Phillips 66 Partners LP
Q3 2020 Earnings Call Transcript

Published: 30 Oct 2020

[Operator:]

Welcome to the Third Quarter 2020 Phillips 66 Partners Earnings Conference Call. My name is David and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

[Jeff Dietert:]

Good afternoon and welcome to Phillips 66 Partners third quarter earnings conference call. Participants on today’s call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President, Operations; and Rosy Zuklic, Vice President and Chief Operating Officer.

[Kevin Mitchell:]

Thank you, Jeff, and good afternoon everyone. In the third quarter, Phillips 66 Partners delivered safe reliably operations. We captured improve market conditions reflected by higher pipeline throughput. During the quarter, we advanced our major growth projects. Volumes on the growth pipeline continue to ramp up, and that the South Texas gateway terminal, additional storage came online. These assets are operating well and contributing to our results. The Board of Directors approved a third quarter distribution of $0.875 per common unit, a 1% increase over third quarter of 2019. Moving onto Slide 4 to discuss financial results. The partnership reported third quarter earnings of $206 million and adjusted EBITDA of $313 million. Adjusted EBITDA from wholly-owned assets improved to $23 million due to increased volumes associated with higher utilization at Mid-Continent refineries operated by Phillips 66. Adjusted EBITDA from the joint ventures improved $21 million due to higher volumes, including the ramp up of Gray Oak Pipeline and startup of the South Texas Gateway Terminal. Third quarter distributable cash flow was $243 million, up $25 million from the prior quarter. The increased reflects higher earnings from wholly-owned assets and increased joint venture distributions. Slide 5 highlights our financial flexibility and liquidity. We ended the third quarter with $2 million of cash and $457 million available under our revolving credit facility. The partnership funded $160 million of growth capital during the quarter. This included spend on the CPG pipeline and investments in South Texas gateway terminal. In addition, the partnership continued to fund it share of prior commitments for the deferred Liberty Pipeline project. The debt to EBITDA ratio on the revolver covenant basis was 2.8, which is consistent with our targets to remain below 3.5. Our distributions coverage ratio was 1.22. Phillips 66 Partners remains committed to discipline capital allocation and maintaining our investment grade credit rating.

[Rosy Zuklic:]

Thanks, Kevin, and hello everyone. Moving on to Slide 6, I'll talk about our growth projects. We continue to advance the C2G Pipeline project. The 240,000 barrels per day ethane pipeline will run from the Clemens Caverns near Texas with Gregory, Texas. The pipeline is backed by long-term commitments and will serve petrochemical customers in the Corpus Christi area. Pipeline construction is roughly 55% complete and it is expected to start-up in mid-2021. At the South Texas Gateway Terminals, the first dock and 5.1 million barrels of storage capacity have been commissioned and the terminal began crude oil export operations in July. Terminal operations are expected to ramp up through the end of this year as additional phases of construction are finished. We expect the project to be completed in the first quarter of 2021 with total storage capacity of 8.6 million barrels and up to 800,000 barrels per day of export capacity. Phillips 66 Partners owned a 25% interest in the terminal. As we near the completion of these in-flight capital projects, we expect the 2021 capital budget to be approximately $300 million. Details of our 2021 capital program will be provided in December. This concludes our prepared remarks. We will now open the line for questions.

[Jeff Dietert:]

David, do you have questions for us?

[Operator:]

Yes, we will now begin the question-and-answer session. Spiro Dounis from Credit Suisse. Please go ahead. Your line is open.

[Spiro Dounis:]

I'd like to go back and maybe just a little bit more color on some topics that came up on the PSX call earlier. Topic that refinery closures came up and I think if I heard you guys correctly, it sounds like the remaining PSX refineries beyond Rodeo are fairly well insulated going forward barring another downturn. So, one that I perfect at correctly and how are you guys assessing the risk and more closer here from PSX perspective as a service provider to those refiners?

[Kevin Mitchell:]

Yes, Spiro, it's Kevin. I think the way to think about this, the PSXP portfolio and generally it's focused on, to the extent that the PSXP assets tied Phillips 66 refineries that tend to be down in the middle of the country. So the Mid-Continent and to Gulf Coast for the most part, which is generally where from a Phillips 66 standpoint was taught that I've been sort of the core parts of the portfolio. And so, I think that's a lot of what that comment meant in terms of relatively insulated.

[Spiro Dounis:]

Okay, that's helpful color. Thanks for that, Kevin. And then just on, if you could make some comments around Midstream assuming to elaborate on a few events. So first, you mentioned the Midstream industry probably sees consolidation in the next few years and it hasn't really been part of the strategy historically. So just wondering how you think PSXP fits into that mold? And then second, can you talk about the lifecycle of MLP being shorter than before? Is there any indication that you're spending a little more time evaluating the c-corp structure, just want to understand how to interpret that comment?

