Blueknight Energy Partners, L.P.
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

Welcome to the Blueknight Energy Partners Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] After today’s presentation there’ll be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Alex Stallings, Chief Financial Officer. Please go ahead, sir.

[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 second quarter ended June 30, 2018. Mark Hurley, our CEO, will update you on our operational performance, projects, opportunities and external factors that are 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 would like to remind everyone that information on this call may contain certain forward-looking statements. Statements included in this call that are not historical facts, including without limitation, any statements about future financial and operating results, guidance, projected or forecasted financial results, objectives, project timing, expectations and intentions and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties related 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 SEC. If any of these risks or uncertainties materializes or should underlying assumptions 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 statements, whether as a result of new information, future events or otherwise Blueknight Energy Partners is a publicly traded master limited partnership with operations in 26 states. We provide integrated terminalling, storage, gathering and transportation services for companies engaged in the production, distribution and marketing of crude oil, asphalt and other petroleum products. We manage our operations through four operating segments

[Mark Hurley:]

Thank you, Alex, and thanks to everyone who dialed in today. On a sad note, it is with a heavy heart that I tell you about the passing of one of our Blueknight Board of Directors, Jimmy Langdon, who was also the Chief Operating Officer at Ergon. Jimmy was 54 years old and died last Friday. He was a person of high integrity. He was a great family man, and he was a tireless worker on the Blueknight board. He will be sorely missed, and our thoughts and prayers go out to his family. Moving on to business. In our first quarter call, we highlighted the challenging market conditions surrounding our Cushing crude oil storage business, and we also reviewed the exciting project we have, along with Ergon, to build a new pipeline from the STACK production area in Oklahoma to our Cushing terminal. With that as a backdrop, we announced we were taking some actions to; one, reduce debt and maintain a strong balance sheet; two, maintain financial flexibility and position ourselves for the acquisition of the STACK JV DevCo from Ergon once it is cash flowing; and three, return to a model of strong distribution coverage and improving the value of our equity. I'm happy to say we completed the actions we laid out on that call. To recap, first, we stated we will reduce our distribution by approximately 30% beginning from the second quarter of 2018. On July 19, we announced we were reducing our quarterly distribution from $0.145 per share to $0.08 per share, a reduction of 44%. We chose a little higher cut simply out of conservatism and our strong desire to improve our balance sheet immediately. We stated we were reviewing some potential asset sales. On June 29, we announced the sale of 3 asphalt terminals to Ergon, our general partner, for $90 million. We like to sale of our assets to our GP as it allows us to keep these terminals in the Ergon, Blueknight family. The sale of the terminal assets was completed on July 12 and was transacted at an EBITDA multiple similar to what we paid when we purchase assets from Ergon, in the 9 to 10x range. The transaction was reviewed and approved by our conflicts committee. We stated we were exploring modifications to our credit facility to provide more financial flexibility and position the company for the acquisition of the STACK pipeline DevCo from Ergon once it is cash flowing. On June 28, we agreed to modifications to our facility with our banking group led by Wells Fargo. These actions, along with continued strong focus on cost control, have reduced our debt-to-EBITDA leverage ratio to 4.7 times. We are now positioned well for the rest of 2018 and into 2019. Meanwhile, our Cushing storage business, which we have discussed extensively, is showing some signs