Blueknight Energy Partners, L.P.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good afternoon, and welcome to the Blueknight Energy Partners earnings conference call. [Operator Instructions] Please note, this event is being recorded. 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 we will discuss Blueknight's financial and operating results for the first quarter of 2015. Alex Stallings, our Chief Financial Officer, will discuss the financial results for the 3 months ended March 31, 2015. And Mark Hurley, our Chief Executive Officer, will update you on our operational performance, projects and opportunities as well as the acquisition we announced this morning in Cheyenne, Wyoming, the asphalt terminal plant. He will also discuss external factors influencing our business. After prepared remarks, Mark and Alex will take 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 various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties relating to partnership debt levels and restrictions in our credit facility, our exposure to the credit risk of our third-party customers, the partnership's future cash flows and operations, future market conditions, current and future government regulations, future taxation and other factors. If any of these risks or uncertainties materialize or should underlying assumptions prove incorrect, our actual results or outcomes may vary materially from those expected. Please refer to Blueknight's SEC filings for a description of these and other risks and uncertainties that could affect our actual results. Blueknight undertakes no obligation to update, revise any forward-looking statements contained in this call whether as a result of new information or future events or otherwise. Blueknight Energy Partners, L.P. is a publicly traded master limited partnership with operations in 21 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 4 operating segments

[Alex G. Stallings:]

Thanks, Brent. Yesterday, we reported financial results for the first quarter of 2015. Distributable cash flow for the 3 months ended March 31, 2015, increased to $11 million as compared to $10 million for the 3 months ended March 31, 2014, which was an increase of 10%. BKEP's adjusted EBITDA was $12.9 million for the first quarter of 2015 as compared to $13.4 million for the same period in 2014, which was a decrease of $0.5 million or about 3.7%. Partnership reported net income of $1.6 million on total revenues of $42.4 million for the 3 months ended March 31, 2015, as compared to net income of $3.9 million on total revenues of $46.4 million for the first quarter of 2014. Keep in mind that the first quarter is historically the lowest-EBITDA quarter for BKEP as the seasonality of our asphalt segment tends to drive quarters 2 through 4 higher as we typically recognize incremental revenues as the asphalt season progresses and throughputs increase. BKEP previously announced a first quarter 2015 cash distribution of $0.1395 per common unit, which was a 2.2% increase over the previous quarter's distribution and a 7.3% increase over the first quarter of 2014's distribution and a $0.17875 distribution per preferred unit, both of which are payable on May 15, 2015, on all outstanding common and preferred units to unitholders of record as of the close of business yesterday. Additional information regarding the partnership's results of operations will be provided in the partnership's quarterly report on Form 10-Q for the 3 months ended March 31, 2015, which will be filed with the SEC a bit later today. A few highlights for each of the segments. Asphalt Services recorded another strong first quarter of operating margin excluding depreciation and amortization, which grew to $8.6 million for the 3 months ended March 31, 2015, as compared to $7.9 million for the similar period in 2014, which was an increase of 10%. Revenues increased slightly year-over-year, and operating expenses declined, primarily as a result of the timing of repair and maintenance expenses. Crude oil terminalling and storage. For the quarter ended March 31, 2015, operating margin decreased $2.3 million or 36% as compared to the first quarter ended March 31, 2014. Revenues decreased due to the timing of storage contract renewals. As contracts expired in the first half of '14, the rates at which we recontracted storage at the Cushing terminal were impacted by a backwardated crude oil market, resulting in decreased storage rates. However, in the fourth quarter of 2014, the market for crude oil returned to a contango market in which future prices are higher than current prices. This has increased demand for Cushing storage, resulting in an upward trend in storage rates. We expect to begin realizing this impact beginning with the second quarter of 2015. Crude oil pipeline. We reported operating margin of $2.7 million for the first quarter of 2015, excluding depreciation and amortization, which is an increase of $2.1 million as compared to the first quarter of 2014. Pipeline revenues increased $1.7 million quarter-over-quarter due to increased volumes on our Mid-Continent system and due to an increased tariff being charged through June of 2015 on certain barrels transported on our east Texas pipeline system. In addition, operating expenses decreased as a result of lower overall maintenance and repair costs. The average throughput volume on our Eagle North Pipeline System was lower in the 3 months ended March 31, 2015, as compared to the 3 months ended March 31, 2014, as a result of the customer's refinery being in turnaround. We anticipate these volumes returning to historical averages in the very near term. In addition, we recorded $656,000 of equity earnings related to our 30% ownership in the West Texas Pecos River Pipeline system during the first quarter ended March 31, 2015, as compared to a loss for the same period in 2014. Volumes on that system continue to steadily increase. Crude oil trucking and producer field services reported operating margin of $1.2 million, which is a decrease over the period last year. Volumes and operating margins were impacted in general by the overall crude oil market and a decrease in the average distance barrels were hauled for our customers, which impacted the overall rate per barrel charged. General and administrative expenses increased about $0.5 million quarter-over-quarter. However, we don't anticipate material changes in G&A for the remainder of 2015. With respect to a couple of other items. Liquidity, our consolidated total leverage was 3.43x at March 31, 2015. And as of May 1, we had aggregate unused commitments on our revolving credit facility of approximately $170 million, which were subject to financial covenant limits. From a capital investment perspective, expansion capital expenditures totaled $4.5 million for the first quarter ended March 31, 2015. We're currently estimating expansion capital expenditures of $100 million to $150 million, inclusive of the previously announced Cheyenne asphalt terminal acquisition, for the year 2015, depending primarily on the timing of capital spend on the Knight Warrior Pipeline project. As I mentioned previously, the majority of the Knight Warrior spend is expected to be second half of 2015 weighted, with the balance of expected expenditures to carry well into the first half of 2016. We continue to patiently monitor MLP debt and equity markets and continue to analyze our financing options for Knight Warrior project and remain very mindful of minimizing any additional equity dilution to existing BKEP unitholders. As previously discussed, we are able to pro forma expected EBITDA from Knight Warrior, subject to limitations, which will continue to increase our borrowing capacity as we proceed through the project. Maintenance capital expenditures for the first quarter ended March 31, 2015, totaled approximately $1.9 million. We expect maintenance capital expenditures to be in the $10 million to $12 million range, net of reimbursable expenditures, in 2015. From a guidance perspective, we're reiterating the guidance that we gave previously but are increasing the upper end of that guidance to $70 million for 2015. And we also expect to continue to increase our common unit distribution, as we did in the first quarter of 2015, and are going to try to lean towards a -- the upper end of that guidance that we gave previously, which was in the 5% to 7% range. With that, I'm going to turn it over to Mark. Mark?