[Kevin Mitchell:]

Yes, let me answer the second one first, and then we'll come back and talk about the first one. So, the comments around the NLP lifecycle, is really just reflecting. If you go back to where we were at, say five years ago, and then look at what's happened in the space, in the Midstream sector over the subsequent five years, you've seen c-crop conversions, you've seen roll-up transactions. And so, you actually have -- the MLP universe is quite a bit smaller than it was back at that point in time. And so, it's just reflecting the reality of what has happened that this lifecycle has somewhat shortened. It really wasn't meant to intend any specific intentions around specific course of action around. It's just somewhat reflecting what we've seen take place in the market over this time period. And then the other question on consolidation, we've always said that, PSXP, we have the ability to grow by organic means by direct capital investments and growth projects at the MLP to drop things from the parent company and through acquisitions. We've done a small number of asset-specific acquisitions and there's one earlier on probably three, four or five years ago. I can't time frame in terms of that. But in principle, we have felt that the PSXP could position itself to participate in broader industry consolidation. We think it needs to happen in the Midstream space. You're seeing that happen in a pretty big way in the upstream right now. And that's I think for the Midstream to compete well bigger is better scale is helpful, the ability to be more efficient to drive cost efficiencies, commercial synergies through the entire Midstream value chains. And so, we think that's likely to happen.

[Operator:]

Theresa Chen from Barclays. Please go ahead. Your line is now open.

[Theresa Chen:]

Hi. Kevin, I would like to unpack your last comment about PSX potentially participating in broader asset consolidation across Midstream. Are there particular assets and/or geographical locations? Just name a certain parts of the value chain that you think would fit well and appeal to PSXP more than others?

[Kevin Mitchell:]

Well, so a little bit portfolio we have in PSXP today, and you've got crude value chain and NGL value chain assets, and some of which are integrated with PSX assets, some of which are not in sort of standalone. And so I think you look at where can you leverage the existing portfolio into something bigger and create a broader opportunity in that respect, because if you don't approach it that way, then the opportunity to drive cost efficiencies and potentially commercial synergies are just not there. And so, that's how I think of I have. I don't know Tim, if you have any other comments around that?

[Timothy Roberts:]

No, I think Kevin, you hit it spot on. It's really about how do we build out the value chain and make sure as we will position so that we can support the effort consolidation it's going on. As mentioned Kevin earlier, so yes, that's right.

[Theresa Chen:]

And shifting to DAPL, can you give us some update on the evolution of the process. Where do you think it goes over the near-term and key milestones from your perspective to keep an eye on it? Also, related to that, can you tell us about the movement on Bayou Bridge that is directly related to DAPL? What is Bayou Bridge EBITDA?

[Timothy Roberts:]

This is Timothy. So I'll cover that a little bit. Let me talk about DAPL real quick. Really, nothing's changed. We still had two items that need to be addressed by district court and an appellate court in DC. We fully expect that those will be addressed based on the briefing schedule we've seen, sometime towards the end of the year, maybe rolling into early next year, but we expect them both around the same time. But regardless of what happens, our expectation is that they're likely going to get appeals. So I think the process is one of an appeals process that likely goes forward. Now from standpoint Bayou Bridge, I can't get into a lot of details that we don't want to share at that point with you. Plus, you got to remember, energy transfers, the commercial lead on that. But what I can tell you is, that is a pipeline that we do on heavies and lights on, and I think that may help you with some of your answer, hopefully.

[Operator:]

Jeremy Tonet from JPMorgan. Please go ahead. Your line is open.

[Jeremy Tonet:]

I was just hoping you might be able to provide a little bit more color on the joint ventures how those businesses perform is, Gray Oak and Sand Hill, Southern Hills, just wondering if those things kind of met expectations that even kind of stood out there in particular, just any color on the JVs would be helpful? Thank you.

[Rosy Zuklic:]

Hi, Jeremy, this is Rosy. Yes, during the quarter, all our JVs actually performed well, I mean, I think as Kevin covered during the prepared remarks. Gray Oak actually was one of the leading ones that that contributed to quarter. Sand Hill did well, but you know, it performed well, last quarter. So I would say that as a standout Gray Oak and the Bakken and explorer where actually were the three JVs that that contributed an upside this quarter compared to last quarter.

[Jeremy Tonet:]

Thanks and just want to see evaluations in the space that kind of declined a lot this year, as we all know. And just wondering with the yield standing where it is -- is there ever a situation where that capital could be kind of better deployed it lowering leverage? Or unit repurchases, or what have you just wondering if you could kind of refresh us on your capital allocation philosophy, given how everything the world has changed so much?

[Tim Roberts:]

Yes, Jeremy, this is a good question. Step back and priority is to maintain a strong balance sheet, maintain that investment grade credit rating, and we also have expectations that we continue to invest in growth in the MLP. We're fortunate that we have a very strong MLP, a great portfolio, really strong assets, the balance sheets solid. We have a fair amount of bloom from a leverage standpoint if we need to utilize that. But I also think that from an equity valuation standpoint, we're hesitant to make any immediate decisions around that because I really believe that the sort of DAPL cloud that's hanging over PSXP is having a significant impact on valuation. So, reluctance to make decisions that could have long term consequences as well until this whole position plays out. And so, don't be rash and in making decisions around that, and so that's really, really sort of frames up how we think about that.

[Operator:]

This concludes today's call. I will now turn the call back over to Jeff.

[Jeff Dietert:]

Thank you for your interest in Phillips 66 partners. I'd like to thank Brent Shaw for his significant contributions to the Investor Relations Group. Brent has been promoted to another area within Phillips 66. And I'd like to welcome Shannon Holy to the Investor Relations team. Do you have any questions please call Shannon or me. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.