Blueknight Energy Partners, L.P.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day, and welcome to the Blueknight Energy Partners Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Alex Stallings, Chief Financial Officer. 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, 2017. I will provide a brief update on financial results. And Mark Hurley, our Chief Executive Officer, will update you on our operational performance, projects, opportunities and external factors influencing our business. We will then take your questions after our prepared comments. 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, expectation 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 relating to the partnership’s debt levels and the 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 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 reporting segments

[Mark Hurley:]

Thank you, Alex, and thanks to everyone who dialed in today. We’re extremely pleased with our performance in the first quarter. Our results clearly reflect the strategic investments made in the past two years in fee-based terminalling focused assets. The assets we acquired in 2016 are clearly paying off, and the investments are on track with our financial targets. Our operating income, adjusted EBITDA and distributable cash flow for the first quarter increased 31%, 12% and 20%, respectively, when compared to the results of 2016. Our asphalt terminalling services segment reported strong quarter-over-quarter performance, posting a 27% increase in operating margin. This growth is a result of the acquisition of the nine Ergon terminals in October of 2016 and the acquisition of two additional asphalt terminals in the first quarter of 2016. We should always remember that the asphalt business is seasonal, and this is reflected in our results. The first quarter in particular is the quarter where revenue is typically lowest and is also the period when we tend to have higher expenses as we take advantage of the lower level of activity to execute our annual maintenance plans. We’re also encouraged by the recent national focus on investing in infrastructure improvements, including roads, bridges and pipelines. In addition to the national discussion, we’ve seen a number of states put in initiatives to improve infrastructure as well. With our broad footprint, our assets and customers are well positioned to benefit from large-scale infrastructure initiatives. So overall, a nice start in asphalt terminalling, and we expect 2017 to be a very good year for the segment. Our crude oil terminalling and storage segment reported consistent results in line with the prior year. This is about a time when Cushing crude oil inventories remain at near record levels. Our Cushing terminal remains fully contracted, and we expect this to continue through the rest of the year. Rates have been stable and consistent with the last few years, and we continue to see interest from potential new customers. In our pipeline segment, we saw the benefit of additional production in Southern Oklahoma, which resulted in higher volumes on our Oklahoma system. We expect this to continue over the next few quarters. The temporary suspension of service on one of our Oklahoma pipelines continues to hamper results to some extent. We’re making progress on the engineering and execution of a river bore to get our second line back in service. We expect that to happen in sometime in the third quarter. Drilling activity in the Niobrara Shale plays in Oklahoma has remained strong. So we are optimistic that earnings of the segment will increase over the course of the year. Looking forward, our strategy for 2017 remains clear, consistent and is comprised of the following objectives. Number one, expedite the completion of our crude oil condensate project and fully utilize all of our Oklahoma pipeline assets. Number two, improve operating margin in our crude trucking business through volume and efficiency gains. We’re seeing volume gains in this business; however, rates remain very competitive. So we’re focused on improving the utilization of our fleet to maximize the operating margin. We actually increased our driver count during the quarter in anticipation of the increased customer volume, which we are starting to see. Number three, continue to identify and execute on strategic growth projects, which may include the acquisitions of additional product terminals or synergistic crude oil pipeline assets. There is strong growth in the STACK and SCOOP areas of Oklahoma, and we continue to look for opportunities to develop additional projects in the area that are good fits with our existing assets. I will also add that our M&A work is probably more active than ever. We’re working on a number of opportunities, and I’m very excited about the possibilities. Further, you saw us sell 2 noncore assets in the first quarter, our East Texas crude oil pipeline and our 30% ownership of Advantage pipeline. So over the last year, you’ve seen us acquire 11 terminals, which fit nicely into our asset portfolio and are performing well. And you have seen us sell through assets that were not core to our business or future growth targets. So today, we have a larger, more focused, better performing business than we did one year ago. Our fourth objective, continue to maintain a strong financial position and a balance sheet. We received cash proceeds of approximately $30 million from the sale of 2 aforementioned assets, and we used the cash to repay outstanding amounts on our revolver. Ultimately, though, we expect to reinvest those proceeds on future growth projects. So that concludes my prepared remarks, and I’ll turn it over to you for the Q&A session.

[Operator:]

Okay, thank you Mark. We will now begin the Question-and-Answer Session. [Operator Instructions]. Our first question comes from Tristan Richardson from SunTrust. Please go ahead.

[Matt Tate:]

This is Matt Tate on in for Tristan today. Just wanted to see if you all could kind of speak broadly around the operating environment that you’re seeing around your assets in Oklahoma?

[Mark Hurley:]

Yes. The assets we have in Oklahoma, of course, are 2 pipelines, one that originates in Southern Oklahoma right near the Texas border and the other that originates in the SCOOP. The activity around the Southern part of Oklahoma has actually picked up, and most of that volume moves on a contract that we have with XTO, which is public knowledge. It’s a contract about 3 years ago. And we have actually seen increased activity and increased volume coming out of that line. We have the line that is now out of service due to the river bed issue originates down around the SCOOP. And in general, we see -- we’ve seen higher activity in the SCOOP. So we’re anxious to get that pipe back in service. I think the area that has seen probably the most activity in Oklahoma is the STACK, and we are doing some business there with our trucking fleet and really very aggressively pursuing projects to take advantage of what we think will be some pretty significant volume growth there.

