BP Midstream Partners LP
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good morning everyone and welcome to the BP Midstream Partners First Quarter 2018 Results Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today’s event is being recorded. And at this time, I like to turn the conference call over to Mr. Brian Sullivan, Mr. Sullivan, please go ahead.

[Brian Sullivan:]

Hello and welcome. This is BP Midstream Partners first quarter 2018 results webcast and conference call. I’m Brian Sullivan, Vice President of Investor Relations. And I’m here with our Chief Executive Officer, Rip Zinsmeister; and Chief Financial Officer, Craig Coburn. Before we start, I would like to draw your attention to our cautionary statement. During today’s webcast presentation and conference call, we will make various forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors we note on this slide, and also in our SEC filings. We will also refer to non-GAAP financial measures. Please refer to our SEC filings and supplementary information for important disclosures related to these measures. These documents are also available on our website. Thank you and now over to Rip.

[Rip Zinsmeister:]

Good morning everyone and thank you for joining us for BP Midstream Partners' first quarter 2018 webcast presentation and conference call. We held our fourth quarter and full year 2017 results call just over a month and a half ago. We spent quite a bit of time during that call, providing an overview of BPMP including details about our differentiated investment proposition and our sponsor. Today, we plan to keep our call much shorter focusing on the operational and financial results for the first quarter, our financial planning through 2020 and our future asset dropdown inventory. I will discuss our operational results. Then hand over to Craig to take you through our financial results and remind you of our financial frame. I'll then come back to provide some more details about our future asset dropdown inventory then briefly summarize some key messages before we take your questions. Before reviewing our operational results though I'd like to mention that yesterday, the Board of Directors of the general partner announced the appointment of Michelle Joy, as an independent director. We now have filled the last of three independent board positions, bringing the total number of directorships to eight, an important step in our governance aspirations. I would also like to briefly cover the impact of BPMP of the recent FERC income tax allowance policy changes and our exposure to potential indexation changes in 2020. As you will be aware, the FERCs income tax allowance ruling applies to tariff set by the cost to service methodology either at the time of setting new rates or when rates are protested by active shippers who think existing rates are unjust and unreasonable. There is also an ongoing interest in how the FERC will factor the reduction of income taxes into the five-year oil pipeline inflation rate model due to be reset in 2020. Firstly, we have no cost base rates in the existing asset portfolio. We have only a few cost base rates for the assets that we have negotiated, a seven-year right of first offer on, what we refer to as the ROFO assets. We have even fewer assets where third-party shippers are present. In many cases, a BP affiliate is the only shipper. Therefore, the risk of a protest to reduce rate is considered highly unlikely. Even if there was a protest of the cost base tariffs in the ROFO assets, the current tariff rates are set substantially below the ceiling level, providing more than sufficient headroom against any loss and income tax allowance. Meaning the tariff rates would not change, even if we lost the entire income tax allowance. Regarding changes to indexing in 2020, it is too early to tell how the FERC will factor the reduction of income taxes into the five year oil pipeline inflationary rate model. However, we do not expect the changes to have either a permanent or a material impact on the allowed earnings of BPMP or the ROFO assets. On that note, I will move on to our operational results. We delivered a strong operational result during the first quarter of 2018 with total gross throughput of 1.5 million barrels of oil equivalent per day. This was 5% higher compared to the fourth quarter of 2017 where our fourth quarter throughput is based on our pro forma asset portfolio for the full quarter. This solid operational delivery reflected increased throughput on the Mars, Proteus and Endymion pipelines, driven by increased production from various offshore fields serviced by these pipelines. Increased throughput on the Diamondback pipeline where we were able to opportunistically capture additional volumes with third-party shippers and BP's integrated supply and trading group during the quarter, and the assets Gulf and Mexico weather related impacts that occurred early in the fourth quarter. This increase was partially offset by decreased throughput on the BP2 pipeline due to the Enbridge mainline apportionment that occurred during the quarter. Looking ahead, we expect second quarter throughput to be lower than the first quarter, reflecting plan maintenance on the Mars platform and other facilities in the Gulf of Mexico, and the absence of elevated diluent volumes on Diamondback as occurred in the first quarter. We expect this impact to be partially offset by increased throughput on the Proteus and Endymion pipelines and improve throughput on the BP2 pipeline. First quarter average revenue per barrel on a portfolio basis was slightly lower compared to fourth quarter. However, on a full-year basis, we expect average revenue per barrel to be broadly flat compared to 2017, calculated on a like-for-like basis. With that, let me hand over to Craig to take you through the financial results and financial frame.

