BP Midstream Partners LP
Q4 2017 Earnings Call Transcript

Published: 22 Mar 2018

[Operator:]

Good morning everyone and welcome to the BP Midstream Partners Fourth Quarter and Full Year 2017 Results Conference Call. 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, Vice President of Investor Relations. Sir, you may begin.

[Brian Sullivan:]

Hello and welcome. This is BP Midstream Partners fourth quarter and full year 2017 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 defer materially due to factors we note on this slide, and also in our SEC filings. We would 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:]

Thanks Brian. Good morning everyone and thank you for joining us for BP Midstream Partners first results webcast presentation and conference call. Today, we are here to report on our results for the fourth quarter and full year 2017. For many of you listening, this is the first time you have heard from me and BP Midstream Partners since our initial public offering in October last year. So, I’ll start today by providing an overview of BP Midstream Partners before summarizing some recent highlights and reporting our operational results. I will then hand over to Craig Coburn, our CFO to take you through our fourth quarter and full-year results, including our post-IPO period results, as well as our financial frame. I’ll then come back to provide some further details regarding potential future asset dropdowns and then briefly summarize some key met messages before we take your questions. BP Midstream Partners or BPMP is a fee-based growth-oriented master limited partnership. As the name indicates, the MLP was formed by BP to own, operate, develop, and acquire pipelines and other midstream assets to generate qualified income and cash flows available for distribution to unit holders. Each member of BPMP’s a leadership team brings substantial experience in oil and gas asset management, averaging over 30 years of relevant experience, most of it with BP. Our asset portfolio consists of interest in entities that own crude oil, natural gas, refined products, and diluent pipelines serving as key infrastructure for BP and its affiliates and third parties to transport onshore and offshore production, and refined products to key refining markets and trading and distribution hubs. We have eight assets in the portfolio today. There are three onshore BP operated pipelines in the Midwestern U.S., which have FERC regulated transportation tariffs, and fee-based contracts. Substantially, all of our aggregate revenues from these onshore pipelines is initially supported by commercial agreements with BP. These wholly owned pipelines serve as the Whiting Refinery, which is also 100% owned by BP. Future growth of these assets is primarily tied to BP's plans to continue to increase Canadian crude processing, as well as optimize distribution of the product slate at the Whiting Refinery. There are also joint venture interests in Gulf of Mexico pipelines operated by Shell. These pipelines are Mars and our interest in Mardi Gras, which include Caesar, Cleopatra, Proteus, and Endymion pipelines. They serve large offshore upstream development. These assets are positioned to capitalize on forecasted production growth from announced projects and new volumes from forecasted future offshore projects, which have yet to reach a final investment decision. Our investment proposition is to deliver a unitholder's consistent top tier distribution growth. With our current asset portfolio, organic distribution growth is expected to average 5% to 6% per annum per unit. Our assets have considerable pre-invested capacity with future growth and transported volumes from BP increasing processing of Canadian crude, as well as producers plans to increase Gulf of Mexico production. Capable of being achieved without capital expenditure by the partnership. Including growth from potential future asset dropdowns what we refer to as inorganic growth we forecast mid-teens distribution growth per annum, per unit over the next three years. This is possible given the significant inventory of assets with qualified income, which BP has identified as dropdown candidates. We plan to achieve this growth within a conservative financial framework as evidenced by our target annualized distribution coverage ratio range of 1.1 to 1.2 times over the medium-term. Our distribution policy targets a quarterly minimum distribution level of $0.2625 per quarter or $1.05 per common unit on an annualized basis. We have a revolving credit facility in place with the BP affiliate and our targeting credit metrics consistent with an investment-grade. We have an outstanding float of 47.8 million common units, representing about 46% of the master limited partnership units. The balance of the units are