[Mark A. Hurley:]

Thank you, Alex. I'm going to spend a few minutes discussing our quarterly results and will then focus on our growth projects, which include the Cheyenne, Wyoming, asphalt terminal acquisition that we announced this morning. I will also update you on our Knight Warrior Pipeline project and the state of our business in the current crude oil market. Our first quarter results were right in line with our expectations. We were obviously pleased with the year-over-year 10% growth in the asphalt segment's operating margin as well as the growth we experienced in our pipeline transportation segment. As we have stated previously, our growth focus will be in the crude oil pipeline segment. Crude oil volumes on our Oklahoma system continued at or near capacity, and volumes on the west Texas Pecos River Pipeline continued to increase steadily from the fourth quarter of 2015 [ph]. In fact, it was the fourth straight quarter of record volumes across our pipeline system. And we expect this record-setting trend to continue over the remainder of 2015. The second quarter is looking very good with respect to pipeline volumes. And of course, we continue to move forward -- to move toward a growth milestone for the company, which is the startup of our Knight Warrior Pipeline project in the second quarter of 2016. For those of you not familiar with this project, this is a 160-mile, 16-inch pipeline originating in Madison County, Texas, to move crude produced in the Eaglebine area in east Texas south to the Houston refining market. We continue to make good progress on this project. Station locations have now been acquired in North Zulch, Midway and Roans Prairie, all small towns in Texas. And we will begin civil work at these sites in the next couple of weeks. Order for pipe and long-lead-time equipment will be placed in May and June, and the right-of-way acquisition process is well underway. The project remains on time and on budget. The pipeline will provide customers an efficient way to transport products safely, reliably and at an economic price to Gulf Coast refineries. In spite of the price decline in the crude market, we continue to be bullish on this project due to the take-or-pay shipper contracts we already have in place and the fundamentals of the area, which include favorable production economics, close proximity to the Houston market and the premium quality of crude produced in the area. Turning to our asphalt business. In addition to having a very strong quarter, we are very pleased to announce the addition of the Cheyenne, Wyoming, asphalt terminal to our asphalt terminal footprint. The Cheyenne acquisition, which is Blueknight's first M&A activity since 2013, was acquired from Simon Contractors, a multistate heavy-construction highway contractor. In addition, we entered into a long-term lease contract with Western States Asphalt, a regional asphalt marketing company based in Spokane, Washington, to lease the Cheyenne facility. The Cheyenne facility, which was constructed in 2003, includes approximately 10 acres of land, 220,000 barrels of asphalt storage and produces and handles polymer-modified asphalt concrete, emulsions and asphalt cement for a variety of customers in the Wyoming and surrounding markets. Western States Asphalt has been an important customer of Blueknight since 2009 and also leases additional sites in the region. Western States Asphalt will continue supplying various products and services to the existing customer base out of this plant. This transaction is consistent with our communicated strategy of growing our asphalt business primarily through acquisitions and will be immediately accretive to our unitholders. Western States is a key long-term customer, and we took this opportunity to restructure their existing contracts and incorporate the new Cheyenne facility into those agreements as a part of our ongoing relationship. Again, this is a very exciting transaction for us, and we look forward to doing additional deals following the same model. I'd like to now turn to the terminalling and storage segment. The crude oil market has undergone significant change over the last 12 months, and as a result, the storage market at Cushing has undergone change as well. 1 year ago the demand for storage was low, and therefore, storage rates were low also. That all changed in the fourth quarter when crude prices began falling and the forward market moved into a contango condition. Demand for storage improved as did rates. Fortunately, we were in the process of renegotiating several contracts in late 2014 when market conditions improved. And we were able to build the higher rates into those contracts, contracts that are now taking effect. So how did all of this affect our results? Looking back, the