NuStar Energy L.P.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good day, ladies and gentlemen. And welcome to the NuStar Energy L.P. Second Quarter 2019 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 be given at that time [Operator Instructions]. As a reminder, this conference is being recorded.I would now like to turn the call over to Tim Delagarza, Manager of Investor Relation. Sir, you may begin.

[Tim Delagarza:]

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.Before we get started we would like to remind you that during the course of this call, NuStar's 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 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 Barron.

[Brad Barron:]

Good morning. Thank you for joining us today. Before I turn the call over to Tom for more details, I want to take a few minutes to walk you through some highlights on NuStar's performance in the second quarter.Our progress on our 2019 capital projects, as well as what we expect for NuStar in the second half of 2019 and beyond. First, for the highlights on the strong results we generate in the second quarter. In a word, we were up over second quarter 2018 on all of our key indicators.Total pipeline and storage revenue up 7%, adjusted EBITDA up 8%, adjusted net income up 85%, adjusted EPU was up 20%, even with the impact of our merger to simplify our structure and eliminate our IDRs.DCF available common limited partners up nearly 10%, there was one key metric, however that was down in the second quarter compared to Q2 2018. I think we all agree that in this case down is better than up.Our second quarter debt-to-EBITDA ratio was 3.95 times, significantly lower than the 4.72 times we reported at the end of Q2 2018. In addition to the EBITDA increase as I mentioned, another key factor in moving our debt-to-EBITDA this year is our sale of the St. Eustatius operations.I'm very pleased to be able to close on our sale. St. Eustatius had a healthy double digit multiple in July. And that sale along with the EBITDA improvements for the quarter I reported earlier has allowed us to lower our year-end 2019 debt-to-EBITDA projection to 4.1 times improve from our prior guidance of 4.3 times well under our revolver debt covenant of five times.What's [ph] more, the sale of St. Eustatius operations not only lowered our leverage, it also simplified our business, reduced our risk profile, lowers our 2019 liability capital and allows us to focus 100% on our core business here in North America.Speaking of our core business; we've made great progress on our 2019 capital projects this summer and I want to congratulate and thank our project teams for what they've accomplished.As you know we have capital projects in 2019 totaling between $500 million and $550 million, marking at high point in NuStar's historical capital spending. The majority of our 2019 spending is earmarked for three things; the continued build-out of our Permian crude system, project to deploy underutilized assets to supply refined products in Northern Mexico and our Corpus Christi export project.Starting with the Permian; we continue expand our system to keep pace with our customers needs. So far this year we've expanded our capacity by 100,000 barrels per day from 460,000 barrels per day to 560,000 barrels per day.We've also added 25 additional well connections and completed connections to third-party pipelines and facilities to ensure we have the flexibilities our shippers need. And our volumes continue to grow and reflect our Permian team's hard work, the quality of our dedicated acreage and the skill and experience of our producers.Our system throughput has now grown by an amazing 200% since we acquired it in May 2017, far outpacing overall Permian Basin throughput which has grown about 80%. We are currently moving nearly 400,000 barrels per day and based on what we know from our producers forecast, we still expect to exit the year around 450,000 barrels per day.As I mentioned before, we work closely with our producers to understand their drilling plans and meet their needs. And contrary to some commentary we've heard about the Permian overall production growth slowdown. Our producers are proceeding full speed ahead on our dedicated acreage.Turning to our projects to supply refined products in Northern Mexico, our early service for Valero and Nuevo Laredo project is scheduled to go in-service this quarter. Our Valley pipeline expansion is also scheduled to be in service this quarter and we're pleased that our open season for the Valley line was fully subscribed.Finally, turning to our Corpus Christi export project, we're happy to announce that the first stage of the project which utilizes our 16-inch pipeline in South Texas to receive and transport WTI from a connection to Cactus II to Corpus Christi export facility is now complete and ready for service.We're excited to report that starting as soon as early next week our Corpus Christi dock facility will be the first in the Port of Corpus Christi to export barrels transported to South Texas via one of the three large Permian long-haul pipeline projects.The second stage of our export project, a new 8 mile 30-inch pipeline to transport WTI from a connection to Cactus II in Taft to our Corpus Christi terminal is on schedule to be in service this quarter.I'd like to add, even in advance of completion of significant project we are seeing volumes on our South Texas crude system up to around 180,000 barrels per day significantly above our minimum buying commitments of 106,000 barrels per day for the system in near the record volumes we transport on that system back in 2015.And that increased pipeline volumes also increase utilization of our Corpus Christi terminal storage. In addition, we now expect to connect our South Texas crude system to Gray Oak and Highway 97. We should bring additional volume to our system as early as the beginning of the fourth quarter.We expect our strategic capital spending to peak in the third quarter as we get -- we begin completing these projects. Moving to our expectations for the full year, we continue to expect 2019 adjusted EBITDA in the range of $665 million to $715 million. And we now expect to finish 2019, the DCF coverage in the range of 1.3 times to 1.4 times, also improved from our prior guidance of 1.2 times to 1.3 times.Beyond 2019, well, we won't be able to provide the specifics on 2020 until later in the year. I can tell you that next year as the cash flow from those completed projects ramp up fully, we're also planning to spend significantly less strategic capital which we expect will lead to another solid year.In 2020, we plan to execute on a smaller scale capital program on low cost, low multiple projects to enhance our existing assets while providing world class service across our footprint. We continue to build financial flexibility, improve our debt metrics and strengthen our balance sheet.Remainder of this year, we are focused on completing our projects and operating efficiently and safely, so we continue to generate solid consistent growth demonstrated by our second quarter results.Now, I'll turn over to Tom for more details on those results.