owned by BP Holdco, primarily in the form of subordinated units initially. In summary, we are excited about the opportunities in front of us. Under pinned by our key strengths. We have a strategically aligned relationship with BP. BP is our most significant shipper, is well capitalized with an investment-grade credit rating and will maintain a significant interest in BPMP. Our asset portfolio is strategically located and highly integrated to refining hubs in the Midwest for our onshore assets, and to Gulf of Mexico oil and gas production growth in our offshore assets. We believe our asset portfolio will create stable and predictable cash flows. BPMP is designed to have financial flexibility in order to execute its growth aspirations, either through accessing the capital markets or debt. The BPMP leadership team brings significant experience, including a focus on core values of environmental, health, safety and regulatory compliance. As previously mentioned, BPMP was formed by BP as a sponsored MLP. We therefore hold an important ongoing strategic relationship with our sponsor. We believe our relationship with BP provides us significant growth opportunities, as well as a source of stable cash flows. Let me briefly recap some important points about our sponsor. BP is one of the world's largest integrated energy business in terms of market capitalization and operating cash flow operating in 70 countries. It is a leading producer and transporter of onshore and offshore hydrocarbons, as well as a major refiner in the United States. BP has a global inventory of midstream logistics assets that provide a critical link between upstream operations and downstream markets. Its U.S. midstream assets consist of more than 4,600 miles of crude oil refined products, diluent, and natural gas pipeline systems in the contiguous U.S. BP's remaining North American midstream asset portfolio provides a significant inventory of assets for potential future asset dropdowns to BPMP. Access to this inventory of assets is underpinned by a seven-year Right of First Offer or ROFO granted to us by BP on its pipeline business assets. I’ll talk more about this ROFO shortly. BP is our most significant customer representing more than 97% of our predecessor revenues for the year ended December 31, 2017. BP is also a material customer of the Mars and Mardi Gras pipeline system. BP is well capitalized with an investment-grade credit rating. We believe this relationship with our sponsor and the integrated nature and strategic importance of our assets to BP's North American operations contributes to our cash flow stability. BP maintains a significant economic interest in BPMP, indirectly owning our general partner, a majority of our limited partner interest, and all of our incentive distribution rights. As a result, we believe BP is motivated to promote and support the successful execution of our business strategies. Including using our partnership as a growth vehicle for its midstream assets. BPMP represents an attractive vehicle for BP to monetize its midstream assets, while maintaining operational control of key infrastructure and commercial alignment with its integrated operations. Future dropdowns may provide our limited partners the opportunity to co-invest in some of BP's most strategic infrastructure. As previously mentioned, our investment proposition is to deliver unitholder's consistent top tier distribution growth. We believe our investment proposition is differentiated in several ways. Firstly, we are well-positioned to deliver stable and predictable cash flows. Let me expand on the reasons for this area of differentiation. Our assets primarily consist of interest in common carrier pipeline systems that generates stable revenues under FERC regulated tariffs and long-term fee-based transportation agreements with BP and other well-established investment-grade producers and shippers. Additionally, our revenues have limited direct exposure to commodity price fluctuations. Substantially all of our aggregate revenue from our onshore pipeline systems BP2, River Rouge, and Diamondback are supported by commercial agreements with BP that include minimum volume commitments. We refer to these as throughput and deficiency agreements. Many of our offshore assets have either commitments for dedicated production from specified fields or provide a primary supply source to major storage facilities. Together, these agreements and commitments should promote stability and predictability in our cash flows. Our diverse asset portfolio is strategically located and highly integrated playing an important role in the success of BP's North American operations. Our onshore pipeline systems play a critical role in maintaining the supply of crude oil to or moving refined products and diluent from