of improvement. Just last week, we entered into a new 2 million barrel agreement starting on November 1 of this year and going through the end of 2019. In addition, a number of independent industry analysts have indicated they see inventories and, therefore, demand for storage rising starting later this year and going into 2019. So we remain optimistic that this market will turn around over the next few quarters. Moving on to second quarter results. Our asphalt terminalling services segment recorded solid quarter-over-quarter growth, achieving a 13% increase in operating margin for the three months ended June 30, 2018, versus the same period in 2017. The recently completed acquisition of the Bainbridge storage terminal from Ergon in 2000 -- in December 2017 and of the Muskogee, Oklahoma terminal in March 2018 helped drive the increase in the operating margin. We remain very positive on the asphalt business. And we have a strong position, and fundamentals in the market remain good. Moving over to our crude oil businesses. We have talked about the crude oil storage segment at length. Total crude oil inventories -- total Cushing crude oil inventories are currently at their lowest level since November 2014, 51% below the 5-year average and 58% below last year's storage level. And the crude oil forward price curve continues to be back war dated. Given the weak storage market coincided with our recontracting efforts, our year-over-year operating margin decreased in this segment. In our crude oil transportation segments, trucking and pipeline, we are seeing the signs of a strengthening production environment in Oklahoma. Our trucking segment is seeing improvement in volume and margins. The increased drilling activity increases demand for crude hauling services, so our volumes have been steadily increasing, and we see this continuing over the remainder of the year. We have a great deal going on around our pipeline segment. First, we did start up our second Oklahoma pipeline that had been out of service for some time due to the riverbed washout. This pipeline went into service, as scheduled, on July 1. We are now in the process of filling line, and this will continue into August. This is obviously much-anticipated news, and it comes at a good time. High crude oil prices have bolstered drilling activity in both the STACK and the SCOOP areas of Oklahoma. Our restarted line serves the SCOOP area, and so we are optimistic about this pipeline over the next year and a half. An independent analysis done recently by one of the banks that reports on the MLP sector predicted utilization of Oklahoma pipeline capacity across the industry will increase over the next few years. The study also point that Oklahoma pipeline takeaway capacity could become constrained by 2020, particularly for those lines that serve the SCOOP and the STACK. So we think we are in a good position with our existing pipelines in addition to the new line we are building out on STACK. That pipeline, to be called the Cimarron Express, will be a 16-inch diameter, 65-mile pipeline capable of transporting 90,000 barrels a day at start-up but easily expandable to over 175,000 barrels a day and it should be completed 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 development company structure. Blueknight and Ergon have entered into an agreement that give each party right 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 project is progressing well. We've executed contracts with a number of service providers. We have purchased the pipe and are now in the process of acquiring the [Indiscernible]. We remain optimistic the project will be done on time and on budget. In conclusion, our strategy remains to continue to focus on two core businesses, one being our asphalt terminalling business, which we intend to continue to grow in the future; and the second being our Oklahoma-based crude oil business, where we are putting in place actions to get maximum value out of our assets. As we move forward in what is typically our strongest quarter for the asphalt business segment, we believe we are doing so with a stronger balance sheet better positioned to support our business objectives. In addition, strengthening storage demand and our ability to increase utilization of our transportation assets will enable us to take advantage of an improved Oklahoma crude oil production environment. Alex, back over to you.

