NuStar Energy L.P.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the NuStar Energy LP and NuStar Energy GP Holdings LLC Q3 2017 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 is being recorded. I would now like to turn the conference over to your host, Mr. Chris Russell, Treasurer and VP of Investor Relations. Please go ahead.

[Chris Russell:]

Thanks, Julien. Good morning everyone and welcome to today's call. On the call this morning are Brad Barron, NuStar Energy LP and NuStar GP Holdings, LLC'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'd 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 make 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 and nustargpholdings.com. Now I am going to turn the call over to Brad.

[Brad Barron:]

Good morning and thank you for joining us today. Before turning the call over to Tom to discuss our third quarter results, I want to say few words about our views on 2017, 2018 current markets, the MLP sector and the impacts of all this on NuStar. Between 17's we're also closed, we’re looking at the fourth consecutive year of crude prices fell of approximately 50% over 2014 levels. As of noted on several of our previous calls, the equity market and disproportionately punitive for the MLP sector due to slow crude cycle. This functional MLP equity markets driven average yields to the new record highs and it seems become self-perpetuated cycle. Price volatility creates concerns for investors, investors get as soon as they emerging the prices. In addition to the significant market headwinds at the MLP sector stayed for some time now, in September, despite hurricanes caused damage in the Gulf and substantial destruction in the Caribbean. As a result, a larger proportion of the nation's refining capacity was shut down, in some cases were weak, negatively impacted in operations of many MLPs, including NuStar. Hurricanes Harvey and Irma affected six of our facilities in Texas and Florida. Fortunately those storms were primarily rain events, rather than wind events, thanks to our employees' planning and hard work, we were able to install pumps and make other preparations, which resulted in relatively minimal damage in our Texas and Florida facilities and we were able to resume operations soon after this storms have passed. Unfortunately, Hurricane Irma have the pass almost over our facilities for extremely high wind in high speeds. And while our planning and preparation mitigated the effect of rising water, virtually no advance planning can buffer the impact of the 140 miles per hour winds. The sheer force of Irma's high winds and waves inflected substantial damage to our facility and the storm batter our tanks, marine facilities and terminal buildings, road to the shore line and positive debris throughout the terminal. We're grateful that all of our tanks some of those under construction were largely spared and are safe to stay in service. We're eager to resume operations in a relatively short period of time, and we expect the facility can fully operational by mid-December. For the remainder of the facility, we're implementing a comprehensive repair program to address the damage while minimizing the disruptions to our commercial operations. Importantly we expect our insurance fully covered the cost and preparing the property damage in our same space facility as well as most of our lost revenue from the damage and the repairs but were insurance deductible. In total, across our 7 affected facilities we currently expect net losses from the hurricane to be about $11 million. When destructive storm was forecasted, we planned and prepared for the storm with high proven your ability with withstand the next storm. In this three year, low crude price cycle and its impacted, it can do a very long very destructive hurricane for the MLP sector. Planning and preparation are critical when you're talking about incremental weather for business cycle. It is due to the planning effort, we launched in 2014 as the outset of historic low crude price cycle and we successfully returned to a one-time cover of our distribution, maintained a full coverage for the last three years, derisked our business and optimized our base business assets. Perhaps most importantly, the groundwork we [Indiscernible] positioned us to establish the significant platform for growth, what’s proven to be the strongest, most resilient U.S. shale play at Permian basin. When we purchased our Permian crudes just in this past May, we projected the acquisition would be diluted to our coverage for little over a year. We made the decision to move forward because we believe the systems' long-term growth are outway back to our coverage ratio. That's exactly what we’ve seen. The Permian basin is meeting and in some cases exceeding our initial forecast. Overall, the basin continued to grow with minimum rig counts of 25 since the acquisition. We’ve seen rig counts on our dedicated interconnect acreage that are already 35% of above what we forecasted for year-end 2017. Receipts on our Permian System are up 56% from 115,000 barrels per day in April to October monthly average of about 180,000 barrels per day. On volume ramp, given the number of new rigs is lumpier than we would have expected, we believe this is due to combination of some producers waiting for fracture availability and development of multi well pads as many as 24 wells come online at one time. We continue to be confident that our Permian Crude System grows as we forecasted in 2018 and beyond. In our view, based on performance to-date and perhaps the most critical indicator of future growth, with our Permian System producers and shippers are saying, not just to us but also publicly in their earnings calls and filings. In their third quarter earnings calls, major producers reported strong results in the Midland Basin this quarter and they are able to continue to capitalize on the geological advantages through refinement and improvement of drilling technology combined with strict cost control. And they are assuring their investors that even if 2018 proves to be a fourth year of lower crude prices, they expect production growth, in many cases in the double-digits. Our forecast of the Permian Basin, our Permian Crude System looks sunny, our base business along with the rest of the MLP sector is showing strain from weathering this historically long lived low crude price cycle. On top of ongoing macroeconomic pressure, so far this year our base was also very considerable of an aggregate $43 million of additional headwinds. These things and hurricane impact for that described above some significant unplanned turnaround and downtimes that our customers are finding and a large anticipated liability project on our ammonia system. The liability project serviced in the course of our ongoing pipeline integrity program, through which we inspected and identified 50 mile segment of our ammonia pipeline that requires replacement. While regulatory standards for spreading the replacement over five years, we made the decision to complete the project immediately for a cost of $19 million in 2017 and an additional $26 million in 2018. We did that because fast tracking the project is a prudent thing to do. Completing the project sooner saves NuStar over $7 million. I think this decision along with our acquisition and immigration of our Permian Crude System illustrates this management team’s focus on doing special to the company and our unitholders for the long-term. We are committed to position the company solidly and unit holder value stable consistent growth now and in the future. With that, I'm going to turn the call over to Tom Shoaf, NuStar's Executive Vice President and CFO. Tom?

