NuStar Energy L.P.
Q2 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Ladies and gentlemen, welcome to the NuStar Energy LP Second Quarter Earnings Conference Call. At this time, all participants' lines are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instruction] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Ms. Pam Schmidt, Vice President of Investor Relations.

[Pam Schmidt:]

Good morning and welcome to today's call. On the call today are Brad Barron, NuStar Energy LP's President and CEO; and Tom Shoaf, Executive Vice President and CFO along with other members of our management team. Before we get started, we would like to remind you that during the course of this call NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties, and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements. Also, throughout the call today, when we talk about our results, we will be describing our results from continuing operations. In other words, the results will refer to the results that we will refer to in this call will exclude the St. Eustatius facility that we sold in July 2019. During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the financials page of the Investors section of our website at nustarenergy.com. With that, I will turn the call over to Brad.

[Brad Barron:]

Good morning and thank you all for taking the time to join us today. Here at NuStar, we started 2020 optimistic about what the year we bring after a great 2019 where we generated strong results and strengthened our balance sheet. Last year, as you know we lowered our leverage below four times and our project teams brought a record number of key low multiple high-return projects to the finish line on time and under budget. That set the stage for us to deliver even stronger results in 2020. And then as we all know, earlier this year in March, the world changed abruptly and profoundly with the pandemic, crushing economic downturn and historic collapse in crude prices. In the face of those headwinds, we prioritized, we adapted, and we took action to protect our employees and our stakeholders by cutting our spending and preserving cash and in May, we handed in very strong first quarter results. As I told you on our first quarter call, I've been impressed and gratified by our employees' perseverance and hard work through such difficult times. Across the board, our employees have not missed a beat. Most of our office employees are working remotely, as they have been since March and their productivity remains very high. And our employees, whose work requires our physical presence on site continue to operate our facilities to the highest standards, all while practicing protective distancing and utilizing PPE to do their job safely. As a result, we've continued to operate reliably, efficiently, and safely to deliver the energy that keeps our country running throughout this crisis. And that continuity is truly critical not only for NuStar and our customers, but also for the communities that our assets serve. We've also taken and continue to take important steps to protect our financial stability. In March, we acted quickly and decisively to reduce our strategic capital spending for 2020 to a range of $165 million to $195 million, which midpoint to midpoint is a $145 million reduction from our previous guidance. That translates to an approximate 45% reduction to the 2020 strategic capital spending, we've had forecasted earlier in the year. Also, we identified about $40 million to $50 million of controllable operating expenses – expense reductions for the full year 2020. Then in April, we put in place a leverage-neutral term loan that reduced our distribution and reduce our distribution both in an effort to further assure, we have the liquidity to address our near-term maturities. Since then, we have focused on maintaining our capital discipline and operating as efficiently as possible, and we continue to look for ways to scale back spending this year, and in 2021. At the same time, we're also focused on lowering our leverage and we are evaluating non-core asset divestitures as market conditions improve. Second quarter 2020, was one of the most challenging quarters in the history of the U.S. energy industry. Thanks to our great employees, our world-class assets, and our blue-chip quality customers, we generated solid second quarter results through some of the darkest days of the global pandemic. During the second quarter alone, we moved almost 138 million barrels of crude oil and refined products through our pipelines. We've also seized the opportunities presented by contango during the second quarter, and successfully filled 100% of our available storage capacity, which will continue to benefit our results through the rest of 2020 and beyond. As a result, we were able to generate $162 million of EBITDA in the second quarter, which is higher than Q2 2019's $161 million. To improve quarterly EBITDA, during quarter with the du bois distinction of being a low