BP's Whiting Refinery. Whiting is the largest refinery in BP's global portfolio. Similarly, our offshore assets link BP and third-party producers offshore, crude oil and natural gas production to Gulf Coast refining and processing markets, providing off-take solutions from much of BP's world-class Deepwater Gulf of Mexico assets. We believe that our strong position as an outlet for major offshore production with growing production activity, as well as our strategic importance to the Whiting refinery provide us with stable and growing cash flows. Investors have been interested in the impact to our tariffs by their recent FERC order, which removed an income tax allowance for cost of service tariffs and an MLP. Since the majority of our rates are either settlement based, contracted, or where cost of service based are below the relevant ceiling level, management does not anticipate a material reduction to either our tariffs or our cash available for distribution as a result of the FERC order. Secondly, we have strong visibility of attractive organic growth opportunities and strategic acquisitions of assets from BP. Our organic growth will be driven by increasing volumes transported on both onshore and offshore pipeline systems, opportunistically attracting new third-party volumes, managing costs and enhancing operating efficiencies. Such opportunities typically do not require any capital expenditure by the partnership. Our inorganic growth is underpinned by our strategic relationship with our sponsor. As I previously mentioned, BP has granted us a seven-year ROFO with respect to its retained ownership interest in Mardi Gras and all of its midstream pipeline systems and assets in the U.S. lower 48 and Gulf of Mexico, the BP Pipelines owned at the time of our IPO. We have a clear line of sight to the significant inventory of dropdown candidates remaining at BP. I’ll talk more about this later. Additionally, we believe BP will offer us opportunities to acquire additional midstream assets that may acquire or develop in the future. We may also have opportunities to acquire or develop additional assets jointly with BP. The important takeaway is that the significant inventory of dropdown candidates remaining at BP combined with ROFO will give us the opportunities to deliver our growth ambitions in the near to intermediate term. Turning now to our 2017 highlights. In October last year, we successfully completed the initial public offering of BPMP on the New York Stock Exchange. In connection with the IPO, we entered into several material agreements, including an omnibus agreement with an affiliate BP for the operation management and maintenance of BPMP, throughput and deficiency agreements with an affiliate of BP, which include minimum volume commitments, as previously mentioned; and a 600 million credit facility with an affiliate of BP; we also adopted a long-term incentive plan; and the Board of Directors of the general partner completed the appointment of two independent directors bringing the total number of directorships to 7. One additional independent board position remains to be filled. In terms of organic growth pipeline throughput of our existing assets grew by 15% over the past year with much of that growth coming from increased volumes shipped on the BP to Mars and Mardi Gras pipeline systems. For clarity, this annual growth has been calculated assuming our post-IPO asset portfolio existed for the full year’s 2016 and 2017. We refer to this as the pro forma asset portfolio. On January 17, 2018 the board of directors of the general partner of BP midstream partners declared its initial cash distribution or approximately $0.18 per unit for the fourth quarter of 2017. The distribution represented of prorated portion of the partnership's minimum quarterly distribution of $0.2625 per unit or $1.05 per unit annualized based upon the number of days after the closing of the partnership's IPO on October 30, 2017. The distribution was paid on 15 February, 2017 to unit holders of record as of 1 February, 2018. Looking at our operational results, total gross throughput for the pro forma asset portfolio in 2017 was approximately 1.4 million barrels of oil equivalent per day. This was 15% higher compared to 2016, reflecting higher throughput on the BP2 pipeline following completion of maintenance at the Whiting Refinery in 2016, higher throughput on the Mars pipeline, due to higher production from Olympus, and higher deliveries from Amberjack and higher throughput on the Proteus and Endymion pipelines following the start-up of the Thunder Horse south expansion project in late 2016. Our 2017 average revenue per barrel was broadly flat compared to 2016. With that, let me hand it over to Craig to take you through the financial results and financial frame.