[Alex Stallings:]

Thanks Mark. Yesterday, we reported results for the second quarter ended June 30 of 2018. Net income was $1.8 million on total revenues of $83.5 million for the three months ended June 30 of 2018 as compared to net income of $6.4 million on total revenues of $43.9 million for the same period in 2017. Operating income was $6.8 million for the three months ended June 30 of 2018 as compared to operating income of $6.5 million for the same period in 2017. Adjusted earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, was $15.4 million for the three months ended June 30 of 2018 versus $19.2 million for the same period in 2017. Distributable cash flow was $8 million for the three months ended June 30 of 2018 as compared to $12.7 million for the same period in 2017. We have provided a reconciliation of our non-GAAP measures in the Non-GAAP Financial Measures section of our earnings release. Keep in mind that net income, adjusted EBITDA and distributable cash flow for the three months ended June 30 of 2017 included gains of $4.2 million related to the sale of our interest in the Advantage Pipeline. The distribution coverage ratio for the three months ended June 30 of 2018 was 0.82 times. Additional information regarding the partnership's results of operations will be provided in the partnership's quarterly report on Form 10-Q for the three and six months ended June 30 of 2018, to be filed later today with the SEC. A few highlights for each of our segments. As Mark mentioned, asphalt terminalling services had a very nice increase of $1.9 million or 13% for the quarter ended June 30 of 2018 as compared to the same quarter in 2017, primarily due to the acquisition of the two asphalt facilities that Mark mentioned. As Mark also previously mentioned, the third quarter is typically the strongest quarter for our asphalt business. Demand appears to be strong, and supply is anticipated to increase. We think the season may ramp up a bit later this year, but overall, we remain optimistic for a good season. Crude oil terminalling services margin excluding depreciation and amortization decreased $2.6 million for the quarter ended June 30 of 2018 as compared to the same quarter in 2017 due to a decrease in volumes under contract and market rates. As of July 27, 2018, we had approximately 5 million barrels of crude oil storage under service contracts, including the recently executed contract for 2 million barrels that commences on November 1 of 2018, out of our total capacity of 6.6 million barrels. We expect our crude oil terminalling segment results to be at their lowest levels for the year in the third quarter and then anticipate a gradual increase in results as the new 2 million-barrel contract commences in Q4. We also anticipate further strengthening into 2019. Crude oil operating -- crude oil pipeline operating margin decreased for the quarter ended June 30 of 2018 as compared to the quarter ended June 30 of 2017, primarily due to the out-of-service pipeline, on which service was restored beginning in July of this year. In addition, during the quarter, we started supplementing a portion of the crude oil volumes that we transported for third-party customers with barrels that are being transported for our own internal crude oil marketing operations in an effort to increase the overall utilization for our pipeline assets. Since we are now utilizing a portion of our Mid-Continent system for our own volumes, we have increased our line fill balance. This increase resulted in a total volume of crude oil repurchased during the period exceeding the volume of crude oil we sold in the period and negatively impacting pipeline operating margin. Going forward, this impact should decrease once we are no longer accumulating line fill. Crude oil trucking services margin excluding depreciation and amortization was flat when comparing quarter ended June 30 of 2018 to the same quarter in 2017, even though volumes increased approximately 18%. This is due primarily to the shorter distance that we are hauling each barrel of crude oil. We continue to see volumes increase as we proceed further into the year, and we expect improved results as we improve efficiency. On April 24 of 2018, we did sell the producer field services business and realized a small gain in the second quarter. General and administrative expenses were consistent with the prior year. However, G&A for the second quarter ended June 30 of 2018 does include about $0.6 million of transaction fees associated with the asset sale. And other income, as I mentioned previously, includes a $4.2 million gain on the sale of our investment in the West Texas Advantage Pipeline. From a liquidity perspective, as Mark mentioned, we made the difficult decision to decrease our common unit distributions to $0.08 per unit beginning with the second quarter distribution. We decided to haircut the distribution more than previously discussed, as Mark said, to be a little bit more conservative with respect to our balance sheet. As a result of the common unit distribution decrease and the closing on our sale of the three asphalt terminals to Ergon in July, we have now decreased our leverage to about 4.7 times, and we are targeting it to be at or near 4 times by the end of 2019 as well as increase our distribution coverage above 1 times. From a capital investment perspective, expansion capital expenditures totaled $17.6 million for the six months ended June 30 of 2018 as compared to $5.2 million for the same period in 2017. The expenditure for the six months ended June 30 of 2018 included approximately $9.8 million related to crude oil purchases for pipeline line fill. We currently expect our expansion capital expenditures to be approximately $19 million to $22 million for the 12 months ended December 31 of 2018. Maintenance capital expenditures totaled $3.8 million for the six months ended June 30 of 2018 as compared to $4.5 million for the same period in 2017. We currently expect maintenance capital expenditures to be approximately $8 million to $10 million for 2018. I did want to mention briefly that Mark Hurley and I will be in investor meetings -- participating in some investor meetings in New York next week, on August 6 and 7. And there will be -- materials that we'll be using for those meetings will be accessible in the Investors section of our website at bkep.com beginning on Monday, August 6. Claudia, that concludes our prepared remarks. We will now open it up for Q&A.

