Blueknight Energy Partners, L.P.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 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 sir.

[Alex Stallings:]

Thank you and good afternoon and it's 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 ended December 31 of 2016. I will provide a brief update on financial results and Mark Hurley, our CEO, 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, expectations, and intentions and other statements that are not historical facts are forward looking statements. Such forward looking statements are subject to various risk 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 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 provided 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. Yesterday we reported financial results for the fourth quarter and year ended December 31 of 2016. As Mark will further emphasize, we had a solid 2016. Do keep in mind that we also had a very strong 2015, and it was impacted by one-time settlements that make comparability challenging and we some noise in our 2016 financial results. First, we incurred $1.8 million of fees related to the Ergon transaction during the year ended December 31of 2016. Second, our 2016 common and preferred unit distributions reflect an additional $1 million of distributions related to the issuance of additional common and preferred units at the closing of the Ergon transaction on October 5, 2016. Third, earnings related to the additional terminals acquired from Ergon are only reflected for the fourth quarter of 2016. To the extent possible we will try to identify and call out these items to help better compare periods. For the year ended December 31 of 2016 we recorded a net loss of $4.8 million on total revenues of $177.4 million compared to net income of $6.4 million on total revenues of $180 million for the same period in 2015. Operating income was $6.5 million for the 12 months ended December 31 of 2016 compared to $14 million for the same period in 2015. Operating income for the 12 months ended December 31 of 2015 included $8.3 million in income related to the settlement of 2008 claim in litigation. Net loss and operating income for the 12 months ended December 31 of 2016 were impacted by impairment expense of $25.8 million primarily related to cancellation of the Knight Warrior pipeline project. BKEP’s adjusted EBITDA was $17.1 million for the three months ended December 31 of 2016 as compared to $14.1 million for the same period in 2015, which is an increase of 21%. Adjusted EBITDA of approximately $70 million for the year ended December 31, 2016 was in line with management's previous guidance but essentially flat as compared to 2015. BKEP’s distributable cash flow for the 12 months ended December 31 of 2016 was $46.6 million as compared to $54.2 million for the same period in 2015. Keep in mind that 2015 adjusted EBITDA and distributable cash flow included $8.3 million and onetime gains. Adjusted EBITDA, and distributable cash flow including a reconciliation of such measure to net income, is contained in our earnings release, which we issued yesterday under the section entitled Non-GAAP Financial Measures. Our fully diluted distribution coverage ratio was one times for the year ended December 31, 2016. Distributable cash flow and coverage for the year ended December 31, 2016 included $1.8 million of fees paid related to the Ergon transaction, and the approximately $1 million of distributions attributable to incremental common and preferred units that I referred to you earlier. Excluding both the Ergon transaction fees and incremental distributions, our coverage for the year would have been closer to 1.1 times. Additional information regarding the Partnership's results of operations will be provided in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016, which will be filed later today with the SEC. A few highlights for each of our segments. Asphalt terminalling services, operating margin excluding depreciation and amortization increased $8.6 million or 18% for the year-ended December 31, 2016 as compared to the prior year. Due primarily to the Ergon nine terminal acquisition, which was completed in October of 2016. The acquisitions of two others Asphalt terminals in February of 2016 as well as increased product throughput at our terminals and renegotiated throughput fees for some of our other facilities. Crude oil terminalling and storage operating margin