NuStar Energy L.P.
Q3 2019 Earnings Call Transcript

Published: 5 Nov 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the NuStar Energy L.P. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised, that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Thank you. Please go ahead, Madame.

[Pam Schmidt:]

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 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. Reconciliation of certain of these non-GAAP 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. Thank you all for joining us today. Before I turn it over to Tom for the details, I want to give you some highlights of NuStar's results and our expectations for 2019 and 2020.NuStar produced strong results in the third quarter, once again demonstrating the strength of our assets and our business plan. On our last call, I told you that NuStar was and were up over second quarter 2018. I'm happy to report that's true again this quarter. NuStar is up over third quarter last year across the board. Our total pipeline and storage segment revenues are up 7%. Our income from continuing operations is up 20%. Our EBITDA from continuing ops, up 10%. DCF available to common limited partners from continuing ops, up 14%. And our EPU from continuing operations is up 67%, adjusting for the EPU charge resulting from our simplification in 2018. Due in part to our sale of our St. Eustatius facility in July facility in July, our third quarter debt-to-EBITDA ratio was 3.96 times, which is significantly lower than Q3 2018's 4.52 times.This past quarter, we also continued executing on our 2019 capital program. We're now projecting 2019 total capital spending of between $485 million and $515 million, and we're already starting to see the benefits of that spending in our results. This year, we'll focus our spending on three primary areas

[Tom Shoaf:]

Thanks, Brad, and good morning, everyone. Before I get started, just a general reminder that because of the sale of St. Eustatius operations this July and the sale of U.K. European operations in 2018, results of those operations for all periods presented are now reported as discontinued operations in our earnings tables. For the third quarter of 2019, we generated EBITDA from continuing operations of $169 million, up $15 million or 10% over the third quarter 2018 EBITDA from continuing operations of $154 million.Third quarter 2019 DCF from continuing operations available to common limited partners was $88 million, up $11 million or 14% compared to DCF from continuing operations available to common limited partners of $77 million for the third quarter of 2018. And our distribution coverage ratio from continuing operations to the common limited partners was 1.36 times.Third quarter 2019 EBITDA in our pipeline segment was $130 million, up $14 million or 12% from the third quarter 2018, due to continued throughput volume ramp on our Permian Crude System and increased crude volumes on our Ardmore system resulting from our connection to the Sunrise pipeline at Wichita Falls and a turnaround at one of our customers' refineries in the third quarter of last year. Additionally, we saw positive contributions from a recently activated – reactivated portion of our Houston LPG pipeline and our completed Mexico expansion project on our Valley system.Our third quarter 2019 EBITDA in our storage segment was $62 million, comparable to the third quarter 2018 EBITDA of $63 million. We experienced continued strength from our West Coast operations as a result of incremental project EBITDA from the biofuels strategy as well as healthy storage and dock fee revenues on our Corpus Christi Crude System, made possible by robust quarterly volume receipts on our legacy system and new business from our recently completed Taft export project with Trafigura. These increases were offset by continued soft storage markets at some of our East Coast locations as well as some of our Gulf Coast facilities.Third quarter 2019 in our Fuels Marketing segment was $4 million, $3 million higher than the third quarter 2018 EBITDA of $1 million due to stronger Gulf Coast bunkering margins experienced during the quarter. Our September 30th debt balance was $3.4 billion, and our debt-to-EBITDA ratio was 3.96 times, significantly below our debt-to-EBITDA ratio of 4.52 times for the third quarter 2018. And in September, we extended our revolver maturity date by one year to October 2021.Now turning to our projections for full year 2019, as noted in the table included in our press release. Our 2019 range for adjusted EBITDA remains unchanged at $665 million to $715 million, which includes results from St. Eustatius operations, but excludes noncash impairment charges related to the sale of those operations.Additionally, we also provided projections for 2019 EBITDA from continuing operations for a clearer view of our ongoing business and for improved comparability, which we expect to be in the range of $625 million to $675 million. This is an expected increase over – I’m sorry, it’s an expected increase of over $50 million or 9% at the midpoint when compared to 2018 EBITDA from continuing operations of $597 million, which excludes EBITDA for both the St. Eustatius and European operation.With regard to 2019 capital spending, we have lowered our range to $485 million to $515 million for strategic and other capital in 2019, which is primarily made up of approximately $160 million on the Permian Crude System, $145 million for the Northern Mexico refined products supply projects and about $105 million of – for our Corpus Christi North Beach terminal export project. This reduction in strategic spending targets was a result of a combination of permanent reductions as well as deferring some spend into 2020.Regarding our reliability capital spending for 2019, we have narrowed the range to $65 million to $75 million, which is unchanged at the midpoint of our previous guidance. Based on these projections, we continue to 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 times.Looking further out to 2020 full year guidance. We expect NuStar's 2020 EBITDA to be $715 million to $765 million, an increase of about 14% at the midpoint over 2019, and above 24% at the midpoint since 2018. With regard to 2020 capital spending estimates, we plan to spend $300 million to $350 million on strategic and other capital. That's a 35% reduction year-over-year. In addition, we plan to spend $40 million to $50 million on reliability capital. Based on these projections, we expect our common unit distribution coverage ratio for 2020 to be in the range of 1.4 times to 1.6 times and we plan to continue to work to delever in 2020.And with that, I will now turn the call back over to Brad for his closing remarks.

