Blueknight Energy Partners, L.P. (BKEP) CEO Mark Hurley on Q2 2019 Results - Earnings Call Transcript

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Blueknight Energy Partners, L.P. (NASDAQ:BKEP) Q2 2019 Results Conference Call August 8, 2019 11:00 AM ET

Company Participants

Andrew Woodward - CFO

Mark Hurley - CEO

Conference Call Participants

Kurt Hoffman - Imperial Capital

Josh Golden - JP Morgan Asset Management

Jeffrey Doppelt - Merrill Lynch

Kevin Roth - Allstate Investments

Operator

Good day and welcome to the Blueknight Energy Partners Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Andrew Woodward, Chief Financial Officer. Please go ahead, sir.

Andrew Woodward

Thank you, and good morning. It’s my pleasure to welcome you to today’s conference call where we will discuss Blueknight’s financial and operating results for the second quarter of 2019.

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

As a reminder, the earnings release, which can be found on our website, includes financial disclosures and reconciliations for non-GAAP financial measures that should help you analyze our results. Our comments and answers to questions during the call will include forward-looking statements that refer to management’s expectations or future predictions. These statements are made as of the date of this call, and we are under no obligation to update these forward-looking statements in the future. They are subject to risks and uncertainties that could cause actual results to differ from our expectations.

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

Mark Hurley

Good morning, and thanks to everyone who dialed in today. I will be updating on our strategy, operational performance and external factors influencing our business. And then, Andy will provide an update on financial results for the quarter.

Overall, we were very pleased with the second quarter performance, especially in light of the challenges the flooding in Midwest created for our asphalt business. We will cover this in more detail. But in short, we had six asphalt facilities impacted by the historic flooding in Oklahoma, Kansas and Missouri. Despite this, we produced strong results and remain on track to meet our EBITDA, distribution coverage and leverage targets for the year. It speaks to the resiliency of our people and the geographic and asset diversity of our footprint.

Our top priority for the year is to strengthen our balance sheet and credit metrics, and improve our base business cash flows and converge. We are very pleased with our performance so far, both for the quarter and for the first half of the year.

Distribution coverage for the quarter was 1.0 times and for the first half of the year it was 1.1 times. These values compared to 0.82 times in the second quarter of 2018 and 0.86 times for the first half of 2018. Those who followed the Company over the last few years will know that we typically had been below 1.0 times in the first quarter and second quarters due to the seasonality within our asphalt business. So, we are happy to be above 1.0 times for the first half of 2019 and we are looking forward to improving those ratios in the third quarter.

Our leverage continues to strengthen as well. Our debt-to-EBITDA ratio of 4.6 times at the end of the quarter was slightly better than the prior quarter and down from 5.1 times at year-end 2018.

As we have previously indicated, our year-end 2019 financial targets are distribution coverage greater than 1.0 times and our leverage ratio between 4.0 times and 4.5 times. We are tracking well to meet those numbers.

As we look longer term, our goal of course is to continue to improve and grow our business, build coverage and make progress towards that long-term leverage target of 3.5 times. Ultimately, we want to be in a position to grow the Company and underlying cash flows without any reliance on additional equity financing. We will look to increase our distribution at a sustainable rate when we have achieved those objectives.

With our financial profile and operations both improving and stabilizing, we’re directing more efforts towards growth and value-creation opportunities, especially within our crude oil operations. As we progress these ideas, we’ll continue to be transparent with our investors and share more details at the appropriate time.

Breaking down our operations, I’ll start with our largest segment asphalt. It was a challenging quarter due to the extensive flooding in Oklahoma, Kansas and Missouri. We had six sites impacted. However, our people did a remarkable job of preparing for the flood and recovering swiftly thereafter with all sites in operation and running well today. In spite of these severe conditions, I am also happy to report we had no safety or environmental incidence, no injuries and no releases, which is truly remarkable and a testament to our team. We estimate the adverse conditions impacted us approximately $300,000 from the second quarter, net of insurance. The remaining expected impact for the year, net of insurance, we expect to receive, will be a little more than $1 million.

Considering the weather impact, the business performed as expected, driven by our take-or-pay arrangements that generate steady cash flow and in line with last year when factoring in the July 2018 asset divestitures and weather-related impact. Weather aside, we continue to see encouraging fundamentals in the business underpinned by state and federal infrastructure spending and a strong economy.