[Operator:]

Thank you sir. [Operator Instructions] Our first question is from Tristan Richardson with SunTrust. Please go ahead.

[Tristan Richardson:]

Hey good morning, Just curious about the growth in asphalt year-over-year in the second quarter and just sort of the normal seasonal aspects there. Did -- the season did not commence on a normal schedule. And Alex, I know you mentioned that it seems as though the season is being pushed out a little bit, but curious kind of normal construction season dynamics going on.

[Alex Stallings:]

I think it's probably a little bit -- from a demand perspective, I think it's a little bit ahead of last year. But I think, because the refineries have been running at such high utilization currently and they're primarily producing light products, we've seen a little bit more constrain around supply this year or at least that's what our customers are telling us. However, we think -- as we get into the third quarter, we think that's going to flip a little bit. And we think that the refineries will start increasing more asphalt production, and we think that will help at least drive throughput. So when I refer to it starting a little bit later this year, that's really what I'm referring to. That's more -- this year, we've seen a little bit more of a supply issue, but the demand is there. The demand is very strong, but we're just waiting for kind of the supply to catch up with the demand. So we expect that to kind of occur a little bit later. But the weather so far has been better this year than it was last year.

[Tristan Richardson:]

That's helpful. Thank you. And then just on the crude terminalling side, you talked about kind of steady strengthening into 2019. Is that just a function of utilization as a driver there as you firm up capacity? Or is there some visibility on pricing improvement as you look out into 2019?

[Mark Hurley:]

Yes. I'll take that one, Tristan. So it's really driven by a couple of things. One is just kind of the normal dynamics around crude demand. And during the middle of the year, typically, refineries are running at full capacity, demand is high. And then as we get into the fall, they start the turnaround season. So that's one dynamic that is driving what is forecasted to be inventory growth, particularly in Cushing. The other thing that's happening in Cushing is that we've gone back a few years to that scenario where inbound capacity and inbound flow has started to exceed outbound capacity and flow. And so that just creates kind of a normal inventory increase reaction. And we really see that being driven by increased crude coming out of West Texas and Midland because it really can't go to the Gulf Coast where those pipelines are kind of maxed out. There are additional pipelines that have come in from the north, the DJ basin, the Bakken area. And it -- the inflow has exceeded the -- starting to exceed the outflow. So what some of the independent forecast are calling for is a pretty strong inventory build starting in the fourth quarter. And I think it remains to be seen to what degree that goes, but certainly, we buy into the concepts that we're going to start seeing increased inventories and increased demand for storage.

[Tristan Richardson:]

Mark, thank you. And then just last one from me. Alex, your comment on sort of exiting 2019 at or near the four times leverage, is that sort of pro forma for a full year of Cimarron Express? Or is that just sort of plain-vanilla 2019 EBITDA?

[Alex Stallings:]

No. We -- no, that would just be pro forma for the existing business today. So Cimarron Express, if we're able to get that done late 2019, that would kind of be on top of it.

[Tristan Richardson:]

Got it. Understood. Thank you guys very much.

[Alex Stallings:]

Thanks Tristan.

[Operator:]

Our next question is from Matt Schmid with Stephens. Please go ahead.

[Matt Schmid:]

Hi. Good morning, guys.

[Alex Stallings:]

Hey, Matt.

[Matt Schmid:]

As you all mentioned, the Oklahoma trends look encouraging. Maybe both on the pipeline and trucking side, when do you all see maybe operating margin start to trend positive again?

[Mark Hurley:]

I think we're beginning to see that already. We've seen some improvement already in our trucking business. For the quarter, it -- we didn't see it at the beginning of the second quarter, but as we've exited the second quarter, we've seen quite a bit of improvement there. And what it does is allow us to improve the overall efficiency of the operation to serve those higher volumes, allow us to get a higher utilization of our existing trucks really without increasing cost substantially. So that's where we see the increased margin coming in, and we've already seen that. And as we look out over the rest of the year, our forecast have those volumes increasing fairly significantly. So we're encouraged by that. And really, the -- on the pipeline side, it's just looking at drilling activity around our pipes, and we see that being very robust. We've seen volumes increasing here particularly at the end of the second quarter and from what we can see, going into the third quarter as well.