[Craig Coburn:]

Thanks, Rip, and good morning everyone. We reported a solid financial result during the quarter, exceeding the IPO forecast we gave for the same period. On April 17th, the Board of Directors of the general partner of the BPMP declared a quarterly cash distribution of $26.75 per unit for the first quarter of 2018. The distribution will be paid on May 15th to unit holders of record as of May 1st. The increase of the $0.015 over the partnerships to minimum quarterly distribution reflects our confidence in the underlying performance of the partnership during the quarter and the expected organic growth and cash available for distribution throughout 2018. Before I talk about the results in more detail, a reminder that for periods prior to our IPO on October 30, 2017 financial data consists of the combined operations of our predecessor, this means that in the comparison table on this slide first quarter 2017 results comprised financials for our predecessor only. Fourth quarter 2017 results comprised financials for our predecessor up to October 30 and financials for BPMP from October 30 to December 31, 2017, and our first quarter 2018 results comprised financials for BPMP for the full quarter. Assets comprising our predecessor are only a subset of the post-IPO period asset portfolio. The assets of our predecessor include BP2, River Rouge and Diamondback pipeline. They do not include our interest in the Mars or Mardi Gras joint ventures. As a result of the differences in asset composition across periods, today I will focus on comparing the first quarter results to the IPO forecast for the same period. Of course as we move forward in time, the comparability of our actual results to prior periods will improve. First quarter revenue was 26.6 million compared to our IPO forecast of 26.8 million. First quarter revenue does not include any net adjustments for volume deficiency under the throughput and deficiency agreements with BP products North America. However, we did report approximately 1.3 million in net adjustments from volume deficiencies in relation to these agreements due to BP's actual throughput being below the minimum contracted volume amount on the BP2 and Diamondback pipeline. As Rip previously mentioned, throughput on the BP2 pipeline was negatively impacted by the Enbridge mainline apportionment that occurred during the quarter. Apportionment average 44% during the quarter. BP's throughput on the Diamondback pipeline was also negatively impacted by products like optimization at the Whiting Refinery, which saw a greater amount of gasoline produced during the quarter, resulting in less diluent shift However, working with BP's world-class training group, together with the seasonality of increased diluent usage during the winter months, the partnership was able to opportunistically capture revenue from shippers seeking additional diluent capacity during the period. On this pipeline, we were compensated under the MVC arrangements and temporarily captured revenue from third parties shippers. Taken together, the revenue and net adjustments from volume deficiency agreements totaled 27.9 million, exceeding the IPO forecast for revenue by 1.1 million. This primarily reflected the increased throughput on the Diamondback pipeline. Costs and expenses for the first quarter were 8.6 million slightly lower than the IPO forecast of 9.7 million, reflecting lower insurance rates and lower variable expenses. First quarter income from equity method investments comprising our interest in the Mars and Mardi Gras joint ventures was 22.8 million compared to the IPO forecast of 23.7 million. The slightly lower income was due to lower throughput on the Caesar pipeline. Net income attributable to the partnership, which eliminates the 80% non-controlling interest in Mardi Gras joint ventures was 30.5 million compared to the IPO forecast of 29.7 million. Non-GAAP measures of adjusted EBITDA and cash available for distribution were 35.2 million and 36.5 million respectively. Adjusted EBITDA was 2.8 million higher than the IPO forecast, benefiting from higher cash distributions from Mars and Mardi Gras joint ventures, reflecting higher throughput in prior periods joint venture performance. Cash available for distribution was 4.8 million higher than the IPO forecast, reflecting increased distributions for Mars and Mardi Gras joint ventures, and net adjustments from volume deficiency agreements of 1.3 million. Our distribution coverage ratio was 1.3 times higher than the top end of our forecast range of 1.1 to 1.2 times. I'll return to this again in a moment on the next slide. Let me remind you of our financial frame. For 2018, guidance for our existing asset portfolio is consistent with the information in our perspective. Organic distribution growth in 2018 is expected to be driven by increasing throughput to approximately 1.5 million barrels of oil equivalent per day with our average revenue per barrel on a portfolio basis, remaining broadly flat with 2017 on a like for like basis. Estimated total maintenance expand is expected to be around 7 million in 2018 the majority of which will be expense. This is slightly higher than the guidance we gave during our fourth quarter and full year results call, reflecting increased estimated maintenance spend in the Gulf of Mexico. Cash available for distribution is forecast to be greater than 126 million and outstanding borrowings of 15 million under our credit facility with an affiliate of BP were repaid earlier this month. In the very near term, we expect adjusted EBITDA in the second quarter to be lower than the first quarter. We expect our distribution coverage ratio in the second quarter which is above the top end of the range during the first quarter to be at or slightly below the lower end of the range before returning to a more normal level within the range for the remainder of the year. The trend of lower adjusted EBITDA and distribution coverage ratio in the second quarter is consistent with the assumptions in the IPO forecast and reflects, forecasted reduced volumes and cash distributions from the Mars joint venture following the Marist platform turnaround in the quarter and higher maintenance expenses related to onshore pipeline consistent with the seasonal phasing of maintenance works through the fall. Looking out through 2020, we expect continued organic growth of the existing asset portfolio through increased growth throughput and average revenue per barrel to support our target 5 to 6% organic distribution growth. Estimated total maintenance spend is forecast to remain consistent with 2018 levels, subject to future dropdown activity, including inorganic activity. Cash available for distribution is expected to be sufficient to achieve our growth aspiration of mid teens per annum unit distribution growth, while maintaining a distribution coverage ratio in the range of 1.1 to 1.2 times. And we are committed to targeting investment grade credit metrics with our debt to adjusted EBITDA ratio not exceeding 3.5 times. With that, I'll hand back to Rip.

