NuStar Energy L.P.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good afternoon. My name is Maggie and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy LP, NuStar GP Holdings LLP Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Chris Russell. Please go ahead, sir.

[Chris Russell:]

Thank you, Maggie. Good afternoon everyone and welcome to today's call. On the call today 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. The 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. This 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. Now, let me turn the call over to Brad.

[Brad Barron:]

Good afternoon and thanks for joining us. Earlier today, we announced distribution coverage in excess of 1 times for the sixth consecutive quarter which highlights the strength of our core fee-based operations in the midst of a challenging time in our industry. Within our stores segment, increased utilization across our terminal locations, higher renewal rates and the benefit from our Linden acquisition contributed to a 17% increase in storage lease revenues, compared to the same quarter last year. In our pipeline business, we were able to increase crude and refined products revenues, as well as throughput volumes, compared to the third quarter of 2014, despite increased turnaround activity at some of our customer refineries and the recent decline in Eagle Ford crude oil production. After the strong third quarter performance from our base business, our full-year total segment guidance remains unchanged and we're on track to cover our distribution for the full-year 2015, second year in a row. Now, let me spend a few minutes updating you on some of our internal growth projects. During the quarter, we completed construction of an additional 400,000 barrels of storage at our Corpus Christi Northeast terminal, that will support our South Texas pipeline operations and provide our customers with the flexibility to segregate and deliver processed condensate. We also recently completed some pipeline projects that connect our Oakville to Corpus Christi 16-inch crude oil pipeline to a couple of major refineries in the Corpus Christi, Texas area. These new connections will give our pipeline customers more options when trying to market their crudes. Also within our pipeline segment, four of our six projects to increase distillate and propane supply throughout the upper Midwest were recently placed in service. These include an eight-mile eight-inch pipeline in our Conway, Kansas facility and an expansion of our Rock Rapids Terminal for additional propane supply to CHS, one of our largest central east region customers. The remaining two projects are on schedule to be completed by the first quarter of 2017. Regarding our 12-inch pipeline between Mont Belvieu and Corpus Christi, Texas, if you recall, the line experienced a pressure reduction shortly after we began operations in May and upon investigation, we identified an area of unexpected, localized corrosion. We suspended propane delivery and we've been conducting assessments on the pipeline. We expect the line to be back in service in December. With regard to our proposed joint venture with PMI to develop new pipeline infrastructure to transport liquefied petroleum gases and refined products from the United States into northern Mexico, we expect to have the agreement finalized by the end of the year. In addition to the projects I just mentioned, we've also recently taken steps to increase the capacity and flexibility of our ammonia pipeline, by investing in a new pump station on the east portion of the line that should be completed in the first quarter of next year. We also have plans to increase the storage capacity at our St. James terminal by building two additional tanks with an aggregate storage capacity of approximately 720,000 barrels. These tanks are under construction and are expected to enter service in the second quarter of next year. Beyond the projects mentioned, we continue to look for ways to further expand our operations within the Eagle Ford and in other regions our pipeline and terminals serve. Now, I'm going to turn the call over to Tom Shoaf, NuStar's Executive Vice President and CFO, so he can provide you with some additional detail on our third quarter results. Tom?

[Tom Shoaf:]