I will now turn to our Cushing crude oil storage business, which had one of its better quarters in a long time. For the full quarter, we averaged 5.9 million barrels of leased storage, an increase of 44% versus the same period last year. We benefited from several short-term contracts executed during the quarter at attractive rates, signaling a healthy Cushing market, despite the persistent shallow contango pricing environment. In addition, we continue to see a significant increase in activity at the terminal and as a result, increased throughput and processing revenue.

Our services revenue which includes blending and throughput continues to be very strong, and our throughput volumes are up 153% from the prior year. We have customers blending 8 to 12 different grades of crude and moving it into the market. This type of business is less sensitive to the shape of the crude oil forward price curve as well as the positive customer trend that we’re keeping a close eye on.

As we look forward, the balance of 2019 remains fully contracted, and we’re encouraged by the various demand factors that play, underpinning the market as we begin to compare for potential renewals with existing customers and/or contracting with new customers at the beginning of next year. Strategically, we are focusing efforts on customers and contracts that are longer term in nature, business where operational storage at Cushing is an integral part of the customers operation. We think there are opportunities in the space as we see increased demand for crude oil blending and segregation services that can be integrated into a customer supply chain and deliver them real value downstream. We are having encouraging discussions with potential customers along these lines.

Lastly, our crude oil transportation segment had a strong year-over-year performance. We continue to see the benefit of high volumes on our two Oklahoma pipelines with an average throughput of 32,000 barrels per day, an increase of 60% compared to the same period in 2018. Similar to our crude oil storage business, we are seeking opportunities to work with strategic partners or customers who value local crude oil production transported out of the Scoop and Southern Oklahoma regions for their integrated operations.

Similar to prior quarters, I’d like to take some time to update you on the latest from the Cimarron Express Pipeline project. During the quarter, we finalized expected cost estimates including adjustments for the asset sale in April 2019. Based on these revisions, the put value as of June 30, 2019 is approximately $12 million, which includes a crude interest since the start of the project. This value is reflected on our balance sheet as contingent liability. Our crude interest for the second quarter was approximately $400,000. Recognizing the high interest rate on the put, uncertainty around timing, potential impact on leverage, we are in active discussions with our sponsor on alternative forms of consideration. We will share more details at the appropriate time.

Looking forward, our two highest priorities for 2019 continue to be strengthening our balance sheet and improving our distribution coverage. With 2019 off to a good start, we remain confident in our plan to accomplish these goals. And with an improving operation and balance sheet, we can now also turn more focus to growth. We are excited about the dialogue we are having on a number of fronts, strategic projects that leverage the value of our existing assets that could generate further growth opportunities while minimizing our own capital investment.

With that, I will now turn the call over to Andy Woodward, our Chief Financial Officer. Andy?

Andrew Woodward

Thanks, Mark.

Yesterday, we reported financial results for the three months ended June 30, 2019. Adjusted EBITDA was $15.1 million for the second quarter as compared to $15.4 million for the same period in 2018. If you remove the impact from the July 2018 asphalt divestiture for comparability purposes, adjusted EBITDA would have been higher year-over-year by approximately $2.1 million. Despite the severe weather that Mark mentioned earlier, impacting our asphalt operations, we are very pleased with this performance.

Distributable cash flow was $8.1 million for the second quarter as compared to $8 million for the same period in 2018. Similar to comparing adjusted EBITDA, our distributable cash flow would have been $1.5 million higher year-over-year, after adjusting for the July 2018 asphalt transaction.

Adjusted EBITDA and distributable cash flow including a reconciliation of such measures to net income are explained in the non-GAAP financial measures section of the earnings release issued yesterday. Additional information regarding the Partnership’s result of operations will be provided in the partnerships quarterly report on Form 10-Q for the three months ended June 30, 2019 to be filed today with the SEC.

I’ll now go into a few highlights for each segment.

Within asphalt terminalling, total operating margin, excluding depreciation and amortization, decreased by $2.9 million for the three ended June 30, 2019 as compared to the prior year. As mentioned earlier, after removing impacts from the asphalt divestiture last year for comparability purposes, the remaining decrease from the prior year is largely due to the severe weather this year.

