BP Midstream Partners LP
Q3 2020 Earnings Call Transcript

Published: 5 Nov 2020

[Operator:]

Good morning everyone and welcome to the BP Midstream Partners 3Q ‘20 Results Conference Call and Webcast. Please also note, today’s event is being recorded. At this time, I would like to turn the conference call over to Brian Sullivan, Vice President of Investor Relations. Sir, please go ahead.

[Brian Sullivan:]

Hello and welcome everyone to BP Midstream Partners third quarter 2020 results presentation. I am Brian Sullivan, Vice President of Investor Relations. And I am joined remotely today by Rip Zinsmeister, our Chief Executive Officer and Craig Coburn, our Chief Financial Officer. Before we begin, please take a moment to review our cautionary statement. During today’s presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to the factors we note on this slide and in our SEC filings.

[Rip Zinsmeister:]

Thanks Brian. Good morning everyone and thank you for joining our call today. We have navigated another challenging quarter, a quarter dominated by continuing COVID-19 concerns and an elevated number of storms in the Gulf of Mexico. In fact, the 2020 Atlantic hurricane season has been a historic season in terms of the number of named storms. This impacted our third quarter results and we expected to have some impact on our fourth quarter results as well. That being said, absent these weather impacts our business continued to perform well demonstrating stability and resilience in a tough period. This performance underpinned our ability to declare an unchanged distribution for another quarter while continuing to maintain a robust distribution coverage ratio within our guided range. Let me start today with a few business updates. First, our COVID-19 response. Second, some thoughts on the macro environment specifically refined products demand. Third, the new minimum volume commitment or MVC arrangements we have agreed with our sponsor and fourth, some reflections on the strategy our sponsor laid out on August 4 and in more detail in September. I’ll then hand over to Craig to take you through our third quarter operational and financial results and our guidance for the remainder of the year and we will leave plenty of time for your questions. The COVID-19 pandemic continues to challenge us all from our own personal lives to the broader impacts on the macro environment. Safe operations remain a core value, to-date we have not had any COVID-19 related issues impacting the availability of our pipelines. We continue to monitor local conditions and adapt our operating practices as appropriate. Additionally, we have not sustained hurricane related damage to any of our offshore pipeline assets so far this year. Looking at the macro environment and more specifically refined products demand across the US Midwest. Based on IHS Markit data, gasoline and distillate demand in North America has recovered levels around 10% lower than a year ago. Jet fuel demand remain subdued at levels around 50% below last year. And according to the US Energy Information Administration Pad 2 refining utilization has been recovering faster than other regions in the US. However it remains around 12% lower than this time last year.

[Craig Coburn:]

Thanks Rip. Good morning, everyone. Starting with operational results, total pipeline gross throughput was approximately 1.5 million barrels of oil equivalent per day in the third quarter around 5% lower compared to the second quarter of 2020. We had expected portfolio gross throughput to be higher this quarter compared to the second quarter. however multiple weather events in the Gulf of Mexico during the third quarter negatively impacted throughput on our offshore pipeline. Hurricanes Delta and Zeta in October are also expected to impact fourth quarter throughput on the offshore pipelines. Gross throughput on our offshore pipelines was around 8% lower compared to the second quarter reflecting the impacts of Hurricane Sally and Laura which resulted in various offshore producers temporarily shutting it. We estimate quarterly gross impact on throughput was in the range of 150 to 200,000 barrels of oil equivalent per day. This negative impact was partially offset by higher production from some offshore producers driven by the ramp up of production from new major projects and wells. Gross throughput on our onshore pipelines was around 2% higher compared to the second quarter primarily driven by higher throughput on River Rouge. This reflected the recovery in refined products demand during the quarter with demand returning to levels lasting in the first quarter of 2020 before the full effects of the pandemic on product demand result. This was partially offset by lower volumes on BP2 due to refinery supply optimization by BP. Net income attributable to the partnership for the third quarter was $45.3 million, 12% higher than the second quarter of 2020 reflecting higher throughput on River Rouge as previously mentioned, higher fixed loss allowance revenue in relation to BP2 due to a higher utilized oil price in the quarter. Lower pipeline maintenance expenses and higher income from equity method investments primarily due to the demand recovery in the quarter favorably impacting the contributions from KM Phoenix joint venture. These favorable impacts were partially offset by, the absence of first quarter 2020 deficiency revenue recognized in the second quarter.

