Blueknight Energy Partners, L.P.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Good morning, my name is Satchi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blueknight Earnings Conference Call for the Second Quarter Results of 2020. [Operator Instructions]. I would now like to turn the call over to Chase Jacobson, Blue Knight's Investor Relations Advisor and Managing Director with Vallum Advisors. Please go ahead.

[Chase Jacobson:]

Thank you, and good morning. We are pleased to welcome you today to the conference call where Blueknight will discuss financial and operating results for second quarter 2020. Andy Woodward, Chief Executive Officer will update you on the operational and financial performance as well as external factors influencing the business in addition to longer-term strategy and full year 2020 outlook. As a reminder the earnings release, which can be found on Blueknight's website includes financial disclosures and reconciliations for non-GAAP financial measures that should help you analyze results. 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 management is 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 Management's expectations. Similar to previous calls, we will highlight factors that differentiate Blueknight over the long term and especially in today's market. We encourage both new and existing investors to visit the website and download the latest presentation which further highlights the strength and stability of Blueknight's core terminalling portfolio and go-forward strategy. After our prepared remarks today, we're happy to address any of your questions. With that I will now turn it over to the CEO of Blueknight, Andy Woodward.

[Andrew Woodward:]

Good morning. And thanks to everyone who dialed in today. As Chase mentioned, I will be updating you on our operations, financial performance and external factors influencing our business for the second quarter of 2020 along with the progress we're making as we execute our long-term strategy. Overall, we had a solid quarter considering a challenging backdrop and macro environment. Year-over-year improvements in our core asphalt crude oil terminalling segments. We also exceeded our distribution coverage targets, reduced debt and remain on track to meet our 2020 guidance - all of which I will discuss in more detail throughout the call. As announced in late June, I was appointed to the Chief Executive Officer position, which I was deeply honored and grateful to accept. I truly appreciate the support I received in my first six weeks from our Board, the entire Blueknight organization, our customers, investors and other key stakeholders. I'm thrilled to be in this position and I look forward to leading Blueknight as we continue our transformation to becoming a leading differentiated in pure-play Terminalling Company focused on solutions for tomorrow's infrastructure and transportation end markets. I've spent over a decade in the midstream and MLP industry participating in a variety of strategic and financial roles, both internally and externally where I have gained a perspective of what I believe our best practices that drive sustainable value. I look forward to this opportunity even more so now than ever to leverage those experiences and incorporate a long-term approach in fully realizing Blueknight's full potential. Before I discuss our financial and operating performance and strategy, I want to start by providing a brief update on the implications of the ongoing COVID-19 pandemic and the related impacts through our markets especially within the energy sector. Consistent with our comments earlier in the year, we were quick to mitigate any potential threat of COVID-19 to our employees and related parties. Our business has and remains fully operational with no disruptions to our operation. We continue to monitor the situation closely with protective measures in place, remaining vigilant with the safety of our employees, customers and partners being our top priority. In regard to the economic impact of COVID-19, we have all witnessed the recent volatility in demand across sectors and especially in energy prices. However, due to Blueknight's essential designation of assets, the necessity of our facilities to operate and our business model. The impact on our core asphalt crude oil terminalling business has been minimal. Now onto our financial performance during the quarter. For the second quarter 2020, adjusted EBITDA was $16.1 million, an improvement over last year, driven by strong results in our core asphalt and crude oil terminalling segments. Excluded from adjusted EBITDA was a $3.6 million non-cash mark-to-market product loss related to short-term storage contracts executed during the quarter that will settle in August and related products will be sold for cash gain in our pipeline segment as well as $0.7 million of severance on yield transaction expenses. Distributable cash flow for the quarter was $10.9 million as compared to $8 million for the same period in 2019, an increase of 37% year-over-year. These figures are a substantial improvement over the prior year and further support management's efforts to drive business improvements while maintaining a disciplined approach to better-managing capital spend and lowering debt costs. Cash interest payments alone were approximately $1.2 million less than the prior year due to lower floating interest rates under our credit facility. Our coverage ratio continues to improve and was 1.35x this quarter tracking well ahead of our coverage ratio guidance of 1.2x or greater in 2020. Again, coverage of 1.35x represents coverage in all distributions, including both the preferred and common. This truly is a significant accomplishment considering only last year we were slightly below 1x for the second quarter and right at 1x for the first six months last year versus 1.3x this year for the same period. Our leverage ratio also continues to improve as we allocate excess cash to pay down debt and I'm glad to report our debt balance at the end of the second quarter of 2020 was $269 million and available liquidity under our credit agreement, subject to covenants was $36 million. As a result, our second quarter leverage improved to 4.2x versus 4.6x last year and 4.3x last quarter. To the end of the second quarter I'm proud to also say we paid down an additional $6 million of debt, putting our current balance at $263 million as of July 31st. Similar to the products we have seen so far in our distribution coverage, our leverage ratio is now tracking inside of our 2020 guidance. Now, moving onto our segment. In our largest segment asphalt terminalling, which represented 80% of our 2019 operating margin, volumes continue to grow compared to last year with a 9% year-over-year increase in throughput. The volume in CPI rate increases along with lower operating costs led to a 4% increase in segment operating margin, excluding