first quarter of 2014 was a very good quarter for us because we were enjoying the benefit of some legacy contracts, contracts that had been put in place 2 to 3 years prior. As those contracts started rolling off in the second quarter, our results started to decline and reached a low point in the third quarter of last year. But since then, results have been improving. We now have experienced 3 consecutive quarters of improving results in this segment, and we see that trend continuing for the rest of the year. In fact, we anticipate that in the second quarter of this year we will start to see same-period year-over-year improvement, and this should continue in the third and fourth quarters as well. Our terminal at Cushing is completely leased for the remainder of 2015 and for much of 2016. And as we have mentioned previously, we have been able to move to a more diverse customer base, one that allows us to generate more services revenue as well as storage revenue. Our trucking and field services segment did feel the impact of the sudden decline in crude price that we experienced in late 2014 and continuing into the first part of this year. We did see some lower-volume marginal wells shut in towards the end of 2014 and -- but volumes in March and April had begun to improve as crude prices have stabilized. A little bit about the state of our business in the current environment. As is now well documented, the price of West Texas Intermediate crude oil has decreased about 40% since last year. While low crude prices are generally viewed as a negative for the midstream sector as a whole, it has actually been beneficial to our asphalt and storage segments, businesses that today make up about 75% of our portfolio. I have covered the positive impact we have seen in our storage business. The asphalt business performed well in this environment also. Since asphalt prices typically tend to trend with the price of crude, we expect our customers to acquire and store additional product in our terminals, and we anticipate that municipalities will be able to purchase more material because of the lower prices. As a result, we expect increased throughput at our facilities in the near term, which should ultimately increase revenues generated by our asphalt services segment. This segment currently comprises 50% of our operating margin, and we are fully contracted at all facilities through 2016. The current business environment, combined with the acquisition of the Cheyenne facility, leaves us very optimistic about this business in 2015 and beyond. As far as the effect of this market on our crude pipeline segment, we are not anticipating a significant impact on this business as a result of the lower crude prices since a large portion of the capacity on our Mid-Continent and Eagle North systems are contracted under throughput and deficiency agreements. In addition, throughput volume on the Pecos River Pipeline, in which we have a 30% equity ownership interest, is expected to continue to increase in 2015. We feel confident about the performance of the system as this pipeline replace truck transportation for the producers in the area. And in fact, because volumes have increased significantly over the last few quarters, we are now installing higher-capacity pumps and additional tankage on this system to handle higher volumes in the remainder of 2015. Overall, combining our 3 main business segments asphalt, storage and terminalling and crude pipelines, we have more than 80% of our operating margin contracted for 2015, which provides great insulation from the volatility in the crude market. We may experience some downward pressure on rates in our crude oil trucking and producer field services segment as producers and marketers attempt to renegotiate contract terms to preserve their operating margins. This operating segment, which is our smallest, may be negatively impacted in the longer term if lower crude prices are sustained and result in decreased crude production in the field and demand for crude transportation services, but again, this is the smallest segment of our business and is not a focus for growth going forward. Overall, we remain excited about 2015 and believe we are very well positioned to add significant unitholder value. Emily, that concludes my remarks, and we're ready to open up the line for Q&A.

[Operator:]

[Operator Instructions] Our first question is from Gabe Moreen of Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

A couple of quick questions just on the asphalt terminal acquisition. Congrats on getting that done. I was just wondering if this was one of those acquisitions which you've been working on a while and whether there's others that are still potentially out there which could contribute near or closing this year.

