Blueknight Energy Partners, L.P.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Hello, everyone, and welcome to the Blueknight Energy Partners First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there’ll 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 Alex Stallings, Chief Financial Officer. Sir, please go ahead.

[Alex Stallings:]

Thank you, and good afternoon. It is my pleasure to welcome you to today's conference call where we will discuss Blueknight's financial and operating results for the first quarter ended March 31, 2018. Mark Hurley, our CEO, will update you on our operational performance, projects, including the STACK pipeline announced this morning, opportunities and external factors influencing our business, and I will provide a brief update on financial results. We will then take your questions after our prepared remarks. Before we begin, I'd like to remind everyone that the 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 or 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 materializing -- materializes or should underlying assumptions should prove incorrect, actual results or outcomes may vary materially from those expected. The partnership undertakes no obligation to publicly update or revise any forward-looking statement, 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 and storage services, crude oil pipeline services, and crude oil trucking and producer field services. I will now turn the call over to Mark Hurley, our CEO. Mark?

[Mark Hurley:]

Thank you, Alex, and thanks to everyone who dialed in today. We have a lot to cover, and I will begin my remarks by talking about the exciting announcement we made this morning regarding our participation in a project to build a pipeline to certain STACK producers and marketers in western Oklahoma. Blueknight working in partnership with our general partner, Ergon, and with Alta Mesa Resources in Kingfisher Midstream will construct a pipeline from Kingfisher Midstream's facility in Northeastern Kingfisher County to our terminal in Cushing, Oklahoma. The pipeline to be called Cimarron Express will be a 16-inch diameter, 65-mile pipe capable of transporting 90,000 barrels a day at start up, but easily expandable to over 170,000 barrels a day. It should be complete in mid-2019. The project will be supported by an acreage dedication from Alta Mesa Resources, one of the largest and most successful producers in the area. Kingfisher Midstream, an affiliate of Alta Mesa Resources, will own 50% of the joint venture while Ergon, our general partner, will own the other 50% in a DevCo or development company structure. Blueknight and Ergon have entered into an agreement that gives each party certain rights for the purchase and sale of the DevCo. Blueknight will construct and operate the pipeline on behalf of the joint venture. Our intention is to acquire the DevCo once it is cash flowing at cost plus a financing charge. The STACK/SCOOP and Merge shale plays in Oklahoma are among the most attractive in the United States right along with the Permian. It is an exciting and important project for us on many levels. First, the project in and of itself is an excellent investment as it provides a mid- to high-teens return. It also represents an excellent growth opportunity and one that perfectly fits our strategy of growing our crude oil business around our asset footprint in Oklahoma. This pipeline will complement our two existing crude oil pipelines in Oklahoma, one originating in Southern Oklahoma and the other originating in the SCOOP region, both of which terminate at our Cushing terminal. It provides us a more valuable integrated crude oil footprint in the state. It will also bring significant volume into our Cushing terminal, which will provide new opportunities for storage, lending services and the fees that go along with them. There should be significant synergy between our three pipelines and the terminal at Cushing, which should be attractive to crude oil marketers. Moving on to first quarter results. I will begin by pointing out the year-over-year increases in adjusted EBITDA and distributable cash flow. Adjusted EBITDA increased 8.6%, and distributable cash flow increased 9%. In addition, our asphalt terminalling business had another very good quarter. Our operating margin increased 7.3% over the first quarter of 2017. The quarter was highlighted by our acquisition of a terminal in Muskogee, Oklahoma. And this, of course, followed the Bainbridge, Georgia acquisition in December of last year. The Muskogee acquisition just closed in March, so you will not see the full benefit of this transaction until second quarter results are released. The acquisition of these two sites contributed to growing the business year-over-year. We remain very positive on the asphalt business as we have a strong position and the fundamentals in the market remain good. Switching over to the crude oil transportation side of our business. Those of you follow us know that we've been impacted for some time by our out-of-service pipeline in Oklahoma. I'm glad to say that our project to reinstate service on this line is going very well. We expect to have this line back in operation in four to six weeks, at which time, we will double our capacity in Oklahoma. We're now marketing capacity on this line, and we expect this pipe to contribute to growing the profitability of this segment in the second half of the year. We are also seeing improvement in our trucking business. Volumes have been increasing steadily and will continue to do so in the second quarter. We are getting the best utilization of our fleet that we have seen in some time. Or fleet is now sized perfectly to support our Oklahoma business. With the increased drilling activity in the area, I would expect to see margins in the business start to strengthen as well. I expect both of these businesses to grow in the second half of 2018 and into 2019. The addition of the STACK pipeline will complete the picture for our strong Oklahoma base crude oil business going forward. Turning to Cushing storage. The first quarter went as expected. However, we have seen a declining market since the beginning of the year. The transition of the crude forward price curve from a contango structure into backwardation has impacted demand for storage. Total industry Cushing storage volume is now 46% below the level of last year. The market conditions combined with our re-contracting schedule are going to create a more challenging environment for the storage segment for the rest of the year and possibly into 2019. We expect to see this impacting our results. Moving forward, we will take some actions that we think are reasonable and prudent, given the current market environment and the STACK pipeline opportunity we have in front of us. We have decided to reduce the distribution by approximately 30%, beginning with the second quarter of 2018, and we are now evaluating some asset sales, which will be accretive to the company to improve leverage for the remainder of 2018 and into 2019. Underpinning these actions, our goals are clear, which are to, one, reduce debt and maintain a strong balance sheet; two, maintain financial flexibility and position ourselves for the acquisition of the STACK joint venture once it is cash flowing; and three, return to a model of increasing distributions, strong distribution coverage and improving the value of our equity. I know we are throwing a lot of information at the market in a short period of time, so I'd like to summarize. Our strategy remains to continue to focus on two core businesses

