Blueknight Energy Partners, L.P. (BKEP) CEO Mark Hurley on Q4 2018 Results - Earnings Call Transcript

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About: Blueknight Energy Partners, L.P. (BKEP)
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Earning Call Audio

Blueknight Energy Partners, L.P. (NASDAQ:BKEP) Q4 2018 Results Earnings Conference Call March 12, 2019 11:00 AM ET

Company Participants

Mark Hurley - CEO

James Griffin - Chief Accounting Officer

Conference Call Participants

TJ Schultz - RBC Capital

Josh Golden - JPMorgan

Jeff Bailey - Beach Capital

Jim Jenkins -

Kevin Roth - Allstate Investments

Operator

Good day, and welcome to the Blueknight Energy Partners Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. James Griffin, Blueknight's Chief Accounting Officer. Mr. Griffin, please go ahead.

James Griffin

Thank you, Anita, and good morning. It is my pleasure to welcome you to today's conference call where we will discuss Blueknight's financial and operating results for the fourth quarter and year ended December 31, 2018.

Mark Hurley, our Chief Executive Officer, will update you on our operational performance, as well as external factors influencing our business, after which I'll provide a brief update on financial results for Blueknight. We will then take your questions after our prepared remarks.

Before we begin, I would like to remind everyone that information on this call may contain certain forward-looking statements. Statements included in this call that are not historical facts, including without limitation, any statements about future financial and operating results, guidance, projected or forecasted financial results, objectives, project timing, expectations and intentions and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties relating to the Partnership’s debt levels and restrictions in its credit facility, its exposure to the credit risk of our third-party customers, the Partnership’s future cash flows and operations, future market conditions, current and future governmental regulation, future taxation and other factors discussed in the Partnership's filings with the Securities and Exchange Commission.

If any of these risks or uncertainties materialize or should underlying assumptions prove incorrect actual results or outcomes may vary materially from those expected, Partnership undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. BlueKnight Energy Partners is a publicly traded master limited partnership with operations in 26 states. We provide integrated terminalling storage, gathering and transportation services for companies engaged in the production, distribution and marketing of crude oil, asphalt and other petroleum products. We manage our operations through four operating segments, asphalt terminalling services, crude oil terminalling storage services, crude oil pipeline services, and crude oil trucking services.

I will now turn it over to Mark Hurley, our CEO. Mark?

Mark Hurley

Thanks James. Good morning, and thanks to everyone who dialed in today.

I will update you on our operational performance, projects, opportunities and external factors influencing our business. James Griffin, our Chief Accounting Officer will then provide you an update on the financial results.

2018 was the year that presented us with challenges and change at BlueKnight. However, as we sit here today we have a highly contracted business that should generate consistent cash flow in 2019 and allow us to meet our objectives of both reducing leverage and improving distribution coverage.

I will begin my detailed comments with a look at our Cushing crude oil storage business, our second largest segment. As we have covered in recent communications, the storage market was weak in the first half of 2018, mainly driven by a backwardation crude oil forward price curve and very low inventories at Cushing. This led to lower demand for storage, lower throughput, lower rates and as a result lower revenue. The storage market reversed however, beginning in the late third quarter. The crude oil price curve went back to a tangled structure inventories began to build the Cushing and demand for storage increased.

Today, the spread in the forward curve is supportive of the storage market and inventories are steadily increasing. As a result, we have had a successful re-contracting effort and we are fully leased through the end of 2019.

Another positive, we are seeing increased throughput in our facility. Throughput is a revenue generator for us in addition to the base storage fees. We have returned to an operation where we are seeing full tanks in high throughput and we are confident this segment will see an earnings improvement over 2018.

Switching to asphalt. This business predictably had another solid quarter and a good year. We no doubt had some challenging weather in 2018 specifically wet conditions along the East Coast and two hurricanes in the Southeast. However, as we have communicated many times a substantial portion of the revenue in this business is locked in when we begin the year. We do get a boost in situations where volumes are high and we are expecting a strong market in 2019.

The industry is forecasting at 7% year-over-year growth in demand and we are seeing increased infrastructure spending in some of our key markets, particularly in the West. In addition, the facility we acquired in Muskogee, Oklahoma in April of last year has performed well, and we are very happy with the investment.

Together, these two businesses have historically made up more than 90% of our operating margin. As of today, we have approximately 92% of the revenue from these segments contracted on a take-or-pay basis for all of 2019 with highly creditworthy customers. So, we are expecting strong predictable cash flow for the year.

