Phillips 66 Partners LP (PSXP) Q1 2020 Earnings Conference Call May 1, 2020 2:00 PM ET
Jeffrey Dietert - Vice President of Investor Relations
Kevin Mitchell - Vice President and Chief Financial Officer
Rosy Zuklic - Vice President and Chief Operating Officer
Timothy Roberts - Vice President of Operations
Conference Call Participants
Spiro Dounis - Credit Suisse
Robert Mosca - Mizuho
Welcome to the First Quarter 2020, Phillips 66 Partners Earnings Conference Call. My name is David, and I will 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.
Good afternoon, and welcome to Phillips 66 Partners first quarter earnings conference call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President, Operations; and Rosy Zuklic, Vice President and Chief Operating Officer.
Today's presentation materials can be found on the events section of the Phillips 66 Partners website along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during the presentation in our Q&A session. Actual results may differ materially from today’s comments. Factors that could cause actual results to differ are included here as well as in our SEC filings.
With that, I'll turn the call over to Kevin Mitchell.
Thank you, Jeff, and good afternoon, everyone. During the first quarter, Phillips 66 Partners delivered solid financial results, operating lively and safely and advanced growth projects. We achieved the major milestone in April with Gray Oak Pipeline starting full operations.
The Board of Directors approved a first quarter distribution of $0.875 per common unit, a 4% over the first quarter of 2019 and unchanged from the fourth quarter of 2019. Phillips 66 Partners is navigating the current business environment from a position of financial strength, supported by a fee-based portfolio of high quality assets, investment grade credit rating and strong liquidity. We remain focused on maintaining our strong balance sheet and disciplined approach to capital allocation. In this challenging environment, we deferred the Liberty Pipeline, postponed FID on the ACE Pipeline and held the quarterly distribution flat.
Moving to Slide 4 to discuss financial results. The Partnership reported first quarter earnings of $226 million and adjusted EBITDA of $321 million. The $24 million decrease in adjusted EBITDA was driven by wholly-owned assets due to low utilization rates in Phillips 66 Refineries.
First quarter distributable cash flow was $269 million, up from $254 million in the fourth quarter. The $24 million increase in joint venture distributions over the prior quarter reflects the first distribution from Gray Oak Pipeline.
Slide 5 highlights our financial flexibility and liquidity. We ended the first quarter with $92 million of cash and $747 million available under our revolving credit facility. The Partnership funded $196 million of total capital during the quarter. This include investments in Gray Oak, the Liberty Pipeline after it was acquired and the South Texas Gateway Terminal.
The debt-to-EBITDA ratio on a revolver covenant basis was 2.9. Our distribution coverage ratio was 1.35. We continue to target a long-term leverage ratio of up to 3.5. Given current market conditions, we expect the coverage ratio for the year to be between 1.1 and 1.2. Looking ahead, we remain focused on maintaining a strong financial position and disciplined capital allocation as we navigate through these unprecedented times.
Now Rosy will provide an update on our growth projects.
Thanks, Kevin, and hello, everyone. Slide 6 lists the projects we have ongoing. The Gray Oak Pipeline has started full operation. Service from West Texas, the Corpus Christi and Eagle Ford South Texas started on April 1. More recently, the Eagle Ford segment of the pipeline came online marking completion of the project. We owned 42.25% in the Gray Oak Pipeline. This is a significant milestone for PSXP and further enhances our stable asset portfolio.
Construction continues at the South Texas Gateway Terminal in Ingleside. The marine export terminal will have two deepwater docks, with storage capacity of 8.5 million barrels and up to 800,000 barrels per day of throughput capacity. Phillips 66 Partners owns a 25% interest in the terminal, which is expected to start up in the third quarter of 2020.
The Sweeny to Pasadena net capacity expansion project remained on track and we expect to reach mechanical completion in June. This is a great project with Partnership with long-term pipeline in terminal volume commitments from Phillips 66.
In response to the uncertainty in the current market environment that Liberty Pipeline project has been deferred and the final investment decision on ACE Pipeline has been postponed. We will continue to find sustaining capital to ensure safe operations as well as the remaining insight growth projects included on this side. These projects are progressing as planned.
Looking ahead to the second quarter, we anticipate results to decrease from the first quarter mainly due to lower domestic production and refinery utilization. This impact many of our wholly-owned and joint venture assets. We anticipate the impact from a throughput more than offset increased earnings from the Gray Oak pipeline.
