NuStar Energy L.P.
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Good day. Thank you for standing by and welcome to the NuStar Energy First Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to hand the conference over to Pam Schmidt, Vice President of Investor Relations. You may begin.

[Pam Schmidt:]

Good morning. Good morning and welcome to today's call. On the call today are Brad Barron, NuStar Energy L.P.’s President and CEO; and Tom Shoaf, Executive Vice President and CFO, along with other members of our management team.

[Brad Barron:]

Good morning. Thank you all for taking the time to join us. As America recovers from the impact of COVID-19, returns to normal activity and growth, I’m pleased to report NuStar turned in another solid quarter. Before I talk about the green shoots we see for market fundamentals and for improving activity across our system for the rest of the year, I want to touch briefly on the impact of mid-February severe weather event. Winter Storm Uri just made national headlines as it brought extreme temperatures, snow and ice to Texas in nearby states and left millions of Texans without heat or water for days. NuStar’s employees worked tirelessly to keep our assets up and running, braved the frigid weather to help our customers in the region, getting wells going again and installing pumps and generators to help address outages and assure that the energy we all need continued to flow. And as I noted above, despite the lingering effects of the pandemic on the global economy, as well as the unprecedented winter weather event that trimmed our results by a total of about $11 million, I'm pleased to report that NuStar turned in another solid quarter. And without the storms impact, earnings were comparable for the fourth quarter of 2020. As America begins to recover from the impact of COVID-19 and begins returning to normal activity and growth, we're seeing signs of stabilization and improvement across the US and in NuStar’s footprint. US refined product demand has improved, as COVID vaccinations have continued to allow more and more Americans to return to normal day to day activities and demand on NuStar’s refined products systems has been remarkably resilient.

[Tom Shoaf:]

Thanks Brad, and good morning, everyone. To put the quarter-over-quarter comparison into perspective, it's important to remember that the first quarter 2020 was qualitatively and quantitatively very different from first quarter 2021 for the world and for NuStar. First quarter 2020 was pre-math, pre-lockdowns. And for NuStar, first quarter 2020 was also a record breaker, with all time high crude oil pipeline volumes, on our Permian Crude System and on our Corpus Christi Crude System. On top of that, as Brad mentioned, winter storm Uri, and its aftermath, drove customer outages and resulted in some short-term disruptions. Even with the 11 million impacts to our earnings due to the storm, we were still able to generate first quarter 2021 EBITDA for $169 million. These results demonstrate the solid performance of our assets, even while facing not only the continuing impact of the pandemic, but also severe weather events and its aftermath. Turning now to our segment discussion for the first quarter of 2021, EBITDA on our pipeline segment was 124 million, which is down $21 million, compared to the first quarter 2020s adjusted EBITDA of $145 million. We saw strong quarter-over-quarter improvement on our Permian Crude System throughput volumes. But that growth was offset by a $10 million segment impact of winter storm Uri and decline in volumes on our pre-pandemic first quarter 2020 record levels on our Corpus Christi Crude System. Our first quarter 2021 EBITDA on our storage segment was $66 million, down $7 million from the first quarter of 2020 EBITDA of $73 million. Strong contributions from our West Coast region renewable fuels network are more than offset again by $1 million impact of the winter storm Uri and throughput declines on our Corpus Christi crude system First Quarter 2021 EBITDA on our fuels marketing segment was $3 million, down from the first quarter of 2022 due to weaker bunker and butane blending margins. First quarter 2021 DCF available to common limited partners was $81 million. And our distribution coverage ratio to the common limited partners was 1.84 times.

[Brad Barron:]

Thanks, Tom. Last year our assets, our business and our employees demonstrated strength and resilience. Faced with the challenges of a global pandemic, we still moved more barrels and generated more adjusted EBITDA in 2020 than we did in 2019. And so far in 2021, even after layering in the impact of historically unprecedented winter storm NuStar remain solidly positioned to fund 100% of our 2021 spending from our internally generated cash flows. As Tom mentioned, we remain on track to generate EBITDA 2021, comparable to 2020 strong results. Expectations for demand, utilization and price for 2021 have all improved, and we see signs of recovery on the horizon. We're positioned to benefit from improving fundamentals and the green shoots we see across our footprint, and we will continue to focus on our strategic priorities. Operating safely and reliably, lowering our leverage and funding all of our 2021 spending from our internally generated cash flows. So ESG seems to be top of mind for everyone these days. So let me take a minute to talk about that. For long before ESG became a buzzword, NuStar always priorities taking care of our employees, our communities and the environment. As a result, we're best-in-class, when it comes to safety and environmental stewardship. And that's not just lift service, in 2020, our 1,400 employees work more than 3.2 million hours with only four lost time injuries, our incident rate was more than seven times better than the bulk terminal industry average and more than twice as good as the pipeline industry average. Similarly, our environmental performance is just as strong with releases accounting for less than two 10,000 of 1% of our total annual throughput of 817 million barrels. I should also note that when it comes to protecting the environment, there's no safer way to transport petroleum products than through pipelines.