[Alex Stallings:]

Thanks, Mark. This morning, we reported financial results for the first quarter ended March 31, 2018. Net income was $4.4 million on total revenues of $44.7 million for the 3 months ended March 31, 2018 versus net income of $3.5 million on total revenues of $46.3 million for the same period in 2017. Operating income was $5.8 million for the 3 months ended March 31, 2018 as compared to operating income of $6.6 million for the same period in 2017. 2018 operating income was impacted by asset impairment charge of $0.6 million, primarily related to write-off of a couple of obsolete trucking stations. Adjusted earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, was $16.5 million for the first quarter of 2018 versus $15.2 million for the same period in 2017. Distributable cash flow of $11.3 million for the 3 months ended March 31, 2018 as compared to $10.3 million for the 3-month period ended March 31, 2017. Our fully diluted distributable -- our coverage for the first quarter was 0.89x versus a coverage of 0.84x for the same period in 2017. Leverage for the first quarter of 2018 was 4.9x, and we maintained our common unit distribution of $0.145 for the first quarter. Additional information regarding the partnership's results of operations will be provided in the partnership's quarterly report on Form 10-Q for the 3 months ended March 31, 2018, which will be filed later today with the SEC. A few highlights for each of our segments. Asphalt terminalling services. As Mark indicated previously, operating margin increased $1 million or 7% for the quarter, primarily due to the acquisition of the 2 asphalt facilities, one from Ergon in December of 2017 and one from a third-party in March of 2018. Crude oil terminalling services. Operating margin excluding depreciation, amortization decreased $1.8 million year-over-year, primarily due to a decrease in market rates for storage contracts. As of May 3, 2018, we had approximately 2.7 million barrels of storage under our service contracts, with remaining terms of up to 44 months. Crude oil pipeline. Operating margin, excluding depreciation and amortization expense, was nearly flat year-over-year. Margin continues to be hampered by our out-of-service pipeline, which as discussed previously, is expected to be back in service by the end of this second quarter. Crude oil trucking and producer field services. Operating margin, excluding depreciation and amortization, decreased $0.3 million year-over-year, even though volumes increased slightly, due primarily to the shorter distance of the average crude oil haul. We continue to see volumes increase as we proceed into the second quarter, and we expect improved results as we move throughout the year. In addition, on April 24 of this year, we sold the producer field services business in West Texas for approximately $3 million, and we expect to recognize a smaller gain on the sale in the second quarter. A few other items. General administrative expenses decreased nearly $0.4 million year-over-year, which is 8%. The equity earnings and unconsolidated affiliate are attributable to the former investment we had in the Advantage Pipeline. On April 3, 2017, we sold the investment in Advantage Pipeline. We received a final payment of $2.2 million in January of 2018, and we recognized an additional gain on the sale during the 3 months ended March 31, 2018. Liquidity. As Mark previously mentioned, we've made a very difficult decision to decrease our common unit distributions beginning with the second quarter of 2018, and we are exploring certain asset sales. As he stated, we believe these steps are necessary as we anticipate a continued weak market for crude storage. And believe these steps will greatly enhance our overall financial flexibility by reducing leverage and enabling us to better fund growth projects without additional equity. We had considered a number of different solutions, including equity and bridge debt, but each seemed to be a stopgap fix and had adverse longer-term overall consequences to the partnership and to our unitholders. As a result, we have chosen a path which we expect to be a longer-term solution. The expectation is to decrease leverage and increase liquidity and distribution coverage in the near term. We plan to decrease leverage to less than 4.25 times and coverage to above 1 times by the end of 2019 unless we see a recovery in the crude storage, in which case this timetable would be accelerated. The expected asset sales, coupled with the distribution decrease will not only help achieve these targets rapidly, but will also help self-fund the expected buyback of Ergon's 50% initial ownership interest in the Cimarron Express pipeline joint venture once the pipeline is generating positive cash flow. Our net maintenance capital expenditures for the quarter ended March 31, 2018, totaled $1.6 million. We expect maintenance capital expenditures to be in the $8 million to $10 million range, net of reimbursable expenditures for 2018, and net expansion capital expenditures totaled $2.7 million for the quarter. And we are currently estimating expansion capital expenditures of $17 million to $22 million, which is inclusive of anticipated crude oil purchases for pipeline linefill and Cushing terminal operational needs during 2018. Steven, that concludes our prepared remarks. We will now turn it over to you for the Q&A session.

