in capital this year of which around $22 million will be growth capital. The growth capital is primarily related to continued expansion of the Permian gas gathering system as previously discussed my Kevin.

So, now for the partnership’s balance sheet and liquidity. As of December 31st, the partnership had total debt outstanding of about $2.1 billion, which equates to a debt to EBITDA ratio of 2.9x based on an annualized Q4 adjusted EBITDA. We continue to be very comfortable with our debt levels. I'd also like to remind everyone that previously announced IDR growth waiver will begin in the first quarter of 2019. Our sponsor shell has waived $50 million of IDR distributions and this amount will be credited back to the partnership over the course of the year as follows. $17 million in each of Q1 and Q2 and then a further $16 million in Q3. We believe this reflects strong sponsor support and combining all of this affords a significant flexibility as we continue to grow our business.

To wrap it all up, reflecting on our continued delivery and growth since our IPO combined with our solid operating results, our diversified portfolio and our strong sponsor support. Let me reiterate our guidance of mid-teens distribution growth for 2019. And at the appropriate time, we will follow-up with further guidance.

So, with all that, we’ll now take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] And our first question is from Jeremy Tonet from JPMorgan. Your line is now open.

Jeremy Tonet

Good morning. Just wanted to pick up on the last point you said there with regards to distribution growth for 2019. It seems like there's been kind of a change in the market with regards to more of an emphasis on internally self funding growth CapEx as opposed to trying to maximize distributions growth. Just wondering if you have any thoughts of whether or not it would make sense to moderate that level of growth or any updated thoughts on distribution philosophy there.

Kevin Nichols

Hey, Jeremy, this Kevin, thank you very much. We get that question, both in the earnings calls like this and in investor conferences around, would we consider slowing down our growth rate. What I would say for 2019 is that we are reiterating our guidance and we are committed to the mid-teens distribution growth. Since we have launched our company, one of the things that we’re proud of and we have always done is deliver on our commitments and our promises for the marketplace and we gave that guidance earlier. So, we're going to stick with the mid-teens distribution growth. That said, we're hearing everything in the marketplace. We're evaluating all that. We specifically have not given guidance beyond 2019 and we’ll take that into consideration as we look to rollout future guidance.

Jeremy Tonet

Thanks for that. And just kind of building off that, I guess, with the intent of distribution rights we’re seeing more simplifications or eliminations occurring in the space. And granted you guys I've just come up with the agreement there with the IDR relief that kind of freezes payment levels, as it is. But wondering if you could share any new thoughts you have as far as IDRs are concerned. And when we should expect any kind of new development from that front?

Kevin Nichols

Yeah, thanks again Jeremy. No additional guidance that we're prepared to give today, but what I will say is that we’ve continued to have dialog with our sponsor. Our sponsor continues to evaluate all options that are available to them. I think the waiver was a good show of support that says, hey, well we're thinking about this. We're going to at least freeze the distributions to effectively reflect fourth quarter of 2018. So, can't comment on the timing, but our sponsor and the company are having a constant communications and will provide guidance at the appropriate time.

Jeremy Tonet

Thanks for that. That’s it for me.


Thank you. Our next question is from Shneur Gershuni from UBS. Your line is now open.

Shneur Gershuni

Hi, good morning guys. Just kind of wanted to build on the last few questions and maybe ask them a little differently. In terms of your overall cost to capital, it sort of seems like it's kind of inefficient. And I was just kind of wondering, if you were looking at ways to optimize it better. You consistently seem to have leverage, you know at around the 3x level. Would it not make more sense to have it, kind of at the 3.5x level, obviously, comfortably under 4x.

Then secondly you know do you foresee a structure in the future in terms of funding future drops, where you use access distributable cash flow is a piece of the pie chart, as well as, equity and getting why they’re slowing the distribution growth rate.

Shawn Carsten

This is Shawn. Good question. We had sort of highlight in our balance sheet, we still have about $1.1 billion of liquidity available to us. And our sponsor continues to be willing to take units back and that's important to our MLP. So, to your question on cost of capital, we hear you and we do always try to maintain a relatively conservative balance sheet. So we can take advantage of opportunities in the market that might present themselves, as well as, be able to work through, whatever comes in future acquisitions, whether its third party or a parent in long-term.

So, with that I think your second question was around cash flow and whether we’d use that in future. Certainly, well that's in the cards and we’ll provide more guidance as appropriate in the future.

Jeremy Tonet

I recognize that the sponsor is showing support by taking back units, but I mean it's still cash leaving the entity at the end of the day by a distribution. I was just sort of thinking of ways to optimize for a lower unit count where the amount of equity issued whether public or to the sponsor goes down and you decide to kind of commit to it, let's say funding 20% of all future is going to drop down by a retained DCF, you know something along those lines to help to optimize.

Kevin Nichols

Yeah, so let me maybe piggyback on something that Shawn answered there is that we've always had the view that over time as we’ve built scale within the company that we would continue to look at building things and spending organic capital inside the entity. Let me remind you that Shell spends about one-third of its capital program overall in the United States of which there is a need for infrastructure and we have said that we will grow with our affiliates as we have with the Mattox pipeline and the Falcon pipeline and others and [indiscernible]. To the extent that we can take advantage of some of those opportunities and fund those inside the MLP, that is the intention. But we will always take a look at how long it takes for those cash flows to get turned on versus when the cash need is, but we’ll -- that's an option.