Thanks, Brad and good afternoon, everyone. For the third quarter of 2015, we reported DCF from continuing operations available to limited partners for the quarter was $1.15 per unit which exceeded our guidance range of $0.95 to $1.05 per unit and covered the distribution to the limited partners by 1.05 times. EBITDA from continuing operations was $155 million, compared to $145 million for the same period last year. EPU for the third quarter of 2015 came in at $0.68 per unit which exceeded our guidance range of $0.50 to $0.60 per unit that we provided last quarter on the call. Our consolidated quarterly results for the third quarter were strong and better than we anticipated, mainly due to solid performance from our storage segment, combined with lower than expected -- reliability capital spending due to lower than anticipated costs associated with certain projects. Turning over to our segment performance, EBITDA from our pipeline segment increased to $90 million which is $5 million higher than the third quarter of 2014. Crude oil pipeline throughputs were up slightly compared to the third quarter of 2014, mainly due to an increase in Eagle Ford throughputs. During the quarter, total Eagle Ford volumes increased from about 255,000 barrels per day in the third quarter of 2014 to around 263,000 barrels per day in the third quarter of 2015. While volumes strictly into our Corpus Christi North Beach terminal and ultimately across our docks increased 2,000 barrels per day to about 175,000 barrels per day, we do not expect this upward quarter over quarter trend in Eagle Ford volumes to continue into the fourth quarter, due to overall declines in Eagle Ford Shale production. Throughputs on our refined product pipelines increased to 531,000 barrels per day, mainly due to an increased demand on our ammonia pipeline and one of our refined products pipeline systems that serve one of our customers in the key Texas refineries. We also experienced higher throughputs on our Burgos Valley pipeline system as a result of expanded naphtha service for PMI at our Edinburg, Texas terminal. Our storage segment generated $89 million of EBITDA, up $13 million from the third quarter of 2014. Storage lease revenues increased 17% due to a number of factors, most notably from the benefit of us now owning 100% of the Linden terminal, as well as higher overall system utilization and higher renewal rates at some of our terminals. Our fuels marketing segment lost $2 million of EBITDA during the quarter, down $9 million compared to the third quarter of 2014, primarily due to lower volumes and margins in our bunkering operations. For the third quarter of 2015, our G&A expenses were $24 million, while our interest expense net of interest income was $33 million, both comparable to the same quarter last year. Our September 30 debt balance was $3.2 billion, while our debt to EBITDA ratio was 4.4 times. On October 29, NuStar Energy's Board of Directors declared a third quarter distribution of $1.095 per unit which will be paid on November 13. NuStar GP Holdings Board also declared a third quarter distribution of $0.545 per unit which will be paid November 17. Now, let me spend a few minutes talking about our projections for the remainder of 2015 and for 2016. Our total 2015 full-year segment guidance is unchanged for the full-year 2015 guidance that we previously provided at last quarter's call. However, guidance within each of the three segments has changed. With regard to segment EBITDA guidance for the full-year 2015, we now expect our pipeline segment EBITDA to be $25 million to $35 million higher than 2014, as steeper than expected declines in Eagle Ford production will likely impact our South Texas crude volumes for the remainder of the year. Our full-year 2015 storage segment EBITDA is now projected to be $40 million to $50 million higher than 2014, due to higher than expected throughput activity and renewal rates at several of our terminals, as well as insurance proceeds related to Hurricane Sandy damage at our Linden terminal that we expect to receive in the fourth quarter. With regard to 2015 EBITDA results in our fuels marketing segment, we now expect EBITDA to be in the range of $10 million to $20 million due to the weaker than expected margins across the segment. We expect 2015 strategic capital spending to be $435 million to $445 million which includes internal growth and acquisition spending. 2015 reliability capital spending projections are now $30 million to $40 million which respects estimated cost savings on certain projects. Based on these projections, we remain on track to cover distribution for the full-year 2015. Regarding fourth quarter 2015 projections, we expect to benefit from the insurance proceeds related from our Linden terminal and higher renewals across our storage segment, to be offset by planned turnaround activity at some of our customers' refineries and reduced throughput volume projections on crude pipelines and terminals that serve the Eagle Ford, due to the recent pullback in domestic shale production. Fourth quarter EBITDA results in the pipeline segment should be comparable to the fourth quarter of 2014, but lower than the third quarter of 2015. While EBITDA results in the storage segment should be higher than the fourth quarter of 2014, but lower than the third quarter of 2015. We expect fourth quarter EBITDA results in our fuels marketing segment to be higher than the fourth quarter of 2014 and third quarter of 2015. During the fourth quarter of 2015, we expect G&A expenses to be in the range of $27 million to $29 million, depreciation and amortization expense to be about $54 million and income tax expenses to be about $9 million and interest expense of approximately $34 million. Based on these projections, fourth quarter 2015 earnings per unit should be $0.45 to $0.55 per unit, while distributable cash flow from continuing operations per limited partner unit should be in the range of $1 to $1.10 per unit. Looking ahead to 2016 full-year guidance, our pipeline segment EBITDA should be comparable to slightly higher than 2015, as increased volumes on our refined product pipelines are expected to be largely offset by lower projected Eagle Ford crude volumes. However, we expect 2016 storage segment EBITDA to normalize in 2016 and decrease $15 million to $35 million, when compared to the strong performance in this segment that we expect this year. The projected decrease in 2016 is attributable to lower expected South Texas crude throughput volumes moving into our Corpus Christi North Beach terminal and expected lower revenue from our foreign terminals. In addition, we do not expect the storage segment to benefit from the receipt of Hurricane Sandy insurance proceeds next year, as we had projected in 2015. We expect 2016 results in our fuels marketing segment to be $15 million to $35 million. During 2016, we expect G&A expenses to be in the range of $105 million to $115 million. With regard to 2016 capital spending estimates, we plan to spend $360 million to $380 million on strategic capital, while our 2016 reliability spending should be in the range of $35 million to $45 million. Based on these 2016 estimates, we expect to cover our distribution for the full-year 2016. Now, let me turn it back over to Brad for any final remarks.