watermark, not only for U.S. refined product demand, but also U.S. refinery utilization, and U.S. crude oil production in an environment in which individuals and businesses across industries, across the country and around the world are struggling is nothing short of impressive. I'm proud of the strength and resilience our second quarter results demonstrate. And we are cautiously optimistic about preliminary positive signs of recovery. We saw refined product demand improve as the second quarter progressed, and we've seen additional encouraging signs of progress toward recovery in July and thus far in August. On average across, our refined product systems, we are about 94% of typical demand, which has improved significantly over the low 70% or so we saw in April. Given the continued uncertainty with economic conditions, we have maintained a projection of about 85% of typical demand through the end of the year. We're hopeful what we're seeing proves to be a sustained trend. To provide you with some more granularity on what we're seeing system by system, on our Central East system in the Midwest, which serves a rural population with healthy agricultural demand we have seen system throughputs rebound strongly from lows of 80%. Our system throughputs are now back-up to around 95%. At the same time, the distillate market in that region has continued to hold up as it has throughout the year. Another bright spot in the Midwest, our ammonia line has continued to perform at near-record levels, with strong agricultural demand again this year. On our Central West system, we saw volumes declined to about 65% at its low point in April, as refinery utilization dropped to accommodate demand deterioration in Texas and surrounding states. We've seen volumes improve in recent months to close to 80% despite the uptick in COVID-19 cases in Texas, since Memorial Day. We now expect this system to benefit further from increased utilization demand rebounding to 85% to 90% in August and beyond. In South Texas, our system throughputs at the low point were about 75%. Since that low, we've seen overall system throughputs rebound sharply to pre-pandemic levels. In addition, we're also benefiting from the completion of our North Mexico refined product supply projects, which went into full-service earlier this year. You'll recall that both of those projects are supported by minimum volume commitments from large creditworthy customers. We think improvement for our refined products demand pool assets bodes well for our supply push pipeline assets. A sustained period of refined product demand recovery should increase refinery utilization, which in turn should drive a recovery and ramp-up in crude production. We continue to believe in the viability and fundamental strength of U.S. shale production, particularly in the Permian and specifically on our Permian crude system. Prior to the pandemic, during the first quarter, our Permian system was moving an average of about 450,000 barrels per day, up about 4% over fourth quarter of 2019. And then, as we told you in May, the U.S. rig counts fell and producers curtail production, volumes declined across the U.S., in the Permian and on our system. We continue to believe that although current conditions of depressed production growth across U.S. shale plays in the near term, our system's geological advantages, including lower production costs and higher -- should drive recovery for our core of the core assets in the Midland Basin, ahead of other shale plays and also other gathering systems in the Permian. We're encouraged that our volumes rebounded in July to 434,000 barrels per day, 21% above our May lows and 8% above our second quarter average. We're also encouraged by our August nominations of 444,000 barrels per day. We're working closely with our producers and given their plans, as well as what we're observing, we have raised our expected exit rate for 2020 and to about 401,000 barrels per day, which is 8.5% higher than our guidance for year-end Permian volumes on our call back in May. We're also seeing some reason for optimism on exports as well. After seeing our Corpus Christi exports dip below MVCs in May. We've been pleased with the ramp-up we've seen in June, July and the beginning of August in both WTI and Eagle Ford volumes. You will recall that we have a substantial take-or-pay agreement with Trafigura and we continue to forecast those revenues and our Eagle Ford commitments at MVC levels. We're encouraged by these helpful signs, but we're also keenly aware of the uncertain environment we're facing here in the U.S. and around the globe. Taking all these factors into account, we continue to project that NuStar will generate full year 2020 adjusted EBITDA of between $665 million to $735 million, which is the same guidance we provided in May and is midpoint to midpoint less than 6% lower than our pre-pandemic guidance. With that, I'll turn it over to Tom to give you details of our second quarter results.

[Tom Shoaf:]