excluding depreciation and amortization increased 6% or $1.2 million year-over-year due primarily due to the timing of the storage contract renewals. Average storage rates during the first half of 2015 were lower than the average storage rates for the second half of 2015, which have continued on into 2016. As contracts expired in 2015, we were able to increase storage rates to better reflect current market rates, due to increased demand and the change from a backwardated crude market curve, which favors transportation to a contango market curve, which favors storage. The transition of the slope of the curve took place in late 2014. As of March 02, 2017, we have approximately six million barrels of crude oil storage under service contracts with remaining terms of up to 58 months. Crude oil pipeline, operating margin excluding depreciation and amortization expense decreased $3.3 million from 2015 to 2016 due to the following; We temporarily suspended service on a portion of our Mid-Continent pipeline system in early second quarter due to a discovery of a pipeline exposure caused by heavy rains and erosion of the river bed in Southern Oklahoma. There was no damage to the pipe and no loss of product. We are currently operating one Oklahoma mainline system, which is a combination of both the Mid-Continent and Eagle pipeline systems. Mark will provide further updates on our plans for the Oklahoma system in his commentary. Service revenues for the year-ended December 31, 2015 included a one-year temporary tariff that was being charged from May of 2015 on certain barrels transported on our East Texas pipeline system. The tariff returned to a lower rate in June 2015 which decreased the service revenues generated on the East Texas pipeline system by $4.6 million as compared to 2015. Partially offsetting this decreases our $4.2 million in sales of crude oil arising from a cumulative product loss allowances in 2016 compared to no such sales in 2015. We expect the sale of accumulated PLA to occur in the future in connection with the pipeline systems we operate. However, future revenue maybe lower than that realized historically. Crude oil trucking and producer field services, operating margin excluding depreciation and amortization increased to $0.5 year-over-year due primarily to an overall improvement in a margin per barrel transported in an overall decrease in cost even though we exited the West Texas region at the end of 2015. A few other items I wanted to mention, general and administrative expenses were $20 million for the year-ended December 31, 2016 compared to $19 million for 2015. The increase from 2015 to 2016 is primarily due to $1.8 million of transaction fees we incurred related to the Ergon transaction. During 2016 as I mentioned previously, we recorded fixed asset impairment expense of $25.8 million due to an impairment recognized on the Knight Warrior pipeline project in the East Texas pipeline system. During 2015 we recorded fixed asset impairment expenses of $22 million related to the East Texas pipeline system, a portion of our Mid-Continent pipeline system and our West Texas trucking stations subsequent to our exit from that business. Gain on sale of assets. in 2015, we had an extraordinary gain on the sale of an asset of $6 million related to some settlement of some prior litigation. From a liquidity perspective our consolidated total leverage ratio increased to 4.2 times at December 31st of 2016 as compared to 3.9 times at September 30 of 2016, as a result of the closing of the Ergon transaction in October. We expect leverage to trend downward assuming we receive proceeds from the sale of our investment and advantage pipeline in the upcoming weeks. As of March 2 of 2017 we have aggregate unused commitments under our revolving credit facility of approximately $76.5 million and cash on hand of approximately $2 million subject to financial covenant limits. From the capital investment perspective, our net maintenance capital expenditures for the year ended December 31 of 2016 totaled $8.7 million. We expect maintenance capital expenditures to be in the $10 million range net of reimbursable expenditures for 2017. The anticipated increase is due to the acquired asphalt terminals. Net expansion capital expenditures totaled $9.4 million for the year ended December 31, 2016 and we expect a similar level of expansion capital in 2017. With that I will turn it over to Mark Hurley our CEO. Mark.