[Brad Barron:]

Thanks, Tom. We had a great quarter. 2019 has been a productive year. We continue to simplify and derisk our business with the sale of St. Eustatius; we significantly improved our debt-to-EBITDA ratio; and we're now completing the most ambitious capital spending program in our history safely and efficiently, expanding and building optionality across our existing asset footprint of low-multiple, healthy-return projects in which NuStar will benefit in 2020 and for many years to come. We're excited about NuStar's future and look forward to reporting more good news on our next call. With that, I'll open it up for Q&A.

[Operator:]

Thank you. [Operator Instructions] And sir, our first question comes from Shneur Gershuni from UBS. Please go ahead.

[Shneur Gershuni:]

Hi, good morning everyone.

[Brad Barron:]

Good morning.

[Shneur Gershuni:]

Maybe I just wanted to start off, first of all, with the storage segment. I noticed that your volumes were up pretty significantly, but even the contribution didn't sort of seem to match that. It's always as if there was a margin compression of sorts. Can you give us a little bit of color on what was going on in that segment this quarter?

[Danny Oliver:]

Yes. Shneur, this is Danny Oliver. We – there's still, in some select markets, some softness in storage. We're still in backwardation, very little to actually no contango off the markets. We had – we have one contract on one of our international contracts that is up for renewal. We haven't renewed that yet, but we're anticipating that coming in at lower rates, and we factored that into our Q3 and Q4 guidance.

[Shneur Gershuni:]

Fair enough. Just as a – I guess two follow-ups. You have CapEx coming down pretty significantly last – next year along with an EBITDA uplift. I was just wondering what your order of priorities on debt reduction was in terms of once you had cash available to do so, do you sort of target some of the high-coupon preferreds or do you look at the debt in particular? Just kind of want to understand the – your order of priorities like how you would retire some leverage.

[Tom Shoaf:]

Yes. Well, I mean, as far as the prefs go, we said this time and time again, the – we really do anything with the prefs until you're about five years out from the date of issuance. So there won't be anything done, obviously, in 2020 based on that with the prefs. In terms of just how we prioritize things, we've been very pleased with our progress on delevering in 2019, and we continue to make that a priority focus for ourselves. We're going to show a lot of capital discipline. You can see that in the capital guidance we've put out there for 2020. That is coming down significantly.So a combination of those things and EBITDA ramp. We're still looking to improve our debt leverage and lower our ratios, so we'll continue to work on that, and that's definitely a priority. But in terms of redeeming debt, I mean, we've got some refinancings coming up in the next couple of years that we think we can take care of, but the prefs are going to be out there for a couple of years at least.

[Shneur Gershuni:]

Is that something you can just find the open market to retire?

[Tom Shoaf:]

No. I don’t think that’s our best use of capital. I mean the prefs, I mean, albeit some people say they're a little expensive, they're pretty cheap equity. When you're looking at it from an equity perspective, they're pretty cheap equity. And so we find those very favorable out there, so we don't have any intentions of bringing those in.

[Shneur Gershuni:]

Okay. And then one last follow-up question. Chesapeake talked about recontracting some crude rates in the Eagle Ford. I'm wondering if, a, you had some exposure; or b, if that would be something now being capsulated with the step-down in the MVCs that you were already experiencing. Just wondering if they sort of talked to you about that news that's out there today.

[Danny Oliver:]

Yes. We’ve renewed really most – pretty much all of our contracts sometimes with different people. But our MVCs, as you are aware now, 106,000 they were 133,000. But we're shipping a lot more product out of the Eagle Ford. We were – on our South Texas Crude System when we had MVCs of 133,000 we were shipping more like 110,000 Now we've got to MVCs of 160,000 and we're shipping 160,000, 170,000.