[Craig Coburn:]

Thanks Rip. Let me start by explaining our fourth quarter and full-year 2017 results that we announced earlier this morning in our 8-K and 10-K filings with the SEC. For periods prior to our IPO on October 30, 2017, financial data consists of the combined operations of our predecessor. As a result, our fourth quarter results comprised financials for our predecessor up to October 30 and financials for BPMP including our post-IPO asset portfolio from October 30 to December 31, 2017. It is important to note that the assets comprising our predecessor are a subset of the post-IPO period asset portfolio. The assets of our predecessor only include the BP2, River Rouge and Diamondback pipeline systems. They do not include our interest in the Mars or Mardi Gras pipeline systems. The comparative quarterly period shown on this slide, the fourth quarter 2016 and the third quarter 2017 comprise financials for our predecessor only. Similarly, our full-year 2017 results comprised financials for our predecessor prior to October 30 and financials for BPMP, including our post-IPO asset portfolio from October 30 to December 31, 2017. The comparative year 2016 comprises financials for our predecessor only. As a result of the differences in asset composition across periods, I will not spend much time today explaining quarter-on-quarter and year-on-year moments. However, I will share a couple of observations with you. Full-year 2017 revenues associated with our onshore pipeline systems increased by more than $5 million, compared to 2016, reflecting increased throughput on the BP2 pipeline, and increased fixed loss allowance revenue associated with the BP2 pipeline, partially offset by lower throughput on the Diamondback pipeline, although 2017 throughput was consistent with more normal throughput levels for this pipeline. Full-year 2017 costs and expenses, including maintenance expenses associated with our onshore pipeline systems increased by 3 million, compared to 2016, due to increased insurance expense prior to the IPO. This was driven by a change in allocation methodology by the parent entity BP and increased insurance premiums, both of which incurred prior to the IPO, and increased maintenance expenses, due to in-line inspections on the River Rouge pipeline. This was partially offset by lower general and administration costs. Full-year 2017 income from the equity method investments relates to our interest in the Mars and Mardi Gras pipeline systems, which were acquired by BPMP at the IPO. Financials for our predecessor did not include these interests. Income tax expense decreased by $4 million, compared to 2016, reflecting a change in the status post-IPO. Turning now to our post-IPO results, a period which covered October 30 to December 31, 2017. That income attributable to the partnership was 22 million. Adjusted EBITDA was 23 million and cash provided by operating activities was 29 million. These post-IPO period results were consistent with our forecast at the time of the IPO. Minimum volume commitment payments during the period subsequent to the IPO very immaterial. Our cash available for distribution was 23 million and as Rip previously mentioned, our initial gas distribution of approximately $0.18 per unit for the fourth quarter of 2017 was declared in January. The distribution represented a prorated portion of the partnership's minimum quarterly distribution of $0.2625 per unit or $1.05 per unit annualized based upon the number of days after the closing of the partnership’s IPO on October 30, 2017. A total distribution of 19 million was paid on 15 February, 2018 to unit holders of record as of 1 February 2018. This represented a distribution coverage of 1.2 times, again consistent with our forecasted range at IPO. We have entered into a $600 million credit facility with an affiliate of BP and in November last year we drew down 15 million under this facility to fund near term working capital requirements. The remainder of the facility is available to fund our future growth aspirations. We are targeting credit metrics consistent with an investment grade. Looking at our financial frame, our 2018 guidance for the existing asset portfolio is consistent with the information on our perspectives at IPO. The 2018 column in the table shown on this slide includes guidance for an existing portfolio only. It does not include guidance on asset dropdowns, which Rip will cover separately shortly. In 2018, organic distribution growth is expected to be driven by increasing growth 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 rate with 2017. Forecast higher growth throughput reflects higher throughput on the BP2 pipeline although there is currently a level for portion in acquiring a relation to this pipeline, our minimum volume commitment provides downside protection from this and higher throughput on the Mars and Mardi Gras pipeline systems due to increased production from various existing fields in the Gulf of Mexico, including new wells that are starting out. Estimated total maintenance spend, which is the average annual total maintenance spend that will be incurred or allocated to us over the next three years is expected to be around 6 million in 2018. The lower amount in 2018 reflects the absence of several maintenance items incurred during 2017, including leak metering upgrades on BP2 and the installation of a new transformer at the Ann Arbor station and Relief valve redesign at the South Bend station, both relating to our River Rouge pipeline. The majority of our maintenance spend in 2018 will be expensed. Cash available for distribution and forecast to be greater than 126 million. This is sufficient to pay minimum annual distributions of $1.05 per unit and leave excess estimated cash available for distribution of approximately 16 million. We estimate that for a portion of 2018, we will have outstanding borrowings of 15 million under the 600 million credit facility we have in place with an affiliate of BP. Looking further 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 our 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 times to 1.2 times. And we are committed to targeting credit metrics consistent with an investment-grade with our debt to adjusted EBITDA ratio not exceeding 3.5 times. With that, I will hand back to Rip.

[Rip Zinsmeister:]