This concludes our prepared remarks. We will now open the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Spiro Dounis with Credit Suisse. Please go ahead. Your line is open.
First question, just maybe just sort of visit some of the guidance provided around the last Analyst Day, You all laid out a target, I guess, of about $1.5 billion as the EBITDA exit ratefor [up to] 2020, is that still a target that you see as intact? And just maybe how to think about some of that forward guidance you guys have previously given out?
Hey, Spiro, it’s Kevin. That guidance was -- what we had at that point in time with the projects we knew were underway and would come online over the course of this year. What I didn't anticipate is the situation that we are through just now in terms of the impact on both the refine product side of the business which is sort of tied to the PSX refining portfolio and where those assets running and then also on the crude throughput -- long haul pipeline business. So we are not giving specific guidance at this point. I think the way to consider that 1.5 is probably when we get to some -- back to some form of normal state, it’s not unreasonable to think that we would get back to – anticipate getting back to that 1.5 level but it’s probably pushed out based on the way we see things right now and as you know there’s a lot of uncertainty as to what this recovery looks like. I think it’s clearer on the products side that once the country get back to work and people start moving then you will see refine product demand increase and refining utilization will rise to meet that demand and you will see that part of the business get back to normal. It’s hard to get a read on the impact in the upstream sector. But, I also go back to the view that $20 oil prices on sustainable forever. So it’s just a question of timing.
Yes and I appreciate that makes sense. Second one, might sound crazy to talk about drop-downs right now. But is there is a mutual interest to drop-down assets here just maybe provide PSX with some liquidity and help you sort of bolster up some of your cash flows or is that really discussion for another time?
Yes, Realistically, that's probably a discussion for another time, it’s kind of really a PSX question anyway, because they would – those conversations are all initiated at that level but it’s hard to see even from Phillips 66 Partners standpoint funding a drop-down transaction, if the objective was would be to get cash back to the PSX level then the funding would have to be either equity and these on equity markets to be going out and to raise funds or debt and we are sort of trying to manage our way through the balance sheet leverage as it is. So it doesn’t feel like it's the right timing.
[Operator Instructions] Your next question comes from the line of Robert Mosca from Mizuho. Please go ahead. Your line is open.
Hi, good afternoon everyone. So I think you kind of answered one of my questions on drop-downs, but thinking about a from different angle, I know on the management – on the PSX call there was some comments from management about a possible reduced opportunity set from an organic standpoint in midstream for 2021. And I guess thinking a little bit further out -- I guess the growth maybe come from inorganic acquisitions -- looking at ‘21 whether it be by size drop-downs or maybe some third-party M&A and kind of thinking about like how the growth strategy shifts in your view?
Yes, I think that the – where the growth opportunities come from – right from the beginning we said that, like PSXP we have the potential to grow through organic means, through drop-downs from the parent and also through acquisitions and while we haven’t done any acquisitions for a while, we have done some relatively small but we’ve done some acquisitions back in the sort of, I think, 2016 time frame.
And in principle, none of that is any different, we still see the growth will come from through those three different sources and at different points in time, different areas will be prioritized depending on where the most attractive opportunities are. Most recently we’ve seen the best opportunities in the organic space – right, sort of categorizes organic drop-downs where the project comes -- the asset project comes from PSX, but it’s early stage construction then it becomes an organic project at the MLP.
If those opportunities are not there it’s the – the projects are not there with the kind of returns we would expect then we would look at other ways of accomplishing growth. But I’d also say whatever we do, it’s going to meet our return thresholds. Our investment criteria has to make sense for the MLP. So potentially acquisitions at some point in the future, certainly possible. And in a sort of sustained down cycle, you often see that trend of consolidation. PSXP could be positioned for that, but it’s not something that we are focused on right now.
Okay, that’s helpful. And then just maybe an easier one on the distribution. Is that going to be kind of a touch and go quarter-to-quarter evaluation or do you see yourselves maybe holding it flat for the remainder of 2020 and seeing how things shakeout afterwards?
Yes, I mean every distribution is a decision by quarter. So it's a decision we make every time. This is a break in practice for us by holding it flat but it just felt like the prudent thing to do given the environment. So a lot of this will depend on how things are transitioned and shake out over the remainder of the year as to whether we – whether or what point we get back to increasing the distribution.
And we have reached the end of today's call. I’ll now turn the call back over to Jeff Dietert.
Thank you for your interest in Phillips 66 Partners. If you have additional questions, please call Brent or me. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.