[Tom Shoaf:]

Thanks, Brad, and good morning, everyone. For the third quarter of 2017, we reported net income of $39 million or $0.15 per unit and EBITDA $156 million, up about $14 million or 9% over the same period in 2016. As we projected at the time of the acquisition, our distribution coverage ratio for the third quarter 2017 was below 1 time. Due to the anticipated acquisition financing costs along with unanticipated higher reliability capital in the third quarter of 2017, our DCF available to common limited partners were $67 million or about 20 million less than the third quarter of 2016. And our distribution coverage ratio for the common limited partners for the third quarter was 0.66 times. Third quarter 2017 EBITDA in our pipeline segment was $96 million, up $15 million or 19% from the third quarter of 2016, mainly due to contributions from our Permian Crude System and higher ammonia throughputs due to the our ammonia system’s hydro test in the third quarter of 2016. Third quarter 2017 EBITDA in our storage segment was $91 million, $3 million higher than the third quarter of 2016. Earnings from our Martin Terminal acquisition as well as higher EBITDA at St. Eustatius terminal were partially offset by lower EBITDA at our [Indiscernible] Terminal due to customer exiting this facility. While our EBITDA for the storage segment was up for third quarter 2017, you will recall from our calls earlier in the year that beginning January 1, 2017, our contracts for refinery storage at our Corpus Christi, Texas City and Vanetia Terminals changed from a throughput arrangement to a lease. So while our reported throughputs did decreased by approximately 515,000 barrels per day when comparing our third quarter 2017 storage throughput for the same period for 2016, on an apples-to-apples basis, our throughputs were only down 25,000 barrels per day or 8%. Our September 30, debt balance was $3.7 billion while our debt-to-EBITDA ratio was 4.8 times, in line with our revolver debt covenant. On October 8, NuStar Energy announced the third quarter Series A preferred unit distribution of $53.125 per unit and the third quarter Series B preferred unit distribution of $47.657 per unit, both of which will be paid on December 15. In addition, NuStar Energy announced the third quarter common unit distribution of a $1.95 per unit, which we paid on November 14. NuStar GP Holdings also announced a third quarter distribution of $0.545 per unit which we paid on November 16. Now let me spend a few minutes talking about our projections for the remainder of 2017 and for 2018. Now we expect NuStar 2017 total EBITDA to be $575 million to $625 million, down 4% from our previous estimate of $600 million to $650 million as a result of the Hurricane-related costs that Brad mentioned, together with significant unexpected and unplanned turnaround and operational issues at our customers refineries, as well as some remaining cost associated with exiting our Heavy Fuels marketing business. We are lowering our 2017 internal gross spending estimates to $360 million to $380 million, down 8% from our previous estimate from $380 million to $420 million, and we have increased our 2017 reliability spending to $50 million to $70 million, up from $35 million to $55 million, due to the additional spending for the Ammonia system replacement project that Brad described. Looking further out to 2018 full year guidance, we expect NuStar's 2018 EBITDA to be $675 million to $725 million. This EBITDA estimate assumes approximately $100 million