[Rip Zinsmeister:]

Thanks Craig. I will now talk more about our future asset dropdowns. The box on the left side of this slide represents BP's entire U.S. business. As I have previously mentioned, virtually all of BP's material U.S. business is technically qualifying income, save for some minor exceptions such as a chemical plant and the ultimate end sale to the customer. The EBITDA proxy of U.S. business is large. It generated approximately 4 billion in 2016 and 8 billion in 2017. Details of how this EBITDA proxy was calculated can be found in the footnote on this slide. Of course, the entire pool of qualifying income assets includes oil and gas production facilities and refineries. There are not necessarily dropdown candidates for BPMP as they don't exhibit characteristics that align with BPMP's differentiated investment proposition. Our proposition that is built upon stable and predictable cash flows and assets that are strategically located with opportunity for growth. Our focus is on selecting assets with high quality qualified income. The subset of assets that do align with our investment proposition is shown in the block pyramid diagram on the right side of the slide. You will recognize a pyramid diagram from our last results call. This subset comprises an extensive portfolio of assets across multiple asset categories, spanning multiple phases of the midstream value chain. However, it is important to remember that this portfolio isn't static. For example, we are working with BP's world-class training group along with BP's upstream and downstream segments to actively progress a hopper business development opportunities and investment ideas that would expand the asset pool behind the pyramid. The bottom layer of the pyramid which is labeled downstream pipeline represents all of BP's pipeline assets in the contiguous lower 48 and offshore Gulf of Mexico. There are more than 2,600 miles of pipeline available as potential dropdown candidates. And in support of our drop program, we negotiated a seven-year right of first offer or ROFO that covers these downstream pipeline assets. These ROFO assets will be a source for our mid teens per annum, per unit targeted growth and annual distributions in the first three to four years from annual drops market conditions permitting. We have included in the supplementary information section of our result slides a sample of the ROFO pipeline assets. We do anticipate that additional inorganic growth options will become available higher in the pyramid and may displace the timing of drops in some of the ROFO assets. You need only look to our peer group to see evidence of this approach. For example, we are aware of Shell's recent presentation, suggesting a path towards upstream platforms and even Trinidad, Phillips 66, Valero, Marathon and Endeavor have provided a roadmap for progressing drops in and around refineries. And we are aware of the track of Marathon including marketing distribution and services. The extent and pace at which we follow our peers will be balanced against our business development agenda. The takeaway message for you is that our strategic relationship with BP and the scale of its asset portfolio across the midstream value chain provides us with access to a large inventory of future dropdown candidates. It creates asset optionality for us to drive top tier growth in distributions for many years. So in summary, we delivered a strong first quarter results driven by organic throughput growth. We declared an increased distribution for the first quarter, signaling our confidence in the sustainable performance of the partnership and the forecast organic growth and cash available for distribution throughout 2018. This is aligned with our differentiated investment proposition to deliver unit holders consistent top tier distribution growth. We are well positioned to deliver stable and predictable cash flows with a diverse asset portfolio that is strategically located and highly integrated. We have strong visibility of attractive organic growth opportunities and strategic acquisitions of assets from BP well into the future. Taken together, we forecast mid teens distribution growth per annum, per unit over the next three years. Thank you for listening. I will now take your questions.

