NuStar Energy L.P.
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good day ladies and gentlemen, and welcome to the NuStar Energy L.P.'s Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Chris Russell, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

[Chris Russell:]

Thank you, George. Good morning, everyone, 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. Before we get started, I’d like to remind you that during 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. During this call, we will also reference 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 websites at nustarenergy.com. Now, I’m going to turn the call over to Brad Barron.

[Brad Barron:]

Good morning. Thank you for joining us today. This morning, before I turn to what we accomplished this past quarter, what we see on the horizon for NuStar, I want to take a moment to highlight some of the key components of this transformational year to date. Given the difficult year we’ve been through, maybe hard to remember that during the historical 3-year low crude price environment between 2014 and last summer, we were able to consistently cover our distributions and outperform most of our peers for optimizing our assets and employing strict fiscal discipline. However, as the Eagle Ford's slowdown continued that became obvious that we needed a new growth platform and we set our sides on the Permian Basin. Our capacity on a number of asset packages, in early 2017, we found a pipeline system in the Core of the Core of the Midland Basin that met all of our acquisition criteria. We knew that our cover would be under one-time for a short period of time with the impact of a near-term dip is far outweighed by our longer-term growth projections. However, last July and August, there was a dramatic paradigm shift in the MLP sector. The capital market that it fueled unprecedented growth in the sector for many years suddenly dried up and it became clear that in order to succeed for the near future, MLPs would have to have five key characteristics. Number one, strong coverage; number two, low leverage; number three, minimal need access to equity, capital markets, finance capital spending; number four, simplified structure and transparent governance; and number five, no IDR burden. So we developed a conference of plan to meet the markets new demand and reposition NuStar for strong stable unit holder growth. Let me talk about how we’ve addressed each of these five characteristics. In order to improve our coverage ratio, we've reset our distribution starting with the first quarter distribution paid in May. We now expect our full year 2018 distribution coverage to be in the range of 1.2x to 1.3x, and our yield is now right around 9%. We also executed on our financing plan and raised approximately $600 million in the private equity markets to lower our leverage. As a result, we currently project our year-end 2018 debt-to-EBITDA to be around 4.7, but we’re working on initiatives that will take that number even lower. And finally, we simplified our structure and governance and eliminated our IDRs from merging NuStar GP Holdings and NuStar Energy. We’re pleased that 98% of the interstate units that were voted by our unit holders were voted in favor of the merger. As a result, NuStar Energy is now a single publicly traded entity with the $3 billion market cap and no IDR burden. Each one of these steps was critical to NuStar's future success, and I’m proud the hard work that we’ve done to accomplished these milestones. NuStar now has the solid balance sheet and financial flexibility to build on our foundational strengths. We’re also well positioned to execute strong return growth projects to enhance unit holder value as markets recover in the Permian and across our footprint. Turning to the Permian. The Permian Basin, as many of you know, is truly a marvel with more recoverable oil than any field in the world except Saudi Arabia’s Ghawar oil field. In fact, it’s Permian or a country that was ranked number seven among the top liquids producers in the world. It’s by far the strongest, fastest growing and most resilient in U.S. shale play, now accounting for 55% of the nation’s active oil rigs even with oil of roughly 65% from 2014 prices. Industry experts expect the basin to grow from the current 3.3 million barrels per day to 5 million barrels per day by the year-end 2020 and then continuing to grow over the next decade surpassing the production of every member of OPEC. By any standards both the performance and the prospects of the Permian Basin are impressive, which made suggest that much more impressive since our acquisition of our Permian System last May our throughputs are up 140% to 300,000 barrels per day significantly higher than the overall growth in the Permian bonds of 46% in that same period. The reasons for the superior growth for Permian Crude System are its location in five of the six most prolific counties and the Core