[Mark Hurley:]

Thank you, Alex, and thanks for everyone who dialed in today. Before I make my comments on our financials and plans going forward I would like to say a few things about our environmental health and safety performance of Blueknight. First it is very high priority for us and we dedicated great deal of time and resources to improving each year. Over the last several years we have seen steady improvement in our injury rates and our environmental statistics. And 2016 was our best year ever with respect to recordable injury rate, fleet safety statistics and environmental performance. We performed substantially better than the overall industry and we have created a culture where safety is a key part of everyone's job. This past week we received an incredibly exciting award. The Oklahoma Trucking Association awarded Blueknight Energy Partners with its Grand Champion Safety Award. Simply put it means that we are recognized as the safest trucking fleet operating in the state of Oklahoma and this cuts across all trucking categories; big and small across all industries. The primary criteria for the award are accident and injury rates however the Association also looks at systems and processes, put in place by companies to ensure strong safety performance. I should also point out that the job of a crude oil truck driver is very physically demanding, I think more so than most of driver jobs. These men and women spend a good portion of their time outside of the trucks, loading and unloading, lifting heavy equipment on all kinds of terrain and all types of extreme weather conditions. The potential for injury is always there. So, this is quite an accomplishment for a crude oil and company. It is a very prestigious award and we are very proud of our folks who day in and day out tirelessly demonstrate leadership and attention to detail and their efforts to do things the right way. So, again congratulations to the folks who made this happen. Onto our financials, 2016 was a very exciting year for us and we were pleased with our performance. Of course, the highlight of the fourth quarter and the year was the closing of the Ergon transaction. We have mentioned many times that we believe the Ergon transaction will be transformative for the company. We are bringing together the most successful asphalt and Emulsions Company in the United States with the largest independent operator of asphalt facilities. Add to that a strong economy and a national focus on infrastructure spending and good things are bound to happen. And as you have seen our results the benefits are paying off, our fourth quarter adjusted EBITDA increased 21% over the same period last year primarily driven by our asphalt segment. This transaction also grows the segment of our business that has been the most successful for us. While one might assume that asphalt terminalling is a low growth area, our earnings in this segment as measured by operating margin have increased 55% since 2012. By the end of 2017, we expect this increase to be 82%. So this business has clearly been a high growth segment for us and we see continue growth in to the future. In addition to the anticipation of a stronger economy, it is clear that infrastructure spending will increase in the future. And what can be more infrastructure related than asphalt. We also continued to work on growing our asset base, either through acquisitions, or new builds or both. As we have mentioned in our earnings released, terminalling in general including asphalt and crude oil has been very successful business for us generating over 95% of our Q4 operating margin. These are predictable fee based, highly contracted businesses that provides steady cash flow. As we look into the future, we intend to expand our terminalling segment and this will not necessarily be limited to crude oil and asphalt. We feel we have developed a strong competency in terminalling in general and we have a nationwide foot print. So we have a desire to move into other product areas and we have a active process in place to search for these types of opportunities. Terminalling aside, we also off course operate two crude oil pipeline systems located in Central Oklahoma at [indiscernible] Cushing terminal. Earnings and volumes on these systems were down due to less drilling activity and the washout of the riverbed on one of our systems. However, we are confident we will regain the contribution from these assets in 2017. One of our top priorities will be to get our condensate project done and improve the revenue flow from these pipelines. The market has given us some help there, the rebound of prices to the $50 range have resulted in more aggressive drilling plans and increase volumes on our Oklahoma system as well as our trucks. We also continue to tightening managed cost, we created a great deal of value for unit holders last year, because we were able to reduce our cost and our business segment where margins were being affected by lower crude oil prices. Our operating expenses were down year-over-year nearly $17 million or 13%. And this focus will continue. While we have executed a number of acquisitions over the last year and half, we also are in the process of making two divestments. The first being the sale of our 30% ownership interest made Advantage pipeline in west Texas and the second the remainder of our east Texas assets. These assets are not core to our strategy going forward and were generating very little cash flow. In the case of Advantage we made that investment in 2013 and we were excited about the potential of the Southern Delaware Basin. Because we were the first mover, we enjoyed early success with the investment. However, as obvious that other saw the same potential that we did and this resulted in significant additional pipeline capacity being built in this area. Still other pipeline investments have been announced and more are being considered. So it is our view that we are susceptible to competing projects and we see the potential for earnings decline for us in this area. The divestment decision was simply a matter of feeling that we could deploy that capital more effectively else were. And we expect to close on the transaction within the next few weeks. In the case of east Texas, that particular system is isolated from the remainder of crude oil foot print and we don’t bring well many competitive advantages to the area. This asset can better utilize by and owner of that has other access oil production in the area. This transaction should also close in the next few weeks. While these transactions have some minor effect on EBITDA and equity earnings and there will be minimal cash flow impact. We are entering our 10th year as a publically traded MLP and we have seen various cycles in the energy industry. If you look back at our earnings over the past several years, we have been extremely stable to adjusted EBITDA in the 60 to 70 range. It is very important to point out particularly today that our earnings have had minimal at any coloration to the price of crude oil, in those seems our unit price sometimes trades up or down based on the price. We believe the incremental investment that we have made in our asphalt terminalling segment as well as further developing our strategic relationship with Ergon will further distinguish our Company from other publically traded MLP's where that significantly more directs exposure to the commodity prices. Chad, that concludes my prepared remarks and I will now turn it over to you for the Q&A session.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tristan Richardson with SunTrust. Please go ahead.