Thanks Brad and good morning, everyone. As a reminder, when I talk about our results, I will be describing our results from continuing operations for all the periods discussed. For the second quarter of 2020, as Brad told you, we generated EBITDA of $162 million, up slightly over second quarter 2019 EBITDA of $161 million. Second quarter 2020 DCF available to common limited partners was $62 million, down $21 million compared to DCF available to common limited partners of $83 million for the second quarter of 2019. And our distribution coverage ratio for the common limited partners for the second quarter of 2020 was 1.43 times. Second quarter 2020 EBITDA in our pipeline segment was $116 million, down $4 million from the second quarter of 2019 EBITDA of $120 million, mainly as a result of COVID-19 related refined product demand destruction and the associated reduced refinery runs from some of our customers' refineries, as well as shut-ins and curtailments in some of our crude markets that we serve. However, increased throughput volumes on our Corpus Christi crude system due to the completion of our Taft 30 inch pipeline continued volume ramp on our Permian Crude system and contributions from our Mexico expansion projects, nearly offset pandemic related pipeline declines for a net decrease in pipeline revenues of only $6 million for the quarter, which was further bolstered by a decline in pipeline OpEx of $2 million, due to lower power costs across the segment. Our second quarter 2020 EBITDA in our storage segment was $68 million, up $6 million or 10% from the second quarter of 2019 EBITDA of $62 million, as a full quarter's contribution from the completion of our Taft 30 inch pipeline, which flows into our Corpus Christi North Beach terminal within our Corpus Christi crude system more than outweighed COVID-19 related throughput declines at certain facilities that directly support some of our customers' refineries. In addition, our storage segment benefited from our Mexico and West Coast expansion projects, new storage contracts and renewals of existing contracts that together brought online about 3 million barrels of our previously idled storage capacity that brought us up to 100% utilization. Second quarter 2020 EBITDA in our fuels marketing segment was $3 million, which was comparable to the second quarter of 2019 EBITDA. Our June 30, debt balance was $3.4 billion and our debt-to-EBITDA ratio was 3.94 times, which puts NuStar under four times for the fifth consecutive quarter. As a reminder, in April, we entered into an unsecured three-year $750 million term loan. To date, we have drawn down $500 million in order to address our upcoming September 2020 maturity and have the option to draw another $250 million to address our February 2021 maturity if warranted. The bridge loan allows us the optionality to reenter the debt capital markets opportunistically but also provides the necessary liquidity to ensure that we can address our cash needs in these uncertain times. Turning to our full year 2020 projections. We continue to expect NuStar's 2020 adjusted EBITDA to be $665 million to $735 million. With regard to 2020 capital spending estimates, as we told you in May, we plan to spend $165 million to $195 million on strategic and other capital. Of that total for the year, about $60 million is for our Permian system. And around $30 million will be for renewable fuels and related improvements for our West Coast storage assets, as well as finishing out our Corpus and Mexico projects. In March, we reduced our planned total 2020 spending significantly. And the midpoint of our current range is now approximately 60% below our 2019 strategic capital spending. Our pared down 2020 capital project program is targeted at low multiple projects and our project teams continue to focus on executing on our plan as efficiently and effectively as possible. And year-to-date through July 31, we have spent about $100 million on strategic capital. In addition, we continue to expect a total of about $40 million to $50 million of reliability capital spending in 2020. Based on these projections, we still expect our common unit distribution coverage ratio for 2020 to be in the range of 1.6 times to 1.8 times. And with that, I'll turn the call back over to Brad.

[Brad Barron:]

Thank you, Tom. As you've heard, thanks to our employees' dedication, our strong assets and our quality customers along with the steps we took to build resilience and flexibility into our business in the past two months and over the past few years, we are weathering the storm, generating solid results and preparing for the future. We're glad to have the first half of 2020 in the review mirror. Rest assured that, we'll be working hard to protect our employees and their families, supply our nation's critical energy needs, build our financial strength, generate value throughout the rest of the second half and into the future. I hope you stay healthy and safe. Thank you. With that we'll open it up for Q&A.

[Operator:]

[Operator Instruction]. Your first response is from Jeremy Tonet of JPMorgan.

[Unidentified Analyst:]

This is Joe on for Jeremy. Wanted to start off digging it with a little more granularity into the Corpus Christi export and do you mind clarifying are you above MVCs now? And if you're below, I guess how much higher you need to hit? How much higher to reach the MVCs and then just kind of your expectations for the remainder of the year? Is it just from that terminal traffic you're at MVCs or anything else baked in?

[Danny Oliver:]

Joe, this is Danny Oliver. So we're running – pre-pandemic we were running about 650,000 barrels a day through that system. It's roughly half WTI and half Eagle Ford our current MVCs on that system are about 462. We dipped to a low in May of about $250 million, but we're back up to about $450 million. So we're kind of right at the MVC levels. Some contracts are below MVCs and we have some shipping above their MVC level. So it's kind of a mixed bag. But on a macro level, we're right at that MVC level. And again we -- MVCs we've forecasted just the MVC levels throughout the rest of the year.

