Blueknight Energy Partners, L.P.
Q4 2012 Earnings Call Transcript

Published: 15 Mar 2013

[Operator:]

Good afternoon and welcome to the Blueknight Energy Partners 2012 yearend 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) I would now like to turn the conference over to Brent Gooden, Blueknight Media Relations. Please go ahead.

[Brent Gooden:]

Thank you very much and thank you to everyone on the call today 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 fourth quarter and year end December 31, 2012. Alex Stallings our Chief Financial Officer will first discuss the financial results for the three and twelve month periods, Mark Hurley our Chief Executive Officer will update you on the strategies, projects, and opportunities, as well as external factors influencing our business. After prepared remarks, Mark and Alex will be happy to respond to your questions. Before we begin, I would like to remind everyone that information on this call may contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated including uncertainties relating to Blueknight’s future cash flows future market conditions, current and future governmental regulation and taxation. Please refer to Blueknight’s SEC filings for a description of these and other risks and uncertainties that could affect our actual results. Blueknight undertakes no obligation to update or revise any forward-looking statements contained in this call whether as a result of new information, future events or otherwise. Blueknight Energy Partners L.P. is a publicly traded master limited partnership with operations in 23 states. We provide integrated terminal ling, storage, gathering, and transportation services for companies engaged in the in the production, distribution, and marketing of crude oil, asphalt and other petroleum products. We manage our operations through four operating segments. Crude oil terminal ling and storage services, crude oil pipeline services, crude oil trucking and producer field services and asphalt services. Now, it is my pleasure to introduce to you CFO, Alex Stallings. Alex?

[Alex Stallings:]