to $110 million of general administrative expenses in 2018 that is now allocated to our segment's EBITDA results. these projections represent an increase of about $100 million or almost 17% in total EBITDA of our forecasted 2017 EBITDA, which is mostly attributable to incremental EBITDA expected from a full year benefit and volume ramp from our Permian Crude system additional EBITDA from several projects coming online and fewer expected turnarounds at our customer refineries next year. We expect these increases to be partially offset by lower throughputs and lower renewal rates next year on our South Texas Crude system and at St. James terminal. With regard to 2018 capital spending estimates, we plan to spend $360 million to $390 million on strategic and other capital, approximately $225 million of which relates to the Permian Crude System. We planned to spend $65 million to $85 million on reliability capital, which is significantly higher than our historically liability capital run rate due to the ammonia system replacement project that Brad mentioned. Although our projected 2018 capital spending is slightly higher than our 2017 estimates, we have built in the flexibility to reduce our capital spending, if necessary, if anyone stays the MLP equity markets next year. And with that, I will turn the call back over to Brad for his closing remarks.

[Brad Barron:]

Thanks, Tom. Based on 2018 projected that Tom just went over and will come to surprise assuming next year turns out to be the fourth year of this prolonged lower crude price cycle. Given the substantial unanticipated challenges that our base business is facing, we are not forecasting we will return to cover in 2018. The crude prices will rebound sooner than expected global demand grow significantly returns in significant way that outlook could change. Right now we just don’t see current price and growth forecast overcoming the base business headwinds we discussed today. As we all know, unlike any forecast for markets or for weather be 100% correct. So we need a plan -- storms that come our way, we are also building on our Permian Crude System and positioning ourselves to be ready when conditions improve in our base business. Regardless of conditions we will continue to work efficiently safely and responsibly to build long-term unit holder value to return to one-time scrubber and to reduce our leverage through stable consistent growth. With that we’ll open it up for Q&A.

[Operator:]

[Operator Instructions]. Your first question comes from Theresa Chen with Barclays. Please go ahead.

[Theresa Chen:]

Good morning. That was a lot of information. Can you just go over the breakdown of the unplanned expenses related or the loss revenues related to the $43 million that you had spoken about earlier, just the breakdown between the unplanned turnarounds and your customer refineries and any additional hurricane impact in Q4 aside from the $11 million already spent and how much ammonia is accounted for in that $43 million?

[Chris Russell:]

Okay. Theresa, this is Chris Russell. That $43 million can be broken into three pieces, as Brad mentioned. $11 million of it relates to the impacts from hurricane; and of that $11 million, $7 million of that falls in the third quarter, $4 million of that falls in the fourth quarter. You have got about another $18 million related to turnarounds and outages. That basically over $29 million. And the remaining 14 million relates to the ammonia project that Brad talked about, reliability project.

