Genesis Energy, L.P.
Q2 2012 Earnings Call Transcript

Published: 2 Aug 2012

[Karen N. Pape:]

Welcome to the 2012 Second Quarter Conference Call for Genesis Energy. Genesis has 3 business segments. The Pipeline Transportation Division is engaged in the pipeline transportation of crude oil and carbon dioxide. The Refinery Services Division primarily processes sour gas streams to remove sulfur at refining operations. The Supply and Logistics Division is engaged in the transportation, blending, storage and supply of energy products, including crude oil, refined products and CO2. Genesis' operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida and the Gulf of Mexico. During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures. At this time, I would like introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Steve Nathanson, President and COO; Bob Deere, Chief Financial Officer; and Karen Pape, Chief Accounting Officer.

[Grant E. Sims:]

Thank you, and welcome to everyone. This quarter, we are pleased to report yet another record of available cash of approximately $43.2 million, a 9% increase over the last quarter and approximately 35% more than the year ago period. Our focus on identifying the right strategic opportunities, continuing to integrate those opportunities, building a business instead of a collection of assets, and capitalizing on increasing demand for our services and capabilities has been the foundation for this growth in available cash. While we'll go into a little more detail later, volumes handled across all of our segments with the general exception of one of our pipelines, which continued to see reduced throughput as a result of extended maintenance of 2 major production facilities dedicated to it. We anticipate such maintenance to end this quarter, a return to throughput levels we experienced in the first quarter of 2011 and a resumption of development drilling, all of which should have meaning -- should be meaningful to fourth quarter 2012 and 2013 financial performance. This targeted focus on expansion of our service capabilities, integration and optimization, along with the relative insensitivity of our businesses to commodity price levels or volatility, has allowed us to increase our distribution for 28 consecutive quarters, 23 of which have been 10% or greater over the year earlier quarter and never less than 8.7%. Before I turn it over to Steve, I'd like to recognize our existing and new lenders that just recently agreed to increase our commitments to the partnership and extend the tenor of our revolving credit facility to July of 2017. With their continuing support, we have significantly increased our committed financial flexibility, pursue organic opportunities, as well as opportunistic acquisitions, if they make sense to us, as we continue to build out our business and create long term value for all of our constituents. With that, I'll turn it over to Steve.

[Steven R. Nathanson:]

Thanks, Grant. During the second quarter of 2012, we benefited from continued integration and optimization of new assets with our existing portfolio of terminals, pipelines and refinery operations. We fully integrated the FMT fleet assets into Genesis Marine. The final step in the acquisition integration plan occurred in 2 parts. First, the flexibility of our expanded fleet allowed us to optimize cost by enhanced alignment of proper horsepower boats and barge configuration. This also allowed us to be more responsive to strong customer demand. Second, we improved our customer mix as a result of continued integration with our crude oil customer portfolio and refined products business. There's been a significant amount of press regarding the drought conditions in the country and to a smaller degree, how this might affect Mississippi River barge traffic. The drought and river conditions have had no impact to date, and little to none are expected in the future on Genesis Marine operations. The largest portion of Genesis barge traffic is between Corpus Christi, Texas and Mobile, Alabama. On the Mississippi and Illinois rivers, we are primarily running ABS-certified barges that always operate in a shallow draft mode. North of St. Louis, we currently only travel the Illinois river, not the Mississippi. Genesis runs 2- and 3-barge configurations, which means we operate 1 barge wide, not the 4- to 6-wide configuration that the Coast Guard has stopped for shallow water conditions. All of our contracts allow us to collect daily charter rates in the event of low-water stoppage or a slowdown by the Coast Guard. Needless to say, we will abide by all Coast Guard rules and advice. We continue to expand and integrate our operations in the Powder River Basin and Niobrara regions in Wyoming, having increased production rates at our crude processing plant. And we are progressing on schedule to reactivate strategic segments of the approximate 300 miles of pipeline acquired via our previously announced acquisition. Likewise, in the Eagle Ford Shale and Permian Basin plays, in the second quarter, we put our expanded crude truck fleet and a portion of our expanded crude rail fleet to work. All the aforementioned assets have started to benefit our operating results and available cash. We are nearing completion on Phase 1 of our previously announced rail-to-pipeline terminal in Walnut Hill, Florida. We will begin to receive unit trains of crude oil in the third quarter of this year, with full operations expected in Q1 2013. Likewise, the expansion of our terminal in Natchez, Mississippi to receive Canadian bitumen will be completed in Q4 of this year. Both projects will contribute to our operating results and available cash in 2013. Sales volumes in Refinery Services were slightly ahead of the same quarter last year as we continue to on pace to equal 2011 volumes for all of 2012. We did experience a decrease in segment margin due to planned maintenance turnaround at 2 of our large refinery operations. This resulted in increased cost incurred primarily from processing at less than optimal refinery locations. The strength of the Genesis refinery service system is the breadth of our production sites and supporting terminals. This ensures uninterrupted service to our customers. And while segment margins are down, we did not miss or curtail any customer operations. During the past quarter, we also completed new or extended contracts of existing major customers in anticipation of their growing needs over the next 5 years. We anticipate our sales to grow not only due to worldwide expansion of new mine projects, but also the recent recovery of the pulp industry. With that, I'll turn it back to Grant.