I will move on now and cover some detail from our crude, and transportation segments. Yesterday, on our earnings release we mentioned that volumes have been ramping up on our Oklahoma pipeline systems. We are expecting approximately 40,000 barrels a day to be shipped on the two systems combined in March. If the forecast holds, it will be our highest volume month since we started up the second line.

Current crude oil prices in the $55 to $60 per barrel range seemed to be supporting higher volumes into our pipes. We did experience some crude price related impacts in the second half of the year however as we started of the second line and executed plans to get the system running at higher volumes in Q4, we were carrying a higher than normal amount of inventory in the system when crude prices dropped significantly in October and November. This impacted pipeline segment earnings in the fourth quarter.

As we have transitioned to higher third party volumes over the last few months, we have been able to reduce working capital by approximately 75% from the fourth quarter of last year. We intend to continue this trend in the second quarter. While we are encouraged by the increase utilization of our pipeline system, the operating margins recently experienced in the pipeline segment led us to assess our pipeline system for impairment. Based on that analysis, we concluded that an impairment charge of $40.7 million was warranted and we took this charge in the fourth quarter.

As we communicated on February 26, work has been halted on the previously announced Cimarron Express pipeline project due to economic considerations. As of December 31, 2018 Cimarron Express had spent approximately $30 million on the pipeline project. Both BlueKnight and Ergon are currently evaluating the status of the investment in Cimarron Express to the extent that Ergon exercises its right to put its interest in the Cimarron Express project to BlueKnight. BlueKnight will be responsible for 50% of the total amount spent by the pipeline project plus interest at 9% per annum.

BlueKnight anticipates the principal cost overruns put could be reduced by $4 million to $7 million upon the sale of the assets of the joint venture for a total net cost of BlueKnight of $8 million to $11 million plus interest.

Looking forward, our two highest priorities for 2019 are strengthening our balance sheet and improving our distribution coverage. But the high degree of contracted revenue we have in 2019, we are confident we have a plan in place to accomplish these goals. With those objectives met, we can again target acquisition opportunities that fit our business strategy of growing our footprint particularly in the asphalt business.

Current guidance is that 2019 adjusted EBITDA will be in the low $60 million range while de-leveraging down to around 4.5x and coverage in the 1 to 1.1 range. Any variability in these earnings will primarily be driven by crude oil volumes on our pipeline system.

The next quarterly distribution decision will be made by the board in the second half of April. With the above balance sheet objectives in mind, leverage and coverage, and it is possible we will do a reduction in the distribution at that time.

I will now turn it over to James Griffin our Chief Accounting Officer. James?

James Griffin

Thank you, Mark.

Yesterday we reported financial results for the fourth quarter and year-ended December 31, 2018. Net loss was $50.7 million for the three months ended December 31, 2018 as compared to net income of $0.4 million through the same period in 2017.

Net loss for the fourth quarter of 2018 was impacted by a $40.7 seven million asset impairment charge related to our crude oil pipeline services segment and a $10 million asset impairment charge related to the Cimarron Express Pipeline project. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was $13.8 million for the fourth quarter ended December 31, 2018 as compared to $14.1 million for the same period in 2017.

Distributable cash flow was $6.5 million for the quarter ended 12, 31 of 2018 as compared to $8.6 million for the same period in 2017. Adjusted EBITDA and distributable cash flow including a reconciliation of such measures to net income are explained in the non-GAAP financial measures sections of the earnings release issued yesterday.

Net loss was $42 million for the 12 months ended 12, 31, 2018 as compared to net income of $20 million for the same period in 2017. Net loss for the 12 months ended in December 31, 2018 was impacted by the previously mentioned $40.7 million asset impairment charge related to our crude oil pipeline services segment as well as the $10 million asset impairment charge related to the Cimarron Express Pipeline project.

Adjusted EBITDA was $60.3 million for the 12 months ended December 31 of 2018 as compared to $70.1 million for the same period in 2017. Distributable cash flow was $34.8 million for the 12 months ended December 31, 2018 as compared to $48.2 million for the same period in 2017.

Our distribution coverage ratio for the 12 months ended December 31, 2018 was approximately 0.83 times. Additional information regarding Partnership’s results of operations will be provided in the Partnership’s annual report on Form 10-K for the year ended December 31, 2018 to be filed with the SEC on March 12, 2019.