[Rip Zinsmeister:]

Thanks Craig. I’ll wrap up with few final messages. It’s been another challenging quarter. but we remained focused on what we can control. First, maintaining safe operations and second, the performance of our assets. Our focus on these areas ultimately begins in service of maintaining the financial strength of the partnership. We have a high quality asset portfolio that continues to perform well. This underpins our expectation and confidence to hold the current distribution level flat to the remainder of 2020 while maintaining a robust distribution coverage ratio, a great outcome in a challenging year. And our balance sheet and liquidity remains strong. Thanks for listening to our call today. Our Investor Relations team are available to speak with you further outside of this results call. And with that, we’ll now take your questions.

[Operator:]

Your first question today comes from Gabe Moreen from Mizuho. Please go ahead with your question.

[Gabe Moreen:]

Two part question on the Gulf first. Can you maybe talk about some of the fields on ramp ups there whether it’s Atlantis or Appomattox kind of where things are in the trajectory? And then I noticed some language in the release around the CHOPS pipeline being down and the impact is on potential shut-in? Is that something you’re potentially thinking may happen or is it another work around is it, that you don’t think that’s going to happen?

[Rip Zinsmeister:]

Good morning, Gabe. This is Rip. Can you hear me okay?

[Gabe Moreen:]

I can.

[Rip Zinsmeister:]

Okay, so your question was two parts first was on offshore activity set and second was offshore delivery, if I got it right. It’s probably fair to say, offshore activity is lagging. It’s kind of confluence of COVID actually effecting both back office work like the engineering support to deliver major projects as well as COVID impacts to drilling cruise. So we’ve seen both. So I’m expecting a delay in drilling wedges and projects slippage likely out of 2021 into 2022. BP announced the Atlantis startup that’s basically on schedule. Shell I think is, let’s just say notionally, one well behind on Appomattox. But honestly those kind of question should be directed to Shell, not me. Okay. We have a very good relationship with Shell and want to keep it that way. And I think BP has also talked about Mad Dog 2 notional slippage. These slippages feel like half years not major slippage. But slippage is slippage okay. And in terms of CHOPS it had some upside circumstances related to one of the hurricanes workaround was put in effect at that point in time and there was no impact to the business. So it’s fair to say that, while we found a way to workaround at once. Lawyers always like when we put a cautionary statement out there when there are things outside our control that could affect our financials. So you should probably see it in that light.

[Gabe Moreen:]

Understood. Thanks Rip. And then second question is bit broader with your cash position net debt being very strong just wondering what organic and inorganic opportunities you may be looking at for 2021 to deploy some of that cash and otherwise balance sheet capacity.

[Rip Zinsmeister:]

So we have a hopper of projects for competitive for proprietary reasons we don’t talk about bespoke projects kind of unwise in our business. The actual CapEx for the entire hopper as it stands right now is substantially less than our cash on hand in many respects. Double-edged sword, right. Good news is, you’ve got plenty of cash on hand with probably like more projects all else being equal. We’ve reviewed all of them and I can say that the IRRs and every project is higher than our yield. So while I don’t like the yield at the moment. It would still bias as to invest in organic projects as oppose to doing something else with cash on hand as our first priority. Okay.

[Gabe Moreen:]

Thanks Rip and then maybe if I could press you a little bit on inorganic is that something you’re still evaluating and seeing anything come across your desk?

[Rip Zinsmeister:]

The investment universe out there is – well let’s put it this way. It’s easier for us to think about inorganic bolt-ons and organic CapEx as opposed to anything substantive and large. Okay. We’re not in the M&A games to increase the size of the firm by 50%. It’s a tough time in the energy world. Our performance is rock solid. I think we’re in generally, enviable position as a firm and where we’re at as BP Midstream. You have your own coverage universe. You can draw your own conclusions. I’ll leave at that, Gabe.

[Gabe Moreen:]

Thanks, Rip. Appreciate the insights.

[Operator:]

And our next question comes from Theresa Chen from Barclays. Please go ahead with your question.