[Tom Shoaf:]

Yes.

[Shneur Gershuni:]

All right. Perfect. Thank you very much. Really appreciate the color today. Bye.

[Tom Shoaf:]

Thank you.

[Operator:]

Thank you. Our next question comes from Gabe Moreen from Mizuho. Please go ahead.

[Gabe Moreen:]

Hey, good morning everyone. Couple questions from me. Can you just discuss what level of volume growth is embedded in your 2020 outlook? And related to that, is volume ramp or lack thereof kind of the biggest variable on that – in that EBITDA range for 2020?

[Danny Oliver:]

Yes. So Gabe, Danny again. Our forecast in the Eagle Ford are below the volumes that we're seeing today, slightly above our MVCs but well below what we've done this year. And then we have a continued ramp-up in the Permian at roughly the rate of growth that we've seen in the last two years.

[Gabe Moreen:]

Okay. So really no slowdown relative to 2019 growth rates?

[Danny Oliver:]

No, not in the Permian. As Brad mentioned, we've – we're in a unique place in the Midland Basin, in kind of the heart of the heart of the growth. And we are – we have seen – even though generally people report 2018 was the biggest year and it came off in 2019 a little bit, we've seen the same rate of growth in 2018 and 2019. And we've got, again, some firm plans that we're working with our producers on that they're giving us their specific plans throughout 2020, and these are – a lot of this volume in the Permian is coming from the majors and the public E&Ps and the creditworthy customers that we have on the system.

[Gabe Moreen:]

Okay. Thanks, Danny. And then related to that, of the $300 million to $350 million in growth you're going to be spending next year, how much of that is Permian and? Sort of where does that get you to, capacity-wise, on PCS?

[Tom Shoaf:]

What I can tell you, we're not really disclosing the breakdown of the Permian yet. I mean we're still talking to customers and trying to get that nailed down. But what I can tell you so far, what we've heard and what we know, we will be spending less on Permian than we did in 2019. So in terms of splitting out that $350 million, some of those are just finishing up the projects that we already – we currently have, the big projects we talked about. It also includes about three projects that we haven't announced yet that we're working on as well. So that's probably about as much breakdown as I'll give you at this point. We get the – we get to total capacity in the system next year. It's somewhere around mid-600s. I can't remember the exact number. But we've got specific projects identified to get that system up to 700,000 eventually. That it's as far as we've gone on that planning. And we'll execute those projects as the volumes dictate.

[Gabe Moreen:]

Okay. And then last one from me is just the lower maintenance CapEx guide. Is that strictly a function of smaller asset base? Or are there any other gives and – puts and takes there?

[Tom Shoaf:]

Yes. That’s mostly a lower asset base. No St. Eustatius, no Europe.

[Gabe Moreen:]

Got it. Okay. Thanks everyone.

[Operator:]

Thank you. Our next question comes from Jeremy Tonet from JPMorgan. Please go ahead.

[Jeremy Tonet:]

Hi, good morning. Just wanted to follow into 2020 EBITDA guidance here. I was wondering if you might be able to share with us some of the assumptions as far as what could drive the upper end versus the lower end of guidance there.

[Tom Shoaf:]

One thing on the upper end, as I mentioned to Gabe, we've – we're forecasting lower volumes out of the Eagle Ford than what we are experiencing this year and today. I think that could be some upside, but we're being cautious.

[Brad Barron:]

I think other things that could drive on the upper have to do with the global economy. Right now this is our best look in the global economy. When that kicks into overdrive, I think you can see some upward movement within that range. So on the lower end, we always want to build in flexibility in case there's something unforeseen that happens, we have a refraining customer that has an unexpected downtime, something like that.A lot of our assumptions on our new projects that we just completed, a lot of those, we tend to just run committed – what committed volumes there are from customers. So to the extent that they were to ship more than the – what their minimum commitment is, then we would see upside there as well just across the system on various projects that we completed.

[Jeremy Tonet:]

That makes sense. And then as far as volumes across the docks, is that at MVCs? Or is that something higher? Any color you could share there?

[Danny Oliver:]

That's right at the MVCs.

[Jeremy Tonet:]

Got it. And then a housekeeping item, for the Permian system for the quarter, are you able to share what the EBITDA generation was there?

[Tom Shoaf:]

Yes. We generated about $35 million of EBITDA in the third quarter.

[Jeremy Tonet:]

Yes, that’s helpful. Thanks. Just last one. There was some media reports revolving around, I guess, an incident with, I think, maybe some of your California assets. I was wondering if you could share any color as far as what's happening there.