[Brad Barron:]

Thanks, Tom. We're very happy to have had another great quarter despite the extremely challenging market conditions. While oil markets are expected to remain volatile for the foreseeable future, NuStar's particularly well-positioned to weather the storm, due to the strength of our diversified asset base, as demonstrated by our solid third quarter results. As I noted earlier in my comments, while much of our growth in recent years is centered around our assets in the Eagle Ford, it's important to note that these pipeline and storage assets comprise less than 20% of total segment EBITDA for 2015. The vast majority of our pipeline throughput volumes are demand pull pipelines, supporting robust refining operations. Further, approximately 65% of our South Texas pipeline throughputs are committed under long-term take-or-pay contracts with strong credit-worthy customers, who are actually shipping well above these minimum thresholds. In fact, we've been conservative in our projected throughputs on our South Texas crude pipeline for the remainder of 2015 and on into 2016. As crude prices increase, we see considerable upside in our projections. Of course, we benefit from our stable, fee-based storage operations which are at a 98% utilization rate, when you factor out the mothballed Piney Point facility. This is why we're confident in saying that we expect to cover our distributions for 2015 and again in 2016. As we move into next year, we will continue to focus on growing our core fee-based storage and pipeline operations, as well as our distributable cash flow through organic internal growth projects and synergistic acquisitions. Time to let me turn it over to the operator and we can open up the call for Q&A.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Steve Sherowski.

[Steve Sherowski:]

Trying to get a better sense of what's driving the 2016 storage guidance? It seems like at the lower end of expectations, it could be down about 10% year over year. What's really -- what's driving that forecast? Are you seeing these volume declines in real time? Or, is this more of the expectation going into next year? Does the shift represent minimum volume commitments?

[Brad Barron:]

I'm going to let Danny Oliver, Senior Vice President of Business Development, answer that question.

[Danny Oliver:]

Thanks, Brad. Really, we're not seeing any change in our base business, as Brad mentioned earlier. We're about 98% utilized once you back out our mothballed Piney Point facility. The real difference year on year are some one-time items like the Linden Hurricane Sandy insurance proceeds and a couple of other one-time items like that in 2015, that really set 2015 apart as a banner year.

[Steve Sherowski:]

Okay. And then, on the transportation segment, what are you seeing currently in terms of throughput and what are your expectations for Eagle Ford throughputs within the areas that you gather, going into 2016? Does this assume an overall decline or like I said previously, are you just assuming that volumes go to your minimal volume commitments?

[Danny Oliver:]

No. We're not looking at minimum volume commitments right now. We're forecasting things to remain steady where they are. We're down in that segment, for that system we're down about 15% from our peak which was in April.

[Steve Sherowski:]

Okay. You're currently down 15%?

[Danny Oliver:]

Yes. The volumes have pulled back a little bit in that segment or in that system. But, right now, things appear to be stable and that's our forecast for next year, is that it will remain stable.

[Brad Barron:]

He mentioned the 15% decline from the April peak, but our volumes have been very flat and steady for the last three months.

[Steve Sherowski:]

Just a final question. So, your CapEx guidance for next year, can you just provide us any detail on what compromises that outlook, aside from I assume that your PEMEX project is included in there? Anything else that you can talk to?

[Chris Russell:]

Yes, Steve. This is Chris Russell. About a third of that relates to the PMI project and then we've got a couple projects we haven't officially announced, one at St. James, some tank projects down there and then we've got a connection on our ammonia pipeline that we're working on, as well.

[Steve Sherowski:]

I'm sorry. On which pipeline?

[Chris Russell:]

Ammonia pipeline.

[Tom Shoaf:]

Finishing up the CHS project as well. There are several other smaller projects.

[Operator:]

Your next question comes from the line of Mark Reichman.

[Mark Reichman:]

Couple of questions. What's the amount of the proceeds that you expect to realize related to Linden in the fourth quarter?

[Chris Russell:]

It's going to be in the $5 million to $10 million range, Mark.

[Mark Reichman:]

$5 million to $10 million and can you just remind me, for the full year what the total proceeds are?

[Chris Russell:]

Well, I think we're talking the same thing, here. We said, when we acquired the remaining 50% of Linden back in January, we said that would contribute an additional $15 million to $20 million worth of EBITDA to the business. The proceeds in the fourth quarter relate to Hurricane Sandy, damage from Hurricane Sandy, back in 2012, 2013.

