Blueknight Energy Partners, L.P.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

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

[Brent Gooden:]

Thank you very much, and thank you and good afternoon. It is my pleasure to welcome you to today’s conference call, where we will discuss Blueknight’s financial and operating results for the second quarter ended June 30, 2013. Alex Stallings, our Chief Financial Officer will be will second discuss the financial results for the third and six month ended June 30, 2013. Mark Hurley our Chief Executive Officer will then update to you on our strategies, projects, and opportunities, as well as external factors influencing our business. After the prepared remarks, Mark and Alex will be happy to respond to your question. 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 flow, operations, future marketing 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 statement 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’m pleased to turn the call over to CFO, Alex Stallings. Alex.

[Alex Stallings:]

Thanks Brent. As announced Tuesday evening, we reported adjusted EBITDA of $15.6 million for the three months ended June 30, 2013, as compared to adjusted EBITDA of $15.7 million for the second quarter of 2012. Adjusted EBITDA for the first six months of 2013 was $30.6 million as compared to $31.5 million for the six months ended June 30, 2012, representing a decrease of about $0.9 million or 2.9%. Net income was $6.2 million on total revenues of $46.3 million for the three months ended June 30, 2013, compared to net income of $6.1 million of total revenues of $43.8 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, the partnership reported net income of $12.2 million on total revenues of $91.9 million, compared to net income of $18.1 million on total revenues of $88.3 million for the six months ended June 30, 2012. Net income for the six months ended June 30, 2013 included gains on the sale of assets of $1 million and an additional $2 million of interest expense resulting from the expensing of debt issuance costs related to our prior credit facility. For the six months ended June 30, 2012, net gains on the sale of assets about $5.2 million. We previously announced a quarterly cash distribution for the second quarter of 2013 of $0.12 per common unit, a 2.1% increase over the previous quarter’s distribution and a 9.1% increase over the second quarter of 2012 distribution. A few highlights on each of our segments. First crude oil terminalling and storage, the reported operating margin of $6.7 million excluding depreciation and amortization, which as a decrease of $1.7 million or 20%; for the three months ended June 30, 2013 is compared to 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 August 2, 2013 we had approximately 5.2 million barrels of crude oil storage under service contracts with remaining terms ranging from month-to-month the 21 months, including 4.1 million barrels under contract to Vitol. Crude oil pipeline segment we reported operating margin of $0.9 million excluding depreciation and amortization which is an increase of a $1 million for the three months ended June 30, 2013 as compared to 2012. Given the volumes transported our pipelines declined quarter-over-quarter due to refinery turnaround affecting throughput on the Eagle system, operating margin increased, operating margin increased due to a decrease of $1.3 million in operating expenses which related to the $1 million impairment loss which we recorded during the three months ended June 30, 2012. This was from the idling of several small Mid-Continent gathering systems which we then ultimately disposed off in the third quarter of this year. The volumes on the Eagle North Pipeline system are expected to return to normalized levels for the remainder of 2013. Trucking and producer field services segment, we reported operating margin of $2.6 million exclusive of depreciation and amortization which is an increase of $0.8 million reported 44% for the quarter ended June 30, 2013 as compared to the quarter ended, same quarter ended 2012. Increase in operating margin for the quarter is driven primarily by the increase in volumes transported which have increased 15% quarter-over-quarter to over 57,000 barrels day. Asphalt Services segment, we reported operating margin of $9.9 million exclusive of depreciation and amortization, which is an increase of $0.9 million or 10% for the quarter ended June 30, 2013 as compared to the quarter ended June 30, of 2012. The increase in operating margin is due to the increased throughput of our facilities, incremental short-term storage service agreements, at certain of our facilities and annual rate escalations on a number of our contracts. General and administrative expenses stayed flat quarter-over-quarter. Liquidity on June 28, 2013 the partnership entered into an Amended And Restated Credit Agreement, which consists of a $400 million revolving loan facility. The new facility amend and restates our previous $295 million facility in as a term, which extends through June 28, of 2018. In addition to the increased term and total commitments, we are expecting improvement in pricing of approximately 125 basis points. Our leverage ratio at June 30, 2013 was at 4.0 times which really reflects the increase that we’ve had in the second quarter and our capital spending. As of August 2, 2013, approximately $258.4 million of revolver borrowings and $0.5 million of letters of credit were outstanding under the credit facility leaving the partnership with approximately $141 million of available capacity, subject to financially covenant limits. From a capital investment perspective, as we’ve discussed in prior quarters, we anticipated a significant ramp up in our 2013 capital spend. As a result expansion in captial expenditures including our investment in Advantage Pipeline were $41.8 million during the first six months of 2013 as compared to just $7.3 million for the first six months of 2012 and a total of $17.9 million with the entirety of 2012, significant maturity of the expenditures relates to the Arbuckle Pipeline project and obviously our investment at Advantage Pipeline. For the remainder of the year, we expect additional capital expenditures of about $15 million to $25 million or more. Maintenance capital expenditures totaled $7.2 million for the six months ended June 30, 2013 compared to $5.9 million for the six months ended June 30, 2012. We currently expect total maintenance capital expenditures to be approximately $14 million to $16 million in total for 2013. I’ll now turn it over to our CEO, Mark Hurley. Mark?