[Mark A. Hurley:]

Yes, it is, Gabe. We've been working on this for a few months. And it's a lot of work involved because it's really a 3-party deal, the party we bought the terminal from as well as the party that we're doing the lease agreement with. And so it does take a while to get all those agreements in place. But it is one that we've been chasing for a while and glad to see that's finished. We are looking at some additional opportunities as well that follow the same kind of model. I don't expect anything within the next few weeks, but we are hopeful that we can get a deal like this put together in the near future.

[Gabriel P. Moreen:]

And is that something where those other deals are also kind of these 3-party negotiations where you've got to buy it and then contract it kind of thing?

[Mark A. Hurley:]

Yes, generally, they follow that model. Not in every single case, but generally they follow that same model.

[Gabriel P. Moreen:]

Got it, great. And then on Knight Warrior, any additional commitments of note since the last update? And also on that project, I think you mentioned you hadn't locked in steel costs yet. Any flexibility to the CapEx costs there given what's -- the decline in steel prices of late?

[Mark A. Hurley:]

We do not have any additional commitments. We are working on a couple as we speak, and we're pretty optimistic, especially given the current crude market. So we feel good about that. As far as from a CapEx standpoint, we have not taken the opportunity to lock-in steel prices, but both steel prices and construction costs are moving in our direction. And so we haven't felt the need to lock it in yet, but we will very soon be doing that. But again, from a CapEx standpoint, the budget that we have put in place looks very safe, and I think we will perform well against those -- against that target.

[Gabriel P. Moreen:]

Great. And then last small one for me is I noticed there were some asset sale proceeds in the DCF generation for this quarter. Can you talk about what that was? And is that just a onetimer?

[Alex G. Stallings:]

Which one are you talking about, Gabe? Are you talking about the investment, the investment we sold or just other gains?

[Gabriel P. Moreen:]

Yes, I think that was it, Alex, if that's the $2.3 million.

[Alex G. Stallings:]

Yes, the $2.3 million really related to some units that we received in kind of a settlement of a claim from the predecessor company. It's from SemGroup, some units we actually received as a result of the claim. And so we just turned those into cash in the first quarter of 2015. You will also see that we actually deducted the unrealized gain that we had from those units in the fourth quarter of 2014. So we deducted the unrealized gain from EBITDA in 2014, and then when we sold them, we put in the actual cash proceeds received in DCF in the first quarter of '15.

[Operator:]

Our next question is from Matt Schmid of Stephens.

[Foster Matthews Schmid:]

Pecos River, as you mentioned, seems to be trending nicely. With the installation of pumps and tankage, it should continue to grow. Is there any update on potentially an extension there or adding some gathering systems or truck stations? Just any update on discussions there?

[Mark A. Hurley:]

Yes, sure, absolutely. We're in the process of adding a number of truck stations. Honestly, Matt, I've lost track, but it's probably 3 to 5 truck stations that we're adding now for new customers, so that's a good sign. We have 2 pipeline companies that we are talking to who are anticipating connecting to us, 1 in May and 1 in probably July. And so that will be a source of additional volume as well. And those are situations where -- in one case, it's a gathering system. And in some of those situations, we build the gathering systems. In some cases, they build the gathering system and tie to us. And in this case, it's the latter, right, so they're building the gathering system and tying it into our Highway 285 station. And so that will be additional volume for us. And then we have one other pipeline system out there who wants to connect to provide an alternate route ultimately to the Gulf Coast. And so really good things happening there. And we're taking this opportunity to increase the capacity of that system, and we're doing that much -- honestly, much sooner than we thought we would. So that's good. And then I think that was it. That was it, Matt?

[Foster Matthews Schmid:]

Yes, no, that's great. That's good to hear. Also too -- I mean, obviously, you'll have plenty on the plate with the Knight Warrior project, and that sounds like it's progressing nicely. But also just potentially on the bigger west Texas and southern Oklahoma growth projects you've talked about in the past, just broadly, are producers beginning to get a little bit more clarity on their drilling plans and returns and budgets where they're potentially willing to move forward with discussion from these types of growth projects? Or is there still this too much really volatility at this point where it might take a little bit longer for them to get more confident in committing to projects?

[Mark A. Hurley:]

Sure, sure, yes. So I would say that compared to where we were 1 quarter ago the discussions are much more positive now that we've seen crude price -- knock on wood -- kind of bottomed out where it did and get a little stronger. And so fortunately for us, the Permian has remained an area that producers really like and -- as well as the Eagle Ford because production economics are very good out there, and they've had -- they have a good track record. And so those discussions have never stopped. They have continued. We're talking to producers about both some regional systems as well as some bigger plays. I think that given what the crude market has done over the last 6 months it will still be another few months before there is a producer willing to step up and make a 5-year-plus kind of commitment, but I think it's definitely going in the right direction.