[Unidentified Analyst:]

Okay. That makes sense. And then also I wanted to dive a little bit deeper on the Permian crude system. Just I guess your assumptions around hitting the exit rate for 401,000 barrels per day by the end of the year. Is that just kind of from the 444,000 in August is that natural declines or are there any other factors at play? And also just kind of looking further along? Is it -- should we think that seems pretty sharp natural declines. Is there -- would that continue into later years? What should that kind of tail back?

[Danny Oliver:]

Yes. Well I think we recognize the uncertainty that remains through the rest of the year. I would tell you that if we stay where we are today in this price set about $40, I think there's room for upside in that volume, but there's a lot of year left and still some uncertainty out there. So we're being cautious.

[Unidentified Analyst:]

Okay, that makes sense. Thanks for taking question. That’s all for me.

[Operator:]

Your next response is from Robert Maska of Mizuho Securities.

[Unidentified Analyst:]

Hi. Good morning everyone.

[Danny Oliver:]

Good morning.

[Unidentified Analyst:]

So I appreciate the updates in the earnings release and kind of tying into Joe's question on PCS. Just hoping you could talk a little bit more about the outlook for rig count or duct completion on your acreage, just based on any conversations that you've had been having with producers -- and yes and how we should think about that production growth and any offsetting legacy declines? And I guess, what the sensitivity would be if you see more sea rig starts to return to your acreage?

[Danny Oliver:]

Yeah, Robert this is Danny again. So we've got really the story in the Permian wherever you are right now, it really doesn't have much to do with rig count. It's more about duct. We've got over 500 ducts on our system. And to put that in perspective in years like 2017, 2018, 2019 when at the peak of the growth on our system we were completing or our producers were completing about 500 wells per year. Now we don't think in this environment they're going to finish these 500 ducts at same pace. But we likely have at least 1.5 years of ducts. If you're in this price environment that you can bring those online and of -- and at least offset natural decline curves. And that's what our producers are communicating to us for the most part is that, here at about $40 they can complete those ducts. And at least stave off the decline curves.

[Unidentified Analyst:]

Got it. That's helpful. And just a second question. You alluded to asset sales in the prepared remarks. And just wondering what you're seeing in the M&A marketplace right now and whether that bid for storage assets have returned as things begin to stabilize? Just any updates on that front would be helpful.

[Brad Barron:]

I mean, we're watching the markets closely to see what's happening out there. I don't know. There's been a whole lot that's transacted in just the last few weeks. So I couldn't really comment on the bid-ask read on assets at this point.

[Unidentified Analyst:]

Okay. And actually just one more. As things stand now looking at your 2020 growth CapEx, would you -- do you think that's a reliable run rate in the near-term, or is there even more ability to flex that in 2021? And, I guess, how much of that would depend on volume growth on PCS and any well connects that you ultimately end up carrying out?

[Brad Barron:]

That's a good question. I would say a lot of that depends on volume growth in PCS. And so when we see good opportunities to invest at low multiples we will do it. But right now, we are evaluating every single project basically everything is coming back for a fresh analysis. And we're looking to maximize our investments there. I don't mean maximize the amount of spend I mean maximum returns.

[Tom Shoaf:]

I mean, we've already made significant cuts in 2020. There's probably some room to do more if necessary. But right now we think we're on target with what we can do. As far as 2021 goes, we've got plenty of room to make cuts in 2021 if necessary. We're just going to continue to evaluate the progress and see how things go and demand and et cetera. And then we'll make that determination for 2021 later.

[Brad Barron:]

Probably the best way to put it with regard to Permian is we have the ability to flex with our producers.

[Unidentified Analyst:]

Okay, great. That’s helpful. Thank you guys for taking my questions.

[Operator:]

[Operator Instructions] Your next response is from Ryan Levine of Citi. Please go ahead.

[Ryan Levine:]

Good morning.

[Brad Barron:]

Good morning.