[Operator:]

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Tristan Richardson with SunTrust.

[Bronson Fleig:]

This is Bronson Fleig filling in for Tristen. So looking at the 30% distribution cut, could you perhaps provide some thoughts on why that's the right number? And I guess, related to that, to what degree does it give effect for your assumptions to acquire the 50% interest in the DevCo? I guess, in another way, what I'm trying to get at is, absent the STACK pipeline project, would headwinds in crude storage and the negative impacts of the cash flow there necessitate a 30% cut?

[Mark Hurley:]

You want to take that or...

[Alex Stallings:]

The 30% cut, again, is an approximate amount. I mean, we'll make that determination when we make the distribution declaration for the second quarter in consultation with our board. But really, where we ended up with that is we did look at everything really on a fulsome basis. So we were wanting the opportunity to execute on growth projects, whether it be a STACK pipeline project or anything else that might come along. So we were trying to fund -- find some opportunities to fund -- to help self-fund that. And so we did also just coupled that with the asset sales. I mean, we think that by doing kind of both of those in tandem, that we can minimize, if you will, the impact on our common unitholders. So really, when we were solving for the 30%, we could have gone steeper than that. But at the same time, what we're trying to do is, we think, coupled with the asset sales, we believe that, that is something that is sustainable for the long term. And so we try to do what we can to kind of minimize that overall impact.

[Mark Hurley:]

I'll just add to that. I guess, we could have chosen to sort of incrementalize and manage this thing quarter-to-quarter. I do think there would have been different options had we not been dealing with STACK pipe. But we've been dealing with that -- we've been developing that project for the last, at least, six months. And so we've never really considered going down one path or the other. It's always been what's the most complete answer for us. And what puts us in a -- the most comfortable position when we get into next year. Because we want to be able to do that acquisition without stretching the balance sheet and be in a good place after that acquisition is done. So we've never really considered one without the other.

[Operator:]

Our next question comes from Matt Schmid with Stephens.

[Matt Schmid:]

Alex touched on this a little bit, but with the weaker conditions at Cushing, is there any impact to how you're thinking about near term on balance sheet growth opportunities? Or really, does the distribution cut allow you to better be able to continue to pursue those opportunities, like I know you've talked about potentially growth projects at Muskogee or different types of incremental growth opportunities?

[Mark Hurley:]

We really -- we have really focused our actions on having flexibility for the rest of this year and having -- being in a very good position for 2019 to do the acquisition. I think what we do, we will do pretty quickly just because we have a plan and, obviously, we're not going to rush the plan. But we think we know what we want to do, have a very good idea about it, and so we want to go ahead and execute and have a nice path into 2019. Alex, do you want to...

[Alex Stallings:]

I think that's right. So I think, yes, the overall -- what we're trying to achieve is to provide us with that financial flexibility so that we can decide if there's additional growth projects or opportunities. I mean, we want the flexibility to be able to pursue those without having to rely on the equity. Because the equity, obviously, is just not a good choice for us or most of the people right now in the whole space.

[Matt Schmid:]

Okay. That makes sense. And maybe could you just provide any color about potential assets you're looking at divesting?

[Mark Hurley:]

Yes. We're looking at -- I mean, if you look at our asset base, it's basically terminals, asphalt terminals and crude oil assets in Oklahoma. And we're really open to all options and looking at a lot of different things. We've got some things in the works. But until things firm up, I'd rather not comment on it.

[Operator:]

Our next question comes from TJ Schultz with RBC Capital Markets.

[TJ Schultz:]

Just first -- at Cushing, what percent of your customer base is utilizing storage for marketing or trading as opposed to operational storage? And then as you think about the weakness that you're pointing to, is it a function of just reupping at lower rates? Are you expecting utilization to go down or some of these current marketing customers to essentially exit?