[Matt Tate:]

That’s great. And I guess, I just wanted to see if you all could just kind of speak broadly just kind of how you’re thinking about the potential future drop-downs, particularly in the asphalt segment?

[Mark Hurley:]

Yes, we have one that we previously announced, what happened this year, and that is on track. Likely, it will happen in the third quarter. It’s a small facility. And so we’re working with the Ergon folks on that one now. We have another one we had announced for next year and have every reason to believe that, that will occur as well.

[Operator:]

[Operator Instructions]. Our next question comes from Matt Schmid from Stephens.

[Matt Schmid:]

Mark, I think you mentioned in the, in your comments that M&A work is more active than ever. Really what’s been the impetus behind that, and has anything really changed over the past couple of quarters?

[Mark Hurley:]

Yes, we have had this model, Matt, on the asphalt side where we’ve been able to go out and acquire one or two terminals, and it’s fast, it really fits our portfolio well. So we have had a very active process internally, to speak off of assets, start discussions with current customers, current owners. And we’re doing that. We have a number of those going right now. And of course, these things take some time. Typically, the way we do this is we have to negotiate with an owner to sell the asset while at the same time negotiate with future customer. So it’s typically a three-way thing that we have to execute. And so like I said, we’ve got a few of those going on right now and just real happy about the possibilities. And then I also mentioned, we’re looking at few things on the crude oil side as well. And really our focus there is going to be on STACK, because we’ve got assets, like I said, down in Southern Oklahoma and the SCOOP. So we really want to have a nice presence in the STACK. So we’re working on possibilities there. And we really like the assets that we have in Oklahoma. And while we haven’t gotten huge earnings out of our pipeline segment in the last couple of quarters, we are very optimistic with it. We think we’ve got assets that fit in the right places. And so we’re looking at some things that fit nicely with the assets that we already have on the ground.

[Matt Schmid:]

Okay, that’s great to hear. And then just moving over to Ergon. It seems like those asphalt terminals you’re integrating well and you’ve got a couple of additional drafts in the future. Could you just update us on beyond those two terminals, just potential development or drop-down opportunities you could have with Ergon?

[Mark Hurley:]

Yes. I mean, we, obviously, anything we do with Ergon will be a negotiated deal. It has to be in the best interest of our unitholders. And so we talk about there being future possibilities, but we haven’t identified anything specifically. We, they obviously acquire the MLP, because they think they’ve got a nice business that fits in MLP model. So we think the potential is there. But they have an expectation of us to grow outside of just the drop-down world and we fully embrace that, and we’re working hard on that. So I can’t give you any specific plans, because we’ve got two right in front of us that we have to execute first, but the possibilities are sure in there in the future.

[Operator:]

Okay. Our next question comes from Mike Gyure from Janney. Please go ahead.

[Mike Gyure:]

Yes. Can you just talk a little bit about the 9 terminals that you acquired from Ergon, I guess, how they’re performing, I guess, with your original expectations now that you’ve had them a little while, although obviously, the asphalt season is getting stronger as we move through the year here. But maybe just your views on that.

[Alex Stallings:]

Yes, I think so far they’re performing at expectation. I mean, I think that’s reflective in kind of the increase you see year-over-year in the asphalt segment. One thing I would point out, and you’re seeing that in our numbers, is that there may be a little difference between what we had anticipated from a maintenance capital perspective and really what we’re seeing from a maintenance expense perspective. So I think what we saw kind of in the first quarter is maybe we had a little bit more maintenance expense than we’d have anticipated, and a little less maintenance capital around those facilities. And that trend may continue through the remainder of the year. But overall, I think the emphasis that we would look at is really kind of where we were from a distributable cash flow perspective. And if you look at kind of the increase that we had projected versus where we came out for the quarter, that was very much on target. But I do think we had a little bit of a difference between maybe some of the ways that we classified items versus the way they classified items and there really a flip-flop between maintenance expense and maintenance capital. So beyond that, I think they’ve performed about as expected.

[Mark Hurley:]

The other thing I’ll add about Ergon is completely off the topic we just raised there. But I did want to mention that. When we did our economics around the Ergon transaction, we never baked in any synergies, but we’ve got a pretty active process now with Ergon on looking for things we can both do together. We’ve got -- right, so things like procurement, insurance. We’ve got -- we just put together 2 pretty big companies, and there’s lots of good ideas that are flowing back and forth. And I think we’re really going to see the benefit of that, particularly on the cost side. And so again, it’s not something we baked into our economics when we did the deal, but it’s something we’ll some benefit for starting this year ahead.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Mark Hurley, for any closing remarks.

[Mark Hurley:]

Yes. Thank you, Bill. Just again, appreciate everyone who called in today. Also want to mention that on the day when we’re seeing crude prices fall off pretty significantly, just want to remind everyone that we’ve got a portfolio of businesses here that are really not very impacted by the pricing of crude oil. And so that’s a thing that we think is a real benefit for Blueknight and Blueknight investors. And so I want to get that in as I looked at the crude prices coming off the day before the call started. But again, thank you all for calling in. And as always, if you have any follow-up questions, feel free to contact Alex and myself.

[Operator:]

Okay. Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.