BP Midstream Partners LP
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning everyone, and welcome to the BP Midstream Partners Second Quarter 2018 Results Conference Call and Webcast. 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] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Brian Sullivan, Vice President of Investor Relations. Mr. Sullivan, you may begin.

[Brian Sullivan:]

Welcome to BP Midstream Partners second quarter 2018 results presentation. I'm Brian Sullivan, Vice President of Investor Relations. And I'm here today with our Chief Executive Officer, Rip Zinsmeister; and Chief Financial Officer, Craig Coburn. Before we begin, I would like to draw your attention to 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 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 Web site. Now, over to Rip.

[Rip Zinsmeister:]

Thanks, Brian, and good morning everyone. Thank you for joining us. We delivered another strong result for the second quarter with both operational and financial performance of the portfolio exceeding the IPO forecast we gave for the same period. With continued growth in earnings and cash available for distribution, the Board of Directors of the General Partner declared an increased quarterly cash distribution of $27.25 per unit for the second quarter, an increase of half a cent over the first quarter distribution, and cumulatively $0.01 over the minimum quarterly distribution. This distribution increase demonstrates our commitment delivering on our differentiated investment proposition to deliver unitholders consistent top tier distribution growth. I will start today by summarizing our operational results. Craig will then take you through our financial results and financial frame. I will come back to summarize our key messages regarding asset dropdowns and distribution growth before we take your questions. Our second quarter total gross throughput was around 1.4 million barrels of oil equivalent per day, slightly lower than the first quarter, consistent with our previous guidance. Even though throughput was slightly lower than last quarter, this was still a solid result, exceeding the IPO forecast for the same period. During last quarter's results call, you may remember that we guided to lower gross throughput in the second quarter, expecting maintenance on facilities in the Gulf of Mexico to affect throughout on the Mars and Mardi Gras pipeline systems, and lower diluent volumes to be captured on the Diamondback pipeline. During the second quarter, we did see lower volumes on the Mars and Mardi Gras pipeline systems compared to the first quarter as a result of the planned [ph] maintenance. However, this was partially offset by increased throughput on the BP2 pipeline, with record levels of crude process at the Whiting Refinery during the quarter, notwithstanding ongoing apportionment on the Enbridge mainline, increased throughput on the River Rouge pipeline with increased production at the Whiting Refinery and strong consumer demand, and continued elevated diluent volumes on the Diamondback pipeline, albeit slightly lower than what we saw in the first quarter. Our IPO forecast anticipated the planned maintenance in the Gulf of Mexico during the second quarter, and throughput on the Mars and Mardi Gras pipeline systems was broadly consistent with that forecast. The increased throughput on the River Rouge pipeline together with the continued elevated diluent volumes of Diamondback contributed to the outperformance of the portfolio relative to the IPO forecast. Looking ahead, we expect third quarter throughput to be higher than the second quarter, reflecting the completion of planned maintenance on facilities in the Gulf of Mexico that occurred during the second quarter, and increased volumes in the Mars pipeline system from the start-up of Kaykus [ph] and increased deliveries via Amberjack. This will be partially offset by lower throughout on Diamondback as diluent volumes return to more levels, lower throughput on River Rouge and the impact of plant maintenance at the Whiting Refinery, which is scheduled to commence in late September and last for approximately seven weeks. A reminder that we have minimum volume commitment arrangements in place with BP with respect to throughput on our onshore pipelines, mitigating the impact of cash available for distribution of the plant maintenance at Whiting. Second quarter average revenue per barrel on a portfolio basis was broadly flat with the first quarter, consistent with our guidance. On a full-year basis, we continue to expect average revenue per barrel for the existing asset portfolio to be broadly flat compared to 2017, calculated on a like-for-like basis. Now, over to Craig.

[Craig Coburn:]

Thanks, Rip. Good morning everyone. Our financial results in the second quarter were strong, with net income, adjusted EBITDA and cash available for distribution all exceeding the IPO forecast we gave for the same period. Net income attributable to the partnership for the quarter was $30.5 million, exceeding the IPO forecast by approximately $3.5 million, and consistent with the first quarter. The result does not include any deficiency revenue under the throughput and deficiency agreement. Compared to the IPO forecast, the higher results reflected increased revenue related to BP2 with higher realized prices favorably impacting fixed loss allowance revenue during the quarter, and increased revenue related to Diamondback and River Rouge driven by higher throughput. Adjusted EBITDA was $33.6 million for the quarter and cash available for distribution was $32.5 million, both exceeded our IPO forecast. After factoring in the increased distribution, our distribution coverage ratio was 1.14 times, which is within our forecast range of 1.1 to 1.2 times. In the third quarter, adjusted EBITDA is expected to be broadly consistent with the second quarter. Higher dividends from our joint venture interests are expected to be largely offset by the impacts of lower throughput on Diamondback as diluent volumes return to more normal levels. The phasing of maintenance activity in plant in the third quarter and lower fixed loss allowance revenue from BP2 as Whiting Refinery commences plant maintenance late in the quarter. Our distribution converge ratio is expected to be within the range of 1.1 to 1.2 times. Turning to our financial frame, you will recognize the table on this slide from our previous results call. Our 2018 guidance is largely changed, as is our guidance through 2020. However, having outperformed our cash available for distribution guidance for the first two quarters of 2018, we are raising our full-year guidance for 2018 to 130 million to 135 million, up from 126 million. With that, I will hand back to Rip.