Thank you, Brent. As we announced last night, Blueknight reported adjusted EBITDA of $13.1 million for the three months ended December 31 of 2012, which is a decrease of $5.5 million or 30% as compared to the three months ended December 31 of 2011. Adjusted EBITDA for the twelve months ended December 31, 2012 was $61.4 million, a decrease of $3.8 million or 6% as compared to the twelve months ended December 31 of 2011. Net income was $5.5 million on total revenues of $46.9 million for the three months ended December 31 of 2012, compared to net income of $7.6 million on total revenues of $45.6 million for the three months ended December 31, 2011. For the twelve months ended December 31 of 2012, we reported net income of $31.6 million on total revenues of $182.4 million as compared to net income of $33.5 million on total revenues of $176.7 million for the twelve months ended December 31, 2011. Net income for the twelve months ended December 31 of 2011 was impacted by non-cash gains of approximately $22.1 million related due to fair value accounting adjustments associated with the capital restructuring completed at the end of 2011. We previously announced a quarterly cash distribution for the fourth quarter of 2012 of $0.1150 per common unit, which is a 2.2% increase over the previous quarter's distribution and $0.17875 per preferred units which were both paid on February 14 of 2013. Cash provided by operating activities increased from $37.2 million for the year ended December 31 of 2011 to $61.7 million, the same period in 2012 which was an increase of $24.5 million or 66%. Before I comment on each of our segment to the high level, I want to address changes in year-over-year EBITDA and highlight a couple of differences. First, adjusted EBITDA excludes $7.3 million and $3 million of gains on sales of assets for the years ended December 31 2012 and 2011 respectively. Second, we mentioned on our conference call last year that we anticipated a year-over-year decrease in our terminal ling and storage business due to changes in rates. However, we expected most of that to be offset by increased crude oil transportation cash flow. Operating margin for our crude oil terminal ling segment decreased $2.3 million year-over-year, and operating margin on crude oil trucking and producer field services increased $2.3 million, an offset. Crude oil pipeline service operating margin excludes the $1 million non-cash impairment charge decreased $0.8 million and asphalt operating margin decreased $0.6 million. Both primarily due to incremental repairs and maintenance expenses. However, the incremental repairs and maintenance expense were more than offset by decreases and maintenance capital expenditures. Expectations for 2012 maintenance CapEx is communicated in our 2011 year end call was $17 million, and actual 2012 maintenance CapEx was approximately $10 million, $7 million difference. Now I am going to jump in and go through specifics by each segment. Crude oil terminal ling and storage, operating margin excluding depreciation and amortization decreased $2.3 million or 6.6% for the year ended December 31, 2012 as compared to 2011. The reason for the decrease as mentioned in previous quarters is due generally to lower negotiated rates for our Cushing Oklahoma storage as compared to the previous year. As of today, we have approximately 6 million barrels of crude oil storage under contract with remaining terms ranging from month-to-month to 27 months, including 4.2 million barrels under contract to Vitol. Crude oil pipeline, operating margin excluding depreciation and amortization decreased $1.8 million or 34.4% for the year ended December 31, 2012 as compared to 2011. On average for 2012, we transported approximately 67,000 barrels per day via our pipeline systems. The reason for the decrease in pipeline operating margin is due to primarily to a $1 million impairment charge reported in the second quarter of 2012, as a result of idling approximately 100 miles of crude oil gathering lines associated with Mid Continent pipeline system. Additionally we experienced incremental repairs and maintenance expenses in 2012. The significant majority of any volumes that are displaced as a result of idling the pipelines have been retained by our crude oil transport trucks and we do not anticipate the idling of the gathering pipeline to have a significant impact on the overall future results of our operations. Trucking and producer field services. Operating margin exclusive of depreciation and amortization increased by $2.3 million or 44.4% for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The change in operating margin for the year ended December 31, 2012 is primarily driven by increased billing rates and increased utilization of our trucking and producer field services fleet. On average, we transported approximately 55,000 barrels per day on our crude oil transport trucks during the year ended December 31 of 2012. Volumes transported, increased by 18% year-over-year primarily due to recent success of Vitol’s marketing group and acquiring crude oil barrels at the least as well as incremental third-party revenue. Asphalt services. Operating margin exclusive of depreciation and amortization as mentioned previously decreased $0.6 million or 1.5% for the year ended December 31 2012, as compared to the year ended December 31, 2011, and as mentioned previously, the decrease is due to increased repair and maintenance expense related to our tank inspection program. General and administrative expenses increased by $2.5 million for the year, which was 14.4% to $19.8 million for the year ended December 31, 2012, as compared to $17.3 million for the year ended – December 31 of 2011. But this was primarily as a result of $2.3 million and expense associated with the hiring of our CEO and the departure of two of our former executive officers. And I should mention that the bulk of that spend, approximately $1.8 million of that was actually expense in Q4. So whenever you compare, both year-over-year numbers 2011 to 2012 as well as quarter-over-quarter this year as compared to last year, keep in mind we believe there are some one-time expenses related to some employment changes that are reflected in both periods. Liquidity, we have approximately $63.5 million of availability under our $295 million credit facility at March 11, 2013. Our leverage ratio at December 31 of 2012 was approximately 3.0 times. As announced last week, we amended our credit facility to among other things, eliminate the requirement that our consolidated total leverage ratio not exceed 4 to 1 for purposes of making distributions. This means that our overall leverage ratio is now simply 4.5 to 1 for both credit facility compliance purposes and for making distributions. Second, increase our ability to make investments and joint ventures and subsidiaries without such joint ventures and subsidiaries becoming guarantors under our facility. Effectively, this makes it easier for us to enter into transactions similar to the Advantage Pipeline transaction, essentially enter into a joint venture type arrangements. Third change; permit us to include projected EBITDA from projects and our EBITDA for purposes of calculating compliance with our credit facilities minimum consolidated interest coverage ratio and maximum total leverage ratio. The total amount of projected EBITDA from projects is included and subject to credit facility administrative agent’s approval and the aggregate amount all material project EBITDA adjustments is limited 15% of the total actual consolidated EBITDA for such period. This amendment better enables us to undertake organic capital projects similar to the Arbuckle Pipeline project. With that, I will now turn it over to our CEO, Mark Hurley. Mark?