[Mark Hurley:]

Well, right now, we had the -- it's a higher percentage of marketing or trading customers. And those are, of course, the ones who are most sensitive to the shape of the forward curve. One of the reasons, and I mentioned it in my remarks, one of the reasons we really like about STACK pipeline project, in addition to the fact that it's just a nice capital investment with a good return, is the fact that it brings kind of a guaranteed flow of crude oil into the facility on a constant basis, right? And when you have that, not only does it give you new opportunities to generate storage revenue, it gives you throughput revenue. We think the crude coming out of the STACK will be natural for blending with other crudes in Oklahoma. And that leads to additional fees. And so one of the reasons we really like that project is that it provides a permanent operational kind of revenue coming into Cushing. So it really, I think, strengthens that asset. And so -- we always like to have a combination of both. Right now, we're too skewed towards the marketers and traders, and so this project moves us more back or more towards the operational customer.

[T. J. Schultz:]

Okay. And then on the STACK pipe, I guess, any more color that you can provide on the option for your option to buy a cost plus a financing charge? I guess, what's the expected drilling cost? And would the cost to you all still allow for those mid- to high-teen type returns?

[Alex Stallings:]

Yes. That cost would still result for us in kind of mid teen or high to mid-teen, kind of, returns if the project is successful. So it -- I mean, we basically have the opportunity to purchase it from our GP at any time. But there are -- I mean, that agreement, essentially, will get filed in the near term. So you will be able to take a look at that kind of agreement publicly. So you can take a look at it. But we definitely have the opportunity -- I mean, they have -- I mean, their ability is to purchase it and sell opportunities as well. But you'll be able to see that pretty soon.

[Mark Hurley:]

It's a financing cost. It's, as you'll see, very competitive with what you can go out and get in the market. So we were very happy with it.

[T. J. Schultz:]

I guess, just lastly. You gave some goals for leverage and coverage by the end of next year, I think 4.25x and over 1x coverage. Is that -- I guess, I'm just trying to understand, is that all-encompassing? Meaning that is taking into consideration potential actions such as the purchase of this STACK pipe or -- and also any kind of lost cash flow you'd have from asset sales?

[Mark Hurley:]

Yes. It's all-encompassing, right? So when we look at the plan that we have laid out, including asset sales, the distribution reduction, the acquisition of DevCo, those targets are all consistent with that plan.

[T. J. Schultz:]

Okay. And when would you expect asset sales to -- you've started that process, I mean, is that far along to where you think over the next quarter or two you'd get something done there?

[Mark Hurley:]

Yes. I mean, we've started the process. We haven't made any decisions yet. But we've got some opportunities we're evaluating. And I would expect, within the next couple of months, we'll have something that we can share with you.

[Operator:]

Our next question comes from David White with Morgan Stanley.

[David White:]

Really quickly, with the drop in the price of the common, the preferred has now a larger market cap than the common does. Can you update us on who -- where the stock ownership is in the convertible preferred? And where is -- does GP still own a majority of the total issue and its affiliates?

[Alex Stallings:]

The GP does own just north of 50% of that. And then the other, call it, 49% are going to be made up predominantly of some other institutional holders. I mean, I don't think the ownership of that has changed that significantly. So it's really going to be fairly tightly held in some institutional ownership.

[David White:]

So how much of the common units does the GP own at this moment? Percentage wise?

[Alex Stallings:]

The GP owns, David, I would have to get you that specific number, but they own about a third of the total units outstanding. So I'd kind of have to back into that. But in total, they own about a third. So I'm thinking they own right around, I don't know, I'd be guessing, I can get you the answer quickly. But I know they own about a third of the fully diluted class.

[David White:]

Well, I know the stock is, of course, down significantly today. But I want to give you guys some sort of a compliment for at least seeing the wisdom of diversifying into the asphalt business with your relationship with your new GP. I can't imagine what we'd be looking like right now if we didn't have them. And I think that, that's something you guys should really be complimented for.

[Mark Hurley:]

Thank you very much, David. Appreciate it. It was a very good move for us. I think not only in diversifying but just the support that they have given us in doing, say, for example, the STACK project. It's really benefited all the unitholders.

[Operator:]

Our next question comes from Harrison Wreschner with C.F. Capital. Please go ahead.

[Harrison Wreschner:]

Just a question for you. So basically, the one-time's coverage exiting '19 is assuming that you guys fully execute on a JV purchase? Is that correct?

[Mark Hurley:]

Yes. That's right.

[Harrison Wreschner:]

And just thinking about this from a multiple perspective, obviously, you've purchased it at a cost but there would still be for plenty of capacity. So that's 1 times plus growing, I would assume or at a similar. And that's not assuming it's at anywhere near capacity of that point. Is that fair?

[Mark Hurley:]

That is very, very fair. Yes. We've assumed some level of minimum liquidity before we would actually execute on a purchase of the DevCo. So that is correct. So we would want to make sure -- and that's part and parcel why we're doing kind of what we're doing and kind of steps that we're taking as to immediately free up some availability. But we would expect that availability to continue through and still have adequate availability once we execute on the purchase of the STACK pipeline project.