Moving to our crude oil terminalling and storage business. Total operating margin, excluding depreciation and amortization, increased by $1.1 million for the three months ended June 30, 2019 compared to the same period in 2018 due to storage fully leased and higher throughput. As mentioned previously, with had a very strong quarter with average leased storage of 5.9 million barrels, a 44% increase from the prior year and our throughput increased 153% versus the same period last year.

Now, onto our crude oil pipeline trucking segment. Performance over the quarter remained strong with throughput on our pipeline systems significantly higher than the prior year. Pipeline throughput averaged 32,000 barrels per day, an increase of 60% compared to the same period in 2018. Trucking volumes were also more favorable than last year. For the two segments combined, operating margin excluding depreciation and amortization was $0.4 million, approximately $1.2 million higher than the same period in 2018.

Benefiting from solid operations, coverage for the second quarter of 2019 was approximately 1 times and 1.1 times for the first half of 2019. Our leverage ratio for the quarter was roughly in line with the prior quarter at 4.6 times, which represents a substantial improvement from year-end 2018.

We ended the second quarter with a debt balance of $262 million and cash of $1.5 million. As of August 1st, our debt balance was approximately $257 million.

Expansion capital remained very well, and net maintenance capital totaled approximately $3.1 million for the quarter. We remain very-focused on driving higher distribution coverage and lower leverage through improve operations and efficiency of our existing assets, sales of non-core assets, strategic partnerships to leverage our existing asset base and retaining more cash flow. Our quarterly common unit distribution announcement of $0.04 supports this effort and we are on track to exceed our target of coverage greater than 1 times for the full year 2019 and on track to achieve a leverage ratios 4 to 4.5 times by the end of the year.

One last item I would like to mention. I'm sure you all saw in our press release earlier this week that Ergon has made a proposal to the Partnership's Board of Directors to acquire the common units and preferred units of the Partnership, not already owned by Ergon. As we mentioned in the press release, the Conflicts Committee of the Partnership’s Board will review this proposal. I'm sure you will understand that we cannot comment any more beyond what has been publicly disclosed about the proposal at this time.

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

Question-and-Answer Session

Operator

[Operator instructions] And our first question today will come from Kurt Hoffman of Imperial Capital. Please go ahead.

Kurt Hoffman

Good morning, guys.

Mark Hurley

Good morning.

Kurt Hoffman

It’s refreshing to see some improved performance on the crude oil terminalling side this quarter. It seems that the EIA data at Cushing is significantly elevated versus last year. I believe, we recontracted lot of our storage when the Cushing numbers were nowhere near as healthy as they are today. You mentioned looking to recontract towards the end of this year on some things that are rolling off, but I didn’t hear a comment around rates. Is it reasonable to believe that the new contracts will be at higher rates, given where the things stand at Cushing now?

Mark Hurley

Yes. Kurt, this is Mark. Thank you for your question. It’s a little bit unpredictable, obviously. We haven’t started those discussions quite yet, and we have the bulk of that expiring right at the end of the year. So, we’ll get more into those negotiations probably Septemberish, something in that timeframe. But, what we see is an improving market. We see higher levels of crude oils certainly in storage today than what we saw mid last year when we did a lot of these recontracts. And so, one would think that that bodes well for higher rates, but we’ll have to obviously wait and see what happens when we get into those negotiations.

Kurt Hoffman

Okay. All right. Well, staying with Cushing then, we saw a ideal in May where CVR Energy sold 1.5 million of Cushing storage to Plains All American I think for $36 million, around $24 a barrel storage. Can you comment on that transaction, and if that $24 barrel valuation metric could be fairly applied to the storage of the Blueknight homes?

Andrew Woodward

Yes. Kurt, this is Andy. Yes. We’re well aware of that transaction. And we at Blueknight management, we’re constantly looking at different valuation techniques to truly understand the value of our units. And we certainly think that CVR transaction is meaningful and something we need to take into consideration for our own value in the assets that we hold in Cushing.

Mark Hurley

I would also additional that we’re pretty familiar with those assets. And we think that the assets that we have in our terminal stack up well with those in terms of capability, age, as well as the other competitors at Cushing also?