[Mark Hurley:]

Thank you, Alex. Overall, we are pleased with the quarter which is in line with our expectations and we’re looking forward to the second half of the year, which will see two significant growth projects materialized for the partnership. Be the two projects that we have been working hard on over the last three – several months and we’re happy to see these come on line here in the third quarter. We are growing our crude pipeline business as a key part of the strategy that we outlined for you earlier in the year and we’re happy to see the first steps in this process take place. First, I’ll talk about the Arbuckle Pipeline. We are nearing completion of our 65 miles Southern Oklahoma crude oil pipeline. And we are constructing as a part of the long-term transportation agreement with XTO Energy, a subsidiary of Exxon Mobil. 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 systems and improve capacity to handle increased demand from XTO and many other customers in the Oklahoma – Central Oklahoma area. Happy to see that with production coming on, much stronger in Central Oklahoma, we are receiving many contacts from customers about truck stations and not trying to find ways to get volume on to our pipeline system here, so we feel very good about the projects that we are doing in the business in this area in general. Expected pipeline to be operational in the third quarter most likely in early September. Next I’ll talk about a Pecos River pipeline Phase I of the 70 mile Pecos River pipeline which runs from Pecos Texas to Crane, Texas is also expected to be operational in the third quarter package should come online around Mid-August to maybe the second half of August. So we’ll see oil flowing very soon. Blueknight has a 30% ownership interest in the pipeline, we will operate the system under a long-term agreement. The new 16-inch diameter pipeline will enable West Texas producers to deliver crude oil to Gulf Coast markets to the pipeline connection at Crane. We are also evaluating numerous expansion projects on this line including a North extension described earlier this year or early in the year as well as gathering systems and additional truck stations. As we have come to the initial operation of the pipeline from Pecos to Crane we also have been contacted by several marketers and several producers back getting connections on this pipeline. So we are very optimistic about the additional revenues this will bring to our business. We also continue to have a number of projects in their initial stages and under development. We have previously announced that we would jointly evaluate the proposed East Texas pipeline called the Silver Eagle pipeline with Silverado Pipeline LLC. The project would include formerly joint-venture to manage the reactivation of a 200 mile crude pipeline between Longview in Houston, Texas. We have since modified or added to the scope of that project to build a lateral that would transport crude oil out of the woodbine very politic production area North of Houston into this pipeline and (inaudible) Houston market. Again pretty live and operated this pipeline under the long-term agreement with Silverado since the announcement we have been actively negotiating commitments with potential shippers and conducting due diligence on the activation or reactivation. Our preliminary indication are very encouraging for this project to proceed and we feel very good about the project going forward protected a bit piece of footprint in future. All the projects that were working on include a number of projects in the Asphalt business. We had announced our key part of Asphalt strategy was is going with current key customers, to find ways to expand that the plants the day they reach form us as world is even explore some of additional new wells as well as the acquisition opportunities all these we’re looking all of these fronts I think growth project in our Asphalt business more alive they never had been and we feel very good about the pipeline of projects we have that will support our Asphalt business. So we should very good about that as well. Also I make a note about couple of comments about Cushing been lot of questions from investors and folks outside the company and inside the company about the impact of the collapsed margin between WTI crude and Brent crude which in the second quater saw a tremendous decrease. One day in fact the WTI pricing actually higher brand price and often the question comes would impact does that have on Cushing. It certainty changes some of the dynamics of Cushing but in no way we makes Cushing less important to the industry then it ever has been. Cushing will continue to be major cross roads for crude business if all the crude coming out of very shale place in the Mid-Continent as well as crude coming from Canada. I think it changes the nature of the business at Cushing to one where customers there now value as opposed to just pure storage, they value operational capability and connectivity more than they ever have. And I think in that regard, we have a terminal at Cushing that stands up to any ones. We have a great deal of pride in our north blending capability and so that the customer proposals that we are now making and discussing with various parties are usually around our blending capability and what we can do for them bringing together light crudes and heavy crudes and so forth to create a common stream barrel that will appeal to the market. So while the business will change and we have to change our focus on how we on the services that we provide, we feel very good about our business there and look forward to challenge in making that transition. And with that, I will bring to an end our prepared comments and operator, I will turn it back over to you for – to open the floor for questions.