[Mark Hurley:]

Thank you Alex. Overall, we had a decent quarter and a solid 2012. And as we look back on the year, our base business and each of our segments performed as expected and I feel very good about the work we did late last year to develop a business strategy for the company going forward. But I primarily want to today focus on the following; first a briefly update on my 90-day plan outlined in our November call, second, a review of our current projects, and third our 2013 outlook. First our 90-day plan update. Organizationally we had a goal to increase staffing of our business development team. I am happy to say that we have added four individuals to our business development staff including two senior managers in both Houston and Oklahoma City. Our Houston Senior Manager, Jake Evert is overseeing our Texas projects including the Advantage Pipeline project and the Open Season on our proposed north extension of that pipeline. Our Oklahoma City manager Marshal oversees our Oklahoma projects including the Arbuckle Pipeline. We expect to hire a new Vice President of business development very soon. We are interviewing a number of candidates for that role as we speak. In our business development area, we also wanted to meet face-to-face with each key target growth customer in our asphalt and crude oil businesses. I am happy to say, we have completed these meetings, we have had good dialogues with each of our key customers in both and these discussions had led to a number of opportunities that we are now targeting. We had a goal to develop a list of acquisition targets for our asphalt business. We have completed this activity. We have one opportunity in particular that we are now pursuing. We also wanted to develop a joint strategy with our Vitol’s marketing team. The relationship with Vitol is very critical to us. It’s one that we put a lot of importance in and we are now pursuing joint strategies with their marketing group and these have paid off in the fourth quarter as we are able to increase business both on the Vitol and Blueknight side. In the trucking area, we want to complete the implementation of the high priority business transformation activities. I am happy to say that we are nearing completion of all of these activities now, most focus is on final implementation of a new information system that will allow much more efficient dispatching of our truck fleet through our Texas, Oklahoma and Kansas. We want to develop new pipelines for driver hiring and development which includes trained department with the military for placement of veterans into our organization. This activity is complete. We have added drivers to our fleet and we feel much better about the ability to retain the drivers. Our Cushing business, we want to develop a plan for contract renewal with Cushing. Historically, the majority of our storage contracts have been for relatively short-term consisting of month-to-month and one year or less and we have been able to contract for higher rates because of the near term exploration and market demand at the Cushing facility. Over the past few years however, we have endeavored to increase the average duration of these contracts and diversify our storage customer base which has led to a decreased average storage rates in return for increased duration. In other words, with the softer market and we had totally expected this. We are now trying to increase the duration of these contracts and facilitate a stable customer base at our Cushing terminal. We did enter into an amended contract with Vitol and we continue to work with other potential customers on new term agreements. On our external message, we feel very good that we have now developed a message that is crisp, concise, and clear for our customers, our investors and our creditors. Secondly a review of our projects. We currently have three pipeline projects under development. The first is our Arbuckle pipeline, where construction remains underway on the 37 million 65 mile crude oil pipeline we are constructing as part of a long term transportation agreement with XTO Energy, a subsidiary of the Exxon Mobil Corporation. The pipeline will connect both of our Oklahoma pipeline systems. In addition, we will take this opportunity to make numerous enhancements and upgrades to our mainline systems and improve capacity to handle increased demand from XTO and other customers. We still anticipate completion by mid-2013 and expect to bring the project on budget. Our Pecos River Pipeline announced back in February, we entered into an agreement with Advantage Pipeline to acquire approximately 30% ownership and a 70 mile crude oil pipeline project running from Pecos, Texas to Crane, Texas. The new 16 inch diameter pipeline will enable West Texas producers to deliver crude oil to the Gulf Coast markets through a pipeline connection at Crane Texas. We might- will operate the pipeline under a long-term agreement with Advantage. The pipeline is currently under construction and we will begin placing pipe in the ground next week. The first phase of the project is expected to be up and running by the end of the second quarter of this year. Advantage remains on target with its timeline and on budget. The Pecos River pipeline north extension, as previously announced, we had launched an open season to solicit shipper commitments to transport crude oil from Southern New Mexico to Crane Texas. We have asked interested customers to submit binding commitments by April 12 of 2013. Southeastern New Mexico and Culberson and Reeves Counties in Texas represent emerging crude oil production areas that are underserved by pipeline capacity. The proposed 95 mile extension will connect to the Pecos River pipeline and will provide shippers access to the Gulf Coast and Midland markets. The transportation capacity at the north extension could reach up to 100,000 barrels per day and will be in service by the first quarter of 2015. The Pecos River and north extension to the Pecos River pipelines are projects right down the middle of the fairway with respect to the strategic objectives I mentioned on our November conference call. We continue to evaluate numerous other projects as well in West Texas, Central Oklahoma, East Texas to Rockies and the Bakken that will continue to be the focus of our growth strategy over the next several months. I am very pleased with the way opportunities are developing for us in the hot shale plays and across the US. As far as our 2013 outlook, our management team is extremely excited about the opportunities in front of us this year. From an operations perspective, the first half of 2013 will be consumed with maintaining our base business and executing on capital projects and therefore to increase cash flows once projects come online in the second half of the year. We will continue to focus on diversification of our storage and terminal ling agreements with Cushing. We will be investing in additional connections at our Cushing facility and making improvements to our Oklahoma mainline system as the Arbuckle Pipeline Project progresses. We expect our trucking business to continue to grow as we complete major system initiatives that we believe will enhance our productivity and utilization of these assets. Our current forecast is to spend $40 million to $50 million of expansion capital this year, a significant majority of the spend will occur in the first half of 2013. Additionally, as indicated previously, we expect at least another $50 million of expansion capital in 2013. We believe our operations group has addressed the bulk of any deferred maintenance items and we expect our maintenance capital remain the range at the normalized levels of $10 million to $13 million per year. Adjusted EBITDA is expected to be in the mid upper sixties for 2013 as we deploy capital in expectation of increased cash flows, anticipated to impact the second half of this year. We remain focused on the continued growth of our common unit distribution and we are pleased with the increase in our distribution in Q3 and Q4 of this year. Overall, we are very optimistic about 2013 and what is ahead for Blueknight and our unit holders. Those are our prepared comments. Operator, I will turn the call back over to you to open the call for questions.