[Grant E. Sims:]

Thanks, Steve. We're extremely pleased with the contribution from our past initiatives and targeted acquisitions. These initiatives have been accretive to our results and will continue to benefit us as we identify additional ways to create synergies and drive efficiencies across our core competencies and service capabilities. We're also very excited about the new projects that we have identified and disclosed to capitalize on opportunities and in Texas, Florida, Mississippi, the Rockies, the deepwater Gulf of Mexico and elsewhere across our footprint. Before I turn it over to Bob to discuss our reported results in greater detail, I'd like to recognize the contribution of our folks here at Genesis. Because of their dedication to safe, responsible and efficient operations, we continue to work together to deliver increasing, long term value to all of our unitholder.

[Robert V. Deere:]

Thank you, Grant. I will discuss the key differences in our second quarter results for 2012 as compared to the second quarter of 2011, and then follow with a discussion on the year-to-date results. My discussion will focus on our segment margin as fluctuations in our revenues resulting from changes in the commodity price levels of crude oil, petroleum products or chemicals like caustic soda, did not have a corresponding impact on our earnings or available cash flow. I will also discuss our results in terms of our 3 reporting segments

[Grant E. Sims:]

Thanks, Bob. As we said in the release, we look forward to the rest of the year and through 2013 and on into 2014 to continue achieving our goals and delivering double-digit annual growth and distribution and increasing coverage ratio and a better than investment grade leverage ratio, while never compromising our commitment to safe, responsible and reliable operations. We believe we've laid the foundation to achieve those goals already with our announced initiatives and have the luxury and committed capital of looking into future periods to identify ways to continue to achieve those goals. We view the process of building sustainable, long term value as a Marathon and not as a sprint. In the 6 years since this team started to come together, the enterprise value for Genesis has grown from less than $200 million to approximately $3.3 billion today. We have accomplished this by navigating through some of the most difficult and volatile periods in the world's economic history, yet we have maintained a conservative balance sheet with pro forma, bank-recognized leverage ratios at June 30 of 3.4 terms. Additionally, we have delivered 28 consecutive increases in our quarterly distribution, 23 of which have been 10% or greater on a year-over-year basis. As always, we're proud of the opportunity to work with a great group of folks, their immeasurable contributions and their commitment to providing safe, responsible and efficient services to our customers. The ability of our people to identify great opportunities and execute on and integrate those successfully has been and will be key to our continuing success. With that, I'll turn it back to the moderator for any questions.

[Operator:]

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

[Gabriel P. Moreen:]

Quick question, if I could, just on CHOPS in the Gulf of Mexico, although I know the BP had said they were bringing those fields backup. I mean, just in terms of impacts to the third or fourth quarter, do you expect to see some of those volumes actually show in the third quarter, or is it more going to be a fourth quarter thing? And then just in terms of the ramps on the volumes to those fields, is that something that's, I won't say instantaneous, but is it kind of an on-off switch or does that kind of build over the course of the several weeks and months?

[Grant E. Sims:]

Well, let me take them in reverse order. I think the first thing is, it certainly was an on-off switch when they went down. We're not privy to their plans. The only thing I'll say is that as they announced in their release on Monday and discussed in their conference call, it is their intent that over the next several weeks that Atlantis and Mad Dog come back onto production. The practical matters, the way CHOPS works, basically with our cash distribution out of it, will be based upon June, July and August performance. Therefore, we will pick up a little bit of increased performance in August assuming that they stay on schedule to start bringing it back up, but the full effects will be felt more in the fourth quarter.

[Gabriel P. Moreen:]

Got it. And then I have just a bigger picture question and maybe it's one which is just sort of irrelevant. But given the fact that there's all this light sweet crude coming, popping up all over onshore, just wondering if that has an impact on the Refinery Services business to the extent you're looking at sweeter, lighter crude. Maybe some of your refineries that have been running heavier stuff. Does that impact Refinery Services at all, or is there just -- there's enough to go around, enough flexibility, that it really doesn't matter?

