Blueknight Energy Partners, L.P.
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Good day and welcome to Blueknight Energy Partners Third Quarter 2013 Earnings Conference Call. All participants will be in a 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 and good afternoon. It is my pleasure to welcome you to today’s conference call where will discuss Blueknight’s financial and operating results for the third quarter ended September 30, 2013. Alex Stallings, our Chief Financial Officer will discuss the financial results for these three and nine months ended September 30, 2013. Mark Hurley, our Chief Executive Officer will update you on our strategies, projects and opportunities as well as external factors influencing our business. After prepared remarks today, 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 risk and uncertainties that could cause the 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’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 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 we announced Tuesday evening, we reported adjusted EBITDA of $23.9 million for the three months ended September 30, 2013 as compared to adjusted EBITDA of $16.8 million for the third quarter of 2012 which is an increase of $7.1 million or 42%. Adjusted EBITDA for the first nine months of 2013 was $54.3 million as compared to $48.3 million for the nine months ended September 30, 2012 which is an increase of $6 million or 12.4. Net income was $10.5 million on total revenues of 55.2 million for the three months ended September 30th of 2013 compared to net income of 7.9 million on total revenues of 47.1 million for the three months ended September 30th of 2012. Net income for the three months ended September 30, 2013 was impacted by a $5.7 million impairment charge on our Southern Texas pipeline system which we have determined is not economic enough or strategic enough for us to continue to operate. For the nine months ended September 30th of 2013, the partnership reported net income of $22.7 million on total revenues of $147 million compared to net income of 26 million on total revenues of $135.5 million for the nine months ended September 30th of 2012. Net income for the nine months ended September 30, 2012 did include gains from the sale of assets of $5.3 million. For the nine months ended September 30th of 2013 gains on the sale of assets of $1.7 million offset by an additional $2 million of interest expense due to the expensing of debt issuance costs related to the partnership’s prior credit facility resulting from our second quarter refinancing. In addition the nine months ended September 30, 2012 also included as referenced before the $5.7 million impairment charge on our Southern Taxes pipeline system. We previously announced a quarterly cash distribution for the third quarter to 2013 of $0.1225 per common unit which is a 2.1% increase over the previous quarter’s distribution and an 8.9% increase over the third quarter of 2012’s distribution. I was to highlight just a few highlights of each of segments and then Mark will get into further discussion. Crude oil terminalling and storage reported operating margin of $6.6 million excluding depreciation and amortization, which is a decrease of $1 million or 13.2% for the three months ended September 30th of 2013 as compared to 2012. Reasons for the decrease as mentioned in previous quarters are due to generally lower negotiated rates for our Cushing Oklahoma storage as compared to prior years. As of November 01, 2013, we had approximately 5.3 million barrels of crude oil storage under service contracts with remaining terms ranging from month-to-month to 26 months including 4.1 million barrels under contract to Vitol. Crude oil pipeline segment reported operating margins of $7.4 million excluding depreciation and amortization which is an increase of $6.2 million for the three months ended September 30th of 2013 as compared to 2012. The increase in operating margin is primarily due to crude oil sales of 6.9 million which do occur from time-to-time and decreased operating expenses partially offset by decreased throughput volumes. Trucking and producer field services. We reported operating margin of $2.3 million exclusive of depreciation of amortization which is an increase of $0.8 million or 53.3% for the quarter ended September 30, 2013 as compared to the quarter ended September 30, 2012. The increase in operating margin for the quarter is driven primarily by the volumes transported which increased 9% quarter-over-quarter to over 62,000 barrels per day. In fact our trucking volumes for September of 2013 are near historic highs. Asphalt services. We reported operating margin of $12.4 million which is exclusive of depreciation and amortization which is an increase of $1.8 million or 17% for the quarter ended September 30th of 2013 as compared to the quarter ended September 30th of 2012. The increase in operating margin is due to increased throughput in our facilities as well as incremental short-term storage agreements at certain of our facilities and annual rate escalations on a number of our contracts. G&A expense; we reported G&A expenses of $4.6 million for the quarter-ended September 30, 2012 which has increased about $0.5 million or 12.2% for the quarter as compared to the prior quarter of September 30, 2012. Our increase in G&A is primarily due to the recording of litigation reserve for about $700,000 during the three months ended September 30, 2013. From a liquidity perspective, our liquidity ratio at September 30th of 2013 was 3.7 times which is a slight decrease from where it was at June 30, 2013 which was up four times. And as of November 1st of 2013 we have approximately $266.4 million of revolver borrowings and about $0.5 million of LCs outstanding in our credit facility leaving us with about $133 million of available capacity which is subject to financial covenants limits. From a capital investment perspective, as we have discussed in prior quarters we did anticipate and we have realized a significant ramp-up in capital spend during 2013. Our expansion capital including our investment in Advantage Pipeline is over $63 million for the first nine months 2013 which compares to $11.8 million for the first nine months of 2012 and $17.9 million for the entirety of 2012. Significant majority of the expenditures relates to the Arbuckle pipeline project and to our investment in Advantage Pipeline. For the remainder of 2013 we are anticipating an additional $7 million to $12 million of expansion capital. Maintenance capital expenditures for the nine months ended September 30th of 2013 totaled $6.9 million which is net of $2 million of reimbursable expenditures and a $4.2 million purchase associated with our Oklahoma mainline system. We are expecting $6 million to $8 million of additional maintenance capital expenditures for the remainder of the year. With that I am going to turn it over to our CEO, Mark Hurley. Mark.