[Operator:]

(Operator Instructions) And our first question is from Michael Bloom of Wells Fargo.

[Michael Bloom:]

Hi good afternoon everybody.

[Mark Hurley:]

Hi, Michael

[Michael Bloom:]

Couple of questions. One, can you just talk about the initial investment in the Pecos Pipeline? What that cost was assuming the open season is successful on the north extension? What type of capital that may entail and then just generally, what types of returns you are thinking about for these projects?

[Mark Hurley:]

Michael, we don’t give out a lot of details on individual investments. The investment however on the Advantage Pipeline that we did – that was originally announced was $20 million for a 30% interest. And of course, like I said, we expect that to be generating cash later mid part of 2013. The extension into New Mexico, as I mentioned is estimated about 95 miles. We don’t publicize the capital cost of that extension nor the returns of the specific projects. It is however inline generally speaking, it’s in line with the normal cost of building pipelines in that part of the country and I think we have indicated previously, we target for about somewhere around a 15% rate of returns when we do a project of this nature.

[Michael Bloom:]

Okay, and then judging by the fact that you raise your distribution this quarter, in spite of the results for the quarter, I am assuming that you beat a lot of the costs that’s one-time in nature. So you outlined the $1.8 million in compensation cost, but can you just talk about what else do you view as kind of one-time and where you think kind of run rate, OpEx and G&A are at?

[Mark Hurley:]

I think a couple of things and I will turn it over to Alex here in a second. But as we had mentioned, we had $1 million cost associated with idling systems in Oklahoma. We had some deferred maintenance that we finished up last year and we feel like we are into more of a normal spend pattern going forward. We had some changes at the executive officer level as you indicated. But the other part of that is that we feel good about the outlook that we have in front us, particularly as getting into the second half of this year. Once the projects that we are investing in now start to generate cash. We also had some deferred revenue that was positive for our cash flow and but doesn’t hit the books in terms of our adjusted EBITDA that maybe Alex may want to comment on.