[Theresa Chen:]

First I wanted to ask about the step down on MVC’s overtime over the next three-year period MVC2, is that reflective your earlier comments about supply optimization for Whiting as in rerouting the WCS or do you think that it will consume less WCS somehow as time goes on. Although it would that the differential would likely widen from here? any thoughts around that?

[Rip Zinsmeister:]

Good morning, Theresa. Thanks for the question. It’s probably fair to say to be a bit cautious to read too much into the drivers of the MVC step down. And if I could start from the top and kind of do a deductive reasoning approach to the rationale. First, the machine itself can process more than 320 kbd heavy crude. Okay. Second, the optimization had that we experienced in 3Q had everything to do with doing some maintenance on heavy end of the refinery. So it was actually we had less heavy demand because we had units that we’re working on as opposed to chasing sweet crude versus heavy. There were attractive sweet barrels available and the supply organization of course access those but it was really more about working on the heavy end of the kit. And then the MVC has more to do with just accessing the crude. BP2 can transport substantially more than even refinery nameplate so it’s not a problem of our pipes being unable to get heavy to Whiting. It is not an issue of Whiting being unable to process more than the MVC, its access and even in the most recent month we were seeing 20% plus apportionment. So the challenge that we found is when the differentials are attractive, too many players in the market, all one access to the same crude and we’ve struggled to get it. And then you pivot into Enbridge Line 3 and contract carriage. We think we’re comfortable playing at space with a certain fixed component and the trader is going to chase opportunistically, topping above fixed component that is been decided as yet. But that’s why the MVC steps down in the later years.

[Theresa Chen:]

Understood and longer term when we think about the points and availability of egress out of Western Canada and if XL does not move forward. But Trans Mountain expansion does and the marginal price setting point for that barrel is Asia. How does that affect the competitive dynamics of WCS being consumed in Midcon and Whiting particular?

[Rip Zinsmeister:]

Okay, needless to say that’s probably a very complicated question. I would say we see more intensity over five years chasing potentially fewer barrels. I think at least in terms of – from an access standpoint. When you look at the Canadian landscape, there are periods when people think every pipe got built, we’re going to be over piped. If only two pipes got built and the Canadian producers continue on their trajectory then rail is the natural solution and this will remain wide. The last I looked, it looks like Canadian production is pretty much going to be back to late 2019 levels by late 2020. Next year we think there are going to be more or less on trend. So I think we’re going to see potential apportionment again. And I think the world will be competing for those barrels. TMX probably isn’t that big of a problem in the round. But it has everything to do with Canadian supply, right?

[Theresa Chen:]

Sure, okay, that’s very helpful. And lastly, if can I ask about the offshore outlook in light of many moving pieces on the legislative political front. What if any impact do you anticipate if there is a federal lease ban put in place. If the permitting process is slower, can you offer any color or thoughts around that?

[Rip Zinsmeister:]

This probably falls more in the area or speculation and judgment and wouldn’t want to labeled as such. First, maybe offshore game is a long cycle game, right. So I think if you look at Appomattox is an example of the latest significantly large field put into production. I think it was discovered in circa 2009, so it was a 10-year cycle time from discovery to even the very front end of first production. So if they stop leasing next year, it has a 10-year implication on our business that far forward. So in the near term. No impact whatsoever. I think there’s a federal lease schedule in the next two weeks. BP is a registered bidder. Okay. Now whether the leases are awarded, a different topic, right? Actually I’m not sure we know, who’s won the election yet. And then on the permitting front kind of living the space of contract is a contract. So all of the industry players could pay good money, pay royalties and will prosecute their business accordingly. It’s fair to say that BP like all large integrated international oil companies, we have constructive relationships with governments’ all around the world and that will certainly include, whatever administration comes in.

[Theresa Chen:]

Thank you very much.

[Operator:]

our next question comes from Derek Walker from Bank of America.

[Q –Derek Walker:]

Maybe if you can just.

[Rip Zinsmeister:]

By the way, Derek. I don’t even know your question is, but I think I’m going to hand it to Craig to get him in the game. So I’ll wake up my CFO with that warning.

[Craig Coburn:]

Rip, you’re doing a splendid job. I don’t know why you need to hand it off, but anyway go ahead.