[Matt Schmid:]

Okay. Thank you. That's helpful. And then with the terminal sales to Ergon, I mean, clearly, that puts you all in a stronger balance sheet position. As far as asset sales, are you pretty much set for now? Or are there any additional sales being considered?

[Mark Hurley:]

Nothing of any significance now, I mean, occasionally, we'll sell a truck station or something like that, but minor stuff so...

[Matt Schmid:]

Okay, great. Thank you.

[Mark Hurley:]

All right. Thank you.

[Operator:]

Our next question is from Josh Golden with JPMorgan. Please go ahead sir.

[Josh Golden:]

Hi. Good quarter. Question for you, the 2 million barrel storage contract that starts in November, if you remind me kind of -- I was reading through the -- one of the Qs. You had another 2 million barrels that was coming due for expiration during the summer here or late fall. Is this a rollover of that contract? Or is this a new customer into the terminal?

[Mark Hurley:]

It's not a rollover of that contract. We -- and it's an established customer with us. I mean, I won't go into naming exactly who it is, but it is a customer who's been with us for a long time off and on. And so it's a relationship that's been a strong one, and they wish to continue to be in the terminal.

[Josh Golden:]

All right. So let me ask this. At the end of the year and in the fourth quarter, let's say December of 2018, can you give me roughly a pro forma capacity utilization of what you have contracted there?

[Alex Stallings:]

On a pro forma basis, I would tell you it will be probably about -- probably two-third.

[Josh Golden:]

Two-third, okay. That's better than what I thought. Very good, gentlemen. I appreciate it. All the actions taken to date seem very positive, so I look forward to it. Thank you. That's it.

[Mark Hurley:]

Thank you, Josh.

[Operator:]

Our next question is from Jeffrey Doppelt from Bank of America/Merrill Lynch. Please go ahead sir.

[Jeffrey Doppelt:]

Hi. I just want to indicate that I have a tremendous position in this company, 645,000 common and 101,000 preferred, most of it is family held. I'm concerned about a few things and have questions on them. You sold three terminals to Ergon, I guess it is. And I noticed that, that left you with 53 terminals left, which is a reduction of about a little over 5%. Yet, the amount of balance of liquid asphalt went down from 10.4 million to 8.8 million, a reduction of more than 15%. Now you said that you got a fairness opinion on this, but since this was a related-party sale and I didn't see that fairness opinion, I don't really know that this is a good deal for us?

[Mark Hurley:]

Well, I mean, the conflicts committee, I mean, hired, obviously, a third party to take a look at it, and they kind of ruled that the transaction was very fair. Kind of like as I mentioned before, it was done on a similar multiple as to what we purchased some assets for from Ergon. The thing though with the asphalt business, you can't necessarily tie the amount of storage to the profitability of each particular facility. It really comes down more to capabilities. These three were pretty large terminals. I mean, they were larger than some of the other terminals that we have. But it's difficult to make the -- you don't just assume that the margin that we receive from those is kind of on a proportional basis as to the size or the amount of absolute storage in the terminal. All the -- it can be some indication at least of how large the terminal is, but it really comes down more to capabilities in that particular market.

[Jeffrey Doppelt:]

Okay. I have one other question. Thank you for explaining. In all the publications since you first started this report, you indicated about the sale, you indicated about the 30% reduction in dividend, but you also said that you would pay up to $10.7 million in dividends per quarter through the end of 2019. As you've probably seen the market has not been very favorable, the companies have reduced their dividends. In fact, in the last two years, Blueknight has gone from over 7.5 to under 3, which is more than 60%. I did a quick calculation, and I noticed that based on a 30% cut, which you anticipated, and the amount of shares outstanding, which somehow grew by more than 2 million, I don't know where that came from, but that being said I came up with a number that was several hundreds of thousands below the $10.7 million, so why this decision to say you're going to cut it 30% up to $10.7 million and then cut it 45%, having drastic results?