A few highlights for each segment. In our asphalt terminalling services segment, operating margin excluding depreciation and amortization increased by $1.7 million or 3% for the year ended December 31, 2018as compared to the year-ended December 31, 2017, primarily as a result of additional revenues generated at the two asphalt facilities we acquired in December of 2017 in March of 2018, partially offset by the sales of three asphalt facilities to Ergon in July of 2018.

Moving to our crude oil terminalling and storage services segment, operating margin excluding depreciation and amortization decreased by $9.2 million year-over-year primarily as a result of a 2.2 million barrel storage contract that expired on April 30, 2018 and a $0.7 million barrel storage contract that expired on October 31, 2017.

The expired contracts were not renewed or replaced until the fourth quarter of 2018 due to the backwardation of the crude oil forward price curve at the time the contract expired. As of today we have approximately $5.7 million barrels of crude oil storage under services contract, but remaining terms up to 34-months.

Next in our crude oil pipeline services segment, operating losses excluding depreciation and amortization expense increased by $1.9 million from 2017 to 2018 primarily the losses in our crude oil and marketing business.

In our crude oil tracking segment, operating losses excluding depreciation and amortization remained flat at $0.4 million in both 2018 and 2017, while the volume transported in our trucking segment increase the average distance haul, the shorter in 2018 than in 2017, which resulted in lower revenue in operating margin per barrel transported.

Our general and administrative expenses for $16 million for the year ended December 31, 2018 compared to $17.1 million in 2017. The decrease in 2017 to 2018 is primarily due to decrease compensation expense related to lower headcount and reduce incentive compensation in 2018.

Asset impairment expenses in 2018 included $40.7 million related to the markdown of our Oklahoma pipeline system to its estimated fair value and also a $10 million impairments on a pushdown basis related to Ergon’s investment in Cimarron Express as well as $1.7 million related to an impairment of our crude oil pipeline, landfill due to the recoverable value of the line fill as indicated by market rates dropping below our historical average cost per barrel.

During 2017, we record fixed asset and intangible asset impairment expense including impairment of goodwill $2.4 million related to a write-down on producer field services business that was subsequently sold in April of 2018.

Moving to our liquidity and capital investments, our consolidated total leverage ratio was 5.09 to 1 at December 31, 2018. Net maintenance capital expenditures the year-ended December 31, 2018 total $8.7 million. Our net expansion capital expenditures totaled $24.8 for the year-ended December 31, 2018.

We currently expect our expansion capital expenditures for organic growth products to be approximately $3.5 million to $4.5 million and our maintenance capital expenditures to be approximately $9.5 million to a $11 million, each net of reimbursable expenditures in 2019.

Operator, that concludes our prepared remarks and I will now turn over to you for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from TJ Schultz with RBC Capital. Please go ahead.

TJ Schultz

Just as you talk about deleveraging and coverage as the priorities understandably, how are you thinking about the ability to finance asphalt acquisitions? That seemed to be the path forward you indicated, correct me if I misunderstood that. But would you consider to focus more exclusively on that business and use asset sales of some of the other businesses as the funding source? Just kind of any more color on the strategic path forward.

James Griffin

Yes, absolutely TJ. First of all, we really like the asphalt acquisitions that we have done in the past of looking back over the history of this in between 2015 and 2017. We acquired well several terminal sites that cost us in the $15 million to $25 million range and those have been very successful for us immediately generating cash. There is the size of investment that fits the company well, and we wish there were more of them out there. So, we do want to focus on that because it’s been a real winner for us.

As we look out you know with the EBITDA forecasts that we have - we do see us kind of ranking down to a point at the end of next year or early 2020, where we have the room to make those kinds of investments. Our revenue is really baked in on the take-or-pay basis as I mentioned and so we will get some variability in the - or the variability that we get in the earnings will really be driven by the volumes on our crude system and if the crude market remains strong, we will delever faster, if the market gets weaker, it maybe a little bit slower.

But in any case, we do see ourself getting to a position within the next three or four quarters where we can go out and do those kinds of acquisitions. But right now we don't plan to do asset sales to fund those.

TJ Schultz

Okay. It makes sense. And then just on the put option on the cost for the Cimarron Express. What's the time line for that? Like, how long would it take you to sell some of those assets? I'm just trying to understand what the interest carry may be for you all.