of the Core of the Midland Basin and the backfill support by top tier producers. Our August 2018 nominations are 320,000 barrels per day. And based on the producers' projections, we expect to exit 2018 between approximately 360,000 to 380,000 barrels per day. We're excited about our system's current performance and this prospect for future growth. While there is some speculation that a potential pinch point will emerge in Permian takeaway capacity, we’re confident about our ability to get our producers barrels to market, because we are solid shippers with firm commitments for at least 85% of their plant production. While we continue to have measures to provide our Permian producers and shippers the flow assurance to get to the existing long haul outbound pipelines, we’re also working on the low cost capital projects that will give our customers alternative solutions to keep barrels flowing out of the Permian. For example, like our customer commitments and ongoing customer interests we are currently constructing 10-bay truck loading rack and evaluating where to construct a second at a couple of terminals located on our Permian Crude System. Firstly truck racks will provide our shippers with the ability to load 30,000 barrels per day and second to bring that total to 40,000 barrels per day. Also, just last week, we executed a new contract to utilize our St. James terminal unit train facilities, storage tanks and docks for one of our customers to rail three to 10 trains per month Permian Crude to St. James. In addition, we’re evaluating to connecting our Wichita Falls Crude Oil Pipeline to the Sunrise Pipeline expansion in Colorado City to Wichita Falls, connecting to the Sunrise Pipeline to provide some of our customers' additional access to Permian Crude. Lastly, in regard to Permian related projects, we continue to have discussions with the companies have planned to construct and with shippers that planned to utilize the three new long-haul pipelines out of the Permian to Corpus Christi. Our discussions include connecting our Permian System to the new long-haul pipeline for our shippers can assess new systems. We’re also discussing connecting our Corpus Christi's North Beach Terminal to the new pipeline, so the system's shippers can utilize our storage and state-of-the-art dock facilities at Corpus Christi. We’re also currently pursuing several synergistic opportunities to help side of the Permian. Earlier this year, we announced we sign several long-term T&D contracts with strong creditworthy customers, including Valero and Howard Energy to support a series of healthy return capital projects to connect a third-party rail facility to Corpus Christi, expand certain South Texas, products pipeline systems and expand our terminal in Nuevo Laredo. Within the past couple months we signed a seven-year contract with another customer to utilize some of our expanded South Texas products pipeline systems to supply additional barrels to Mexico’s markets. All these projects will supply refine products to the growing market in Mexico and all are progressing on schedule. We're forecasting incremental EBITDA from some of these projects as soon as late 2018. On previous earnings calls, we've mentioned that a few of our South Texas crude oil system take-or-pay contracts expire in August 2018. These expiring contracts represent about 45% of our South Texas crude oil system take-or-pay volume commitments. Today, I’m happy to say we have successfully renewed these contracts for an additional two years at current throughput volumes. Our minimum take-or-pay volume commitments on our South Texas crude system are now around 116,000 barrels per day. As projected, the tariffs in these new contracts will be about 50% lower than our previous contracts. However, new contracts ensure that the committed volumes are consistent what we are actually shipping today, and consistent with our current forecast. Over the past year or so we've also been investing in a new strategy to improve the returns for West Coast terminals. We've invested in a number of low cost, high return biofuels projects to meet emerging demand for biofuels storage, which commence the premium of our other storage rates. With the total investment of approximately $60 million, we expect these products to deliver an EBITDA multiple of approximately 6x. We've already began seeing improvements for some of the projects and we expect that to continue as the remaining projects are completed. So I hope it's abundantly clear that we have done and continue to do the hard work to position ourselves to thrive MLP fundamentals continue to improve. We’re focused on our core objectives to solve logistics dislocations to carefully manage solid return in synergistic projects provide world-class service safely and efficiently and enhance unit holder value. With that, I will turn the call over to Tom Shoaf, NuStar's Executive Vice President & CFO to discuss Q2 results. Tom?