[Alex Stallings:]

Yes. A couple of things there, I mean, the $10.7 million is what we're allowed to pay based on the amendment we got from the banks. So that's the maximum we can pay in total distributions for each quarter. And so we have that ability, and that really was factored on something around a potential 30% cut. However, in kind of consultation with the board, we made the decision to go ahead and cut just a little bit more aggressively than that. Again, the decision was made just more to kind of reflect a little bit more conservatism to try to improve the balance sheet a little bit more dramatically than maybe what we had originally anticipated. But we think it's the right thing to do. We think it's the right thing to do in this time, in this environment, and we just think it makes sense for the longer-term health of the company.

[Mark Hurley:]

Yes. The other thing, Jeffrey -- it's Mark. I'll chime in. Really, our -- the decisions we're making are really focused on not the next quarter but the next couple of years. And we think we've got a very good growth story. We obviously hit a rough patch in the storage market, had a bad time. And so the actions that we have taken have been to set this company up for success over the next year and a half to two years, when we think we will likely see a rebound in the storage market and we will have in front of us a new project that really strengthens our crude oil business in a very favorable production environment. And so the things we're doing are really intended to set us up for success a year to two years down the road.

[Jeffrey Doppelt:]

I understand and I assume the completion of the pipeline will help dramatically as well.

[Alex Stallings:]

It absolutely will. That's a fantastic project. The STACK area is probably second or even at par with some of the more favorable areas in the Permian. It's not -- obviously not as big, but it is a very favorable production environment in terms of economics. We will have one of the main lines coming out of that area with an acreage dedication by one of the most successful producers in the area. So we think that's going to be a home run.

[Jeffrey Doppelt:]

Okay. Thank you.

[Mark Hurley:]

Thank you.

[Operator:]

Our next question is from David [Indiscernible], a Private Investor. Please go ahead sir.

[Unidentified Analyst:]

Thanks for taking my question. I just want to expound on the individual just on. You sold these three terminals for $90 million. Was that at a gain or a loss?

[Alex Stallings:]

From a book perspective, it's at a gain.

[Unidentified Analyst:]

What was the cash flow they were generating?

[Alex Stallings:]

I think what Mark indicated is -- and we haven't said what the exact amount of cash flow is because some of it's variable anyway. But we indicated it's about a 9 to 10 times multiple of that absolute value.

[Unidentified Analyst:]

Okay. And then you mentioned that your dividend coverage was 0.82. Is that after the dividend cut, the $0.08, you're still covered at 0.82 times? Or is that based on the old dividend?

[Alex Stallings:]

That is -- you'll see it kind of in the earnings release. I mean, that is based on the new dividend calculation.

[Unidentified Analyst:]

So you still.

[Mark Hurley:]

Please understand that it's -- we have a very seasonal business, so if you look back over time, our coverage always fluctuates, and typically, we hit our maximum coverage in the third quarter. And so you'll typically see us under one first, second and fourth quarters because of the seasonality of the asphalt business. If you were to look at last year's coverage, you would see it in the same neighborhood as this year's coverage, once you account for the asset sale that we had last year. So we're at a very normal place for a second quarter.

[Alex Stallings:]

Yes. If you remove the gain of $4.2 million from last year related to Advantage, the absolute coverage last year probably would have been at 0.75, 0.78 times. I'm not sure of the exact number, but it's somewhere in that ballpark.

[Unidentified Analyst:]

So that was [Indiscernible] higher rate.

[Alex Stallings:]

Yes. I don't disagree with you there. So it was at a higher rate. But again, we think it was the right thing to do. We know it was painful.