[Ryan Levine:]

Can you comment on -- Brad, you highlighted the noncore asset sales as a potential action that you take. Can you speak to the commercial logic or strategic logic in selling in light of the recent change in distribution policy and capital raise? And any color you could provide around the stage of the respect?

[Brad Barron:]

Sure. As we came into the year, we've told you -- we said multiple times that we're focused on lowering our leverage and we continue to be focused on learning our leverage. And over the last several years, we've also talked about how we continually look through our portfolio to find either underperforming or non-core assets. Station was a great example of that. And so we'll continue to do that throughout 2020 and 2021 with a focus on lowering leverage. So, some of the things that you mentioned are tools that we can use to lower leverage and we've implemented those tools, but we want to be cognizant -- or we want to always be looking for opportunities to improve. So, that's the way I would explain that.

[Ryan Levine:]

All right. Thanks. And then one other. In terms of recent utilization across your system, can you comment around what you're seeing over this month and what you're seeing going forward? Are you expecting a meaningful ramp-up in the near-term in terms of utilization across the system particularly on the product side?

[Tom Shoaf:]

I think in Brad's remarks you mentioned that we were around 95% on -- in total on average of typical demand for this time of the year. I suspect we're not going to get back to 100% anytime soon. So, that 95% -- 90% to 95% demand levels, I think is probably going to stick around for a while.

[Ryan Levine:]

Okay. Thanks.

[Operator:]

Thank you. Your next response is from Theresa Chen of Barclays. Please go ahead.

[Theresa Chen:]

Hi there. Thanks for taking my questions. So, first, I wanted to ask about the reaffirmed guidance range. So, it sounds like in general things got better through the quarter and the outlook very resilient probably better than what we had thought before. And with -- on the refined product side and on the crude side the exit rate now is higher than the $0.037 previously guided. So, I was just wondering in keeping that guidance range the same, are there areas elsewhere in your portfolio that are experiencing headwinds? Do you expect a slower than previous second half or is there anything else we're missing in terms of just the moving pieces?

[Pam Schmidt:]

Hi Theresa, this is Pam Schmidt. We are having certain assets that are coming in a little bit lower and others that are kind of performing even better. I think we've kind of talked about that in our remarks. But I would also say that we're just trying to be cautious due to all the uncertainties in the market at this period in time. So, I think we've been pretty clear about what we're seeing currently and what we expect, but we also know that there's just a lot going on with the pandemic.

[Brad Barron:]

I would echo what Pam said. I think what I hope you took from our remarks is that we're seeing signs that lead us to be optimistic about things in the future, but things are still very uncertain.

[Theresa Chen:]

Okay. And I guess just turning to the refined products portion for the Central West and South Texas system. So for Central West your expectations of 85% to 90% utilization in August and beyond. Can you just talk about the week-to-week trend given the resurgence of cases in some of those areas served? Is it a deceleration in the rate of increase is pretty much unchanged with we're just engaging activity regardless of the resurgence. And then on the South Texas piece. Okay, so it seems that your rebound to pre-pandemic levels is better than what the aggregate macro data would suggest and also the anecdotal commentary from some of your refining customers. Just wondering, what exactly is happening there?

[Danny Oliver:]

Yeah. So Theresa, this is Danny, again. So, I'll start with the Central West. Our assets up there serve some big – pretty big urban markets like Dallas-Fort Worth and Denver and not directly, but Phoenix grade gasoline and so as we've seen pandemic impacts in some of those markets from time-to-time, we've seen some reaction there in terms of the volumes that are being produced. But I would say in general, it steadily improved since the lows in April with just a little bit of noise week-to-week with what's going on in some of those markets. But again, general pretty see improvement since the lows. Down in South Texas, yeah, I don't know if the volumes we're seeing are indicative of actual demand, but we are seeing volumes actually slightly above where they were one year ago levels out of a combination of three rivers in our Valley pipeline system. And that does not include any Mexico volumes. That's just the local demand.

[Theresa Chen:]

Got it. Danny, related to your comments about not expecting to get back to 100% utilization or 100% normal of – of normal demand anytime soon, is that related to any expectations for structural demand changes, or do you just think that this is going to be a very slow recovery to a normal environment?