[Tom Shoaf:]

Thanks, Brad, and good morning everyone. Turning to our overall second quarter 2018 results, we generated net income applicable to common limited partners of $13.7 million or $0.15 per unit and EBITDA of $157 million, up $16 million or 11% in the second quarter of 2017. DCF available to common limited partners was $82 million, up $22 million or 36% from the second quarter of 2017. And our distribution coverage ratio for the common limited partners for the second quarter was 1.28x and 1.45x for the six months ending June 30, 2018. Second quarter 2018 EBITDA and our pipeline segment was $102 million, up $15 million or 17% from the second quarter of 2017, largely due to the contributions from our Permian Crude System as well as North system due to a customer's refinery turnaround last year. Second quarter 2018 EBITDA and our storage segment was $79 million, down $9 million from the second quarter of 2017, largely as a result of weakness experienced at some of our Gulf Coast terminals. As Brand mentioned earlier, we recently closed on a private placement of $590 million of Series D cumulative convertible preferred units, the initial closing of $400 million of units occurred on June 29, while the second closing of $190 million occurred on July 13. In addition, on June 29, we closed on the issuance of $10 million of common units to Bill Greehey, our Chairman. During the second quarter, we used the initial closing proceeds to pay down borrowings under our revolver bringing our June 30 debt balance down to $3.4 billion and our debt-to-EBITDA ratio to 4.7x, below our credit agreement covenant threshold of 5.25x. It’s important to know had we been able to complete both closings of the preferred in the second quarter it would have taken our debt-to-EBITDA ratio even lower. Turning to our 2018 projections. We continue to expect NuStar’s 2018 EBITDA to be in the range of $700 million to $750 million, which includes the first quarter $79 million gain associated with the cash received of hurricane-related insurance proceeds discussed on last quarter’s call. If you exclude the hurricane gain, we expect our 2018 adjusted EBITDA to continue to be in the range of $620 million to $670 million. With regard to 2018 capital spending, we still plan to spend $360 million to $390 million on strategic capital of which approximately $190 million relates to the Permian Crude System. Our 2018 spending guidance also includes about $50 million of spending associated with the strategic projects to supply refine products to Mexico. Regarding our reliability capital spending for 2018, we still plan to spend $80 million to $100 million of which approximately $37 million relates to hurricane repair spending as St. Eustatius funded with hurricane insurance proceeds. Based on these projections, we continue to expect our common unit distribution coverage ratio for 2018 to be in the range of 1.2x to 1.3x. Additionally, we continue to expect our debt-to-EBITDA ratio that would be around 4.7x by the end of 2018, but as Brad noted earlier, we’re working on initiatives that can take that number even lower. And with that, I’ll turn the call back over to Brad for his closing remarks.

[Brad Barron:]

Thanks, Tom. By the year ago, we experienced a fundamental shift in the MLP sector that requires some transformative actions to ensure the long-term financial strength of the company. When MLP market priority change, we of course directed to address those priorities and adjust our strategy to position NuStar for success. I’m proud of the transformation we've accomplished to date in 2018, as we checked a number of mission-critical boxes in a short timeframe. Our decision to simplify our corporate structure and eliminate the incentive distribution rates has lowered cost of capital and will allow us to continue to build on the strength of our superior asset base with less dependence on the equity capital markets. We will also create more efficient and transparent structure and was a critical step in the implementation of our comprehensive plan to position the NuStar to successfully deliver and deliver strong sustainable distribution coverage for the future. We now see encouraging signs and improvement in the MLP sector as there are significant opportunities emerging with strong, stable, midstream MLPs. With each of the steps in our plan now complete, NuStar is poised to be one of the NLPs that thrives markets recover and I’m truly excited about the opportunities on the horizon for NuStar. With that, I will open up the call to Q&A.

[Operator:]

[Operator Instructions] And our first question comes from the line of Jeremy Tonet from J.P. Morgan. Your line is now open.

[Jeremy Tonet:]

Just want to start off with navigator, if you could. I was wondering if you might get a share with the EBITDA contribution was during the quarter, how much CapEx you spend in the quarter and kind of where you see that shaken out for our 2018 and 2019 for navigator CapEx?

[Brad Barron:]

As far as the EBITDA goes for the second quarter, the Permian generated about $19 million of EBITDA during the second quarter. As far as CapEx goes, I think we have about $190 million of CapEx associated with the Permian in 2018. We haven’t really given any guidance for '19 yet, but that's what it is for that. In terms of CapEx for the second quarter, Chris, do you?

[Chris Russell:]

About $45 million.

[Brad Barron:]

About $45 million in the second quarter.

[Jeremy Tonet:]

That's helpful. Thanks. And then for the system, do you still see kind of expansion to 460,000 barrels of day of capacity or what's your latest thoughts on how big the system could get?

[Daniel Oliver:]

We've got -- we just completed the Colorado City expansion to 70,000 barrels a day we've talked to you about in the past. That's in-service. We've got another expansion into Midland -- into the enterprise terminal that should come online about January, February of next year. And then we've got a couple of more expansions another one in connection in Colorado City and further expansion into Midland that we would likely come online about mid-2019. So we continue to plan for a 600,000 barrel a day system.

[Brad Barron:]

Okay. That was Daniel Oliver answering that question.

[Jeremy Tonet:]

That's helpful. Thank you. Turning over to St. Eustatius, so just wondering if you could share with us where utilization factor in the quarter, and how much PDVSA revenue or utilization was there? And if you don’t want to kind of talk about individual customers -- could you just kind of share how you think utilization trends play out this quarter and kind of next quarter over in the balance of the year?