depreciation and amortization. Importantly this week, we executed a new seven-year agreement that consolidates previous agreements with Ergon, our largest customer on 22 asphalt facilities at more favorable terms, which will generate incremental EBITDA compared to the previous contracts for these sites. Additionally, this new agreement will improve our percentage of qualifying income by restructuring certain lease arrangements to operating arrangements and extend the total weighted average length of take-or-pay contracts to six years from four years. This new agreement further improves our already solid visibility into future revenue and earnings in our asphalt terminalling services business. This is a great example of the type of long-term contracts Blueknight will continue to seek out as it begins to expand its asphalt terminalling footprint services. We remain cautiously optimistic about the market for Asphalt in the U.S. and are now closely monitoring progress towards a new long-term highway construction funding bill. In the near term, we have been encouraged to see many states and municipalities taking advantage of lower traffic volumes and lower asphalt prices to accelerate road construction projects. However, conversely, we are closely watching to see how potentially lower tax revenues as a result of the pandemic will impact state budgets going forward. Our second largest segment, crude oil terminalling which represented approximately 15% of our 2019 operating margin had its best financial performance since mid-2017. Third-party contracted storage remained strong at 5.8 million barrels with operating margin, excluding depreciation and amortization of $4.1 million, up 24% year-over-year. The strength in this segment was driven by strong demand for oil storage due to the deep contango market during the quarter, increased throughput, our ongoing efforts to optimize our storage capacity and benefits of higher margin short-term contracts, which contributed $800,000 during the quarter. We do expect solid results in our crude oil terminalling business to continue over the course of the year due to the more favorable long-term contract of storage we executed earlier this year. However, we have unwound are month to month contracts due to a flatter future crude oil curve. As mentioned previously, the team did a fantastic job optimizing the system and freeing up additional storage for lease. To facilitate the storage contracts, we executed sell-buy arrangements with customers through our pipeline and marketing business. To account for this arrangement, we used derivative accounting, which marks to market the product we buy and sell over the quarter until we finally purchase the product back in August. As a result of rising prices over the quarter, we recorded a non-cash loss of $3.6 million but expect to recognize a cash gain when we sell the product in August to another third-party. The cash gain we expect to realize is approximately $1 million in the third quarter, which also covers the non-cash losses recorded in the second quarter. Importantly, this new arrangement allowed us to take advantage of the deep contango curve, but does not create any additional oil price exposure in the business. After removing the impact of this non-cash loss of 3.6 million, our pipeline and trucking services segment had a combined operating margin excluding depreciation and amortization of $0.7 million in the second quarter of 2020, up $0.3 million versus the prior year. It was a challenging quarter overall, due to the sudden change in crude oil prices. While we did experience producer shut-ins in May, encouragingly we saw a reversal and a solid rebound in June with average daily volume at the highest level since late 2019. With a month that's behind us in the third quarter, we are seeing volumes consistent with the average daily rate we saw throughout the second quarter. As mentioned earlier in the year, we are actively managing this business to optimize the cost structure in today's ever-changing environment and feel very fortunate that our exposure to a rather challenging upstream environment represents less than 5% of our total operating margin in 2019. Turning to capital investment in the second quarter. Consistent with our messaging last quarter, net capital expenditures were lower year-over-year at $2.9 million including $2.6 million of net maintenance capital. We continue to expect total capital spend in 2020 to be lower compared to last year. Now I'd like to look forward and discuss the progress we're making with our long-term strategy. As we previously mentioned, our long-term vision for Blueknight is to become a pure-play terminal company. An important step in this direction is a strategic review of our crude oil businesses. As previously mentioned, we are evaluating strategic options in a potential sale of our crude oil pipeline trucking business. Also under evaluation and consideration is adding a portion of Cushing storage which may take the form of a joint venture or a long-term lease arrangement depending on interest. We have engaged an investment bank and now active in the market. We have received significant interest from both private-public parties and remain optimistic that we will be able to transact over the next six to eight months. However, as you all are aware, timing on a transaction is difficult to predict, especially in the current market environment. As stated before, our objective here is to further reduce leverage, maintain or improve distribution coverage and strengthen our core terminalling capability. We plan to be patient and thoughtful with this process, knowing our motivation to transact is as much strategic as it is financial to best position Blueknight for growth and long-term success. We will continue to keep our investors apprised of the process In summary I'm very pleased with our second quarter performance and the progress we are making towards our long-term strategic objectives. Adjusted EBITDA remains ahead of last year as our core asphalt in crude oil terminalling businesses continue to outpace last year. We are now developing a solid track record of demonstrating to the market our commitment to better manage leverage and distribution coverage with continuing to improve both metrics on a consistent basis. Knowing this has been a challenging environment to begin with, coupled with a transition of leadership, I want to personally thank all of the Blueknight employees for their support and firmly believe our performance and continued success is a testament of their hard work and dedication. As I mentioned earlier, I'm incredibly excited to be in the CEO role and energized to lead Blueknight into this next phase of its strategy and growth. We have also made a lot of progress in our CFO search and I look forward to announcing that appointment soon. With that, I will now turn the call over to the operator for Q&A. Operator?

