Blueknight Energy Partners, L.P.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good afternoon, and welcome to the Blueknight Energy Partners’ First Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Brent Gooden, Director of Media Relations. Please go ahead.

[Brent Gooden:]

Thank you very much, and good afternoon everyone. It is our 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, 2013. Alex Stallings, our Chief Financial Officer will first discuss financial results for the three month ended March 31, 2013. Mark Hurley our Chief Executive Officer will then update you on our strategies, projects, and opportunities, as well as external factors influencing our business. After prepared remarks, Mark and Alex will be glad to respond to your questions. Before we begin, however, 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 and operations, future market conditions, current and future governmental regulations, and future taxation. Please refer to the Blueknight 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 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. Crude oil terminalling and storage services, crude oil pipeline services, crude oil trucking and producer field services, and asphalt services. Now, I am pleased to turn the call over to CFO, Alex Stallings. Alex?

[Alex Stallings:]

Thanks Brent. As announced Tuesday evening, we reported adjusted EBITDA of $14.9 million for the three months ended March 31, 2013, a decrease of $0.9 million or 6% as compared to the three months ended March 31, 2012. Net income was $6 million on total revenues of $45.6 million for the three months ended March 31, 2013, as compared to net income of $12 million on total revenues of $44.6 million for the three months ended March 31, 2012. Net income for the three months ended March 31, 2012 included gains on the sale of assets of $5 million, while the three months ended March 31, 2013 had a loss on the sale of assets of about $0.2 million. We previously announced a quarterly cash distribution for the first quarter of 2013 of $11.75 per unit, a 2.2% increase over the previous quarter’s distribution and a 6.8% increase over the first quarter of 2012 distribution. And I give you a few specifics by segment. First, crude oil terminalling and storage, we reported operating margin of $7.5 million, excluding depreciation and amortization, which is a decrease of $1 million, or 11.8% for the quarter ended March 31, 2013 as compared to the quarter ended 2012. 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 prior 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 24 months, including 4.2 million barrels under contract to Vitol. Crude oil pipeline segment, reported operating margin of $1.5 million excluding depreciation and amortization, which is a decrease of $0.3 million, or 16.7% for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012. On average for the first quarter of 2013, we transported approximately 61,000 barrels per day via our pipeline systems. The reason for the decrease in pipeline operating margin is due primarily to decreased throughput on our Eagle North Pipeline System, which resulted in deferral of $0.4 million of revenue for the three months ended March 31, 2013 under the minimum throughput agreement associated with that particular system. Trucking and producer field services segment. Reported operating margin of $2.1 million exclusive of depreciation and amortization, which is a decrease of $0.8 million or 27.6% for the quarter ended March 31, 2013 as compared to the quarter ended March 31 of 2012. The change in operating margin for the quarter ended March 31, 2013 is primarily driven by weather-related impacts during the months of 2013 and increased driver commissions and fleet maintenance cost. On average, we transported approximately 56,000 barrels per day on our crude transport trucks during the quarter ended March 31, 2013, which is an increase of 5% as compared to the same period in 2012. Asphalt services segment. Reported operating margin of $8.5 million exclusive of depreciation and amortization, which is an increase of $0.8 million or 10.4% for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012. The increase in operating margin is due to incremental short-term storage service agreements as certain of our facilities and annual rate escalations on a number of our contracts. General and admin expenses, G&A expenses decreased $0.4 million or 8% to $4.7 million for the three months ended March 31, 2013 compared to $5.1 million for the three months ended March 31, 2012. The decrease was impacted by severance costs incurred in the first quarter of 2012 due to the resignation of our former executive officer and the professional expenses related to the hiring of our CEO. Liquidity, at March 31, 2013, we had approximately $57.5 million of availability under our $295 million credit facility. Our leverage ratio at March 31, 2013 was approximately 3.4 times. With respect to capital investment as discussed previously, we have anticipated our expansion capital to ramp up rapidly in 2013. As a result, expansion capital expenditures totaled $10.2 million in the three months ended March 31, 2013 as compared to $2.8 million for the three months ended March 31, 2012. Significant majority of expenditures relates to the Arbuckle Pipeline project. In addition, we invested $14 million in the Advantage Pipeline joint venture during the first quarter of 2013. For the remainder of 2013, we expect additional expansion capital expenditures of $30 million to $40 million with much of the remaining expense to occur in the second quarter. Maintenance capital expenditures totaled $3.7 million for the three months ended March 31, 2013 compared to $3.4 million in the three months ended March 31, 2012. We currently expect total maintenance capital expenditures to be approximately $11 million to $14 million in 2013. With that, I’ll now turn it over to our CEO, Mark Hurley. Mark?