[Alex Stallings:]

Michael, a couple things I would just add to what Mark said, the G&A, if you look at G&A year-over-year, the number of – at least what I am assuming is really one-time, that’s probably closer to that – call it $2.2 million. So I think if you back that out of the 2012 number, I really don’t see G&A increasing significantly in 2012 and I see it being much more consistent with what it was in 2011 and in 2013. So, I probably clip off a couple of million dollars for G&A for 2013. From a – if you go kind of segment-by-segment, I think that one of you guys see the K that’s going to be filed later this afternoon, I think the year – I think it be fairly consistent for crude oil terminal ling and storage, maybe down a little bit from where it was in 2012, for the most part it will be fairly consistent. Asphalt, I think it will be fairly consistent in 2013 as well, as compared to 2012. I think where you are going to see the growth again is going to come in our transportation businesses. Trucking implemented some billing changes at the beginning of the year. We also increased drivers pay to try to retain those drivers. But I do think that from a margin perspective, we have the ability to grow margin – continue to grow margin in the trucking business in 2013. The other real impact you are going to see is in the pipeline side of the business. I think what we’ve done to the pipeline is we really went in, in 2012 and pruned our pipeline of some gathering systems that really were not that economic. We took $1 million non-cash impairment charge, but I think what you are going to see is as these – assuming we can execute on these projects, you should see the second half of cash flow run rate significantly higher than what it’s going to be in the first half of 2013. So, I think our challenge is just to – like Mark said, maintain our base business in the near term with the expectation of executing on these growth projects and these pipeline growth projects and hopefully we will see a nice, nice uptick of incremental cash flows as we get to the second half of this year.

[Michael Bloom:]

Great. That was very helpful. Last question from me, in terms of the storage segment, do you have any significant contracts whether rolling over in 2013 that we should be aware?

[Mark Hurley:]

We have Vitol contracts that we have already extended. I believe we have now – first of all we have a number of contracts with Vitol not just one. I believe we have one now that expires at the end of September. The others go into next year. We have couple of other contracts with other customers that are on 90-day cycles or 90-day evergreen cycle. We believe those are very stable. So we are not expecting any problem with those. But in general, we do want a customer base at Cushing that consisted customers that are long-term customers that have an interest in more operational needs for storage as opposed to traders who might be – tend to be more short-term focused. We think we have great facility at Cushing, by the way, we think we have as good a blending facility as any terminal at Cushing and the ability to blend crude in the future is getting more and more important as different grades of crude come into Cushing both very light materials and very heavy materials. And so we think we are as good a blender as there is out there. We are putting some more money into connectivity. And so our vision for our site at Cushing is to be the best connected with the best blending capability, not necessarily the biggest, because I don’t see us putting a lot more capital into just bulk storage, because that the markets needs it. But we want a facility that is very attractive for long-term customers who have operational means and those are the customers we are talking to now.

[Michael Bloom:]

Great. Thank you very much for everything.

[Mark Hurley:]

Thank you, Mike.

[Operator:]

And the next question comes from the Jerren Holder of Barclays.

[Jerren Holder:]

Hi, good afternoon. Wanted to start off with, I guess confirming that you give the guidance, does that include like the partial contribution that you will be getting from growth projects that’s coming online gets later end of 2Q?

[Alex Stallings:]

Yes, yes, what Mark went through earlier kind of mid to upper 60s, yes, that does assume those pipeline projects start kicking in, start increasing cash flow really in the third quarter.

[Jerren Holder:]

Okay, and how should we think about, I guess coverage given the progress and the timing of your projects and given how high distribution coverage is at the moment?