[Tristan Richardson:]

Hey, good afternoon, guys. Just curious on the timing of the condensate project. Is that somewhat of a function really at this point just construction or is there some element of commercial development that still ongoing for this?

[Mark Hurley:]

It’s really a function of the river bore and how we approach that. It’s obviously something that we want to do very carefully and put a lot of analysis behind. The river in this particular area does tend to shift quite a bit and so we are making sure, we are doing good engineering size on those and understanding potential patterns, as far as where water flow could go. And so it’s kind of iterative process of coming up with the design, working with the land owner to make sure it meets their needs and requirements. And then kind of going back and forth and we feel, we are getting very close on that and once that is settled, it’s actually a very good project to do and a very cheap project to do as well. So I expect that will be resolved within the next four to eight weeks or so.

[Tristan Richardson:]

Thanks Mark. That’s helpful. And then just an update just on the plan drops from Ergon. Just sort of any general developments there, obviously don’t want to be too specific on timing, but in general sense there. And then also contract structure on the planned drops, I know the nine terminals that came in 4Q or a little unique in the contract structure that provides or maybe a little less for you know. Curious, if that’s the case for future drops and just kind of stated in there?

[Mark Hurley:]

Yes, sure. First of all, as we have already announce, we will do one drop this year and one next year. The one for this year is on track, we had originally planned on early third quarter, this one may actually the second quarter. But it will happen, it will be a little more of traditional dropdown in other words if you pointed out, the contracting strategy around the last one was a little bit different than what we made. I see this one would be more straight forward, but basically with the same kind of the economics and return that we have seen with the other Ergon dropdowns.

[Tristan Richardson:]

Thanks Mark. And then just lastly anything, any updates between you and your sponsors about longer term drop plans?

[Mark Hurley:]

Not really, I mean we talk conceptually all the time. But we really have been focused on executing this first one and as we have mentioned many times, we know that bringing together of these two companies is going to generate other opportunities and that is in fact the case. And so we are working on a lot more things at Ergon than just that dropdown. And again, it just kind of reaffirms the idea that there are going to be opportunities here between the two companies. So we have got a number of irons in the fire.

[Tristan Richardson:]

Great. Thanks guys very much.

[Mark Hurley:]

Thank you.

[Operator:]

The next question will come from Matt Schmid with Stephens. Please go ahead.

[Matt Schmid:]

Hi. Good afternoon, guys. May be with the condensate project hopefully coming online later this year. Could you provide a little more detail or maybe an update about just your footprint in Oklahoma and potential growth opportunities around those assets and once you get that condensate project online?

[Mark Hurley:]

Yes, absolutely. So once we get condensate project online, we will have one pipeline that originates in far South Oklahoma and actually we have a lateral that goes into North Texas acquisition that we did, in late 2015. So how the system dedicate to the WTI type of crude that’s the system that [XTO] (Ph) has the shipping contract on. And then the condensate system effectively originates kind of only Eastern edge of the SCOOP plays and so we expect that we will be trucking into both of those system and really targeting the SCOOP area primarily from new volume on that condensate system, because that is the follow on and it's coming out of that system that really needs a more efficient transportation to cushion. And once we get that system up in running it will allow us to really focus on building laterals during gathering systems and getting more aggressive with other pipeline connected barrels which is what our strategy is.