Thanks Craig. I will now talk a little about our future asset dropdowns. As the block pyramid diagram on the right side of the slideshows, we have access to an extensive portfolio of existing assets across multiple asset categories, expanding multiple phases of the midstream value chain through our strategic relationship with BP. This provides us with an inventory of future dropdown candidates to drive top tier growth in distributions for many years. In support of our drop program, we negotiated a seven-year ROFO on all BP pipeline assets in the continuous lower 48 and offshore Gulf of Mexico as depicted in the bottom layer of the chart providing high confidence for our near to intermediate term inorganic growth rate. We also anticipate that additional inorganic growth options will become available higher in the pyramid and may displace the timing of the drops to some of the ROFO assets. Virtually all of BP's U.S. business is technically qualifying income. Say for one chemical plant and the ultimate end sale to the customer. It is important to recognize this area isn’t static. Beyond dropdowns there is a hop or business development and investment ideas actively being worked, which would add to the runway. Subject to market conditions, we would expect to do at least one dropdown per year. In 2018, we are planning a dropdown in the second half of the year. We believe we have financial flexibility and optionality when it comes to executing our growth strategy. We will evaluate all forms of financing, including borrowing under the revolving credit facility accessing capital markets or potentially a hybrid of financing to ensure we optimize the value of dropdown transactions and to ensure we remain flexible to market conditions. As Craig previously mentioned, we are targeting credit metrics consistent with an investment-grade midstream company and a balanced capital structure, while pursuing our growth strategy. So, in summary, we successfully completed the initial public offering of BPMP on the New York Stock Exchange in October, and today we have delivered a solid set of results for our first quarter as a listed entity. These results demonstrate our ability to organically grow throughput in our existing asset portfolio, maintain discipline in our operating costs and maintenance spend, and deliver cash available for distribution, consistent with our expectations at the time of the IPO. We have an asset portfolio that is strategically located and highly integrated to refining hubs in the Midwest and the Gulf of Mexico oil and gas production growth that will create stable and predictable cash flows. It has considerable reinvested capacity allowing us to capture future growth without capital spend by the partnership. Our strong and strategic relationship with BP, a company that is well capitalized with an investment-grade credit rating and that has committed to retaining a significant interest in the partnership provides a source of significant asset inventory with qualified income that potentially could be dropdown candidates for the partnership well into the future. And we have the financial flexibility to execute our growth ambitions. Taken together, we forecast mid-teens distribution growth per annum, per unit over the next three years. This supports our investment proposition to deliver unit holders consistent top tier distribution growth. On that note, thank you for listening, and we’ll now take your questions.

[Operator:]

[Operator Instructions]

[Brian Sullivan:]

Alright. We’ll take our first question from Jeremy Tonet with JPMorgan.

[Unidentified Analyst:]

Good morning. This is Bill on for Jeremy. Just curious, did you see any meaningful benefits on BP2 during the quarter given the wider WCS differentials?

[Rip Zinsmeister:]

Well, it’s an interesting question in the first instance. We’ve seen differentials north of $25 a barrel. That benefit entirely accrues to the refinery. We just shipped the crude and, in some respect, we have fixed loss allowance income, which drops if the dips get too large, but our FLA income is less than 5% of our revenues. So, it really doesn't move the needle. Is that responsive to your question?

[Unidentified Analyst:]

Yes, thank you. And then just on the cash distributions received from equity investments, those were pretty strong during the quarter, can you share more color on which assets drove that and whether this is a good run rate level to assume going forward or if there were any one-offs because of the end of the year?

[Rip Zinsmeister:]

Okay. I’ll talk about the offshore in general and then Craig can offer comments about hurricane impacts. We like our offshore footprint, 28.5% of Mars, basically Mississippi Canyon and the adjacent basin is a growth area for the industry. The quarter-on-quarter distributions are consistent with what we expect. There is more wells coming online this year. So, we do expect that they will grow over the long haul, it is a source of our 5% to 6% organic forecasted growth over the next five years. And then with respect to Mardi Gras, at the moment we only own 20% of it, so its impact is so sort of a third of what the Mars impact is. So, Mars is an important asset for us. Craig?

[Craig Coburn:]

I would like to say, I think with respect to the fourth quarter Bill, expectations were a little lower than we had hoped because of the tropical storm made and the activity there, so there was some downtime on all of those assets and in the Gulf. So, we would expect first-quarter to be a bit stronger in that respect, as well as we have some pipes coming on line in the Gulf of Mexico in the first quarter. So, we would expect the volumes to be a bit stronger in the first quarter going forward. We do know from discussions with Shell, we’ve got a routine turnaround going on in Mars in the second quarter, which will affect those volumes somewhat, but in general we see it being equivalent to what we said in our S1 and our perspectives earlier in 2017.

[Rip Zinsmeister:]

Bill, I don't want to kill you with detail, but we know about the Mars April turnaround. Basically, last year, so it was incorporated in our S1 forecast as well.

[Unidentified Analyst:]

Okay, that’s great. Thanks. And then just, at this point, any quantification you can provide on the EBITDA in the drop-down pyramid?