[Mark Hurley:]

Thank you, Alex. I am going to spend a few minutes talking this afternoon reviewing the corporate objectives and the business strategy that I outlined when I started at Blueknight last year and update you on our progress. One year ago I set down with our executive team with a goal to refine and communicate both internally and externally overall vision for the company. Our overall corporate objectives included the following

[Operator:]

We will now begin the question-and-answer session (Operator Instructions). The first question comes from Theresa Chen of Barclays Capital. Please go ahead.

[Theresa Chen:]

Good afternoon.

[Alex Stallings:]

Hello

[Mark Hurley:]

Hi.

[Theresa Chen:]

Hi. I just had a quick question or two. One would mind giving a little bit more detail about the strength of your asphalt business, where is that volume growth coming from and how long do you think it can persist?

[Mark Hurley:]

Yeah. The asphalt business as you have seen the results are pretty strong and if you look at the asset base it is all across the country and we have 44 terminals across the U.S. I would say most of the growth is coming from the Mid-Continent and not so much it won’t pick their location but spread across several locations in the Midwest. We are optimistic on the business; it doesn’t have the growth trajectory that the crude business has. But we are seeing very steady growth. We remarket or we operate facilities to the biggest marketers really in the business and some of them have had a great deal of success and we are benefitting from some that success and finding some growth opportunities with them.

[Theresa Chen:]

Okay and then also on growth CapEx so you mentioned how 2013, there was a big upstart in that; any early indication on what 2014 could look like?

[Mark Hurley:]

Do you want to take that Alex?

[Alex Stallings:]

Well it really goes to some of the projects that Mark was outlining I think that our primary is focused around the East Texas and West Texas building, I mean it is mostly organic pipeline so I don’t know if we are prepared to give a gross number. I think it is comfortable to say that at least we want to achieve more than what we achieved this year. So at least north of $50 million to $60 million I think is a good target but at the same time the projects that we are looking at in both West and East Texas are, we hope we will start firming some of those up next several months and then maybe we will be able to give you a little bit guidance on our target for ‘14 and beyond.

[Theresa Chen:]

Thank you.

[Operator:]

Our next question comes from Michael Blum of Wells Fargo. Please go ahead.

[Michael Blum:]

Maybe I can ask basically the same question a little differently on CapEx; can you quantify realizing these projects are still in development but just the total potential backlog of projects, if they all came to fruition which they probably won’t, what does that total capital number look like in a ballpark so we just get a sense of what that can look like.

[Mark Hurley:]

Do you want me to take that question? I think that over next two to three years Michael it would be safe to say it is in the $300 million. Going on the upside of that spectrum I think you might see 400 or so over the next, over that same period. But I think conservatively probably somewhere in the $200 million to $300 million.

[Michael Blum:]

Okay that’s helpful. And then maybe going back to the, sort of circling back on the first back; can you kind of walk back to this segment and talk about for each segment this quarter if you view that level as a sustainable level going forward, if there were some sort of outperformance or underperformance I guess I am just basically trying to drive that, what would be the kind of sustainable EBITDA run rate for each segment going forward.