[Harrison Wreschner:]

I'm sorry, maybe let me rephrase. When you purchased that STACK pipeline, you exercised your option to purchase, which seems like a much more favorable relationship than a typical GP/LP, so that's a good thing. The EBITDA out of that JV will still have plenty of room to ramp. So even though you're saying you're at 1 time coverage.

[Mark Hurley:]

Yes.

[Alex Stallings:]

We're talking about capacity of the facility so...

[Harrison Wreschner:]

I want to think about where -- what percentage of potential EBITDA exiting 2019 at 1 time within that pipeline will be? Will it be at 25% of potential? 50% of potential? When you're thinking about that model, can you give me a rough estimate of what that would be so I can think about how much more in -- I guess, owned assets improvement there still is? Because there is, obviously, embedded upside within that pipeline.

[Mark Hurley:]

That's right. So I would say, very -- and again, it's very rough, probably about a third. That -- it's in that ballpark. And I'm just thinking about the production profile that we have, the production forecast that we have. It'd be about one third of total capacity.

[Harrison Wreschner:]

The other question, does that also assume at that point that storage has not gotten any better and is at this current lower run rate?

[Alex Stallings:]

That is correct, Harrison. We are assuming that storage is not real great for in at least what we're trying to plan for, so next, call it, 4 to 6 quarters is what we're looking at. Now we have no crystal ball on what happens with storage. But what we're trying to do is to kind of plan for a fairly weak market for the next 4 to 6 quarters. Now historically, we've seen these cycles before. But really, in the last -- you called it the last 5 to 6 years, I want to say the most prolonged backwardation we've had during that period of time, maybe 6 to 9 months.

[Mark Hurley:]

It was about 9 months.

[Alex Stallings:]

So we're trying to kind of plan for it being weak for longer than that just so that we try to do the right things now to at least kind of buy time just to get through.

[Harrison Wreschner:]

You're modeling in, which is good, you're modeling in a weaker market for storage than we thought just 4 or 5 months ago. Is that fair?

[Mark Hurley:]

Absolutely. Yes.

[Harrison Wreschner:]

And the asset sales, we should see those kind of happen throughout '18, is that right?

[Mark Hurley:]

I think you'll see them happen fairly -- in near term. So I think by -- like I said, I think, within a couple of months, we'll be able to give you some -- give you the details around those.

[Harrison Wreschner:]

And obviously, you anticipate those being delevering, but do you think they'll be accretive to the overall enterprise?

[Mark Hurley:]

Yes, they -- as we see it play out now, it will be accretive to the enterprise.

[Harrison Wreschner:]

And accretive -- just so I'm clear, is that accretive on a multiple or accretive on a coverage? I'm assuming it's accretive on a multiple basis, correct?

[Alex Stallings:]

Correct.

[Mark Hurley:]

Yes, yes.

[Operator:]

Our next question comes from Mike Gyure with Janney.

[Mike Gyure:]

Yes, could you go through the expansion capital one more time? And kind of what segments that's going to for the rest of the year?

[Alex Stallings:]

Yes, again, the most significant expansion project we have just on kind of our core business is the -- completing the light crude line, which should be done by the end of the second quarter. And I think we've mentioned to people that kind of have project all in was around, call it, $5-or-so million of capital. Most of the remainder -- or a chunk of the remainder is going to be for pipeline line fill that we're anticipating and some store -- and some operational crude needs at Cushing. So as we mentioned, when we get the -- we're now starting to buy some barrels for our own accounts and moving those up the pipe and into Cushing. And when we do that, we have to kind of replace or at least have in place some proportional percentage of the line fill. So what that expansion capital number assumes is that we are putting some of the line fill on our existing Oklahoma Mainline System but that we're also going to have to put the majority of the line fill on the light crude system. Now we don't know if that will ultimately happen or not because we would expect to have and are actively seeking third-party marketers as this line comes up and running. But at the same time, we've planned for that and that's included in our numbers. So a piece of that is, and probably the most significant piece, is actually putting barrels into the light crude system so that it has operational needs can be met.

[Michael Gyure:]

Okay. And then maybe switching gears to the asphalt business. I guess, what are you seeing sort of as we sit here in early May? Is it off to a better start than last year? Or I guess, how would you view things on a year-over-year basis maybe?

[Alex Stallings:]

It would seem to be. I think we haven't seen -- of course, I better knock on something but, I mean, we've seen a little bit more favorable weather so far this year. The economy still seems to be doing fairly decently. So we are optimistic for this -- for the season ahead of us. But so far, we had, at least in our part of the country, it was a fairly mild winter. A fairly mild spring. I think it's now into summer. So spring lasted about 1.5 days. But I think we're still pretty optimistic about what the asphalt season could look like for 2018.