[Matt Schmid:]

Okay, great. Thanks, that's helpful. Then maybe on your pipeline services operating margin was down a little bit in the fourth quarter. I know it's you have the one system owning and it's been a little bit challenging there but whether account to expectations for the first half of this year until you get the condensate project online is it going to look pretty similar or was there anything going on in the fourth quarter?

[Mark Hurley:]

I think we saw our business kind of bottom out in the December, January kind of timeframe we have seen with the rebound in the price we have seen some additional drilling activity and we have also seen some of our producers producing more well completions and so as a result of that we have seen volume actually pickup quite substantially in our trucking segment. And to a certain extent in our pipeline segment and I think that trend will continue to I can't exactly quantify right now [indiscernible] if really depends how well is the drilling activity but I do think it bottoms out kind of way that the at year-end and you'll see if they start to slowly trend upwards. As we do our plans for the rest of the year we see that trend upwards continuing.

[Matt Schmid:]

Okay, that's great to hear. I appreciate the color.

[Mark Hurley:]

Okay. Thank you.

[Operator:]

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

[Michael Gyure:]

Yes. Could you talk a little bit about the acquired terminals and kind of the integration there and I guess if you learned anything with your existing terminals prior that you are viewing to improve the margins?

[Alex Stallings:]

At least we mentioned the acquired terminals. We had the Ergon acquisition and then prior to that Ergon acquisition we had an acquisition in Wyoming and then in North Carolina and Virginia. So you are thinking about a particular set of those or?

[Michael Gyure:]

Yes, more on the Ergon side if you have earned anything by bringing those terminals like in the year-fold that helped to your existing terminals structure?

[Mark Hurley:]

Well certainly I think with the bringing the Ergon terminals in we got a chance to have started down the path of kind of sharing best practices and we find things that there are areas where Ergon can learn from us and areas where we can learn from Ergon, and I think and we will this year roll out a more formal process around sharing of those best practices across the companies. So that is one thing, and I think you naturally will be expect that. In the first two that we did, we really found a model that worked well for us in terms of acquiring a terminal from a company that was operating it who is fully into the business and being able to come in kind of take over the operational alone, put in place a very traditional for us lease agreement or operating agreement and that model has worked well for us in the two acquisitions prior to the Ergon transaction. And so we really looked to do more of that. We kind of have a target at least to those potential opportunities out there and we work with those constantly and in both of the previous cases part of Ergon all of the parties have been very satisfied with it. And so it's I think that will gain some momentum for us and has proven to be a good model to put in place. So, that's off the top of my head those were the things back of my mind.

[Michael Gyure:]

And then on the asset impairment charge of the 2.9 million for the quarter, I assume that was related to the East Texas assets, if you could maybe talk a little bit sort of what those assets you are divesting are and kind of what are you looking to get there?

[Alex Stallings:]

What we have remaining in East Texas is we have the Longview terminal and we have a couple of hotlines that connect into that terminal. So, basically we are looking to exit that particular area. So, you will see it in the 10-K today, but I think we had it written down to around $6.5 million at the end of 2015 and so the difference between the 6.5 and the charge that we are taking in the fourth quarter as you pointed out is kind of what we think that asset will eventually give for that asset. So, we think we have got it written down to kind of a net realizable value and we are hoping to get that sale consummated soon, in the next few weeks.

[Michael Gyure:]

Great. Thank you.

[Operator:]

The next question will come from Poe Fratt of D.A. Davidson. Please go ahead.

[Poe Fratt:]

Yes thanks. So, it looks like cash proceeds on the Longview sale or East Texas sale could be like 3.5 million is that a ballpark?

[Alex Stallings:]

About a million more than that, a million, 1.5 million more than that. 4.5 to 5 probably. And again it's not closed yet, so it's still something we are working but we hope to close it soon.