[Mark Hurley:]

Thank you, Alex. Overall, the quarter met our expectations and we are excited about the opportunities in front of those which is where I will focus the majority of my comments. I will provide an update on our existing projects and we’ll update you on additional projects now being considered. First, I’ll talk about our Arbuckle Pipeline. There are no real changes since our last update, which is good news. The construction remains underway on our $37 million, 65 mile crude oil pipeline, which we are constructing as a part of a long-term transportation agreement with XTO Energy, a subsidiary of Exxon Mobil Corporation. The pipeline will interconnect both of our Oklahoma pipeline systems and in addition we will take this opportunity to make numerous enhancements and upgrades to our mainline system and improve capacity to handle increased demand from XTO and other customers. One additional item that I wanted to mention with respect to the Arbuckle Pipeline is that once complete, the pipeline will connect to and utilize what is now the Eagle North Pipeline System, another pipeline system in Oklahoma. The Eagle North System will actually be reversed and will deliver barrels from Southern Oklahoma into the Cushing terminal. Our Oklahoma mainline system will also be reversed and will be utilized to deliver barrels to a refinery in Ardmore. We believe this effort will enable us to more efficiently use our Oklahoma pipeline systems. We still anticipate completion of these projects by mid-2013 and expect to bring projects and on budget. This pipeline is well positioned to serve new production areas coming on in South and Central Oklahoma. Next, I will talk about our Pecos River pipeline. As announced in February we entered into an agreement with Advantage Pipeline to acquire approximately 30% ownership in 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 Gulf Coast markets through a pipeline connection at Crane, Texas. We might - will operate the pipeline under our long-term agreement with Advantage. The construction is proceeding well and crews are placing pipe in the ground as we speak and the first phase of the project is still expected to be up and running by the end of the second quarter. Advantage continues to remain on target with its timeline – within its timeline and budget. The Pecos River pipeline north extension, our previously announced open season in the Pecos River pipeline north extension has ended. While no firm commitments are currently in hand, we continue to work with a number of interested counterparties. We continue to look for commercial terms and project scope that will serve their needs into the future and we feel good about this project as we continue to have discussions with these producers and shippers. We initially proposed 95 mile extension in the Southeast and New Mexico and Culberson and Reeves Counties and Texas, maybe slightly ahead of the production curve in this market. However, we still believe this project or a similar project is viable in this infrastructure light area. We will update you on this project in our next quarterly announcement. Projects in the initial stages include our Silver Eagle pipeline project which we announced yesterday. We are currently working with the partner Silverado Pipeline LLC to jointly evaluate the development of a pipeline transportation option out of East Texas area and in the Houston. Specifically subject to receiving adequate shipper commitments Blueknight and Silverado intend to form a joint venture and manage the reactivation of a 200 mile crude oil pipeline between Longview and Houston, Texas. Blueknight will operate this pipeline under a long-term agreement with Silverado. A project named the Silver Eagle pipeline is expected to take approximately one year to be operational. This has the potential to be – this has potential of being a very exciting project for Blueknight and our partner Silverado. We are currently in the developmental phase of the project and are in discussions with potential shippers. Initial response has been very positive. We continue to evaluate other projects in West Texas, Central Oklahoma, the Rockies and the Bakken to grow not only our crude pipeline business but also our asphalt and trucking businesses as well. As indicated previously the first half of 2013 will be consumed with maintaining our base business and executing on capital projects in an effort to increase cash flows once the projects come on line in the second half of the year. We continue to be focused on the diversification of our storage and terminal ling agreements of Cushing and are investing in additional connections at our Cushing facility. Our Cushing operations team is very experienced and capable of delivering a high level of service to our customers and we expect to build on that expertise. Trucking system enhancements are ongoing with the electronic logistics equipments installed and operational now in our entire fleet. As a result we expect to increase the efficiency and utilization of our crude trucking fleet the rest of the year. Organizationally, we had a goal to grow our business development team and we made progress in this area in the first quarter of the year. We added a senior business development manager in our Okalahoma City office and we also added a commercial representative in our Houston office. Those were our prepared comments and Lora I will turn it back over to you to open the call for questions.

[Operator:]

We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Michael Bloom of Wells Fargo.

[Michael Bloom:]

Hi, good afternoon guys.

[Mark Hurley:]

Hi Michael.

[Michael Bloom:]

Just some questions on Silverado on the potential JV, can you just talk about to the extent you can assuming this project goes forward what type of capital commitment we’re talking about expected returns are you going to – will you build it with you need commitments to proceed and things of that nature and what length of contracts you are looking for?