[Mark Hurley:]

I think we mentioned in our last call that, and, of course, we've mentioned previously to that, that last year was -- it wasn't a disappointing year, but it wasn't of year we expected it to be just from a volume standpoint. So we expected -- we expect this year to be a nice bump up. And I think the industry, overall, has been projecting a 6% increase. And I would say, through the first quarter, things look pretty good. But it's all very seasonal, so we have to really wait until we get into the second or third quarter and see how it's going to play out.

[Operator:]

Our next question comes from [Randy Godoy] with Pacific Beach Capital.

[Unidentified Analyst:]

Regarding the Cimarron pipe, did you all conduct an open season? And are there any anchor shippers for that pipe yet?

[Mark Hurley:]

We did not conduct an open season but that's because Alta Mesa, the affiliate of our partner in the project who is Kingfisher Midstream, did a dedication of about 120,000 acres. So all of the production out of that area will be bound to the pipe for 10 years. We expect on top of that -- so with that -- given that we really didn't -- we chose not to do an open season, however, we are pursuing other third-party shippers in addition to Alta Mesa. And we expect to get some additional volume on top of that.

[Unidentified Analyst:]

So does Alta Mesa have a minimum volume commitment then?

[Mark Hurley:]

No, it's an acreage dedication.

[Unidentified Analyst:]

Okay. And what's the breakeven -- go ahead.

[Mark Hurley:]

It covers two counties, Kingfisher and Garfield Counties, which is where primarily their operations are now.

[Unidentified Analyst:]

Okay. And do you have any idea what their breakeven is at the wellhead in that area? And what I'm trying to -- I think you know what I'm trying to get at is if their price -- if the prices of crude eventually goes down, at what point is it going to be not viable for them to keep pumping?

[Mark Hurley:]

Yes, I don't want to sit here and speak for them because that's, obviously, not our place. But their economics are, from what we have seen publicly, are very favorable and they can sustain a fairly low price environment from everything we've seen in their public information. But again, I just don't want to speak for them. So -- but we have tested -- I will say, we have done our due diligence on that production profile and the economics, and we were very comfortable proceeding on an acreage-dedication basis.

[Unidentified Analyst:]

Okay. But theoretically, if the price of crude got low enough, then they could decrease shipments on the pipe, theoretically speaking?

[Mark Hurley:]

Yes. Theoretically speaking, that's right.

[Unidentified Analyst:]

Okay. As part of the...

[Mark Hurley:]

I was going to say, I think if you went out and just look at the market for pipeline projects such as this, you would see that almost all get done on an acreage dedication basis today. And so it's not unusual. Sometimes the longer haul interstate pipes go through an open season and they get volume commitments. But those are much, much bigger projects, obviously, than we're talking about.

[Unidentified Analyst:]

So assuming you all have done the due diligence on the acreage, then that's what essentially makes up for the minimum -- for the lack of a minimum volume commitment, right?

[Mark Hurley:]

That is right. And then, of course, we have tested our economics at very pessimistic downside cases and are comfortable that the economic -- that the project will sustain itself.

[Unidentified Analyst:]

Well, then you must have some idea of the breakeven cost on that acreage? I would assume that's part of the due diligence?

[Mark Hurley:]

It is. But again, I'm just not going to speak for Alta Mesa.

[Unidentified Analyst:]

Okay. As far as the trucking segment, where do you feel we are in the cycle? And what you think is kind of -- I mean, could you -- we talked about improvement and how we're optimistic through 2018 for that segment. So what do you view as kind of a mid-cycle level of profitability for the trucking?

[Mark Hurley:]

Well, if you could back up a second and just think strategically about trucking, it's a challenging business, primarily because it's very cyclical. And the barrier to entry in that business is actually pretty low, right? So it's very easy for smaller companies to come out, lease some trucks and get into the business. So it's profitability that can be fleeting because getting into this business is relatively inexpensive. We stay in the trucking business because it complements our pipeline business well, right? So typically, production from the field is trucked to a pipeline, and then in the pipeline, it goes to Cushing or some other hub. It's easier to deal with a customer when you have both the trucking capability and the pipeline capability because it's a one-stop shop for them. I would not view, frankly, the trucking business for us to be something that we would be in if it was just a pure third-party standalone business. And so if we can get that business cash flowing positive and making $0.5 million to $1 million, that would be a good thing. But we don't -- our expectations of the trucking business are always tempered because we know it's an easy business to get into.

[Alex Stallings:]

So I think other -- our expectations are going from a negative contribution to something like Mark said, that's a positive contribution and call it $1 million annually. But again, it's -- nearly all of the barrels that hit our Oklahoma system, our existing Oklahoma system, are trucked. And then we would also expect to have some opportunities on the STACK pipeline project as well. And we now have a fleet that is appropriately sized to really just manage that business that is inside of Oklahoma and inside of our graphs. So that when we think about trucking, it really moving from something that's been kind of a negative contribution over the past year to something that has some positive contribution. But at the end of the day, you're really using it to feed the pipeline. It's really what the overall intent is because you can make a lot more money on the pipeline side.