[Poe Fratt:]

And then could you give us a flavor for sort of where CapEx came in net of acquisition for 2016? And then what you expect in 2017?

[Alex Stallings:]

Yes, from an expansion.. - are you talking about expansion or maintenance or both?

[Poe Fratt:]

Either one, however you want to break it, I can back in to the other one part of it?

[Alex Stallings:]

Yes, expansion for 2016 was about $10 million net of the acquisitions or exclusive of the acquisitions. And we expect 2017 to be about $10 million as well kind of exclusive of any acquisitions. Maintenance capital for 2016 was about 8.7 million; for 2017 we expect it to be call it $10 million and that's because we have picked up nine more terminals.

[Poe Fratt:]

Great. Thanks a lot.

[Alex Stallings:]

One other thing I wanted to mention kind of in response to Poe's comment is do keep in mind that typically the first quarter is kind of the seasonally - that's probably our typically our lowest quarter and typically we do a lot of our maintenance capital spend in kind of call it the first four months of the year and that's primarily driven because that's kind of the off season for the asphalt terminals. So like last year you will probably see that trend continue as we move through the first quarter of 2017 and then obviously it accelerates from there, with second quarter and third quarter typically being our highest quarters or best quarters.

[Mark Hurley:]

The other thing I would like to add subject to CapEx, the numbers that we talk about of 2016, really in terms of expansion CapEx really represent the condensate pipeline and just a series of smaller projects. It does not include other things that we are looking at in the acquisition on new build area and we do have a number of things that we have that we are working on right now. So, anything that we would do there in terms of building a new terminal or acquiring an existing terminal would be above and beyond those expansion CapEx numbers.

[Operator:]

The next question will come from [Neil Shire with ALM] (Ph). Please go ahead.

[Unidentified Analyst:]

Good afternoon. Could you speak to a timeline as far as growth of distributions and what circumstances would have to say appear to allow for growth in distributions? Thank you.

[Mark Hurley:]

Yes I mean our intention is to continue to grow the distribution again, we don't have a specific quarter in mind; I would think we are year away from that and really the key thing is that we have put a priority right now on working down the leverage. And so we like to see that leverage under four and our target for the long term is kind is like the 3.5 level. But as we see that trend firm up we will then start talking seriously about a distribution increase, I think we are probably a your way.

[Unidentified Analyst:]

A year away. Okay. Thank you very much.

[Operator:]

The next question will come from [Elliot Miller], a Private Investor. Please go ahead.

[Unidentified Analyst:]

Yes thank you. You talked about both non-core assets dispositions closing within a relatively short period of time. Is either of them now under contract or your still negotiating contracts?

[Mark Hurley:]

I mean we have previously disclosed on the Advantage sale that we put an 8-K on that deal earlier, so there is a signed PSA on that deal and they are really waiting for kind regulatory approvals to consummate that transaction. So that one has a signed agreement with it, on the other one what you will see in the K today is that we have classified East Texas as assets that are held for sale and that we expect to sell those assets sometime in 2017, but we are actively marketing that today and working on a transaction there as well.

[Unidentified Analyst:]

And is it your intention for the proceeds of both transactions to reduce the revolver?

[Mark Hurley:]

Yes currently and yes and then obviously with those proceeds assuming we are successful and getting of those done. That basically more than funds kind what we have talked about today with respect to expansion capital and probably to be anticipated drop down for Ergon for 2017. So hopefully we were able to find other growth projects and well we need some more capital, but right now with the proceeds we are expecting we will more than be able to pay for those as well as continue to reduce our leverage.

[Unidentified Analyst:]

Very good. Excellent. Thank you.

[Operator:]

Ladies and gentleman this 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, thanks very much, I just want to again thank the callers today for your interest in Blueknight, we think we have got a good story here, we think we have got a good year in front of us and a good story long-term. And so again, thanks and please feel free to contact Alex or myself, if you have any follow-up questions.

[Operator:]

Thank you, sir. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Take care.