[Operator:]

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] All right, we have a question from JP Morgan, Jeremy Tonet. Are you there? Please proceed.

[Unidentified Analyst:]

This is Bill on for Jeremy. Just curious on the dropdown EBITDA that you mentioned and recognizing the total pool of U.S. qualifying income, any breakdown you can share between the subset of assets that you've considered putting into the MLP and then maybe between the categories of the pyramid?

[Rip Zinsmeister:]

So far, our guidance has really been distribution growth oriented as opposed to lumping EBITDA pools. We're comfortable in that space. It's not dead certain what pacing will take it in terms of how things come out of that pyramid. I reviewed with the board this week, the next two-year profile and candidates for drop. We anticipate will be taking things from the second tier and the bottom tier.

[Unidentified Analyst:]

And then just touching on Diamondback, I know you mentioned the ability to put marketing barrels on that pipeline. Can you just explain a little bit on that and what the outlook is for the rest of the year there?

[Rip Zinsmeister:]

So, Diamondbacks services diluent to the Canadian oil fields and historically basically it takes substantially more diluent during the winter because of viscosity of the heavy crude to ship --heavy crude during the winter versus the versus of the year. So, we see stronger volumes in December, January, February and that's consistent over the last three to four years. We build our MVC volume to more or less equal out on an average basis. We had an exceptionally strong Q1, but that's not sustainable through Q2, Q3 and then we'll pick backup tail end of the year.

[Unidentified Analyst:]

And then just one last one. If you could touch on, any expected organic growth in the Gulf of Mexico through the end of the year in terms of maybe some, if there are any tie backs to platforms that feed into your pipeline?

[Rip Zinsmeister:]

It's probably fair to say that we are very bullish on the GoM deepwater. With our partner, Shell, there's a lot of activity out there. I do anticipate incremental volumes in the second half of the year, but that's really not my press release or my news. So that's all I'm going to say at this point,

[Operator:]

Our next call is from Mizuho, Brian Zarahn. Brian, go ahead.

[Brian Zarahn:]

Appreciate the update on the dropdown inventory circling back the 40 billion of EBITDA. Can you just review what's comprised 8 billion is a very large number, you mentioned I thought downstream. So are you including refinery EBITDA in that number? And just help us get a little more better understanding of what the dropdown inventory is for more traditional midstream assets in that number?

[Rip Zinsmeister:]

Okay, I think it's fair to say because we consolidate at the group level and also at the U.S. It's not as easy as it first appears to carve out and allocate income, qualifying income to midstream businesses. So, we haven't gone through that exercise and we realize the market has a keen interest in, how big might big be. These numbers are from our financial and operational report that we provide to the market, which breaks out the U.S. by segments. They've been conservative. So the actual numbers would be 10 to 20% higher if you get to the exact decimal math. Mindful of my caveats that not everything we do is qualifying income, so we thought this was representative. And then if you want to take just a really high level view about a third of it is downstream.

[Brian Zarahn:]

Two-thirds of 8 billion of EBITDA really classified as midstream?

[Rip Zinsmeister:]

No, not at all, what I said was two-thirds is upstream oriented, which would include upstream gathering pipes and processing plants et cetera, et cetera. So that's a cut -- the group does on our lines of business.

[Brian Zarahn:]

The two-thirds of 8 billion of upstream, so that includes, you're saying that's inclusive of production and related midstream services provided to the upstream business?

[Rip Zinsmeister:]

Excellent, correct.

[Brian Zarahn:]

And then as it relates to what you've shown previously and today on the four categories of dropdowns. What percentage of those four buckets comprise of the 8 billion amount of EBITDA?

[Rip Zinsmeister:]

We haven't made that cut yet, so I'm sorry I can't answer that.

[Brian Zarahn:]

Is there an approximate percentage or way to think about even -- whatever percentage it is, it's more than enough -- provides more than enough visibility to meet your growth objectives, but it is helpful for I think the market to go farther out in the future in terms of what the growth potential is for the MLP. Okay, I guess we'll move on from there.

[Craig Coburn:]

Brian, this is Craig. I think we can have you address that with investor relations a little bit deeper.