[Mark Reichman:]

Right.

[Chris Russell:]

So, these are just the cash proceeds coming in from those insurance settlements. It's nothing to do with the EBITDA stream from the business we brought back in January.

[Mark Reichman:]

Okay. With the modest delay, in terms of giving the PEMEX deal signed, there's still no change to the anticipated project completion? That still would be first half 2017?

[Brad Barron:]

That's correct.

[Mark Reichman:]

Okay. Then, with the slow-down in production in the Eagle Ford and with as many MLPs now that are rushing to secure dock space, how are you thinking about development of that -- of the additional private dock at Corpus that I think you had signed a lease for, but you are looking to complete in the second quarter of 2017? Is this environment causing you to slow down development projects beyond 2016? Or, is it still -- you're still proceeding as business as usual?

[Brad Barron:]

We're still actively pursuing that project. We have some customers that it's very important to them to have a private dock that they can schedule. Also, the scope of this dock project would allow for larger ships, for export size vessels to come in. In order to secure our existing commitments and additional commitments, we feel like we'll be pursuing the project in 2016.

[Mark Reichman:]

Okay. You may have addressed this earlier. But, with regard to the expansion of the Mid Continent pipeline and terminal network, all those projects, I think there were six projects. Those are all still pretty much on schedule? What's left or remaining?

[Brad Barron:]

We've got, four of those have just gone into service. So, next year will be a full year realization of those and a couple others will be going into service next year. But, everyone of them, all six that we talked to you about earlier, are moving forward. And we've contracted all of those projects, as well.

[Mark Reichman:]

Okay. And then, if I might, how are you thinking, now, of financing? I know that you filed a prospectus supplement. We've seen some other MLPs do perpetual preferreds. If it looks like 2016 EBITDA, if pipelines, is kind of the same and storage is down, but you'll have more units outstanding, would you expect coverage to still be above 1, but maybe less than what you were looking, expecting in 2015? How are you thinking about the financing?

[Tom Shoaf:]

This is Tom. We definitely are still expecting our coverage to be about 1 for 2016 and in terms of financing our capital needs, we're just looking at the markets, as a whole and just trying to come up with a financing plan that is the most economic for us, as we need capital. Now, the preferred markets are there. We can obviously take advantage of that, if we needed to. We're also looking, keeping our eye on the equity markets and valuations there, but unfortunately, we don't have a really large equity need in 2016. So, we're just going to keep to monitor the markets and we will take full advantage of the most economic way to raise capital in 2016.

[Operator:]

Your next question comes from the line of Jeremy Tonet.

[Jeremy Tonet:]

I was just hoping you might be able to share a little bit more color with us, as far as what you're seeing in the Eagle Ford, that gives you the visibility of the volume expectations, there. If you see a certain amount of rigs working behind your pipes or the docks there? Any color would be helpful.

[Danny Oliver:]

This is Danny, again. We have several customers, actually, who have contracts in front of them right now, to build on their existing commitments to us. They want to ship more on the line. They want to go through our system and to our Corpus facility. It's a matter of getting some comfort with their ability to secure the volumes out in the future. Most of what's being shipped today is -- our customers have contracted with their suppliers. They're just looking for the producers to give them incremental production guarantees, before they sign any new takeaway capacities.

[Jeremy Tonet:]

Trying to get a feel for the PEMEX project and a sense for what could be slowing things down there, has the shape or the scope of the project changed at all? Or is there anything else that you could share with us, as far as what's slowing down the process there?

[Brad Barron:]

We're still working well with PMI. When we think of deregulation of the Mexican energy markets, it has created a lot of challenges and distractions within PEMEX. But we have teams that are working daily on the project. Like I said, we expect to finalize it by year-end.

[Danny Oliver:]

Your question about scope, scope hasn't changed. The commercial aspects of the agreement really haven't changed at all. Our engineer, our respective engineering groups, are meeting and progressing the project forward. It's just some of the matters Brad referred to are slowing things down.

[Operator:]

Your next question comes from the line of Selman Akyol.

[Selman Akyol:]

I just want to go back to the Eagle Ford, here. In your comments, I think you said volumes were 263,000 in the quarter, compared to 255,000 in 2014. Did I get that right?

[Brad Barron:]

Sounds about right.

[Selman Akyol:]

Okay. And calm you said, I believe you said you expect it to slow going into the fourth quarter. I was wondering, can you put any brackets around where you think those volumes are going for 2016?

[Brad Barron:]

We're looking at our volumes in 2016 being relatively flat to what we see today. I think our comment about the fourth quarter was the fourth quarter 2015 versus fourth quarter 2014 would be lower. But, we expect our volumes in the fourth quarter this year to be similar to what they were this quarter and similar to what we expect next year.