[Operator:]

[Operator Instructions]. The first question is from Chris Cook of Zazove. Please go ahead.

[Chris Cook:]

Yes, a couple of questions. One, I guess have you seen any pullback as far as states spending on budgets thus far? And number two, what kind of vetting process will be used to determine what acquisitions are good or bad with respect to Ergon's involvement, potentially Ergon selling you assets at prices that are not reasonable for the partnership? How will that conflict of interest be handled? Thank you.

[Andrew Woodward:]

Thanks, Chris. Appreciate both those questions. On the first, I would say some of the data out there through June has been very positive on the state funding front. There was the American Road and Transportation Builders Association came out with June spending and that was up roughly 50% for June alone versus the same time last year and up about 40% versus the five-year average. So very encouraging from that standpoint. But like you said, what we're paying attention to right now is Congress and the ability to put a bill in place for future spending that we think is coming. It's just more of a matter of when. A bill that's needed knowing that that revenues across states or likely down as a result of COVID-19. On your second question, similar to other MLPs due to the GP/LP relationship, we have a conflicts committee that's made up of independents and similar to my own to do sheer responsibility to Blueknight unit holders. They have the same fiduciary responsibilities to make sure that whatever transaction we're doing with our sponsor Ergon is in the best interest of Blueknight unit holders.