[Theresa Chen:]

Great. And going back to Brad’s comments about how these macroeconomic and commodity price developments continue to be unknown and that dictate when you ultimately return to coverage. Has that changed your distribution policy outlook at all?

[Brad Barron:]

Theresa, I mean the real question is we’re always in the cycle this is short-term thing or long-term thing. I have been involved in this business for 17 years and we have seen these things come and go. But what I will say is that this is probably the most unusual one I have seen. I would have never dreamed past year and a half close to 20 MLPs that have either restructured or reset or cut their distribution in some way. So what we are trying to figure out as to what is going on in this sector, and I think most analysts are -- many analysts and investors don’t even know. What that brings to sector raising debate on how do you value MLP, is it a dividend discount model, with the enterprise to EBITDA model. So what I think would be most helpful is for the space to in terms of the normalcies with the equity markets begin acting rational again. And I think most MLP belief most MLP manage teams believe that they are undervalued and yields are high. I think really in this market, the value of NuStar has not being recognized appropriately with all those assets our cash flows and you've got to remember we're managing this business for the long term. So that's a long answer to your question.

[Theresa Chen:]

Now that's helpful. And speaking of the long term, in terms of Navigator, are you still expecting the ramp to a high single digits multiple by 2020. Has that changed at all?

[Brad Barron:]

No, still good. So we're seeing there. I have mentioned in my comments, volumes are lumpier. We modeled it. It was right at the beginning to add them with these multi-well pads and now we're seeing people lots of 10-plus well pads coming on not just single. And so that makes your cash flow your volumes and then your resulting cash flow as a little bit lumpier. And then across the Permian what you seen is a little bit of delay in the volume ramp. And so what I told people at the MLP Conference back in August is that the volumes are ramping, they're just a couple of months delayed. So but everything that hear from the Permian is positive. The producers are still positive on the rock they have, the acres they have, their drilling plans and people are actually even figuring it out better and better each day kind of work in progress in these multi-well pads or at new development. And so tight curves are actually starting to shift upwards as well.

[Theresa Chen:]

Okay that's helpful. And in terms of the labor shortage issues that you've mentioned in your prepared remarks. Given that you have -- on the field. Do you have any sense of visibility and timeline of when that will be resolved?

[Brad Barron:]

No. I mean it's getting better when we hear from producers it is getting better. I think most people expect a little bit of a blip in December. That happens every year. And we saw back in the Eagle Ford during the --. Sometimes crews have disappeared for the Christmas holiday. So I can say that is getting better.

[Theresa Chen:]

Great. Thank you very much.

[Operator:]

Your next question comes from Shneur Gershuni with UBS. Please go ahead.

[Shneur Gershuni:]

Just to start off. You have coverage at 66 for the quarter, you expect to be free cash flow negative this year. Based on your CapEx numbers, if you are just sharing with us, it sounds like you're going to be free cash flow negative next year as well too. Are there any risks of bumping into any of your waiver covenants -- rather your covenants and need for a waiver? Do you planned to issue any equity or equity-like securities, for example preferred from this year or next year?

[Tom Shoaf:]

This is Tom. No, I mean we just talked about this during when we did the acquisition we've been talking about it since that time about our debt leverage coverage, and we fully anticipated that the debt leverage to -- up some as it relates the acquisition with all the financings and all that we did. So we've got an eye on that. We're certainly well below the debt limit the maximum as they allow. If you recall, they allow us 5.5 times through the first quarter of '18. So we ended the quarter at 4.8. It's a little higher than we would like to have, but our plan is to delever over time, as we mentioned, when we did the acquisition and we expect to get that leverage back down again to a comfortable level. But we don't see any big threat in hitting our limits on our debt covenant. We will certainly manage that. Any equity or equity-like securities that we put out or don’t put out in the future is just going to be to manage that covenant, so that’s kind of where we’re out with that.