[Mark Hurley:]

I mean I would say if you start with the trucking business and we certainly see that having upside from where we have been. Last year was better than 2011, 2013 looks better than 2012 and has been and we see 2014 improving on that. And so we don’t really know how big that will get, but we certainly see it as an important part of our portfolio and we are getting to the point now where we can offer trucking as part of a bundled deal to pipeline and transportation. We are doing that now in East Texas. So we see that slowing. As far as our pipeline and transportation business we certainly see that increasing, that is where we are putting our capital and that will be the primary growth for the future. The asphalt business, certainly we see upside there although not to the extent that you would see on the crude transportation side. What we have been able to achieve is growth at existing, a few key existing in the Midwest and out further west and we see that continuing at a fairly low rate. But we are really looking for acquisition opportunities, we think that with the age of some of the assets and the companies that are out there and where they are in their evolutions that over the next two to three years we might be able to acquire some smaller companies and increase our asset base. And of course the challenge for us in looking at our business segments will be the Cushing asset and all of the terminal owners who have assets at Cushing or experiencing the same thing. Supply demand situation, it is kind of a buyers’ market right now. So we work hard on keeping our facilities leased and I think to do that you have to be able to offer something other than a tank and that is where I really like where we are. We have I think the best blending facility at Cushing, even though we are not the biggest I think we have got the best blending facility, I think we have got the best blending capability. We are doing a project right now to improve our connectivity, so I think it is all about services and connectivity in terms of being able to get out and win business. And so we have got to work hard at that but so far so good. But that is the challenge for us.

[Michael Blum:]

Great, thanks. That was very helpful.

[Operator:]

The next question comes from Michael Tanzer of DG Capital. Please go ahead.

[Michael Tanzer:]

Hi Mark, hi Alex; thanks for taking my question. I just have a couple. So one, on normalized adjusted EBITDA you said with respect to the pipeline segment there is crude oil sales of that $6.9 million. So if you are trying to look at the business as sort of a run rate, what is the business doing today, if you subtract that 6.9 million from the total adjusted EBITDA you get to a run rate of 17 million per quarter, am I think about that correctly?

[Mark Hurley:]

I think Michael the thing you realize about the crude oil sales is that, it is a normal part of business.

[Michael Tanzer:]

But it is lumpy; it is like for building into models I am thinking about what could be like a normal run rate?

[Mark Hurley:]

I mean you are exactly right it is lumpy and it is income that would have gotten in 2013, it just happened to occur for us manly in the third quarter. And so yeah if you take that out the run rate would be what it is without that sale. However, the important thing to keep in mind is that particularly on the crude transportation side as well as to a certain extent on the trucking and the asphalt segment; we are seeing steady increases, but I think you are right.

[Michael Tanzer:]

Okay.

[Mark Hurley:]

Alex do you want to…

[Alex Stallings:]

I don’t know, I think that is something that is correct and the way I look at our pipeline business Michael; we have really done I mean if you look at the past couple of years, what we have tried to do on the pipeline business is we have really, for a lack of better terms we have tried to prune it I mean we have eliminated some very small kind of uneconomic systems, we have really pruned it so now we are really running mainlines. And what I think you are going to see all of our capital development going forwards at least in the next couple of years are going to be some significant enhancements for some additional systems that we are adding to pipeline. So I really look at our pipelines business today as really a very much normalized basis, it is really kind of at the ground level, it is slightly profitable but it is not a big part of our business today, but it is a huge part of our focus going forward. So kind of to Mark’s earlier point I mean that’s going to be where we are hopefully going to realize the growth starting with the Arbuckle pipeline system and the Advantage system as we move into ‘14 and beyond.

[Michael Tanzer:]

That actually leads nicely into my next question which is the two projects that you mention, the XTO Arbuckle and then the Advantage structure with the Pecos Pipeline. So XTO I think the total CapEx was about $40 million, $41 million expecting 15% return that gets you the $5 million to $6 million of EBITDA and from my understanding that’s been turned on in the last couple of months. So is the revenue, as we sit here today, is the revenue ramping up early at that $5 million to $6 million EBITDA run rate through that project or if not when can we get there? And that’s with that question, I’ll ask on Advantage next.

[Mark Hurley:]

You are right on the numbers; in terms of where the EBITDA gets to, it is an increasing volume over a long period of time, we have a 15 year deal with XTO and they are the primary on that part of our system and so they are about where they thought they would be but their volumes will be increasing overtime and so you expect to get there to the $5 million to $6 million EBITDA level, not there yet it is up in operations about six weeks. So we are very satisfied with the volumes XTO are shipping and we have a lot of confidence and the ability to ramp up volumes. In terms of the Advantage system and this is a system that has been in operation for more like six weeks and so volumes are low but interest is very high, we started up that system with, just to get it up and running with one shipper. And we will win the next four months probably bring on five to 10 shippers, we have got as on-date on Monday have incredible interest from shippers and building truck stations which allow them to ship from the system and so we are going to build truck stations as fast as we possibly can to get that volume in there, so we feel good with that.