Mark Hurley

Yes. Any sale of assets, we think can be done reasonably quick if we decide to go that route. The hard assets that are owned by the JV are very common kinds of materials used in industry, so there's usually a market for those kinds of assets. And then the exercise with the put, obviously is an Ergon decision and the timing around that would be an Ergon decision. But we think that the situation is very manageable in terms of the cost exposure that we might have and that Ergon have been very, very supportive of any plans we have along those lines going forward.

Operator

The next question comes from Josh Golden with JPMorgan. Please go ahead.

Josh Golden

Can I get a updated debt number either post quarter end where you're at right now?

Mark Hurley

Sure. Yes. Today, just we’ve come down off of the 1231 number by about $14 million through today.

Josh Golden

One comment, Mark. You know there was a point in time last year where there was discussion about taking an incremental risk and the reality of it is I don't see a problem with anything that happened. And I encourage the partnership to continue doing business and to look at developing further organic projects. It is what it is. And I appreciate your time. Thank you.

Mark Hurley

Well, was that. Thank you, Josh. We're certainly going to be on the lookout for those acquisitions and organic projects. And I appreciate your comments. Thanks.

Operator

The next question comes from Jeff Bailey with Beach Capital. Please go ahead.

Jeff Bailey

Staying on the topic of Cimarron, what is the liability at 312, 2019, including imputed interest. You gave it for the end of the year 2018, but what's the liability right now including the 9% carrier interest?

Mark Hurley

Yes. It’s still at that same range there. There haven't been any incremental expenditures on the part of the JV.

Jeff Bailey

So, I mean, give or take$16 million, $17 million somewhere in that ballpark with the interest…

Mark Hurley

That’s right. Yes. And that's what we anticipated it remaining.

Jeff Bailey

And then you talked about selling the assets. Can Blueknight if to put this exercise can Blueknight unilaterally sell those assets I mean dose Alta Mesa own half of them, what was the process be for selling those assets.

Mark Hurley

Right. Good question. Well right now of course because we did this project and the debt cost structure the assets are owned by both Alta Mesa or Kingfisher Midstream and Ergon so any decision to sell assets will obviously come between those two, so would be a joint decision there. And so in all likelihood of Ergon, I’m sorry, Blueknight would help facilitate the process as construction manager but the assets were actually be sold by Ergon and Kingfisher Midstream.

Jeff Bailey

So there is an unfavorable scenario where Alta Mesa doesn’t want to sell the assets, maybe they want to hold up for higher oil price or something like that and you're not able to liquidate the assets is that true?

Mark Hurley

Well, it's a joint decision between the two parties. I don't see that happening frankly. I don't see that scenario playing out. But it's a decision between two.

Jeff Bailey

And then what would happen, if there's a change of control at Alta Mesa, what would happen to the acreage dedication that Cimarron enjoys and what would happen essentially to the JV, would the JV just transfer over legally to a new buyer.

Mark Hurley

The acreage dedication is owned by the joint venture right. It’s dedicated to the joint venture and you know when you a change of control on the other side, I assume we transition through to the other partner in some fashion.

Jeff Bailey

So the acreage…

Mark Hurley

I’m not sure what the mechanics of that would be depending on the situation obviously, but the acreage dedication is owned by the joint venture.

Jeff Bailey

And so it was like most as far as you know if there was a change of control Alta Mesa the acreage dedication when get yanked out from under the JV or is that a possibility?

Mark Hurley

I don't see that being a possibility, but obviously, I don't know what the circumstances might be on the automation side. I really can't speak to that, but today, the acreage dedication is clearly owned by the joint venture.

Jeff Bailey

Well I guess, I'll take that one offline and if you don't mind. And then do you expect in the event that the put is exercised the JV, that the JV have to be dissolved first or Ergon to put the project back to BlueKnight?

Mark Hurley

There are the JV does not have to be dissolved for them to exercise to put and it’s not a requirement.

Jeff Bailey

And then I think this one is from James in the event that put his exercised James for accounting purposes, I take it Bill the charge running through the income statement on that quarter. Is that right for the amount of the liability plus the carried interest?

Mark Hurley

The charge actually shows up in that fourth quarter impairments of $10 million that I referenced earlier, it's done on a push down basis, so that's Ergon’s investment in the JV was written down to its estimated fair value and that’s flow down into BlueKnight. So that at the time that the Put is exercised to the extent that there's incremental interest that would be recognized in that quarter.