[Daniel Oliver:]

So we're -- this is Danny, again, we’re full at St. Eustatius still. All of our customers continue to pay their bills. We are on PDVSA situation. We’re continuing to look at potential replacements and or maybe lowering their footprint there at the terminal and make room for some replacements to come in. But, currently we’re fully utilized, and I think, it’s worth noting our storage system across the entire system is at 94% utilization, which is we’re not, particularly happy with some of the renewal rates, we see in the backdated market that 94% utilization is an enviable position to save the least.

[Jeremy Tonet:]

That’s great. And as you kind of roll forward a bit here into IMO-2020, would you be able to share kind of your thoughts on how you think that will impact your business?

[Daniel Oliver:]

I think IMO-2020 is a positive for our business. We’ll continue to store bunker fuels, and we have a bunker fuels business. From our standpoint, we felt really care what the sulfur content is. It requires the same amount of storage. We actually believe this -- we may see an increase in some storage due to IMO-2020, because we’re hearing more and more that at least some of the ship owners will continue to take the higher sulfur material. And then we’ll have the introduction of the lower sulfur material that we’ll have to handle as well.

[Jeremy Tonet:]

Great. Thanks. And just last one if I could, as far as how you think about your funding plan going forward post of that preferred here. And if there is any other kind of asset sales that might make sense if you as you look to kind of optimize the portfolio? Thanks.

[Brad Barron:]

Yes, as far as the financing plans going forward, obviously, the preferred we just did was a big step to the overall plan that Brad laid out. And so, the objective there was to minimize our equity needs going forward. And I don’t think we have any plans to go into the equity market anytime soon, probably for the next couple of years. So I think we’re done there. The only thing really left to do we still have some bonds that we need to refinance this year. We still plan on doing that. So that’s kind of the financing plan going forward.

[Jeremy Tonet:]

That’s all for me. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Ryan Levine from Citi. Your line is now open002E

[Ryan Levine:]

Can you comment on current status of the $100 million to $200 million potential non-core asset sales process that was highlighted in the recent press release?

[Brad Barron:]

I mean we’re still looking at that as a lever we can quote to continue to delever. And we have some assets that we are looking at that are less core than others. And we’ll continue to look at that as the year progresses and kind of determine what we want to do there.

[Ryan Levine:]

Okay. I mean is it still something that the [indiscernible] you’re going to sell or is it more of a condition of market pricing?

[Brad Barron:]

I think it’s a condition of market pricing more than anything else. I mean you want to -- we think, anything we sell, we would want to get, obviously, we want to get a very attractive multiple for it and be able to redeploy that into lower multiple projects. So that would be the objective there. So it’s -- a lot of it is price sensitive, yes.

[Ryan Levine:]

Okay. And you can take any write-downs for doing those potential asset sales?

[Brad Barron:]

No, we have not taken any write-downs.

[Ryan Levine:]

Okay. And what is the cost escalation storage business year-over-year comparison?

[Brad Barron:]

Can you say that question again. We’re not sure we understand…

[Ryan Levine:]

In terms of the operating expense in the storage business, do you expect that year-over-year, what drove that?

[Brad Barron:]

What drove operating expenses are up? Is that what…

[Chris Russell:]

Storage, part of that's going to be maintenance costs, real quick. And most of that Ryan, it's on the maintenance expense side.

[Ryan Levine:]

Okay. And then, right, in terms of the St. James comment in your prepared remarks, what’s the CapEx and EBITDA contribution from that potential expansion? And does that anticipate every play announced competitor pipe from pushing trough St. James?

[Brad Barron:]

It's not -- there is no CapEx involved. We have all the facilities there ready to go. So it's just incremental EBITDA there at the facility. And I didn't get second part of your question.

[Ryan Levine:]

If there is a large pipe and pushing that move through the St. James market, would that create additional opportunity for your business?

[Brad Barron:]

Absolutely. And we’re working on those connections right now. So, yes, we do see St. James evolving into a more critical export facility into the future.

[Operator:]

Thank you. And our next question comes from the line of Michael Blum from Wells Fargo. Your line is now open.

[Michael Blum:]

Can you guys expand a little bit on your comments about initiatives that you're working on to further improve the leverage of the company?

[Brad Barron:]

Well, I mean there is a couple, there is several leverage right. I mean, one of them is EBITDA ramp-up, which naturally will improve the leverage of the company over time. We've already issued the preferred -- that that was big step, that was a big help. And for the ramp up EBITDA other initiatives we're working, we're already talked about potential asset sales, those types of things. And I think, it's a combination of those two that probably the biggest drivers of the continued de-levering over time.