Kurt Hoffman

Got it. Okay. Well, then, if that’s the case, it would be about $160 million in value. I know you can’t comment on the Ergon transaction, so I don’t -- I’m not asking to do that. But just to help me frame it, I think $5.67 in the preferred, $1.35 in the stock, we’re creating the Company for around $525 million. If those storage assets are worth a $160 million, even if we assumed our crude oil pipeline and trucking businesses were zero, Ergon is trying to buying the asphalt business for around $365 million, and I think it’s doing $60 million of EBITDA pretty conservatively, based on what you presented today. So, that’s about 6 times multiple in the asphalt business assuming our oil -- other oil businesses away from storage zero. Can you remind me what multiples we’ve done deals with Ergon on the asphalt side, historically?

Andrew Woodward

Yes. Kurt, this is Andy. I obviously just joined the Company, so I don’t have all the details of the transactions between Blueknight and Ergon. And I think with some of the data we shared today around the three asphalt -- the divestiture of three asphalt facilities to Ergon last year was approximately $2.4 million for the quarter, I think, roughly the value we got for those were $90 million.

Kurt Hoffman

Got you. Alright, well, so 6 times. I kind recall kind of upper single digit type multiples, so -- every churn multiple here is worth about $1.50 on the stack. So, it doesn’t strike me as really a serious offer So, I hope the Company doesn't spend enormous resources trying to figure that out. But, thank you for your time.

Mark Hurley

Okay. Thank you, Kurt. I understand your views. And obviously, as Andy said we really can't comment any further on the value, what they offered. But, I appreciate your comments. Thanks.

Operator

And our next question today will come from Josh Golden of JP Morgan Asset Management. Please go ahead.

Josh Golden

Yes. I’m not sure, but can you remind me of some of the language in the prospectus for the prefs about M&A, the solution, et cetera? I believe the face value on those preferreds was around 6.50 at 11%. There is some language about those being redeemed at 6.50. Can you refresh my knowledge about that? Thank you.

Andrew Woodward

Josh, this is Andy. I defiantly encourage you to go out and read the prospectus to fully understand your rights. Based on my knowledge of the preferreds, they do get a separate vote and the vote requires majority approval. And right now as it stands, Ergon does own over 50% of the outstanding units for that approval. So, they do have the ability to change the terms outside 6.50 liquidation price.

Josh Golden

So, just looking at this, roughly speaking, at the current value, the pref and sort of the debt, looking at an enterprise value of around $425 million plus-minus, if we’re talking about doing multiples with our sponsor around 10 times, even through pref that’s 7 times multiple right through the pref at $5.67, using updated leverage and EBITDA, if you drop down all the way through the common, it’s even -- the multiples are fairly inconsistent with transactions at the sponsor level. So, I think there is something for the Conflicts Committee to look at and addressing sort of the corporate governance between GP, pref et cetera. I know you can’t comment, but I -- the multiples look out of line with past industry transactions.

Andrew Woodward

We appreciate the feedback. And like you said, we cannot comment on the process that Conflicts Committee is currently undertaking at the moment.

Operator

The next question will come from Jeffrey Doppelt of Merrill Lynch. Please go ahead.

Jeffrey Doppelt

Yes. Hi, gentlemen. My concern about this acquisition by Ergon is that -- or my question really is, can Ergon actually vote on this since everyone’s making the proposal to buy the shares at a $1.35 and the preferred I think $5.67? And just so my understanding of preferred was that it could be redeemed at $8.45 or when the dividend on the common was greater than the preferred. So, it seems that that’s a depressed price. But more importantly, can Ergon actually vote on this because they’re the ones making the acquisition offer?

Andrew Woodward

Yes. This is Andy. We don’t have full knowledge of exactly how the voting will occur related to the proposed transaction. If you were to read the partnership agreement, a merger -- which this would be a merger between Blueknight and a sub of Ergon, would require the approval of a unit majority. And unit majority means a majority of the outstanding common units and preferred units voting as single class. And that includes units held by Ergon as well. And so, as you’ll note in the 13D filed, Ergon’s total ownership including the preferred and common is roughly 28%.

Jeffrey Doppelt

Okay. I have no further comment, other than I think the people that I speak to that own substantial amounts including myself are not in favor of this acquisition whatsoever. So, I’ll leave it at that.

Mark Hurley

Okay. Thank you for your comments, Jeffery. I appreciate it.

Operator

And our next question is a follow-up from Josh Golden of JP Morgan. Please go ahead.

Josh Golden

Could you remind me, the cost on the revolving credit line? I believe it was 5 and change, but can you just roughly give me the cost of capital on the revolver?