[Mark Hurley:]

Yeah, we don’t give our specifics – those type specific kind of detailed data on individual projects as a general rule. As far as type of investment we are talking about, it’s very significant relative to past investments that we have made to be one of our bigger ones. We are soliciting shipper commitments because we obviously feel that’s the best way to ensure the kind of return that we are looking for going forward and we are talking to shippers about commitments that ranged from 5 to 10 years. We have had good interest, we right now do not plan to go off an open season, let’s say, that’s an indication of the kind of interest that we have received. We feel the fundamentals of the project are very strong Michael in that. It does a couple of things, one is that – it’s the pipeline that goes right through a production area that is reemerging the Woodbine and Eaglebine areas and this pipeline goes very, very close to those areas and will be a – I think the obvious pipeline of choice to get those barrels to the Houston market. The other thing it does is it provides the direct connection from Longview to Houston and the barrels that shippers and traders have up in the Longview market are disadvantaged from a pricing standpoint compared to Houston market. And this provides - this will provide the most direct connection from Longview down into Houston. So, we like the fundamentals of it and as usual we are looking for project returns that we feel good about and kind of the mid-teens.

[Michael Bloom:]

Great, thanks for that, that’s all I had.

[Operator:]

And our next question is from Michael Tanzer of DG Capital.

[Michael Tanzer:]

Hey guys, thanks for taking my questions on the call. I just have two questions, so one with your current fleet the newly announced project. I know it’s very early stages considering that you have to find capacity utilization throughput for marketers and basically are you negotiated the evaluation with your partner, but if you could maybe roughly handicap what’s the probability that this project actually gets done?

[Mark Hurley:]

Well, I can start with we feel good about it. We did our homework on the market opportunity that exist here in terms of what the fundamentals are that would drive shippers to this market, what the production is in the area. And we like what we saw and like I said the fact that we don’t think we will have to go up for an open season is an indication I think we are feeling pretty positive about it. We do have some due diligence to do it’s a pipeline that’s been out of service and so will have to be put back into service. We will spend some capital and so we are doing the due diligence now to firm up that capital number. And although we think we’ve got a pretty good idea of what it is. And there are some connectivity things we have to do on each end, but those were very doable and so we feel good about it as far as on number of probability when you go there, but we do feel good about it.

[Michael Tanzer:]

Okay. And then my next question and my other question is that at the end of 2012 in the first quarter call, you mentioned that you would expect roughly revenue, and EBITDA in Q1 and Q2 to be flat with the first quarter and you could be up substantially on the new project initiated the XTO pipeline and the Arbuckle pipeline and the Pecos River Pipeline in the third and fourth quarters. So, can you give rough guidance of mid to high-60s EBITDA? So, are you reaffirming that guidance say or do you any sort of information that would lead us to believe that it would be materially different?

[Alex Stallings:]

Yeah, I mean, right now, I mean we don’t have any reason to believe it’s going to be clearly different. So, I think that’s kind of still our target for the year and so far I think the to Mark’s point I think the first quarter was about as we had anticipated. And I think that’s kind of what we have indicated is I believe it would be fairly flat Q1 and Q2 and then we should start seeing some increased cash flows as these projects combined in Q3 and Q4. So and also remember we are a little bit seasonal on our asphalt business as well so we typically have a little bit better quarters and Q3 and Q4 with respect to asphalt business as well even the asphalt business was a little bit better than what we had anticipated in Q1 of this year, so.

[Michael Tanzer:]

Okay. And with regards to the coverage of your distribution in terms of distributable cash flow I think it’s fair to say that you underpay relative to the amount of distributable cash flow that you’re currently generating and will generate in the future. So, assuming that things go as planned and it seems like every thing is on target both from a cost and timeline perspective, could we expect a more substantial increase in the distribution once these project come online?

[Mark Hurley:]

Well, we like the model and although possibly well conservative. We like the model of steady growth in our distributions that will allows us to manage any risk whatsoever we might have and project costs or unexpected items in the future. And so we just feel good about the model of kind of put in place of gradually and steadily increasing that distribution. Right now that’s the track we’re on I think we’ll stay on that track, but it’s something we talk about obviously pretty frequently. And so we will continue to give you that kind of consideration, but right now it’s from a path of slow steady growth and that’s where I think will be for a while.

[Michael Tanzer:]

Okay, well, thanks for answering my questions. And we appreciate the work you’re doing and good luck in the next few months.

[Mark Hurley:]

Thank you, Mark.

[Operator:]

(Operator Instructions) I’m showing no additional questions. We will conclude the Q&A session. I would like to turn the conference back over to management for any closing remarks.

[Mark Hurley:]

Now, I think that’s going to wrap it first we appreciate the attendance at the call, appreciate the interest in Blueknight it seems to growing and so again we appreciate that and we feel good about where we are going. So, I think that we’ll conclude the call. Thank you very much.

[Operator:]

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