Jeff Bailey

Do you expect to adjust based on the related figures at the time that the Put is exercised and then adjusted again at the time of sale?

Mark Hurley

That's correct.

Jeff Bailey

James, I'm wondering if you could explain a little more detail the accounting justification for the Oklahoma pipe write down. If I understand correctly, $1.7 million that's a lower cost or market adjustments, the inventory of the line fill?

James Griffin

That's right.

Jeff Bailey

And the other, I mean that's a pretty - if I remember correctly that’s about $180 million in invested capital. So you took the essentially the fair value – the fair value down by more than a third, maybe you could talk about the economic and accounting justifications for a write down of that size.

James Griffin

Sure. So any time we have an indication of an impairments and in this case it was the operating loss generated in the segment, we evaluate the recoverability of – for carrying amount of those assets and we look at our projected future cash flows on a discounted basis as well as market exit multiples for those types of assets and determining a fair value at that point in time, and so based on our projected discounted future cash flows for that system that was the result of the impairment charge.

Jeff Bailey

So going forward is it fair to say that you see the economics of the pipeline situation significantly worse than you did say six months or a year ago. I mean, if I’m understanding correctly you're saying the economics of that operation have deteriorated.

James Griffin

I think that's a fair statement if we were to wind the clock back a year, our estimates were very different than they are now. But I think we're encouraged by what we're seeing going forward. We're seeing increased utilization of the system and again it's – as Mark indicated it’s going to be heavily dependent on what crude prices are and what kind of volume is being produced in the area that we serve.

Jeff Bailey

So, if you had to deteriorate – if you had to you know attribute to write down the impairment would you say, it's mostly due to crude prices, partially due to crude prices or what would you know the broader picture what do you attributed to?

James Griffin

Let me address that one. Yes, Jeff. It's really highly dependent on volume, right that the more – the more volume we have flowing through the two pipes the higher earnings are in this very sensitive to volume. And of course, what drives volume is crude price. And as I indicated in my earlier remarks, we're seeing good volumes today. These prices that are in the 50s are supporting drilling in the area. And so, we're seeing pretty good volumes. But if you were to get into a very weak crude market you know presumably, we'd see volumes decline and you would see the impact on the earnings, and conversely stronger crude prices would be a pretty good story for us on that system.

Jeff Bailey

So in other words the impairment is due mostly to the crude price change and not so much to continue – an introduction of competing pipelines or lack of – permanent lack of future activity in the basins?

James Griffin

Well, that's right. And then of course activity in the basin – basin kind of goes back to what worth crude price is at the time, but no it's not so much of competitive issue as other pipelines in the area. It's more what is the price and how is that supporting drilling in the basins or pipelines are located.

Jeff Bailey

And then in the press release Mark, you talked about at the end of the year you're hoping for a leverage ratio of 4.5 a distribution coverage of 1.1 does that assume that that Ergon exercises the Cimarron put?

Mark Hurley

No it doesn't make any assumptions about the exercise of the put. We do expect that the put will be or we plan for the put to be exercised, but I think the timing of that payback will be very flexible going forward.

Jeff Bailey

So you don't expect - so you're not going to put the mouth on – it will be a transaction between you and Ergon and not – you won't just put it on the revolver and then?

Mark Hurley

I’m not sure I understand the question. It would be an obligation that we would have to back to Ergon.

Jeff Bailey

Right and I was under the assumption that you would borrow that and pay that immediately, but instead you're saying you would put that liability on the balance sheet and carry the 9% interest rate?

Mark Hurley

Well we don't have the mechanics of that worked out, but what I would tell you is that Ergon have indicated that they'll be very supportive in the obligations paid back.

Jeff Bailey

Right but 9% is higher than what you're currently paying on your credit facility right?

Mark Hurley

Yes.

Jeff Bailey

So I'm having difficulty why you wouldn't put it on a facility as opposed to keeping on a straight deal of Ergon?

Mark Hurley

Well that maybe what we do jump way or work that out at the time that might be the way we handle it, but we're not locked into any particular payback structure at this point.

Jeff Bailey

But so if Ergon does put it back to BlueKnight, we can expect that it's more – it will be more difficult to reach the 4.5 leverage ratio on a 1.1 distribution coverage ratio by the end of 2019, because if I understood you correctly you didn't assume the put?

Mark Hurley

Well, I mean by definition it would be more difficult, but I'll go back to my earlier comment. We think it will be very manageable and we think those targets will be very to in any circumstance.