[Alex Stallings:]

I think, again the guidance we’ve given is that we are going to certainly probably bring that coverage down. My guess is, we are going to bring it down on a long-term basis to probably by two times, but I think what you are going to see and I’ve been saying this now for the past couple of quarters, but Mark alluded to maybe, call it $40 million to $50 million of CapEx, nearly all of that is going to be spent in the first half of this year. So, I know, I’ve been telling you guys now for a couple of quarters that you are going to start seeing some pretty significant for us expansion capital, finally when we get to the first quarter conference call, you can see what I’ve been talking about. So, you are going to see very rapidly our debt will increase for these organic projects, which is another reason why we did what we did on the credit amendment. That will be very helpful to us to continue to manage our leverage ratio. But to employ this capital on these organic projects and that’s really why we’ve been maintaining a higher than 1.2 times coverage ratio is to maintain reserves to really fund these capital projects internally. As we think over the long term it’s going to be the best thing for our unit holders.

[Jerren Holder:]

Right, and also I think last quarter you mentioned, there was like a maybe a small rail project you guys were looking at. Is there any update on that?

[Mark Hurley:]

Let me just make sure I hear that okay. Do you said a rail project?

[Jerren Holder:]

Yes, I think last quarter in the call you mentioned, maybe like a rail facility terminal something along those lines you mentioned that maybe that’s something you guys were looking at.

[Mark Hurley:]

We are not looking anything specific to rail right now. However, in some of the shale areas where we are looking at pipelines. There are some obvious connections to either existing rail facilities or rail facilities that are being contemplated or announced. But I think rail might be a part of our future. But I don’t think that will be our main focus growth.

[Jerren Holder:]

Right, okay. Thank you.

[Operator:]

(Operator Instructions) And we do have a question from Clay Fairley of LPL

[Clay Fairley:]

I was just curious as to how you go about fund these expansion projects in the future, we are going to have to issue more shares, I would assume or how do we …?

[Alex Stallings:]

I think everyone is very aware, our credit facility extends, the maturity date on our credit facility is third quarter of 2014. So, we are in the process of starting to evaluate when it makes sense to redo our credit facility. And I think what you are going to see Clay is, we are going to address that issue well before we have to. So, it’s something that we are looking at today. I don’t think equity is something that I am real excited about doing, right now and I don’t think we’ll need to unless we have a project that dictates really because of size that we would need to got to do something little bit more dramatic. But right now, with what I am seeing and what Mark’s group is focused on, I feel real good about where we are in – really feel like kind of a next dollar in project. We will probably determine what type of financing we go in and do. But right now, I feel real good about where we are with the projects that we know about that are currently on the table to be able to do those inside of Blueknight.

[Mark Hurley:]

The kind of projects that we are looking at and we have a number of that we are looking at now are all – would all be backed by shipping commitments take or pay kind of shipping commitments. And this is something that we think we feel very good that we do go out and fund through debt.

[Clay Fairley:]

Thank you.

[Operator:]

Next question is from John Lydecker of M.J. Whitman.

[John Lydecker:]

Hi guys, good afternoon.

[Mark Hurley:]

Hi, John.

[Alex Stallings:]

Hi, John.

[John Lydecker:]

Just clarify one thing for me because, couple of my notes are contradictory or maybe I misheard you as to when the basic Pecos River line will start to be operational?

[Mark Hurley:]

Yes, the Pecos River line that was part of our initial investment in Advantage. It’s being done in two phases. The first phase will be complete by the end of the second quarter and it should start generating some volume and some cash flow. The second phase of that line which is the piece that extends all the way to Pecos that will be done by the end of the year and then of course the north extension of that line is the project that is out subject to shipper commitments.

[John Lydecker:]

Right

[Mark Hurley:]

That helps?

[John Lydecker:]

Yes, thanks. But at some point I thought I heard you say, mid-2014.

[Mark Hurley:]

No, no, sorry.

[John Lydecker:]

Okay.

[Operator:]

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

[Mark Hurley:]

Well, thank you all for your time. We remain very excited about the Blueknight and the future we have ahead of us and we appreciate your interest and as always, if you have any follow-up questions for Alex or I, please don’t hesitate to give us a call. Thank you very much.

[Alex Stallings:]

Thank you.

[Operator:]

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