[Unidentified Analyst:]

Understood. Okay. There's been some talk that with the IMO 2020 coming on, that there's going to be a lot more heavy bottom available from the refiners, and that's potentially going to produce an oversupply of asphalt. Do you all then credence to the theory, a? And then b, if you do, what do you expect the effects to be on the asphalt industry and your terminals if supply increases significantly and the price of asphalt goes down? Or is the price pretty inelastic? Essentially, what do you -- holistically speaking, what do you expect the effects of the IMO 2020 to be on your asphalt business?

[Mark Hurley:]

Well, I mean, we've heard different theories, including the one that you put forward. But keep in mind, we are strictly a services provider. And when we do our contracts, they're going on a very relatively long-term basis, so typically five to 10 years. And so we are more interested in what are the storage fees, what are the throughput fees. Obviously, asphalt being in high demand is a good thing because a component, although pretty small component of our revenue is made up by higher throughput fees. So it's not something that has a direct or proportionate lever on our business. And so I'll probably defer to our friends on the marketing side to ask that question. But mainly what we want to see is high demand, right? That's the key thing that drives our business. The higher the demand is, the more volume we get, the more solid the business is. And that's where our revenue comes from in the asphalt segment.

[Unidentified Analyst:]

All right. Well, so if the supply increases significantly, therefore, brings down the price, do you expect that to have a change in demand? Or is the demand pretty inelastic?

[Mark Hurley:]

I think the demand is really driven by state infrastructure budgets, right? So states budget a certain amount for infrastructure at the beginning of the year. And so what you want to see is a good economy. You want to see state budgets in a condition where they can spend money, more money on the infrastructure. You want to see the federal government supporting those expenditures on infrastructure. That creates more demand which translates into revenue for us. So that's really the key factor for us. But the actual price of asphalt is something that our customers has more impact on their business by either expanding or contracting their margins. But what you really want to see at the end of the day is high demand and high state and federal infrastructure spending.

[Unidentified Analyst:]

Yes. Okay. And so that demand isn't necessarily tied to changes in the market price of the asphalt?

[Mark Hurley:]

I would say it's a rough correlation. I wouldn't say it's not tied at all, but it's more of a right correlation.

[Unidentified Analyst:]

And then, so you are optimistic about asphalt going into '18 and '19 and you're optimistic about, obviously, the pipes in Oklahoma and you're optimistic about trucking, but pessimistic on storage. So can you kind of quantify the distribution cut based on the kind of relative contribution of those 3 units, and then, obviously, storage. I mean, you're optimistic, essentially, on 3 units, and we know the trucking doesn't contribute that much. And you're pessimistic on one and there's a distribution cut. So I'm wondering if you can just kind of square that up with us numerically?

[Alex Stallings:]

I don't know if I can parse it out. But I can tell you that the reason we're doing what we're doing is 90% around the -- our current outlook on storage. So really, any of the -- and part of it is timing. So I'd say, part of it is a timing issue of us getting the pipeline back up to speed or the pipeline back into service, and then also our ability to kind of fill up and more fully utilize those assets. And I talked about kind of in our forecast that we're assuming kind of forward utilization or near-forward utilization of all of our pipeline systems by the end of '19 is what we're targeting. So hopefully, we can do better than that but that's what we're assuming. So part of the kind of prudence around the distribution would be to buy some time to allow us to increase utilization of those pipes. But I'd say, the vast majority or the bulk majority is just our current outlook on storage. So if I were to break it down, I'd say 90% of it is a result of just what our outlook is on storage. And maybe 10% is to help buy some time for us to go out and start better utilizing the pipeline assets that we have in the ground today.

[Unidentified Analyst:]

Well, and so then if you're optimistic on asphalt and the pipes for the rest of 2018, storage -- we're pretty pessimistic on storage in a sense that, that -- is that going to go into a loss mode for the rest of the year, do you think?

[Alex Stallings:]

No.

[Mark Hurley:]

No. It won't...

[Alex Stallings:]

It won't go into a loss mode. But we -- previously, it was really a rate issue. And now there's -- potentially it's got some volume risk to it as well. So because previously, even through the first quarter, we were nearly fully contracted. And so we had assumed we would remain fully contracted or near-fully contracted through the year, albeit at a decreased rate. But what we're saying is, we're just concerned a little bit about the weakness of recontracting some of the storage as it comes up for renewal. So that's kind of where we are on that right now. But not a loss position.

[Unidentified Analyst:]

And then how confident are you, gentlemen, that the Oklahoma pipe will be operational by the end of Q2? What is your confidence level on that date?