[Operator:]

Our next question is from TJ Schultz of RBC Capital Markets.

[TJ Schultz:]

I guess, just first on Knight Warrior. What's been spent to date? And I think you said you had some orders coming up over the next couple of months. As we just kind of think about spending, I know the bulk or the heavy spend is a ways away, but I think ultimately the question is just as we think about financing is this something that you could easily bridge with debt until the cash flow comes on? Or are there other financing options beyond just straight equity that you are considering?

[Alex G. Stallings:]

I mean, right now, TJ, we're considering everything, I think. I mean, to the extent we can, we're going to do whatever we can with debt. Obviously, the high-yield market's certainly strong right now, so we've definitely been noticing where those are and have been tracking with those. With respect to equity, we're again going to be very kind of cautious and patient and mindful of equity. We have opportunities or options through our sponsors potentially if we wanted to come up with some type of a, calls it, a structured equity solution. But it's not something that we're imminently concerned with because I think we've got plenty of ramp available to us, whether it be through our revolver or other potential debt options. And again, to date, we've spent a little under $10 million on the project to date. And so like I said, I mean, we still have another good, solid year, 1.5 years in front of us to take whatever excess cash flow we generate, plus looking at some debt options, before we really have to really consider any equity options. So we're going to do whatever we can to be real patient about that and not do anything too prematurely because we feel real good about where we are right now. We feel real good about the liquidity we have to do what we need to do on the project in the -- in really the near and midterm.

[TJ Schultz:]

And then just the last thing for me. I'm just trying to get a sense of the absolute and relative size, I guess, really of some of these asphalt acquisitions for you all. I guess, first, if you are able to quantify the price and cash flow impact from Cheyenne. And then or maybe if we think about the opportunity set kind of larger scale out there for you all, just how material really are some of those acquisitions? It -- I guess that business is, what, about 50% of the mix now? So where do you think that goes? Or how much larger would you want the asphalt segment as a mix of your business?

[Mark A. Hurley:]

Yes, I would say, first of all, as far as the terms of this deal, we have agreed with the all the parties that we won't release the specifics of it, so we won't do that. We don't typically do that anyway, but I will tell you to give you some general guidance. This facility was built for something under, say, $20 million. And in these kinds of deals, we're going to be looking to do those at earnings multiples in the kind of high – mid- to high single digits. And this deal fell into that -- into those ranges. As far as the size of these deals going forward, typically these facilities are going to cost somewhere in the $10 million to $20 million range, depending on how large they are. And so if you buy one, you're going to be -- it's going to be that kind of expenditure. Or if you buy a group of assets, which is something that's always a possibility, it'll -- you can multiply that by the number of assets that you buy. And we like this business because commercially it fits an MLP, a midstream MLP, structure very well

[Operator:]

Our next question is from Lin Shen of HITE.

[Lin Shen:]

I'm just wondering, maybe you can talk a little bit about the Cushing storage margin now, what do we see different from 2 months ago and how it can affect your business in the rest of the year. [Audio Gap]

[Unknown Executive:]

Now versus 2 months ago.

[Mark A. Hurley:]

Yes, happy to. And we have Brian Melton, our VP of Business Development, on. And so Brian's deep into the Cushing business and market, so I'm going to turn that question over to him.

[Brian L. Melton:]

Yes, absolutely, Lin. We have -- as the crude oil price has trended up over the last 30 days or so, we have seen a somewhat of a narrowing in the month-to-month spreads, but we really haven't seen any impact in terms of current storage rates. And as Mark mentioned earlier, we're fully leased through 2015 and through majority of 2016 as well, but we get inquiries on almost a weekly basis from customers inquiring about additional storage. And so we have plenty of demand even in the current environment. The market continues to be kind of $1-plus month-to-month rolls. And we wish we had more storage. Unfortunately, we don't, but we continue to see a pretty robust storage market at Cushing.

[Operator:]

[Operator Instructions] There are no additional questions. This concludes the question-and-answer session. I'd like to turn the conference back over to Mark Hurley for any closing remarks.

[Mark A. Hurley:]

Okay, well, thank you very much. We appreciate your interest in Blueknight. We feel very good about our story for the rest of the year. We love the diversity of our business and how it's performing in this market. And we know 2016 is going to be really a great year for us. And so we appreciate your interest. We welcome any further questions that you have after this call is over. And again, thank you for attending.

[Operator:]

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