[Michael Blum:]

And you've kind of touched on this a little before, but can you give us your general thoughts on storage markets kind of where do you see the trends in rates going, obviously, we're in backwardation. And do you see that -- do you think we’re close to a trough and when do you think you can start to see a rebound in the storage rates?

[Chris Russell:]

So well, I don't think we'll see significant rebound until we see some contango in the market. But it’s very regional in storage. So we've seen increases in storage rates on the West Coast, overall, in part due to some of the biofuels projects that Brad mentioned earlier, but really just across the board. We've just seen a couple of markets, mainly in the Gulf Coast and in the Northeast, around the New York Harbor that we saw a lot of pressure on those markets because there are more trader, blender type storage markets. But I can't speak for the rest of the market. But I think we've pretty much got kind of a lid on the decreases that we've seen -- we've re-contracted the stores that came up albeit at lower rates. So we think we're seeing kind of a bottoming affect there in terms of NuStar's business.

[Michael Blum:]

Okay. Great. Thank you.

[Operator:]

Thank you [Operator Instructions] And our next question comes from the line of Sunil Sibal from Seaport Global Securities. Your line is now open.

[Sunil Sibal:]

Yes. Hi, good morning guys. Most of my questions have been heard. But I just wanted to go back to your comments on moving Permian volumes by rail to St. James. I was kind of curious, are those mainly going to be moved on spot market or spot basis? Or you’re seeing kind of timelines on those kind of contracts to? And what kind of margins can you expect on those kind of volumes?

[Brad Barron:]

To be clear we’re not moving the oil -- that’s our customer that's moving the oil. We’re just -- we’re handling it in St. James. So they have their own contracts with the railroads on the unit train rates. And I can’t tell you exactly what those are. But I believe they have significant margins to do the business.

[Sunil Sibal:]

Okay. Got it. And then on the IMO 2020, I was kind of curious if you could talk a little bit about any potential CapEx needs that you miss as you kind of change some of your tank age around IMO 2020?

[Brad Barron:]

I don’t see any CapEx needs to switch grades. We may clean tank to get the higher sulfur set about in the new, but it won’t be significant.

[Sunil Sibal:]

Okay. Got it. Thanks guys. That’s all I had.

[Brad Barron:]

Thank you.

[Chris Russell:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of Selman Akyol from Stifel. Your line is now open.

[Selman Akyol:]

Thank you. Just a couple of clarifications. When you talked about higher expenses at store that you said it was maintenance. So do you expect those expenses to come back down as we go through third quarter and fourth quarter? Or is that become sort of the run-rate now?

[Chris Russell:]

Third quarter OpEx has decreased. They actually -- they’re going to start come off a little bit each quarter, the ramp down some in the third quarter and the ramp down even further in the fourth quarter.

[Selman Akyol:]

Okay. Thank you.

[Chris Russell:]

That’s not a good run-rate.

[Selman Akyol:]

Okay. Thank you for that. And then I thought in your opening comments you've made comments about weakness at the West Coast terminals and then you’re talking about strengthening in terms of rates there as well I guess ….

[Brad Barron:]

You missed, I said the Golf Coast, not the West Coast.

[Selman Akyol:]

Okay. All right. Thank you very much.

[Operator:]

Thank you. And there is no further question. I'm sorry. We have one more question that just came into queue. Our next question comes from the line of James Carreker from U.S. Capital Advisors. Your line is now open.

[James Carreker:]

I was wondering if you could clarify some of the comments you made around St. Eustatius and that all the capacity was leased and all customers are paying that - are paying their bills. Is that to imply that PDVSA is still, I guess giving you revenue?

[Chris Russell:]

They are still a customer. We still have a contract with them and…

[Brad Barron:]

We expect to get paid.

[Chris Russell:]

We expect to get paid.

[James Carreker:]

And what is the status, I guess, of the lien supposedly that Conoco has on their barrels there?

[Brad Barron:]

There has been no change in that status from the last time we talked about it. ConocoPhillips is [indiscernible] lien and we are sort of similar lien to secure payment.

[Operator:]

Thank you. And they show no further questions at this time. I would like to hand the call back over to Chris Russell, Treasurer and Vice President of Investor Relations, for any closing remarks.

[Chris Russell:]

Thank you, George. I would once again like to thank everybody for joining us on the call today. If anybody has any further questions, please feel free to reach out to NuStar’s Investor Relations department. Thank you very much and have a great day.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today’s call. This does conclude the program and you may all disconnect. Everyone have a great day.