[Shneur Gershuni:]

And does that expectation sort of take into account some sensitivity around some of the contract expirations you have coming up next year in the Eagle Ford and some challenges that could occur from PDVSA?

[Tom Shoaf:]

Yes, it takes all that into account. We have adjusted for contracts coming off in Eagle Ford and are now expecting volumes impact and rate impact on that as well. So it’s all accounted for.

[Shneur Gershuni:]

And then just following up on Theresa’s question. You sort of now -- you talked about it’s kind of an unknown environment right now managing for the longer term versus the shorter term, how do you balance the era that we’re in where the market seems to prefer a faster deleveraging pace and higher coverage, and you can see that when you measure by equity gross payment, and you can look at some peers that have those metrics and have much higher multiples and yield as a result and balance that against the signal of the distribution, you do have rising EBITDA and so forth. But the potential to get there faster versus a lower - a longer protracted rate, how do you kind of think about that in terms of even the potential of diluting growth with equity issuance if it comes to it?

[Brad Barron:]

The way I think about it, as we manage our MLP for the long term, we want to provide long-term unitholder value not the short term. It’s one of the most first things about the MLP sector. If you think about ammonia pipeline replacement situation, we could manage for quarterly coverage and spread that thing out of the five year. That would cost the MLP an additional $7 million, right? So why would we do that? That’s the wrong way for I think to look at it. So what we are doing we are setting a long view on all that and what I think is going to happen over the long term is, like I said, the MLPs are going to drive will have high coverage, low leverage, diverged high-quality assets and fiscal discipline. So we will continue to work toward all of those things.

[Shneur Gershuni:]

So how do you think about this area where if you would have let’s say temporarily reduce your distribution say by 30% or 40% where you would lower the claim on cash flows that the distribution client puts on it by a couple of hundred million dollars which would then make you or put at least on a stronger position to make investments with longer term without diluting growth?

[Brad Barron:]

I am sorry what’s your question, how do we view something like that?

[Shneur Gershuni:]

Yes, how do you balance that? I mean because you are talking about managing for the longer term so forth and it just seems that the distribution entity just really claiming on cash flows and it’s kind of at the GP discretion. And so if you were to lower the distribution by $200 million, that would put you in a much stronger position potentially at lower cost of funding, and there would be less dilution of growth?

[Brad Barron:]

Right. What you say may be correct but I would tell you that no one step is going to get you there reduce long-term unitholder value. And so, as I said before, we are really looking at managing this business. So we are going to work to improve our coverage, which we have done substantially. Four years ago, we were below 1 times. We returned to 1 times. We made an intentional decision to go below 1 so that we could rebuild our platform for growth, and that’s turned out well for us. We are still below 1 with that acquisition. That’s exactly what we had forecasted for this year. So we will continue to try a bit long-term unitholder value all I can say.

[Shneur Gershuni:]

Yeah, I know. I completely appreciate that. and I do see the Permian system growing. And we're not questioning the decisions it's more different as time if I guess what I was looking for comments on. But it sounds like…

[Brad Barron:]

What you say that's a single lever and there is a levers out there.

[Shneur Gershuni:]

Okay fair enough. Thank you very much, guys. Really appreciate the commentary.

[Operator:]

Your next question comes from Jeremy Tonet with JPMorgan. Please go ahead.

[Unidentified Analyst:]

Hi, this is Bill in for Jeremy. First question, what was the EBITDA contribution of Navigator for 3Q '17 and roughly what portion of the 2018 guide does have to make up?

[Tom Shoaf:]

The 3Q EBITDA contribution was about $18 million, and for the piece of '18, we haven't broken that out.

[Brad Barron:]

No we haven't.

[Unidentified Analyst:]

Okay, thanks understand. And then what was the number of rigs that you exited 2017 with under your dedicated acreage. And what it is the 2018 exit rig forecast still has 39?