Jeff Bailey

The 2017 10-K report of the material weakness in financial reporting, is that going out also is that going to be included in 2018 10-K or is that been eliminated during the year?

Mark Hurley

As we disclosed in our 10-Qs throughout this year that have been remediated, so that will not be moving forward into the 2018 10-K.

Jeff Bailey

I missed that. Thank you, James. And then Mark, as far as your CFO search, any news?

Mark Hurley

It’s going well, where we’ve seen a number of weak – candidates here recently. And so I think you know we were very optimistic we'll have something done here in the next two weeks.

Operator

The next question comes from Jim Jenkins, a Private Investor. Please go ahead.

Jim Jenkins

Yes. Thanks for taking my call. I was a little nervous. I'm 80 years old and got 25,000 shares. Will we be able to complete the Cimarron and what changed to cause Iran to pull out?

Mark Hurley

Well, right now we're evaluating where we’ll go with the project. We're looking at all scenarios and obviously that's why we've talked about the potential asset sales. And I would say, what is changed is basically drilling economics in the area and in drilling, I don't think it's much more complicated than that.

Obviously, the amount of volume that is produced is determines the amount of revenue on any future pipeline and as drilling economics are better understood, those forecasts can change, and so that's really where we are right now. I’m sorry. Did you have a – did you have another question, Jim?

Jim Jenkins

Yes. If things improve, will you sell additional shares to work that pipeline or how will you continue to finance it?

Mark Hurley

Well, if things were to improve, obviously, you know we do – we’d execute some, some sort of project. But right now, we're in the evaluation step of that. The way we have finance this project today has been with the support of our general partner, who have been supplying the funding as a half owner of the JV. And we're about to go, had that been planned to go forward that would eventually be dropped down into BlueKnight.

Jim Jenkins

Okay.

Mark Hurley

But we're just – we're just in the evaluation stage now, Jim. Just…

Jim Jenkins

All right. Good. I look forward to some comment on that in the future then.

Mark Hurley

Sure. Okay.

Jim Jenkins

I’m still your happy investor. Let's hang in there.

Mark Hurley

Thank you very much.

Operator

The next question comes from [Harrison Wreschner with Never Summer].

Unidentified Analyst

Just want to - two quick questions. Want to ask one that was touched on earlier but are you allowed to put $10 million more to take this payment to Ergon on the Wells Fargo facility?

Mark Hurley

I'm sorry. Harrison, can you repeat that question.

Unidentified Analyst

Are you allowed to make the payments to Ergon off the Wells Fargo facility?

Mark Hurley

There is not anything that would preclude us from drawing on the revolver to make a payment other than the covenant restrictions around our leverage that we work with today. There's nothing specific to that particular transaction.

Unidentified Analyst

I guess my question is do you think you’ll be within those covenants to make the payment if need be?

Mark Hurley

Yes. And Ergon has indicated that their plans are to be supportive of us and to work with us around those covenants as well.

Unidentified Analyst

When you guys cut the dividend the last time, I think was an April declaration and Cimarron I think was announced late May. So when you came to the new level of $0.08 was there an anticipation that Cimarron would be a part of that going forward or was this made the $0.08 going without that anticipation of the Cimarron pipeline?

Mark Hurley

The $0.08 - both of those items were part of the plan at the time. However, the $0.08 distribution obviously took effect immediately and has gone into 2019. The dropdown of Cimarron was anticipated to be around first quarter 2020. So, all of that was a part of the same plan.

Unidentified Analyst

So, I guess I'm saying is when you decided on $0.08, I appreciate that obviously there was a timing delay, but that $0.08 was dependent, I would assume on Cimarron being completed in Q1 2020. So, Cimarron was within the math when you decided on $0.08 going forward number. You’re already tracking that end. Is that right?

Mark Hurley

Yes.

Unidentified Analyst

Okay.

Mark Hurley

Yes. That’s correct.

Unidentified Analyst

That is definitely helpful when I kind of look at that going forward. In terms of asphalt’s acquisitions, that's going to be the primary focus is what I'm hearing going forward. Does that makes sense?

Mark Hurley

I think that's a - I think that's correct. Yes. It will certainly be our top priority in terms of what we go look for as far as growth opportunities. We've had a great track record with those. And we think there are some more out there, not as many as we like, but we think there are some more out there.