[Brian Zarahn:]

And then, sure on dropdowns you've identified what the likely near-term dropdowns will be. Any updated thoughts on the timing and the second half of the year and the financing plan?

[Rip Zinsmeister:]

Thanks for that Brian. So, we're targeting doing a drop in the latter half of this year, timing of which is still a bit fluid. From our introductory comments, we just brought our last board member on board roughly three days ago. So we reviewed our distribution growth plans our dropdown inventory due diligence results, and we are priming the conflicts committee to get ready for a deeper dialogue about the drop.

[Brian Zarahn:]

In terms of the financing even net cash position, is it fair to assume for now that the first drop will likely to be debt financed?

[Rip Zinsmeister:]

That’s a fair assumption. We're out on the road at the IPO and said we wanted to grow into our balance sheet. That's one of the reasons why we went out that three. We wanted that flexibility given the dynamics of the market. So, our intercompany loan facility can comfortably handle the size of the drop. We will monitor where the equity markets are at, but easily more than half will be debt financed if not all, okay.

[Operator:]

Our next call is from Bank of America's Derek Walker. Derek, go ahead.

[Derek Walker:]

In terms of quick one, you mentioned just some turnaround this year, and I think you mentioned the queue or queue for margin Diamondback should -- might be down quarter over quarter. Do you have a sense on what that like be? You mentioned the strong quarter for Diamondback. Do you feel like those volumes might be more in line with sort of 4Q levels and similarly on Mars?

[Craig Coburn:]

Thanks for the question Derek, it's Craig. I think that in terms of the Diamondback volumes actually what we are seeing through the second quarters is that a little bit stronger right now than they were in the fourth quarter. But we would probably guides back closer to fourth quarter levels and levels consistent with what we said in the IPO. But right now they are little bit stronger than we had in the fourth quarter. In terms of Mars shutdown, I think generally speaking we are guiding towards a sort of $3 million to $4 million EBITDA impact from the Mars piece for second quarter in terms of cash and net income there.

[Rip Zinsmeister:]

And this is Rip, following on Craig's comments. Shell's had disclosure about what's going on at Mars. It looks like there are more or less on time as they are bringing certain fields back on. So, look to their disclosure.

[Derek Walker:]

And just one little on the dropdown. You've obviously provided a lot of commentary there, but you also mentioned that it continued, I know plethora of a pack lot of inventory, but you also mentioned that it continues to grow too. So, what are some of the opportunities you are looking at or in discussions with BP to continue to grow that backlog?

[Rip Zinsmeister:]

Actually, it comes in two parts. So we see organic growth in our business, which we haven't really talked about line conversions, line extensions as well as the ability to fill the capacity of existing lines where they're not fully utilized. So, that's the one call it low hanging fruit, but it's certainly attractive fruit. So, we are working that and in addition in the broader business development arena. We are contemplating some inorganics with BP. Those are if you know the inorganic game, the likelihood of capturing any one particular opportunity is relatively low like more than expected value approach to that, and as well as the organics to grow our business is very early days. So we've we pulled together a multi-segment approach to how we want to grow the midstream and the fruits of that labor will be really a 2019 type dialogue and not this year. I hope that response of your question there.

[Operator:]

Our next question comes from MUFG Securities, Barrett Blaschke. Barrett, go ahead.

[Barrett Blaschke:]

If I'm looking around the space, one of the things we've seen from a lot of the newer, the younger dropdown story MLPs is that they are actually backing off the pace of the dropdowns partially because you've sort of an unfriendly equity capital market environment out there right now for new stock and partially because they are able to achieve the growth targets without the drops. Is that something you guys evaluate? Do you look at going maybe moderating pace at all or anything like that? I know we're probably too early for that for you guys. but is that something that you've looked at all.

[Rip Zinsmeister:]

Well in a perverse way, I’d like to say the answer is no. We are very serious about the commitments we've made to the market, right. So, commitments too strong, target is a better a more new ones term when you lawyers in the room. So, I'll reverse to -- our targets are our targets, and we intend to deliver against our target, right. So, it then becomes more of, you monitor your business. We're I'd say happy with our organic growth and the existing assets, but again those are consistent with what we call the market at the time and the IPO and a drop downs will feature in meeting our targets to the market. And then, it becomes really an issue of what's the optimum financing mix given in the market environment.

[Brian Sullivan:]

We have no further questions in the queue at this time, so this concludes our call today. Follow-up questions however can be directed to investor relations. Our contact information is amiable on the BPMP website. Thank you for your time and listening today.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.