[Rip Zinsmeister:]

No. My approach to that has consistently been, we can offer top tier distribution growth for the next three years based on the pipeline and portfolio, as well as the qualifying assets. When I look at the disclosure of the peer set, a lot of people throw out a lot of big numbers for potential and don't really back those up. Our attorneys get quite nervous when people do things like that. So, it’s not a game we’re interested in playing. As I said in my comments, virtually everything we do in the U.S. is qualifying income for the BP Group say for one chemical plant and the ultimate sale to the final customer. For the EBITDA pool itself is large. We intend to play in the midstream stay close to the refinery generally outside the fence, a little bit inside the fence, not interested in carving up our business at this stage, I think others are, but we will be fine. It’s an attractive investment.

[Unidentified Analyst:]

Okay, thanks. That’s very helpful. Thank you for taking my questions.

[Brian Sullivan:]

Great. Thank you, Bill. Our next call, excuse me, our next question is from Brian Zarahn with Mizuho. Go ahead Brian.

[Brian Zarahn:]

Good morning. On the FERC tax allowance order, you stated the impact is expected not to be material, but could you elaborate a little bit on the cost of service types? I think you mentioned your targeting rates below the maximum levels, any additional color would be helpful.

[Rip Zinsmeister:]

Sure. There is a couple of different ways to parse that. Firstly, where we have an income tax allowance, the removal of that is less than 0.5% of our cash available for distribution. So, when we say material we really do mean it is not material. If you look at our revenues on the predecessor. 97% of our revenues come from BP. So, we have a very happy shipper. It is one way to hear that. And the fact that our cost of service tariffs as calculated or higher than we’re actually charging just reflects the market reality of a competitive market. So, IT ages doesn't feature for us. I hope that’s responsive to your question Brian.

[Brian Zarahn:]

That’s helpful, and I guess looking further out to the liquids type index escalator, and potential changes I know it’s not until 2021, but any initial thoughts on what the outcomes could be or you think that this system is fairly insulated from any changes to the escalator?

[Rip Zinsmeister:]

I don't see the escalator at all coming at issue here unless FERC does some kind of wholesale revisiting of how they approach pipeline tariffs for the oil business. When we looked at our RODO assets we only had one other pipe that we could see where the ITA was relevant or applicable, excuse me. And again, not material. So, my sense Brian is while this is an issue for us as BPMP you can anticipate those people that do have an impact will take issue with this and decide how they want to work with the FERC to perhaps reset tariffs in some other way.

[Brian Zarahn:]

And then shifting to the drop-down inventory you commented there is potential additions, any sort of file level descriptions of what projects, what type of projects could be potentially constructed and added to the drop-down inventory?

[Rip Zinsmeister:]

Okay. So, our team currently is looking at the first two years of drop-down, so we are doing due diligence on the assets. Basically, they would comprise the first two tiers of our paramount and we haven't made – have not made any definitive decisions, the composition of the 2018 drop. We’ve warmed up our conflicts committee in anticipation of doing a drop in the latter half of this year. So, they are aware of how to conduct the process and what’s likely to come at them in due course, and I just think it is healthy business to plan two years in advance. So that’s where we are at on our state of play.

[Brian Zarahn:]

I appreciate the near-term outlook. I thought I was actually asking, I thought a comment I heard that you are looking to add your potential additions to the – what assets could be available at the parent level, as I was looking at other investments, so they hit out correctly and if that is true it would be helpful to have a broader description of what type of assets would be similar assets that are in that drop-down portfolio or something else?

[Rip Zinsmeister:]

Okay. Firstly, you can look at what BP America publishes in terms of the significance of BP America to BP Global, right. So, with a huge portfolio in the first instance. Having said that, we have a very sophisticated and commercial trading organization that actually creates business development opportunities for us, got at least two of those from 2017 that we’re looking at, and I have met with the head of both our gas trading business and our oil trading business, as well as our chairman who is the head of our North American fuels business. So, those three entities are tasked with delivering commercially attractive growth opportunities, a portion of which clearly would fit BPMP because I revert to my earlier statement, virtually everything we do in the U.S. is qualifying income.