[Operator:]

Your next question comes from the line of James Chappell.

[James Chappell:]

This may seem a bit naive. But, with the world awash in crude oil and you having storage assets in various international places, what is going on in the storage market from your perspective, that would cause those operations to operate flat next year?

[Danny Oliver:]

You're right about plenty of crude oil in the world. That's giving a lot of people opportunities in the storage segment. I guess, it's a good thing. I guess, the problem with that for us, is we're full. We're already fully leased, as Brad mentioned. We're 98% utilized. I don't have another tank to lease. What we would hope and we're starting to see this, is that as contracts come up for renewal, we're able to get some stronger renewal rates, because of those market fundamentals that you mentioned.

[James Chappell:]

So, are there contracts coming up this year that could give some color to how you might do in the future, if you are able to get better rates?

[Brad Barron:]

We do. We have, I think, about 20% to 30% of our storage lease contracts coming up for renewal in the next year. Now, those are all over the map in the United States and some of our foreign waterborne terminals, as well. So, not all those see an open market for crude storage and things like that. But, they are all a little bit different. But, we would expect to see, especially in our marine terminals, some strengthening of renewal rates.

[James Chappell:]

But you've assumed none of that in the projections that you published?

[Brad Barron:]

Yes. Nothing that we haven't already renewed.

[James Chappell:]

I see. In terms of what's going on at Corpus Christi, I guess Magellan seems to be very bullish on Corpus, in terms of their ability to fill in volumes and you less so. Is a purely the function of where the oil is coming from?

[Brad Barron:]

No. I don't think we feel less so. We think our Corpus facility is one of our flagship facilities. We've seen a tremendous amount of growth, there. All of our customers want to bring more products to us. We're still working on projects. We just finished two projects, one in connection to local area refiners for our customers. We just completed a segregation for processed condensate and moving forward on a new dock project in Corpus. I think that demonstrates our positive attitude towards what's going on in Corpus. We're very excited about that business, it's just slowed down a little bit compared to what we thought it would be doing, going into this year.

[James Chappell:]

I see. In terms of -- on the financing, are we to conclude that a common unit offering at the NS level is unlikely in 2016?

[Brad Barron:]

I wouldn't say it's unlikely. We're going to look and measure and see, we don't have a really big raise equity need in 2016. There could be something that we might want to do in 2016, but it's not going to be very large, let's put it that way. But, I would say -- I'm not saying it's unlikely we'll do any, I just don't think it's going to be very large.

[James Chappell:]

I see. From our point of view, to get a couple of these storage contracts renewed at higher rates before doing the equity offering, I think would be a good idea.

[Brad Barron:]

We'll do our best.

[Operator:]

And your next question comes from the line of John Edwards.

[John Edwards:]

Just following up some of the questions that have been asked, in view of your commentary. I'm just curious, in terms of the returns on projects, you indicated we still have a fair amount of capital spending you're doing next year and it sounds like, obviously, your pricing, there's upward pressure in the storage area and it sounds like in the pipeline area, there is some downside there based on your Eagle Ford volumes. So, how is this, how are you seeing this reflected in some of the new spending in terms of returns and even returns on some of your new project opportunities that maybe is not committed, at this point?

[Danny Oliver:]

John, this is Danny, again. We still see the projects that we're pursuing in this 6 to 8 multiple area in terms of returns. I think our only point on the shale plays and the Eagle Ford, in particular, with us, is that the projects have just slowed down a little bit, with the production coming off. But we haven't really seen our returns changing that much.

[John Edwards:]

Okay. Remind me now on your distribution policy. You're covering this year, you expect to cover next year. Haven't seen an increase in a while. And I realize it's subject to the leverage metrics on your balance sheet, as well. What's the thought at this point, when you might expect to start moving that higher?

[Brad Barron:]

It's the same as we've always talked about on these calls. We're a conservative management team and we need to see big chunks of DCF steadily coming toward us. And obviously, we're in a volatile market and our number-one priority is to secure the distribution, like we did last year and the year before. And like we said, we have a secure distribution heading into next year and that's our number-one priority. We won't really talk about increasing the distribution until we see those big chunks of DCF coming our way.

[Operator:]

There are no audio questions at this time.

[Chris Russell:]

Okay, Maggie. Thanks. I want to thank everybody for calling today. If you have any further questions, please feel free to call NuStar's Investor Relations. Thank you.

[Operator:]

This does conclude today's conference call. You may now disconnect.