[Chris Cook:]

Thanks.

[Operator:]

The next question is from Nat Stewart of N.A.S. Capital. Please go ahead.

[Nat Stewart:]

Hi, and welcome as your new role as CEO. I was kind of excited to hear that when it was announced.

[Andrew Woodward:]

I appreciate that, Nat.

[Nat Stewart:]

I just have two questions. I was on the last call and I'm particularly asked about the Cushing assets, given that they're strategic value to me is really being highlighted and also having seen some comp transactions that suggest relative to the current market capitalization of Blueknight's equity and debt. To me it's a hidden asset and to me, nothing is really valued correctly right now in the public markets with the security. But in terms of interest in these assets, the pipeline and trucking versus Cushing, are you seeing interest in both those assets or is there any further detail you can provide on where the market's interest right now or is it just kind of all there is not much to say about that?

[Andrew Woodward:]

No, I appreciate that question, Nat. I'll be a little bit careful with my statements knowing we're out in the market currently in the active process, but what I'll say is, we're seeing a lot of interest in what we're putting out in the market. Our approach here by including a portion of Cushing is really to attract more interest to the process itself and have it be at the right scale and size where not only private companies may look at but public strategic companies as well. And I think by doing so, this is increasing our likelihood of transacting at what we hope is a good value overall for these types of assets. My last point there -

[Nat Stewart:]

So would it be - go ahead.

[Andrew Woodward:]

And one of my last points there is we're also not trying to make this a one-size fits-all approach. What we're really trying to strive for is an approach here that allows us to have some flexibility with the ultimate structure that allows for a potential win-win for both sides depending on their fit for these types of assets. And the overall goal remains unchanged for us which is lowering leverage to our long-term targets, improving coverage for all investors and really focusing on a go-forward basis on our core strengths on the terminalling side. By doing all of that we believe this is going to best position Blueknight over the long-term to grow and succeed.

[Nat Stewart:]

That makes a lot of sense. I think you're going to succeed based on the quality of your assets. But I have one additional follow-up question related. It makes a lot more sense to me about the Cushing now, but is there anything about the Cushing assets themselves where it makes sense to kind of sell it in part or is it exactly, just what you said is that the main factor that by saying it's partially opened? It's a matter of positioning the full package, maybe to one seller. Is there anything beyond that element that makes it makes sense to sell part of the assets, not just look for a buyer for the whole thing?

[Andrew Woodward:]

Yes. Again, I think part of it is what we're trying to do to achieve pro forma, so you have to take that into consideration. I will say to an extent these are assets on the pipeline side and Cushing that are integrated. I wouldn't necessarily go as far as to say all of Cushing needs the pipeline or vice versa. But again, I think from our standpoint what we're putting out into the market and having that flexibility on structure will create a scenario for us that gives us more optionality to truly check all the boxes that we're trying to achieve. And then again best position Blueknight on a go-forward basis.

[Nat Stewart:]

All right. Well, I think you're going to succeed and I look forward to seeing how it goes. Good luck.

[Andrew Woodward:]

Thanks, Nat.

[Operator:]

The next question is from Tom Forbes [ph], an investor. Please go ahead.

[Unidentified Analyst:]

Yes. My question is what's the name of the investment banker that you retained?

[Andrew Woodward:]

Appreciate the question, Tom. I'm not going to comment on the investment bank that we've retained, just to kind of keep that process as clean as possible.

[Unidentified Analyst:]

Okay.

[Andrew Woodward:]

Any other question?

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Andrew Woodward for any closing remarks.

[Andrew Woodward:]

Again, thanks, everyone, for participating in our call today. I can't say it enough, but we're very excited about the potential for Blueknight and appreciate your support and interest in our company. We will be attending several virtual investor conferences over the next few months and look forward to speaking to many of you during those events or through our normal investor outreach efforts. In the meantime, please don't hesitate to reach out with any questions. But again, thanks for everybody for dialing in.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.