[Brad Barron:]

So we projected that we would exit by I think with 29. And then I think in middle of last month it was about 39. I think we're somewhere in the 30s now so some rigs have moved around within the basin that's up -- basis points acreage that is moved over to another section that's joining our, so tough thing likes I can't tell you the precise number but somewhere in the 30.

[Unidentified Analyst:]

Okay, thanks. And then any updates on the Panamax project and is that included in the 360 to 390 gross spending for 2018?

[Brad Barron:]

That is not included in the gross spending for next year. So we continue to evaluate the need for refining products in Northern Mexico, and we can find the right partner to do that with we will.

[Unidentified Analyst:]

Great, thanks. And then just one last one on the -- storage utilization for 3Q, '17?

[Brad Barron:]

About 96%.

[Operator:]

Your next question comes from James Carreker with US Capital Advisors. Please go ahead.

[James Carreker:]

Hi, guys. Thanks for taking the question. Actually I had a couple of follow-ups. Some of the numbers were flying pretty fast and just curious what was the number for your EBITDA guide in 2018?

[Tom Shoaf:]

2018 was $675 million, $725 million.

[James Carreker:]

Okay. Thank you. And then I think you also mentioned within the CapEx for 2018, what was the number of that dedicated to Navigator. 225?

[Brad Barron:]

Correct.

[James Carreker:]

Okay thank you. And then you mentioned in October Navigator volumes running at about 180 that's a pretty nice increase. Do we have an average number during Q3?

[Brad Barron:]

Total receipts in Q3 were probably close to 160 or 165.

[James Carreker:]

Okay. And then you also mentioned that based on the guidance you do not expect to cover the distribution in 2018. Does that still leave the door open for like getting to above one-time's coverage still by the perhaps Q4, '18?

[Brad Barron:]

That's little bit at the out. I don't know that we're ready to say that yet. Based on the headwinds that Brad talked about I mean it's probably less likely that we would cover in '18 but there’s certainly a scenario where we could - ‘19 looks better than ‘18.

[Operator:]

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

[Brad Barron:]

Yes, Ryan, hold on Chris wanted to say something.

[Chris Russell:]

Yes. Julian, this is Chris Russell again. Hey Bill, you asked earlier about the navigator EBITDA for the third quarter, I told you it was 18, it was actually closer to 12 in the third quarter.

[Ryan Levine:]

Good morning. If the equity in preferred markets are not available at attractive rates, can you take measures to delay or defer any of the ‘18 CapEx spending until the financing cost would create more value?

[Brad Barron:]

Yes.

[Ryan Levine:]

And any more color you could provide around the opportunity there and how flexible the spending guidance is?

[Brad Barron:]

We have built in flexibility today. We would rather invest that capital or rather continue to grow, but if we have to we can pull back on substantial portion of that spend.

[Ryan Levine:]

What’s the current capital issuance guidance or assumption that you may be able to provide?

[Brad Barron:]

We haven’t given that number up Ryan.

[Ryan Levine:]

Okay. And then regarding the pipeline lawsuit, is there any update you can provide around the status of that law proceeding?

[Brad Barron:]

Well the litigation is ongoing. We expect a decision by the end of the year.

[Ryan Levine:]

The end of ‘17. Okay. And then on the PDVSA contracts, there’s been a lot of media articles around that. Can you clarify what cash you have or have not received from that customer?

[Brad Barron:]

We don’t comment on specific customer and particularly don’t comment cash flows and payments to the customers. What I can tell you is that we are working closely with them to make sure that we get paid and that their service continues uninterrupted.

[Ryan Levine:]

Are they currently utilizing the asset as they were, 12 months ago, as Idea from the bunigging

[Brad Barron:]

We haven’t changed any contracts, there’s still at least the same amount of storage as they did from the beginning.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Chris Russell.

[Chris Russell:]

Thanks, Julian. Once again I want to thank everybody for joining us on the call today. If anybody has any additional questions, please feel free to reach at NuStar’s investor relations department. Thank you.

[Operator:]

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