[Operator:]

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Theresa Chen of Barclays Capital. Please go ahead.

[Theresa Chen:]

Hi. How are you?

[Mark Hurley:]

Hi Theresa.

[Alex Stallings:]

Hi Theresa.

[Theresa Chen:]

Hi. Mark, I just wanted to follow up on your comments about the Cushing facility. Do you have any organic measures there that could possibly help offset some of the pressure from crude price differentials?

[Mark Hurley:]

You say organic measures, explain it to me, I’m sorry Teresa.

[Theresa Chen:]

In terms of growth added capacity or levers that can be hold that could help with the pressure fix there?

[Mark Hurley:]

Yeah I understand. As far as growth in pure storage capacity, it’s not something that we’re looking at right now, I think Cushing is general has enough across the industry has enough storage capacity. But we are putting capital into Cushing, but we continue to invest on connectivity projects and projects that are even further enhanced our ability to blend various groups, for our customers. And so yes we do continue to invest to improve our service capabilities, but not in terms of adding pure storage volume.

[Theresa Chen:]

Got it. And on Arbuckle and Pecos River projects, could you just broadly help us think about what kind of profit contributions that they could bring?

[Mark Hurley:]

Well we tend not to talk specific economics around individual projects base, but they do certainly add significantly to our growth particularly within out pipeline segment, which is a segment where we’re targeting a lot of growth, and so it is growth that you will see certainly in our results this year as we get into the third and fourth quarter and then into 2014. And if you look at our results across the pipeline segment, you’ll see – certainly it isn’t our biggest segment, it’s one of smaller segments. And but you will see that start to expand I think pretty significantly as these projects come online, as well as some of the other project that we have.

[Theresa Chen:]

Got it and then lastly, on this Silver Eagle project, given the changes, is this still expected to be operational roughly in the middle of next year?

[Mark Hurley:]

I think we’ve always said that the line that is being reactivated, we think can be reactivated within a year and so from the day that we get commitments and board approval. We see that being about 12 months out, and so really it’s a rolling clock and so if we were to get approval in the third quarter, I think the first phase of that project you could see on one year later. The part of the project that will probably take more like 18 months is the lateral that I mentioned, since that’s a pure new build into an area where we have to acquire right a way and so forth. And so we think that’s more like an 18 month cycle for that particular piece of the project.

[Theresa Chen:]

Great, thank you very much.

[Mark Hurley:]

Sure, thank you.

[Operator:]

(Operator Instructions) I’m showing no further questions I would like to turn the call back to Mark Hurley for any closing remarks.

[Mark Hurley:]

Well, thank you very much. I appreciate everyone listening in and supporting Blueknight with your questions and attention. And so we look forward to working with you into the future. We feel very good about the Company, we think the second half will be an upward from the first half and so we look forward to that, and again thank you all for joining.

[Operator:]

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