[Danny Oliver:]

Yeah. No, I just think, it's going to be a slow recovery. There's likely people going to be working remotely for the rest of the year at least and that – a little bit of that's probably going to stick with us for a little while at least.

[Theresa Chen:]

Okay. And lastly, on your OpEx target of $40 million to $50 million savings, how much of that has been executed? And how much of that is permanent i.e. if we do ramp-up in a bigger way in 2021 and beyond to 100% of normal demand for example, can you still keep some of those savings?

[Pam Schmidt:]

I would say that, the large part of that is still to come in the second half of 2020 definitely. And I would say that, for 2021, we are still going to analyze that and flex according to what happens with the market and with demand. So I think those are things where, if it calls for it, we can make it a hard cut. And if the economy recovers, then we'll recover with it.

[Theresa Chen:]

Thank you.

[Danny Oliver:]

Some of that OpEx is related to power, right? And so that's variable depending upon where volumes fall out. So, as you see volumes increase you see power go up those type of related costs that are in OpEx. So part of that is just the nature of volumes and going up or down.

[Theresa Chen:]

Got it. Thank you.

[Operator:]

Thank you. Your next response is from Shneur Gershuni of UBS. Please go ahead.

[Shneur Gershuni:]

Hi. Good morning, everyone. Good to hear everyone is well. Just maybe to follow-up on a couple of those questions from Theresa. When I sort of think about your guidance range as it stands and sort of the fence posts that you sort of put out there last quarter earlier recovery and so forth. Given the updates that, you're seeing out there right now and let's run a scenario where there's not an absolute return to a full in place scenario. Would you expect NuStar to basically end the year kind of in the upper end of your guidance range? Is that the right way to be thinking about it?

[Brad Barron:]

It's a range. So we give you the full range. So we target typically the middle of the range is what we expect. There are factors that could come into play that would cause us to hit the upper end of that range.

[Shneur Gershuni:]

Okay. And what are the signposts that you're following most closely? Is it should we be focused mostly on kind of the storage market for you to hit the upper end? Is it really going to come down to Navigator? Is it congestion data? Just what are the key things that you think are going to be primarily the biggest drivers as we think about the second half?

[Tom Shoaf:]

Yes Shneur, I think the two biggest drivers are just going to be demand and crude oil price. From 40 if it goes to 30 then that's obviously negative versus what we're seeing today. If it goes to 60, we probably have a much more positive view.

[Shneur Gershuni:]

Okay. Fair enough. You had mentioned in your remarks that you expect the storage benefits to roll through 2020 or to continue through 2020. Is any of it going to roll into '21 as well also were you able to capitalize on the contango that was out there a couple of months ago and sort of put in place a couple of longer-term contracts that would go into '21?

[Tom Shoaf:]

Yes. We were -- most of those contracts we signed up back in April/May go out through about June or July of '21.

[Shneur Gershuni:]

Okay. Perfect. And then one final question just a follow-up on the cost. We -- I know that you mentioned in the prior question that a lot of the costs or some of the costs are variable in nature which makes perfect sense. Is there any level of cost reduction that you can identify to us that more of a permanent nature that wouldn't be coming back it wouldn't be volumetrically sensitive? Have there been a reduction in force of some store, have you looked at taking the opportunity to look at how you run the business? And found some permanent cost reductions that could carry through into the future?

[Brad Barron:]

Sure. I mean we've scrubbed the business from top to bottom. And so we're looking for every cost reduction we can find. In terms of things that would carry through permanently we can get back to you on a number on that. I can't quote it off the top of my head.

[Danny Oliver:]

We could at least give you a percentage of what's variable related to volume.

[Shneur Gershuni:]

If you can share that percentage that would be great.

[Pam Schmidt:]

We'll get back to you on that Shneur, we will.

[Shneur Gershuni:]

Perfect. Okay. That sounds good. We'll have a follow-up call. I appreciate the color today guys and have a safe day.

[Danny Oliver:]

Thank you.

[Operator:]

I'm showing no further questions at this time. I would now like to turn the conference back to Pam Schmidt.

[Pam Schmidt:]

Thank you, Natera. 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:]

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.