Jeremy Tonet

And then following up on the IDR question. I know that you've kept your cards about trying to do something with the relief in hand, and you said that you’ve had discussions with your parent and so forth. Have they advanced at all since the last time you updated us? Are they considering more options? Is it something that gives us some degree of comfort that there's kind of a light at the end of the tunnel on an IDR restructure?

Kevin Nichols

Yeah, thanks, I appreciate that and I know that it's on all of your minds. And I wish I could give you something more definitive at this time, but it's just not appropriate. What I can tell you from my perspective is that I am comfortable from where I sit. Looking at the discussions, the communication and the activity and the work that's being done to continue to look at not only the IDRs but a holistic strategy and longer term. So, I'm comfortable with what's being done at this stage and we’ll just have to wait until we can actually announce something to you.

Jeremy Tonet

Okay. And final question, just in terms of rotations of management of SHLX. Is there kind of a philosophy within Shell where people rotate on a fairly regular basis. Or can we expect to see some increased consistency in terms of who's communicating with the street and managing the entity and so forth?

Kevin Nichols

Yeah, there really hasn't been any change to any of those plans. I think when my announcement came out as well as, Shawn’s announcement came out, I think we told the market that, while it was appropriate time with the previous CEOs and people we had in place for their expertise, both Shawn and I were going to be here for a longer period of time and we announced that that would be in the range of at least kind of in that six year timeframe, there’s no change to that.

Jeremy Tonet

All right. Perfect. Thank you very much guys. I really appreciate the color.


[Operator Instructions] And our next question from Derek Walker from Bank of America. Your line is now open.

Derek Walker

Hi, good morning guys.

Kevin Nichols

Good morning Derek.

Derek Walker

Appreciate the kind of the color that you gave in -- just around Zydeco and some of the potential turnarounds. Maybe just a little bit, I know you kind of just still thinking about dropdowns at some point. But is the mid-teens distribution growth for 2019, does that assume a drop? Then as far as timing around that, just given sort of the IDR waiver, the Zydeco sort of impacts and then turnaround, so that’s sort of a back half of 2019 sort of event. Just any sort of color that you might share there would be helpful?

Kevin Nichols

Yeah, so, thank you. I appreciate it Derek. We're not going to give specific guidance to acquisitions at this moment in time. A drop is a possibility as part of what we may be looking at or can do sometime in the year, but we're not going to give guidance to kind of a win, what does that look like as far as that goes. But I'm comfortable, again, with the mid-teen distribution coverage with everything that we’ve talked about.

Derek Walker

Okay. And then maybe on Zydeco. It sounds like you're just running more on spot these days and just given the kind of the volume growth in the quarter. And it seemed like the revenue per barrel came in a little less Q-over-Q. I guess, how should we think about that revenue per barrel of sort of on a spot basis, kind of, throughout 2019?

Kevin Nichols

Yeah, so thank you. I think, well, first, I'm very careful, it’s not appropriate and we don't plan to give guidance beyond Q1. At this time, the best that we can give you combined with everything that's going on in Zydeco the ongoing commercial discussions and the credits that are rolling off the $15 million to $25 million impact in Q1 is the best guidance that I can give you. We continue to see Zydeco as a strategic asset. It is well positioned in the marketplace. It is the only asset that's connecting the two refining centers, both Houston and Louisiana and also connected to [indiscernible] for possible exports.

With what I said in these earnings call, we will be a little bit less predictable on the volumes as we rely on customers and what they bring to us on a monthly basis, while we run on spot. That said, we're always looking to optimize the value for the system in the market and we could be looking at and consider an open season again at some point in the future.

Derek Walker

Got it. appreciate that. And maybe just one last one for me, I think you previously alluded to volumes on to Amberjack around 400, I believe, by the end of 2019, has that outlook changed at all?

Kevin Nichols

Yeah, so I mean you heard me say that we’ve grown the system. The system has grown 40,000 barrels in two quarters, its progressing nicely. We had a few operational issues with some of our customers on the line. But I see nothing that takes us off our previous bullishness on this as a growth asset in the portfolio. And with that and you saw the growth in the Gulf of Mexico, it's an exciting time for Amberjack.

Derek Walker

I appreciate the comments. Thanks guys.


Thank you. Our next question is from Spiro Dounis from Credit Suisse. Your line is now open.

Spiro Dounis

Hey good morning everyone. Maybe just want to start with Zydeco again here. Trying to get a sense of the contracting for negotiations and most you can offer there is -- has there been any sort of price discovery around Zydeco? Is it a case where you'd rather not commit to those levels? Or is there just so much uncertainty from the customers here that they sort of prefer to wait?

Kevin Nichols

Yeah, I appreciate the comments, I know it's on all of your minds. But it really is best for me not to get into the specific discussions, as they are ongoing right now. With existing shippers, new shippers and the market continues to evolve. I think everybody in the marketplace has been used to the system running one way and now it's running differently and I think it's taking time from market to understand all of that. So, we're going to get through those discussions and I’ll provide some more guidance at the appropriate time.

Spiro Dounis

Okay. Fair enough. That's all I had. Thanks guys.


Thank you. We have no further questions. I will now turn the call back over to Jamie Parker.

Jamie Parker

Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up questions following today's presentation, please feel free to call me directly. My contact information could be found on the presentation materials, as well as, on our website


Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.