[Q –Derek Walker:]

He’s already retiring, right. So there you go. Just a real quick one here, with BP2 volumes. Too many for the quarter, you need to reset the MVC at 300, just given the dynamics that you see, do you feel like you can get either at or above those levels going into next year? I’m just trying to understand sort of how you guys are thinking about the dynamics with near term?

[Craig Coburn:]

You got it, Rip. Go ahead.

[Rip Zinsmeister:]

Go ahead, Craig.

[Craig Coburn:]

I was just going to say, we’re going to be careful about giving 2021 guidance, Derek. But I would say yes, I think that we feel good about that 300 range. With the caveats that Rip talked about. In the world of dips, when the dips widened people go after the Canadian crude and it results in the apportionment game again. Right? But we do expect that the Canadian production as Rip said it’s going to come back towards the end of this year and into 2021. There’ll be more available. The dips we hope will widen and will be in the market to go after that. So I think when we set these I think again coming back to sort of the text we had in the beginning of the call. You need to think about these as good downside protection to the partnership and not necessarily indicative over the forecast and things that we’ll be talking about going forward. I mean we’re very pleased with the fact that we’ve got this three-year deal now with BP and we have this underpinning our cash flows going forward.

[Q –Derek Walker:]

Appreciate that. And maybe a little higher level, just on some of the – was there lot of back and forth between you and BP and you know sort of the legacy investor preference for the multi-year extension. But was there a lot of back and forth around, how to think about either commodity prices, demand versus obviously a slower factors that went into it. But just trying to feel how the discussions actually played out over the last couple of months?

[Rip Zinsmeister:]

I’ll take the lead on that one. Actually I’ll supplement what Craig had to say about the 2021. So the first point would be the machine can process more than 320. In terms of heavy and it is the most attractive crude that we want to process. The question is, can you get it? We’ve had historically weeks where we’ve processed more than 330, 340. The challenge of course is, can you do that consistently month in, month out? The reality has been, no. And opportunistically what tends to happen as you nominate crude and then some other player has an upset condition at their refinery and then there is incremental crude available that you’re buying from them, that they have nominated, that’s how you get surplus crude above say 310, 320 occasionally. But you can’t run your business on a planning basis, that’s going to happen month in, month out. So that’s the color, Derek. Then on the MVC’s, we IPO the business in 2017. The landscape on what pipes were going to be built when has changed quite frequently obviously given Presidential permits, legal challenges, continually legal challenges, expressed statements by candidates about KXL and here we sit, not quite sure what the election result is. It’s fair to say the ambiguity about Line 3 and KXL has changed or shaped our views, quarter in, quarter out and we’ve talked about this back and forth. At one point, what I might characterize is kicking the can down the road of just doing a single year because there’s too much uncertainty, was a possibility. But we as BP Midstream we’re comfortable with that, nor was our sponsor really advocating it as the desired outcome. So this is the comprise we’ve reached. And clearly by my testimony, we still see ample ambiguity in the future of what’s really going to happen.

[Q –Derek Walker:]

Understood and then maybe I’ll just ask one last one. March you talked about diluent to the gasoline supply, just how you kind of think about that dynamic over the near term?

[Rip Zinsmeister:]

Diluents, a bit of a surprising market, it’s got too many moving points. Right so you’ve got Canadian condensate supply which is local, the relative attractiveness is selling that condensate to someone else versus using it as diluent. And then the recycle game of shipping diluent from far south which some people do much further south than us. Our bias is to make gasoline out of it when we can. But when we’re in such a challenging market as the one we’re in. And the Canadian producers actually want diluent. We see Q4 is being a bit of soft and diluent from a planning basis. But we’ve must say we probably had a 100% increase in diluent demand in two weeks and it’s just a volatile market at the moment. So our bias is to make gasoline quite frankly which is why the MVC is been stepped down.

[Q –Derek Walker:]

Got it. Appreciate that. Look forward to working with the new officers, Craig congrats on your retirement and good luck with your next endeavors. It was a pleasure working with you. Thanks guys.

[Craig Coburn:]

Thank you, Derek.

[Operator:]

And ladies and gentlemen with that we’ll conclude today’s question-and-answer session as well as today’s conference. We do thank you for attending today’s presentation. You may now disconnect your lines.