[Steven R. Nathanson:]

No, the refineries that we operate in are the flagships of the majors in their networks. So they have 3, 4, 5 refineries. These are typically the largest, the lowest cost refineries that they have. And these are also -- was known in the industry as complex refineries, so they have to run sour and some sweet so they can't just run the sweeter crudes that we're seeing from the various shale plays.

[Grant E. Sims:]

I might also add that in most cases, our sulfur handling capacity is a small percentage of the total sulfur handling capacity in any of the particular refinery locations, and because of the sufficiencies of our operations versus their turning on if you will, their SRUs, we tend to be a base-loaded sulfur handling processing facility inside in the refinery fence.

[Operator:]

[Operator Instructions] Our next question is coming from TJ Schultz.

[TJ Schultz:]

I guess just first, on the Texas City and West Columbia projects, just looking for a little detail on where these are from a timing and cost standpoint and when you expect to see the full cash flow impact?

[Grant E. Sims:]

I think that we -- both West Columbia trucking facility, as well as Texas City terminal, should be operational this quarter. We're going to be limited, if you will, on our ability to access our capacity at the Texas City terminal because of the extraordinary demands from the pipeline capacity about our refinery customers on our existing pipeline until probably second quarter 2013, at which point, our new pipeline from Webster down to Texas City should become operational.

[TJ Schultz:]

Okay, good. I guess just on the 300 miles of Wyoming pipe that you mentioned returning to oil service. I think before, you had mentioned maybe a $5 million to $10 million cost there, is that still the right ballpark? And then how long of a process to get to this oil service? And what kind of return on that investment?

[Steven R. Nathanson:]

Well, that is in the ballpark estimate of the capital and I said we're activating strategic portions. So first portion -- we're moving along on those -- the first portion will be into our refinery, the second will be connection to refineries in the area, and then the third, to the announced logistics piece of movements in the area.

[TJ Schultz:]

Okay. I guess moving over to the Natchez terminal opportunity, just any more detail on cost and return expectations as you get further into that project? And then beyond the terminal opportunity, do you expect to utilize your barges here as well?

[Grant E. Sims:]

Again, I think, because of our existing operations at that facility that certainly put us in a position where we can take advantage of the economies of scale, as we're already having active operations at Natchez, we're not spending a whole lot of money, and I think it's fair to say less than $10 million. As Steve said, we will be operational, ready probably in the fourth quarter, whether or not that exactly matches up with when the dedicated shipper is ready to start delivering bitumen at that point, we don't know if that's consistent with their timeframe. Depending upon volume expectations, we could expect a significant return on marginal capital invested. I think part of the strategic value of them seeking us out was that we also have the barge capability to -- once the bitumen or dilbit is unload it off the rail, take it through our terminal facility and be able to load it on barges and distribute it to markets along the Lower Mississippi river. So we have kind of the opportunity to provide an integrated suite of services to affect an economic value proposition for the producers in Canada.

[TJ Schultz:]

Okay. And would the expectation then also be able to move diluent back through the terminal for backhaul to Canada?

[Grant E. Sims:]

Yes, we're designing the facilities to do exactly that, which is bring in dilbit via rail and backhaul diluent, which is a very effective transportation. It's -- in essence, in some respects, it's free transportation of diluent back, because otherwise, the cars would go back empty.

[TJ Schultz:]

Okay, great. I guess, just lastly on Walnut Hill, it sounds like the second phase may be up and running first part of next year. Is there any guidance you could provide on what this may mean on Jay System volumes?

[Grant E. Sims:]

I think a little bit of it depends on, ultimately, the market, obviously. But we should be ready within the next couple of weeks to -- as we call it Phase 1, to be handled -- be able to handle 2 unit trains, which would be a week, which would be 140,000 barrels if all is utilized at design capacity. At the point in time, when the rest of the -- at least our facilities are in place, we'll be able to handle substantially more from a receiving point of view. And obviously, the capacity on the Jay System is such that we could clearly, potentially handle again the ping-pong market conditions up to a train a day.

[Operator:]

[Operator Instructions] We're showing no further questions at this time. I would like to turn the floor back over to Mr. Sims for any additional or closing comments.

[Grant E. Sims:]

Well, thank you very much and we'll [indiscernible] 90 days if -- or approximately 90 days, if not sooner. So thanks again for your participation.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.