[Rip Zinsmeister:]

Thanks, Craig. Our differentiated investment proposition is to deliver unitholders consistent top tier distribution growth. Combining attractive organic growth opportunities and strategic acquisitions of assets from BP, we forecast mid-teens distribution growth per annum per unit over the next three years. We are committed to the distribution growth targets we have made to unitholders, and we are focused on consistent delivery against these targets. Let me explain how we will achieve this. Organic distribution growth from our current asset portfolio is expected to average 5% to 6% per annum per unit. This growth will be achieved by increasing throughput on existing pipelines with surplus capacity, which can be achieved without capital expenditure. Forecast increased processing of Canadian crude at BP's Whiting Refinery provides visible growth opportunities for our current onshore pipeline portfolio. Forecast production growth from offshore Gulf of Mexico fields provides opportunities to leverage to pre-invested surplus capacity available on pipelines that form the Mars and Mardi Gras joint ventures. We see a lot of expiration and development activity in the Gulf of Mexico and remain bullish on the potential growth from this region. In addition, we are evaluating a range of business development opportunities such as line extensions and product batching optimization that may add to our organic growth. Inorganic distribution growth is underpinned by our strategic relationship with BP. The scale of BP's midstream value chain assets provides us with access to a significant inventory of drop down candidates including all of BP's downstream pipelines in the contiguous lower 48 and offshore Gulf of Mexico. These assets are included in a seven-year Right of First Offer or ROFO. These drop candidates have stable and predictable cash flows, are strategically located and highly integrated with BP's upstream and downstream portfolios and provide asset optionality to drive top tier distribution growth for many years. BP is a supportive sponsor having strong incentive and alignment to recycle midstream capital using BPMP. Confirming the drop we plan to do this year, we are targeting to execute this during the second half of the year as previously communicated. We continue to work the drop. We expect it will include an asset or assets from the bottom two tiers of our dropdown inventory pyramid as shown in our supplementary information and be consistent with the asset characteristics that align with our differentiated investment proposition. We anticipate a drop that could be at least half the size of our initial IPO. Of course, this is subject to change as the asset mixes progress and finalized and depending on market conditions. We will remain flexible and opportunistic regarding financing of the drop. We anticipate using our revolver facility. We'll also evaluate the use of equity depending on market conditions. Our conflicts committee is in place and comprises the three independent directors. The committee is actively reviewing and evaluating drop down materials in advance of the anticipated drop. Let me close by reiterating again the takeaway messages for you regarding future asset drop downs. 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 drop down candidates. This inventory comprises assets that exhibit stable and predictable cash flows, are strategically located with opportunity for growth, giving us many choices to drive top tier growth and distributions for many years. Our focus is on selecting assets with high quality qualified income. We will remain flexible regarding financing to achieve the optimum financing mix given the market environment. Thank you for listening and let me now turn it over to you for questions.

[Operator:]

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] We'll pause momentarily to assemble the roster. And our first question today comes from Jeremy Tonet from JPMorgan. Please, go ahead with your question.

[Unidentified Analyst:]

Good morning, this is Bill, on for Jeremy. Just curious, how do you expect BPMP could have become involved in the Permian given BP purchasing a BHP's acreage there?

[Rip Zinsmeister:]

Good morning. Is that Bill, did I get that right?

[Unidentified Analyst:]

Hey, yes.

[Rip Zinsmeister:]

Okay. Well, first, let's just say we're in the interim period waiting on antitrust approval, so kind of important not to get too far ahead of yourself and over your skis, talking about a combination that hasn't yet been approved. Having said that, BP has signaled to the market there's $1 billion to $2 billion of infrastructure present in the BHP assets. I think we have a bias to organically grow them as BP near-term. There's a lot of build out that needs to occur. It's a very attractive position, because it's relatively unencumbered with acreage dedications. So we have ample freedom to operate and choices in terms of building it our self partnering, or eventually dropping it into BPMP. As BPMP, we like it, because it extends our drop down inventory, creates greater optionality. I'm also comfortable that you know, we have a multi-year drop down plan using our R&M assets. So I don't see BHP featuring in the near-term for us. And that will be more long-dated.

[Unidentified Analyst:]

Great, thanks. And then switching to the Gulf of Mexico, looks like Caesar volumes declined year-on-year. Could you share a little more color there and the expectation for that asset through the rest of 2018?

[Craig Coburn:]

Hey, Bill, it's Craig here, how are you?

[Unidentified Analyst:]

Good, thanks, how are you?