[Tom Shoaf:]

Thanks Brad and good morning everyone. Before I get started, I just wanted to have a few housekeeping items related to our sell of the St. Eustatius operations. First, because of that sale the St. Eustatius operation results for all periods presented in our earnings tables are now reported as discontinued operations.Further discontinued operations for the prior year periods, includes the results of our European operations, which were sold in late 2018. Our reported second quarter results which include adjusted net income, adjusted EPU, adjusted EBITDA, DCF and related metrics include results for both continuing and discontinuing operations.Excluding these measures is a non-cash impairment charge totaling $8.4 million related to our St. Eustatius divestiture. For the second quarter of 2019, we generated adjusted EBITDA of a $169 million, up $12 million over the second quarter 2018, adjusted EBITDA of $150 million.Adjusted net income for the second quarter of 2019 with $54 million, up 25 million or 85% over the adjusted net income of $29 million in the second quarter of 2018. Second quarter 2019 adjusted earnings per unit was $0.18 compared to adjusted EPU of $0.15 for the second quarter 2018.Second quarter 2019 DCF available to common limited partners was $90 million, up $8 million compared to DCF available to common limited partners of $82 million for the second quarter of 2018 and our distribution coverage ratio for this common limited partners was a strong 1.39 times.Second quarter 2019 EBITDA in our pipeline segment was $120 million, up $18 million or 18% from the second quarter of 2018 due to continued throughput volume ramp in our Permian crude system, increased crude volumes on our Ardmore system resulting from our recent connection to the Sunrise Pipeline at Wichita Falls.For segment reporting, we exclude the divested St. Eustatius and European operations from all prior periods for an apples-to-apples comparison of our results between periods. Our second quarter 2019 EBITDA and our storage segment with $62 million comparable to second quarter 2018 EBITDA.While we have seen increased storage and dock fee revenues at our St -- I'm sorry, our Corpus Christi North Beach terminal, from increased quarterly volume receipts on our South Texas crude oil system, as well as the startup of revenue from some recently completed West Coast bio fuel storage projects. Those increases were offset by a one time accounting entry related to contract termination in the second quarter of 2018.Second quarter 2019 EBITDA on our fuels marketing segment was $3 million essentially flat compared to the second quarter of 2018. On May 16th, we raised $500 million by issuing 6% seven-year senior notes. This bond offering was significantly over subscribed and we used a portion of these proceeds to refinance $350 of notes that matured in 2018, and for general corporate purposes including funding our capital spending program and repayment of our outstanding borrowings on our revolving credit facility.Our June 30th debt balance was $3.5 billion and our debt-to-EBITDA ratio was 3.95 times significantly below our credit agreement covenant threshold of five times. Since turning to our projections for full year 2019, which now include our recent sale of the St. Eustatius operations.We continue to expect NuStar's 2019 adjusted EBITDA to be in the range of $165 million to $715 million. With regard to 2019 capital spending, Brad mentioned that we continue to expect $500 million to $550 million of spending for Strategic and other capital in 2019 which is primarily made up of approximately $175 million on the Permian crude system, $150 million for the Northern Mexico refined products supply projects and about a $105 million for Corpus Christi North Beach terminal export projects.Regarding our reliability spending for 2019, we now expect to spend $60 million to $80 million which is lower than our prior estimate range. Based on these projections as Brad noted in his remarks we now expect our common unit distribution coverage ratio for 2019 to be in the range of 1.3 times to 1.4 times and our year end debt-to-EBITDA ratio to be around 4.1 times.And with that, I'll turn the call back over to Brad for his closing remarks.