[Operator:]

Thank you. The first question comes from line of Theresa Chen from Barclays. Your line is now open.

[Theresa Chen:]

Good morning, everyone. Great to see the progress on the West Coast biofuel side. And I just wanted to delve into this a little bit more. So far, it seems that most of the work and the incremental cash flows have come on the terminalling inside. And I was just wondering, if other states within the Mid-Con, for example, open up for LCFS, where you have more pipeline assets, how easily would it be to transport these types of renewable products within your pipelines in addition to the terminalling movement?

[Brad Barron:]

It would be easy to do. And I don't know if that would be coming in at origin points to the pipelines or if it would be coming in directly to the terminals, but we could handle it either way.

[Theresa Chen:]

Thank you. And can you talk about the feedstock side? What kind of logistical services can you offer there? And specifically, what kind of feedstock will you be handling at Selby? Is there incremental capital cost of handling vegetable oil versus true waste feedstock, for example?

[Brad Barron:]

Right. It's not waste feedstocks. But we'll be handling -- we'll be bringing in these feedstocks by rail and then delivering directly to our customer. But no special handling needs.

[Theresa Chen:]

Got it. And just lastly, outside of on-road transportation fuels, can you talk about your SAF partnership with Neste and how that came about and where you expect that to evolve?

[Brad Barron:]

Yeah. So we began talking to Neste back in about 2017, I believe, when you may recall, there was a time when everybody, including NuStar, had a crude-by-rail project into the West Coast and we made the decision very early on that, that just wasn't going to be executable.

[Brad Barron:]

Theresa? Still there Theresa?

[Operator:]

Theresa is disconnected. Your next question comes to the line of Joe Martoglio from JPMorgan.

[Joe Martoglio:]

Hi, thanks for taking my question.

[Brad Barron:]

You bet.

[Joe Martoglio:]

Wanted to ask about the Winter Storm Uri impacts and the 11 million for the quarter, was any of that shipments below NBC's were a benefit will be recognized later in the year.

[Brad Barron:]

No. We – First in the Permian for example, I can break it down a little bit for you. So about $3.5 million was the freeze-off in the Permian. But our volume average for the month was still well above NBCs. So that was just you know, some lost revenue during that dip. There was another 1.2 -- roughly 1.2 million related to our ammonia system, because one of the ammonia plants that feeds that system was taken out of service for a week or two because of the storm. And the remaining $6 million or so was all a slump in refined product demand mostly in the state of Texas, as you know, the state was pretty much shutdown for four or five days.

[Joe Martoglio:]

Okay, that's helpful. And then also on the Permian crude system, and with the updated exit rate guidance, is there any rate that capital spend will be higher there than originally anticipated? Or can you kind of do the increase volumes without kind of additional capital? Or they're all set somewhere else?

[Brad Barron:]

Yeah. There's -- that moves around a little bit, but our current capital guidance has everything in it to get to that 500 exit rate.

[Joe Martoglio:]

Okay, great. And then if I can squeeze in one more, kind of interested to hear, if you're having any conversations to sell assets, whether that still remains something you're interested in and just kind of how you're thinking about that generally?

[Tom Shoaf:]

Yeah, you know, reducing our leverage has been top of mind for us for the past year. And so, we're continuing to review our portfolio to see if there are assets that would be appropriate for that. But it's always something that we're looking to lower leverage further.

[Joe Martoglio:]

Okay, got it. Thanks for taking my questions.

[Tom Shoaf:]

Thank you.

[Operator:]

Your next question comes to the line of Brian Levine from Citi. Your line is now open.

[Brian Levine:]

Hi, good morning. I was wondering if you're able to comment on opportunities you see to expand the Lyndon terminal around any biofuels related projects or any commercial opportunities that you see with that asset?

[Brad Barron:]

We very certainly could, you know, do what we've done on the West Coast in Lyndon. What's missing in Lyndon and most places in the United States other than the West Coast is the mandate. So as these states start coming out with some their version of LCFS like they have in California, then we can certainly move operations like that into those areas as well.

[Brian Levine:]

Is there anyway to put numbers around the commercial – around what opportunities that you see there rather than potential volumes or EBITDA? Or any type of investment up-teen?

[Brad Barron:]

You mean in London, specifically?

[Brian Levine:]

Yes.

[Brad Barron:]

Not really, it's too early for that. Again, we don't have a mandate to do that. So nobody's really moving that way yet. But when they do, I'm sure, you will be involved.

[Brian Levine:]

Okay. Great. And then, in terms of the quarter specifically, what was the impact of higher electricity costs to your business during the quarter? And how does that – and what line items in your income statement is that hidden?