[Craig Coburn:]

2Q, we had the Mad Dog tar that came into play there. So we do expect that Caesar would recover in 3Q and 4Q, after that turn around. But Caesar, longer term, is a more mature asset in terms of the Mad Dog and some of the things that are on-stream there. So eventually, we will see some decrease in volumes on that over time, but with Mad Dog 2, it will be coming back up in later years.

[Unidentified Analyst:]

Okay, thanks. And then just one last one, Diamondback was strong I 1Q and I think you guys said would not be sustainable that way for 2Q and 3Q and then this quarter seemed pretty strong. Is there room for that to continue to outperform over the rest of the year?

[Craig Coburn:]

So Bill, I haven't deeply interrogated what drove that, heard some whispers that basically went when [indiscernible] crude goes out, it creates a higher call on traditional Canadian Heavy, which then creates a higher call on diluent. So I think we had a knock-on effect of other people not producing as much or and/or going through turnaround. We're forecasting kind of returning to trend. There may be some conservatism in that. But that's kind of the safer approach.

[Unidentified Analyst:]

Great, thanks for taking my questions.

[Craig Coburn:]

Hey, Bill, just to build on that. It's Craig again. I'd say that we signaled around 54 for 3Q in the S1. I think we'll be in that -- we'll be close to that range. So it's still going to be -- it's going to return back to where we planned on it in the S1 in 3Q. So we're still seeing strength there, but just not as strong as the first and second quarter.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question comes from Derek Walker from Bank of America. Please go ahead with your question.

[Derek Walker:]

Hi, good morning.

[Rip Zinsmeister:]

Good morning.

[Derek Walker:]

Rip, you mentioned just some business development opportunities on the organic side. Some of that was line extensions and some patching opportunities. Can you just give us a little bit more of a sense of that opportunity set. And is that sort of supportive of that 5% to 6% per annum growth or do you see that perhaps going a little bit more?

[Rip Zinsmeister:]

So firstly, the 5% to 6% organic growth is embedded in the portfolio absent any kind of CapEx spend. So that's simply what's going to happen in the Gulf with producer activities and you can pretty much click off -- we have had Kaykus this year, [indiscernible], Mad Dog 2, Atlantis 3, Shell has their Norphlet play. So we see all that organic development and growth rate really coming from existing activity sets of our customers and not us. Okay? And then in terms of the inorganics for BPMP, we're mindful of keeping our 1.2 high-end coverage ratio and managing between 1.1 and 1.2. As a consequence of that you will build cash. So we are looking for some singles, so to speak. We have one line extension project, it's like early engineering phase, we would not want to talk but where that's at, because it is a competitive market. So others would potentially be equally interested in servicing that market. And then Diamondback, we've continued to look at back service Diamondback, because the pipe is really just 35% full given the seasonality of the diluent market. We have some other things that are certainly in the mix, but it actually affects the ROFO assets that may feature in our first drop. So we'll talk about that in subsequent calls.

[Derek Walker:]

Okay, great, thanks…

[Craig Coburn:]

Derek, it's Craig.

[Derek Walker:]

Hey, Craig.

[Craig Coburn:]

Craig here. I just wanted to emphasize as well -- Rip talked about the organic growth 5% to 6% pertaining to the offshore pieces. The onshore, of course, is driven by the increased use of Heavy and Whiting. And Whiting is running very well. I think BP came out and talked about how well it was running in their second quarter announcement. So we are on track to see that organic growth as well coming out of the onshore assets at Whiting increases its heavy consumption.

[Derek Walker:]

Got it, I appreciate the additional color there, Craig. That's it from me. Thanks, guys.

[Operator:]

[Operator Instructions] Our next question comes from Barrett Blaschke from MUFG Securities. Please go ahead with your question.

[Barrett Blaschke:]

Hey, guys, just a quick one. As we get kind of into the back-half of the year and we are probably getting closer to the first drop, can you give us any color at all as how it will breakdown, whether it's onshore, offshore, mix of both, and if so, what would that mix kind of look like?

[Rip Zinsmeister:]

Blaschke, I have a smile on my face because I have read how other MLPs have handled this question, and the short answer is, well, we should just let the conflicts committee do their work, okay? We've put a couple of things in front of them. And so, they have all passed the due diligence stream. We are kind of talking about pricing. And we are also running a trap on final accounting requirements, which may in fact change the mix of the drop notionally at the margin. And as a consequence, I just don't feel like at this point in time it makes sense to articulate something in the market that may actually change a bit in the next month or two.

[Barrett Blaschke:]

That's fair. Thank you.

[Rip Zinsmeister:]

Apologies.

[Operator:]

Ladies and gentlemen, at this time, in showing no additional questions, I would like to turn the conference call back over to Rip Zinsmeister for any closing remarks.

[Rip Zinsmeister:]

Well, thank you very much. I just like to offer given this quarter's result, I hope you sense our confidence in meeting our commitment to sustainably growing distributions to the unitholders. That's why we are here. As we continue to work on our first drop, we look forward to further demonstrating the strength of our growth model, and the strength of our sponsor, as evidenced by the BHP deal and their support of us. So, thank you again for joining the call. I look forward to further dialog in the future. Thank you everyone.

[Operator:]

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