[Michael Tanzer:]

And then really in to another gross opportunity I know that in your prepared remarks you didn’t say anything about the Silverado project or Silver Eagle pipeline, can you may be give us an update about that?

[Mark Hurley:]

Happy to, we did talk about the East Texas pipeline and you can – and so what happened Michael is that the project originally conceived and this is for all the people who are listening. The project originally conceived has evolved into something different. Our original concept is that build a line for Longview and Houston utilizing existing assets and so as we got out and shippers and understood what their interest was, it turns out that the strong interest was not in shipping from Longview and Houston, strong interest was shipping out of the Woodbine, Eaglebine area and to the point where the project evolved from mainline from Longview and Houston to now in line from Woodbine, Eaglebine area in to Houston into the oil terminals in Houston. The real interest is in so it kind of burst from what we used to call Silverado to more of an Eaglebine and Woodbine play and so…

[Michael Tanzer:]

Does this utilize Silverado’s assets or is this just a completely new greenfield pipeline and project.

[Mark Hurley:]

That is still under development it could either way, in the event that it utilize some Silverado assets, it would be a very limited use.

[Michael Tanzer:]

Got you.

[Mark Hurley:]

Because that production area really needs new pipelines built and so that is primarily what that project has evolved into.

[Michael Tanzer:]

Is there a potential time line that you could discuss in terms of when you can make an announcement in regards to the capital budget?

[Mark Hurley:]

We think it is moving on pretty well, what we are trying to do is get Board approval by the end of this year and in the event that we can do that, the construction period is of 15 to 18 months timeline so it would be a mid-2015 project.

[Michael Tanzer:]

Got you. And then just my last question and this is may be more of a request but when you guys release you earnings press release. You breakup the segments in to third-party revenue I guess and there is no sort of build up to your interest in the EBITDA first things like trying to find a number on the churn rate. I guess the question is why don’t you guys just disclose the different segments between terminalling and storage and pipeline, trucking and asphalt because get a better understanding what is going on when you release the earning?

[Alex Stallings:]

I think it is something we can take a look at Michael and I am got to have to just talk to you about it and may be get your thoughts about it I think the way we look at it I mean it is very, very detailed and I think we are extremely transparent in our Q. So I guess we put more of the effort in trying to kind of breaking it all out what we report in the Q’s that we may be on the press release just to the keep the press release fairly concise. So it is not a total regurgitation of what ends up in the 10-Q but it something that we can take a look at.

[Michael Tanzer:]

Well thanks very much for answering my questions and I appreciate the detail in the Q’s and look for all the progress next year. Thanks guys.

[Mark Hurley:]

Thanks Michael.

[Operator:]

(Operator Instructions). The next question comes from Greg Porter, a private investor. Please go ahead.

[Unidentified Analyst:]

Thank you for taking my call. Most of my questions have been answered but one question I have regards your dividend policy seemed to me to make perfect when you are working to complete two large capital projects, as you now have brought these two online, is there any plan to move more aggressively towards your longer term target of 1.2 times coverage for you dividend?

[Mark Hurley:]

I think the answer is yes but however it kind of goes back to the question previously asked if you really look at these two projects that just went online maybe six weeks ago the Advantage project only Phase 1 is online today and volumes are just starting to ramp up really from zero so if you really look out and win more realizing both cash flows on the Advantage system as well as the Arbuckle system. Phase 2 of Advantage will be complete probably by the end of the year and then probably go online some time may be late Q1 so from an Advantage perspective you really won’t have a full quarter’s worth of cash flows until probably Q2 of 2014. On the Arbuckle system it is somewhat of the similar story and that it is still being completed, there are still segments of that, that are just now coming online and they will be coming online as we go into Q4 and so you won’t start seeing a full quarter’s worth of cash flow on that until probably sometime Q1 or Q2 2014. So I think the right time to start looking at that and if we were to move a little bit more aggressively, it would be after we see a quarter or so of total cash flows coming from both of those projects.

[Alex Stallings:]

I think the short answer is I think we are just a little premature on that since we really haven’t realized any cash flow from those projects as of yet.

[Unidentified Analyst:]

Thank you, that’s helpful.

[Mark Hurley:]

Thanks for calling Greg, we appreciate it.

[Operator:]

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Alex Stallings for any closing remarks.

[Alex Stallings:]

Just wanted to appreciate everybody’s time on today’s call and if you have any questions feel free to call either Mark or me and we’ll do the best we can to answer those questions. Appreciate your time today, thanks. Bye-bye.

[Mark Hurley:]

Thank you very much.

[Operator:]

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