[Brad Barron:]

It was really immaterial across the board. So we had some puts and takes, but they sort of washed out to an immaterial impact.

[Brian Levine:]

Okay. Was there any business interruption as a result of power outages?

[Brad Barron:]

Not really. No not that would – not that would result in a business interruption claim.

[Tom Shoaf:]

They were very limited very short term in nature. We had, as Brad mentioned in his comments, we had employees out in the middle of that storm, getting generators set-up and really, really kept running most, most of the time.

[Brad Barron:]

Yeah. I wish we had more time, I will tell you the extraordinary – the stories about the extraordinary efforts that our employees went to, not only to reconnect, the Permian, all the producers in the Permian we got. Our employees went above and beyond to help them and then, things like the City of San Antonio, we had crews that work throughout the night, to make sure there weren't gasoline and diesel shortages in some of the big markets we serve in particular San Antonio.

[Brian Levine:]

Okay. Great. That is all for me. Thank you.

[Brad Barron:]

Thank you.

[Operator:]

Your next question comes in line of Shneur Gershuni from UBS. Your line is now open.

[Shneur Gershuni:]

Hi, everyone. Maybe to start-off, you gave a lot of color today around, your guidance drivers. For example, the rig count that's around the navigator assets. You also told us about the utilization expectations on the refined product system. I was wondering, if you can give us your assumptions around corpus – kind of when you expect to get back to 4Q 2019 type of levels? Just given that the poor teams have already come back in terms of volumetrically of what's going in. Just wondering any color that you can give around that?

[Brad Barron:]

Sure. So in my comments, we mentioned that we expect that system to be around NBCs for the remainder of this year. And then I think the important thing to know is that's export driven. And as we see the emerging economies making progress on the Coronavirus, we expect Corpus Christi exports to rebound. And so if you look at it, you look at what's happened in the United States with our economy, I don't think it's much of a stretch to think that the same thing is going to happen on a global level. Once you see India, some of the larger economies returning the activity. So - we run at NBC levels through the end of the year, and then it'll start picking up along with global demand.

[Shneur Gershuni:]

Just to clarify before asking my second question. It's my understanding that the corpus exports themselves out of the – the export is an entirety is already kind of back to close to those levels. So, just kind of curious about, where NuStar fits within the stack on that in terms of getting back to your normal levels?

[Brad Barron:]

Well, wait, there's also a piece of our business in Corpus that, you don't see. I know, I know, a lot of people track exports out of there, but we have a pretty healthy business where we deliver crude to the local area refiners, and that part of the business has returned to normal. You just don't see that anywhere. I think, some of our larger customers there that are involved in the export markets are waiting to see some improvement in these emerging markets to get to be shipping the volumes that they were, but they were also -- when we were right at the peak in first quarter of 2020, about half of our volumes that were coming in and exported were coming out of the Eagle Ford as well. So both of those markets need to see some improvement before we get back to those Q1 2020 volumes.

[Shneur Gershuni:]

Okay. So it's not based on other builds in the Corpus area, that taking some share?

[Brad Barron:]

No, we knew that we would have capacity available in Corpus. But pre-pandemic, we would have assumed today, the Permian would be producing somewhere close to 6 million barrels a day. And we would see that capacity filling up faster than it has with a pandemic. But I think it will come back. I mean, we will get to 6 million barrels a day out of the Permian eventually. And then I think at that point, the glass feels more half full than half empty.

[Tom Shoaf:]

Yeah. And I think another thing to keep in mind is we have commitments on our loans through 2023.

[Brad Barron:]

And beyond.

[Tom Shoaf:]

And beyond.

[Shneur Gershuni:]

Okay, perfect. Sorry for all the clarifications, just one question. And my follow-up question is just; there's been some renegotiation requests around some of the pipelines coming into Corpus. There are some reports out there, have there been any attempts to renegotiate any minimum volume commitments on any of the ports that you've seen, or any of the export capacity or everything just kind of status quo?

[Brad Barron:]

Yes, we are having those conversations now. We have some significant customers that have extended agreements, like you brought up and so we know that they're going to be there beyond the term of our agreement. So those conversations are taking place out.

[Shneur Gershuni:]

And do those conversations involve a shifting of minimum volume commitments? Or is it a blend and extend, what's the framework that mix with that?

[Brad Barron:]

Yeah. It’s a little bit of everything. We're looking to extend and what volumes and other terms are still being negotiated.

[Shneur Gershuni:]

Perfect. Thank you very much. Really appreciate the color today.

[Brad Barron:]

Thank you Shneur.

[Operator:]

I’m showing no further questions at this time. I would now like to turn the conference back to management.

[Pam Schmidt:]

Thank you. We would once again like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks again and have a great day.

[Operator:]

This concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.