Unidentified Analyst

So, we're looking at where we're levered and looking at the pipeline business, which is undersized and the storage business, which is a good size for us, but might be a better tack on. Does it make sense to maybe sell those off, use the proceeds delever, and kind of just refocus around asphalt or do you think it makes sense to kind of keep those. Obviously, the market is much better than it was right now for the storage in particular. But, is there a key reason to keep these going or are these frankly, is it a good time to you know put these on the block and refocus glowing?

Mark Hurley

Right now, we don't have any plans to put them on the block. But, we do look at it quite frequently. I mean, we look at strategic options quite frequently. We think we have some, some assets sitting in a good place. And so, you know we talk about things like joint ventures with some other companies where there might be, combined assets might generate more value for both companies looking at a you know bigger footprint. Those sorts of things we're not expecting at this point to do any sale of crude assets, however.

Unidentified Analyst

And obviously, we saw a drop in SG&A this quarter, is that a – should we anticipate that, I guess what led to that drop? And is that a lower run rate we should anticipate going forward? I think it’s more like a $12 million run rate down from closer to $14 million to $15 million?

Mark Hurley

Yes, that's accurate. We've had some headcount reductions throughout the last year. And that's what you're seeing there.

Unidentified Analyst

Is there any talk that Ergon about repaying them in securities as opposed to cash?

Mark Hurley

We looked at all the options and all the possibilities there. We prefer a cash payback.

Unidentified Analyst

Okay.

Mark Hurley

Just because we rather not dilute the current year and staying further.

Operator

The next question comes from Kevin Roth with Allstate Investments. Please go ahead.

Kevin Roth

My question has been answered so I'm all set to go.

Operator

The next question is a follow up from Jeff Bailey with Beach Capital. Please go ahead.

Jeff Bailey

I just wanted to come back around from what the previous questioner asked about the Cushing storage assets. I mean we know that 2018 was a difficult year and that was partly what contributed to the distribution then and the Cimarron pipe was intended to stabilize the Cushing storage going forward and that was like looks like a challenge and it won't achieve its objectives, so I guess I'm asking if you would explain to investors why for a partnership of BlueKnight size the Cushing storage make sense it's an extremely volatile asset and I understand you have it mostly contracted out for 2019, but aren’t we subjecting a pretty small partnership to the vicissitudes of Cushing, which could given the crude market could go into backwardation really at any given time?

Mark Hurley

I understand the concern, but the premise around it being a volatile asset. I think if you go back in history you'll see it actually has not been involved in last, certainly it was in 2018. But if you go back and look though over five or six years of earnings of BlueKnight you will see a business that consistently generates between $15 million and $ 20 million of EBITDA I mean year-in, year-out we had those kind of a perfect storm scenario last year where we had some contracts expiring in the middle of a very weak market and so that's really what led to the lower revenue.

However, we experienced backwardated markets many times and without the timing sequence there we've been able to enter those and it's been a very attractive cash generating business for us. Well, what we want to do is take the volatility out of it is keep working on diversifying the customer mix. So and diversifying the contract portfolio so that we're not going to have too much volume expiring at one time.

And then really work on finding customers who have operational needs for storage right in the STACK pipeline and Cimarron Express Pipeline would've been one of those customers that's why it was a really good fit for Cushing. But that won't be the last pipeline build and we talked to a lot of companies that are interested in pipeline projects and need origins and destinations for pipelines going in and out of Cushing. So those are the kind of deals that we want to find and bring more stability to that revenue.

Jeff Bailey

Is there any thought about hedging your bet with the Cimarron type in some way. I mean if you're convinced that the rock that Alta Mesa has is great rock then it's only a question of oil prices to make Cimarron viable again. In addition, you've got Encana as your next-door neighbor over there in Kingfisher since they just bought new field. I mean is there any thought about some way trying to hedge your bet with Cimarron or at this point in time that we've thrown in the towel and decided to sell.

Mark Hurley

Well, we’re in the middle of the right equation, so we have not come to any conclusion, but we obviously have looked at a number of scenarios including the asset sale option. Then we obviously look at that, because we want to understand the exposure which we think we understand well now. But we’re just in middle of that, so we haven’t made any choices here.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Mark Hurley for any closing remarks.

Mark Hurley

Yes. So, thank you very much for all who dialed in today. We appreciate your interest in BlueKnight. Appreciate all the questions. It was a good round of questions today. And as always happy to speak with you following the call as well. So again, thank you, and thank you Anita.

Operator

Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.