[Unidentified Analyst:]

Yes. But it does affect people's cash flow on your investor side. I guess the other question I have is, are you folks in management taking any pay cut since we got to take the pay cut as investors?

[Alex Stallings:]

But we -- all of -- our compensation of all of our officers and management and in fact, almost every employee in the company has a very high variable component that depends on cash flow. And so we will see the impact of this, I assure you.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

[Operator Instructions] Our next question is from Mike Gyure with Janney. Please go ahead sir.

[Alex Stallings:]

Hi, Mike.

[Mike Gyure:]

Good morning, good afternoon, I guess. Could you talk a little bit more about, I guess, the funding and the timing of funding related to your portion of the Cimarron Express, just maybe an update there?

[Mark Hurley:]

Yes. I mean, we have the ability to buy the project at whatever -- whenever we want to kind of further stated agreement. Now if you look at the amendment that we did with the banks, I mean, we -- we're going to have to be at kind of a pro forma leverage to be able to do that, but that ought to coincide. Everything we've done kind of heretofore really coincides. And we've tried to rightsize the company, rightsize the distribution, rightsize the balance sheet to set us up to be in a position to acquire that project shortly after kind of it's projected to cash flow. So what we're assuming internally, Mike, is probably late 2019 would probably be -- and probably, it would be a quarter or two after the project is up and running and starting to cash flow. But I mean, we're targeting completion of the project in kind of the mid part of 2019. And then our intent would be, assuming everything works out, everything is successful, we're positioning ourselves to be able to buy that back a quarter or two after that.

[Mike Gyure:]

And then maybe on the asphalt terminal sales, I guess, how did you pick the locations for the assets that you sold? Is it basically ones that Ergon wanted and were leveraged in your business model? Or I guess, how did you look at it? Were they sort of less performing – go ahead, I'm sorry.

[Mark Hurley:]

We did a lot of modeling on various options of a higher number of terminals, a lower number of terminals, what fit their business, what fit our business. And there were a lot of factors that played into it. We wanted to keep the number of terminals relatively small. We did not want to break up an existing cluster of terminals that were under one particular customer. And so there were many, many factors that went into it and -- including what fit their business as well. So this is what we arrived at. We had certain amount of funds that we wanted to raise as a result of the sale, and that was a big factor. So it was just -- it was an iterative process. And I can't say there was one thing that drove it, but there was really multiple things that drove it.

[Mike Gyure:]

Okay. And then maybe last one for me on the -- I guess, the product sales revenue. This quarter, I think you mentioned, was sort of abnormally high because of the line fill type of things. I guess as I think about working capital, is there a significant impact on working capital when the balance sheet comes out here?

[Alex Stallings:]

I mean, we have deployed some working capital. And again, what the -- we are -- as we've indicated and we've been -- we've indicated this now for a couple of quarters. But we have started supplementing kind of our third-party volumes on our pipelines with some barrels that we're buying on our own. So obviously, in order to do that, we do have to put up our share of the line fill, which we did the majority of that build in Q2. You'll see a little bit more of that build for the light crude line that came on in July, you'll see that a little bit bleed into Q3 as we fill that line up. But the intent is to keep both of those lines with a mix of third-party and we will just kind of supplement, as we see fit, with kind of our own program. And again, it -- we would be basically selling those barrels pretty much in the same month in which we're purchasing them. So it's not intended on a longer-term basis to take a tremendous amount more of working capital. Most of that build was completed as we got through the second quarter.

[Mike Gyure:]

Okay. Thank you.

[Operator:]

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

[Mark Hurley:]

Thank you, Claudia. We appreciate you dialing in today. First of all, thank you very much. We appreciate your interest in Blueknight. I know that we have gone through quite a bit of change since the end of the first quarter until now. And so if we haven't answered all of your questions, Alex and I are always available to do that. And again, we'll have some updated investor deck out there next Monday, as we will be sharing some of that with investors in New York as well. So please, we invite you to take a look at that. Thank you, Claudia. That concludes our remarks.

[Operator:]

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