[Mark Hurley:]

It's high. They're -- they had to do a bore across the river. That bore will be complete by the end of next week. And then there's some tie-ins and some station work that needs to be done. But we're very confident. We are four to five to six weeks out.

[Operator:]

[Operator Instructions] And our next question comes from Josh Golden with JPMorgan.

[Josh Golden:]

I have a couple of questions. Firstly, you had talked about some greenfield projects and some recent acres for building a new terminal for customers. Can you touch base on that?

[Mark Hurley:]

Yes. It's still something -- we had talked in our last call about a terminal that would be greenfield, new construction. And that is still in play. It's just moving. It's a big project so it's moving very, very slowly. And so -- but it is still in progress. I can't give you a probability that -- of success on it, but it is still in play.

[Josh Golden:]

And my question then would be, you mentioned sort of a large project or potential timing, et cetera, with the recent cut in the distribution, why not cut it further to free up more capital to reinvest in the business?

[Mark Hurley:]

We -- as Alex mentioned earlier, we really took a holistic view of this. And between asset sales and between where we want our leverage to be, what we thought was a kind of fair, more in line market reduction that's more in line with what we've seen other companies make. It's where we chose to go and model into our future plans. And when we look at those plans, they work for us in terms of meeting our objectives this year and next year. So not much more science to it than that. And really thinking about the common unitholders.

[Josh Golden:]

What type of -- in terms of asset sales, what kind of dollar value are you targeting? Is there -- can you give us a rough range?

[Mark Hurley:]

I would say you would see something in the $50 million to $70 million range. Something in that ballpark.

[Josh Golden:]

Which is relatively meaningful for you. The forecasted distribution, can you remind us of the splits levels with your general partner? Where they would now sits in the IDR schedule?

[Mark Hurley:]

With what we're talking about, they go back to the first tier. So it -- with the 30% cut, they will go back to the first tier.

[Josh Golden:]

And has there been any discussion with them?

[Alex Stallings:]

They were in the third tier.

[Josh Golden:]

Correct. So has there been any discussion with them about eliminating or restructuring the IDRs to further enhance the cost of capital for the partnership?

[Alex Stallings:]

We've not had any of those conversations at this point.

[Josh Golden:]

Okay. And have there been any further discussions with them in terms of other supportive measures? As you sort of mentioned in the press release, they are a large holder of the convertible preferred. Has there been any discussion about converting some of the high coupon or high-cost preferred into common?

[Alex Stallings:]

Well, I mean, we've looked at -- and I've looked with them as well as talk with others. I mean, we have -- I've looked at 100 different scenarios. I mean, we've looked at a lot of different scenarios and this is the one we landed on. So we -- like I said, we've looked at a lot of different models.

[Mark Hurley:]

But -- and don't underestimate the support around this DevCo structure that we have because this project will be very strategic for us. It will be a growth -- a new growth platform for us. And had we gone out to the market and gotten the kind of financing that would've been available to us by investment companies or investment funds or whatever banks, whatever, we would not have done this well. So this -- the DevCo structure is a tremendous step up for the GP and we appreciate it.

[Josh Golden:]

And given the structure of this and the plans going forward, what would your thoughts -- and I get what happened in terms of the reduction in the distribution, but you sort of made -- mentioned that your plan is to grow the distribution. Is that something that you would look to do once you acquired the ownership, the 50% ownership from the DevCo?

[Mark Hurley:]

Yes. Certainly, it will not happen before then. But we expect the project to be done in 2019. And our plan will be to acquire it as soon after it is cash flowing as possible. As far as increasing distributions, the criteria that we want to have is that we want to have our leverage in a good comfortable place. And obviously, we want to have a good coverage of the distributions before we do that. But long term, that is our plan. That's where we want to be.

[Alex Stallings:]

And I think longer term, I mean, before we would look at doing something like that, we would want leverage to be probably around 4x or less and then coverage -- targeting coverage closer to 1

[Josh Golden:]

And on the terminal business, there are inflation escalators on that? Am I mistaken or in some of those contracts for the terminal's business?

[Mark Hurley:]

In the asphalt terminalling side, that is correct. That is correct. Almost all of those contracts have inflation or PPI escalators.

[Operator:]

Our next question is a follow-up with David White with Morgan Stanley.

[David White:]

My question has been answered.

[Operator:]

And this concludes -- this concludes our question-and-answer session. I'd like to turn the conference back over to Mark Hurley for any closing remarks.

[Mark Hurley:]

Yes. Once again, thank you for your interest in Blueknight. Thank you for dialing into the call. I know that we have, in the last 24 hours, given you a lot of new information. So we appreciate you listening to us, and we're always available to answer follow-up questions. So if you have those, please contact Alex or myself, and we'll be happy to help you out. Thank you very much.

[Operator:]

The conference has now concluded. Ladies and gentlemen, thank you for attending today's presentation, you may now disconnect.