[Brad Barron:]

Sure. So back on October 15th, we had a fire at our Selby, California terminal. The fire was isolated to ethanol tanks there at Selby. So very pleased. I believe that no one was injured. No employees, no contractors were injured during the incident. I'm also – one thing I want to say is I'm very proud of the way our employees responded to the incident. And we're also grateful to the first responders, including the local first responders and the mutual aid association. They had the fire under control in very short order.So the terminal came up for service yesterday for everything but ethanol. So we're able to move renewable diesel, renewable jet and jet from the terminal now, and so we don't expect it to have a material impact on our financials.

[Jeremy Tonet:]

That’s helpful. That’s it from me, thanks.

[Operator:]

Thank you. Our next question comes from Ryan Levine from Citi. Please go ahead.

[Ryan Levine:]

Good morning. What's your – or how do you view your optimal capital structure today? And what are your priorities once that's achieved if this reduced CapEx spending outlook persists?

[Tom Shoaf:]

Well, I mean as far as our optimal capital structure, I think we're pretty much there in our cap structure. I don't – as we said before, we don't plan on doing anymore prefs. So that is what it is. And we're just going to continue to delever and work on that. And like I said, that's a primary focus for us. There's no – as I said before, there's no plans to bring in any prefs anytime soon or refinance those. So we're just going to continue to pay down debt and delever, and that's pretty much it.

[Ryan Levine:]

Once you achieve the leverage that you're targeting, is there a preference for unit repurchases versus distribution increases?

[Tom Shoaf:]

I think that would be way off the curve for us. Based on our free cash flow and what we're expecting this year, next year and the year after that, our spending rate, albeit we have come down tremendously in 2020 and we would expect to do that in years subsequent to that as well, no, I mean, I don't think so.I think we're – that – our targets out there, that's – we'll continue to try and achieve that and just kind of work from there.

[Ryan Levine:]

Okay. What was the impact there for FERC reindexation rate in July in the quarter?

[Tom Shoaf:]

We can get that for – I don't have the dollar amount.

[Brad Barron:]

I know it was about 43% was the increase. And we don't have the dollar amount right in front of us, but we can get back to you offline maybe. Pam, will you give him a call?

[Pam Schmidt:]

We'll get back to you on that, Ryan.

[Ryan Levine:]

Okay. And then do you see any counterparty credit concerns for any of your customers across the Permian or other systems? And there – have you taken any steps to improve your positioning on those contracts on the gathering side?

[Brad Barron:]

That's one of the best things about our system, is our customers are some of the best blue-chip names that you can imagine.

[Ryan Levine:]

Okay, that’s it from me. Thank you.

[Operator:]

Thank you. Our next question comes from Sunil Sibal from Seaport Global Securities. Please go ahead.

[Sunil Sibal:]

Hey, good morning guys. And thanks for the color in the call. I just wanted to get a little bit more clarity on the 2020 guidance. I was wondering if you could talk about the EBITDA range that you guided to. How much of that is kind of covered through your MVCs or contractual requirements either on the transportation side or on the storage side?

[Brad Barron:]

Yes. Most of that – about, well, maybe half of that comes out of the Permian, a little less than half. And everything else is covered by MVCs. Some of the Permian is covered by MVCs but not all.

[Sunil Sibal:]

And could you remind us, where is your leverage target? It seems like you're already close to 4x. So is it – is the desired, I don't know, 3.5, are you looking to go even now further down?

[Tom Shoaf:]

Well, we've got a lot of priorities, right? Our – Continue growth, the delevering, all of that. So I think for – as far as that goes, we'd like to be a 0.5 turn better than where we are. We're getting continue to focus on that and delever and find ways to do that. And we have a short list of things that we can do, but we're not really putting a, I'd say, a concrete target out there, but we would like to be better than where we end – where we are currently, and we think we can do that.

[Brad Barron:]

The way I'd like to think of it is we won't lower our leverage, but we're going to do it in a balanced way. So we're trying to balance a lot of competing priorities, but it is a focus for us going forward.

[Sunil Sibal:]

Okay, that’s it from me guys, thanks.

[Brad Barron:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Michael Blum from Wells Fargo. Please go ahead.

[Michael Blum:]

Hey, good morning guys. My questions were actually addressed. So, thank you.

[Operator:]

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Pam Schmidt, Vice President of Investor Relations for closing remarks.

[Pam Schmidt:]

Thank you, Dylan. 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’s Investor Relations. Thank you again, and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participating. You may now disconnect.