[Brad Barron:]

Thanks Tom. Thank you all for listening today. Give me the opportunity to talk to you about what our employees have accomplished so far in 2019. Look forward to reporting more good news as the year progresses, more positive results, more projects completed and more information about the growth and improvement we plan for 2020.And with that, I'll open it up for Q&A.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Jeremy Tonet with JPMorgan. Your line is open.

[Unidentified Analyst:]

Hi. This is Joe for Jeremy. I wanted to ask first just kind of accounting wise the $62 million I think you mentioned for storage EBITDA. Is that before or after the $8 million impairment for St. Eustatius?

[Brad Barron:]

No. It doesn't include that. That's not there. No. $62 million does not include the $8 million.

[Unidentified Analyst:]

Okay. So, then including that, it would be $8 million by the way, is that correct?

[Brad Barron:]

Well that's been moved. That's down in..,

[Tom Shoaf:]

All the result -- that $8 million related to St. Eustatius and all the results for St. Eustatius are included in a line of discontinued operations. None of the St. Eustatius results are included in the storage segment results -- stored segment earnings for either period.

[Unidentified Analyst:]

Okay. That makes sense. That's helpful. And then also I wanted to ask with the Kaplan reversal proceeding. Could you just kind of talk about the opportunities you're seeing at your St. James terminal and the possible size and timing of any expansion you may see there?

[Danny Oliver:]

Yes. Joe, this is Danny Oliver. We're working on a project right now to get our portion, our connection there reversed. We plan on being in service at the time that they've said Kaplan will be reversed. We've got many customers in the facility that are interested in that connection and we expect that it will increase throughput at the terminal probably very significantly. And we'll just continue to monitor that interest and look for opportunities possibly even to build more storage if the volumes come.

[Unidentified Analyst:]

Great. That's helpful. Thanks. That's all from it.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Ryan Levine from Citi. Your line is open.

[Ryan Levine:]

Good morning.

[Brad Barron:]

Good morning.

[Ryan Levine:]

Can you -- what are the volumes that you're expecting to come off of Gray Oak. I think in your prepared remarks you mentioned some connectivity that you're building there?

[Danny Oliver:]

Yes. We've got connectivity. Some of our customers want that connection. We're expecting at least initially the bulk of the volume coming in from the Permian to come in on the Cactus line with one of our customers. We don't have a specific volume that we're anticipating coming over there, but they will supplement their exports with volume off of Gray Oak.

[Ryan Levine:]

What's the capacity that you're able to take off at Gray Oak?

[Danny Oliver:]

Through this connection because it flows through our Eagle Ford system, we could probably run 50,000 to 75,000 barrels a day through that system or from that system, from the point.

[Ryan Levine:]

Okay. Thanks. And then, in terms of the reliability CapEx, what's driving the lower numbers that you're guiding to?

[Brad Barron:]

Pulling St. Eustatius out.

[Ryan Levine:]

Okay. And then to your point about your leverage is coming down, you're expecting more consolidated free cash flow for next year. Are you more open to strategic acquisitions? And is there certain type of assets that you're more focused on today?

[Brad Barron:]

I'd say, right now, we're really focused on completing our projects, lower our leverage. We've got great business. And so we want to continue grow our business. And our organic opportunities at this point look better than anything we see out in the market.

[Ryan Levine:]

Okay, great. Thank you.

[Operator:]

Thank you. And I'm showing no further questions. At this time, I would now like to turn the call back Tim Delagarza for closing remarks.

[Tim Delagarza:]

Thank you, Sidney. 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, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.