[Brian Zarahn:]

I feel like stay tuned for any developments there. The last question from me given the financial flexibility with no debt, actually [ph] net cash. Is it reasonable to assume that the drop-down in the second half of this year will likely be debt financed and not to be no equity issuance for this year?

[Rip Zinsmeister:]

The size of the drop-down would comfortably fit within our revolver. So, right now, my thinking is that we will be mostly if not entirely financed by debt. We will be opportunistic in the market. I’m an M&A guy by background. So, I tend to be opportunistic when it comes to a trade, each and every trade quite frankly.

[Brian Zarahn:]

Understood. I think with this current backdrop, if there is [indiscernible] flexibility, if there is no equity expected to be issued, I think it is helpful to the market that is the case. So, thank you very much.

[Rip Zinsmeister:]

You're welcome.

[Brian Sullivan:]

Thanks Brian. Our next question comes from Dennis Coleman with Bank of America. Dennis, go ahead.

[Derek Walker:]

Hi this is Derek Walker on for Dennis. Most of my questions have been answered, and we appreciate the comments around FERC. Maybe I will just ask the more – a clarification just around how you're thinking about the dropdown type candidates, you know Rip you mentioned your first drop at least for the next couple of years is going to be around the first couple of years, but in general I guess what sort of the thought process around kind of the grouping and is there a path of kind of you alluded to kind of saying in a rather refinery, but any sort of strategy how your kind of thinking about the near-term outlook on the types of drops? What’s sort of the criteria for adding some of these assets?

[Rip Zinsmeister:]

Okay, good question Derek. So, we met a lot of investors on our roadshow as you can imagine. And part of our narrative is kind of back to basics old school MLP, there have been are lot of headwinds in this industry in the last year. So, our approach to drop downs in general is an emphasis on quality, as opposed – in addition to qualifying income, so the nature of our business is our principal counterparty at BP. So, our dropdowns will principally be liquids. Our pipes run liquids. We have I think only one gas pipe in the entire portfolio. It’s a strategic call we made quite some time ago. And then in the second-tier pyramid there is splitters, there are some terminal opportunities. So, I think we're going to take more of a portfolio approach as opposed to a single asset approach. The initial interest is diversifying a bit from right now it is Whiting plus calm only. So, some diversification would make some sense from our perspective for the benefit of our investors.

[Derek Walker:]

Got it. Thanks. And then just a second question from me. Maybe a little bit longer out here. With the MVC's ending 2020, I guess is there any initial thought here to the potentially extend those? I know you mentioned the kind of 5% to 6% sort of growth rate, but would there be an appetite to extend that, obviously probably little early days there, but just any thoughts around that and the agreement you have with BP?

[Rip Zinsmeister:]

This is slightly more complicated than most people would appreciate. There is only two ways to get into our Whiting. It is the BP2 line and the BP1 line. And I talk to investors about this at length during the road show. Once I dropped BP1 into the MLP, you run into the dilemma of having a MVC on both lines. One line will swing for the other and basically Whiting's nameplate is [indiscernible] 430 going towards 450. If I’m paying MVC on one, the investors would actually get the income on the other line if that makes sense. So, it’s a bit more tricky than that and actually as we look at Q1, our principal client Whiting has decided to manufacture more gasoline then send diluent back to Canada on Diamondback. It looks, well we are going to get the MVC payments from the Whiting Refinery for that selection that they have made, but our volumes on Diamondback are actually up by 50% because other people are filling the pipe with diluent. So, in some respect you can create a win-win as evidenced by Diamondback, but MVC on both BP2 and BP1 seems like a net loss. So that’s how we’re thinking about it. If the need is there to extend them we will of course think it through at the time. So, apologies for what might be a complicated answer, but that’s our circumstances.

[Derek Walker:]

That’s helpful. Thanks Rip.

[Brian Sullivan:]

Right. Thanks Derek. We have no other questions on the line. At this point, I’ll turn it back to Rip for a closing comment.

[Rip Zinsmeister:]

Well firstly, thank you for participating. We’re really enjoying running this business. It is a partnership. We have talked to our limited partners who are around on the road show. It’s a relationship amongst BP or a parent, and the source of our dropdowns and our customer, the general partner and our limited partners. So, look forward to doing this again in 90 days or so. Take care everyone.

[Operator:]

Ladies and gentlemen. That will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.