Andrew Woodward

Yes. For the quarter, it’s roughly 6.5%, right now.

Josh Golden

And how much limit do you have on that revolver, what’s that all?

Andrew Woodward

As noted in the prepared remarks, as of August 1st, we have approximately $257 million outstanding of debt.

Josh Golden

Right. And any restricted covenants et cetera? I understand there is 257. But, given some step down language et cetera, how much will be available on that?

Andrew Woodward

So, our covenant does step down this quarter to 5 times.

Josh Golden

Yes. And how much will be available from a liquidity standpoint on the revolver?

Andrew Woodward

Liquidity -- so, our Q will get filed today. I don’t have the exact numbers in front of me, but it will be filed.

Josh Golden

Okay. So, one of the reasons I ask is what does the Company itself offer to make a tender offer for the prefs, given the cost of capital on the prefs, why doesn’t the Partnership look to make a tender offer and transfer some of those on to the revolver?

Andrew Woodward

Yes. Again, the pref itself has -- it’s more than the liquidity we have underneath the revolver.

Josh Golden

Sorry. I didn’t hear that. Could you repeat?

Andrew Woodward

The amount of pref that’s outstanding is more than liquidity we have on the revolver.

Josh Golden

Do you believe there would be any opportunity to refinance that at a more attractive cost of capital?

Andrew Woodward

It’s something we're always looking all the time with our banks and something we're constantly reviewing with them.

Operator

And our next question will come from Kevin Roth of Allstate Investments. Please go ahead.

Kevin Roth

Hi. No to belabor the discussion on the Ergon proposal, but does Ergon have the ability,, since they own majority of the shares, to buy more shares in the open market?

Andrew Woodward

Yes. Again, we don’t fully know Ergon’s intent and what they plan to do. But, I would assume they would have the ability to buy more shares in the open market.

Operator

And our next question will come from Richard Free [ph] a private investor. Please go ahead.

Unidentified Analyst

Thank you for taking my call. As a follow-up to some of the questions already asked on the Ergon proposal. Has the Company was the Board retained any outside advisor to value the company as a whole on a liquidated basis where debt preferred and whichever left for the unitholders is returned, so as to -- to make an enlightened vote, knowing what the alternatives are, if the Company was liquidated?

Mark Hurley

Yes. Richard, this is Mark. They have. So, it’s a Conflicts Committee activity. And we know that they’ve reached out to advisors and are doing quite a bit of analysis. And so, I think you can feel comfortable of that. They’ll look at this from many different angles and get the opinions of quite a few outside folks.

Operator

[Operator instructions] The next question is from Tom Ford, [ph] a private investor. Please go ahead.

Unidentified Analyst

Yes. My question is, when will the information that's made -- evaluated from the Conflicts Committee and/or outside consultants be available to the investors?

Andrew Woodward

Hey, Tom. This is Andy. We can’t comment, again, on the process itself, other than what’s been disclosed in our press release and the 13D that was filed by Ergon. As noted in the 13D letter from Ergon, they have plan to try to be able to negotiate this and close by the end of the year. And as part of that process, it would require approvals at their Board level, Conflicts Committee approval, our Board as well along with a majority holder votes. So, as part of the unitholder vote, you would then be provided that information. But at the same time, the letter itself and what we noted in the press release doesn’t mean that the proposal at hand will be accepted or that a transaction will be consummated.

Unidentified Analyst

Is your Board going to disseminate to investors the reasons for its recommendation and the financial analysis or at least summary of it, so that the investors can make a reasonable decision?

Mark Hurley

Again, we can’t comment on the process itself, but there would be a proxy that would detail some of that information.

Unidentified Analyst

Okay. Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to Mr. Mark Hurley, CEO, for closing remarks.

Mark Hurley

Yes. Thank you, everyone who dialed in today. We appreciate your participation; we appreciate your interest in Blueknight. We know that we’re entering a period here where you’re going to have views and some uncertainty and probably some frustration. We encourage you to use our investor email, investor hotline that is available on our website. In the meantime, I can assure you that the management of the Company is going to work every day, just like we all always have and looking to increase value for you, the shareholders. And that doesn’t change and we will remain focused on that throughout this process. And so, once again, thank you very much for dialing in today.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for joining today’s presentation. And you may now disconnect your lines.

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