Shell Midstream Partners, L.P.
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Good morning. My name is Angela, and I’ll be your conference operator today. At this time, I would like to welcome everyone to today’s webcast for Shell Midstream Partners. At this time, all participants are on a listen-only mode. I will now like to turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.

[Jamie Parker:]

Thank you, Angela. Welcome to today’s webcast for Shell Midstream Partners. With me today are Kevin Nichols, CEO; Shawn Carsten, CFO; and Steve Ledbetter, VP, Commercial and Business Development.

[Kevin Nichols:]

Hey thanks, Jamie. Good morning, everyone, and welcome to our Fourth Quarter Earnings Webcast. And even though, we’re already halfway through the month of February, let me start by saying that after a difficult 2020, I hope that you and your families have had a healthy start to the New Year. And for those of you that are affected by the current winter storm and are dealing with power issues, we hope that you are safe, you stay warm and things returned for you to normal quickly. I’ll begin today by offering my reflections on 2020. I’ll then pass the call over to Steve who provide a few operational updates. And finally, Shawn will walk you through the financials for the quarter. 2020 will forever be remembered as one of the most difficult periods in recent history with a pivotal shift in the ways we interact and do business. As a society, we experienced illness and unfortunately the loss of life due to COVID-19, a terrible pandemic that has had a profound impact on people, the global economy and local businesses. The oil and gas sector was not immune to these impacts. As we have dealt with unprecedented supply and demand imbalances, as well as temporary demand destruction across the hydrocarbon value chain, which we’re still navigating today. In the latter half of the year, we dealt with an active hurricane season resulting in multiple producer shut-ins that impacted production flow through many of our assets. Against this backdrop Shell Midstream continued to deliver value to unitholders in 2020 generating $767 million of EBITDA and $658 million of cash available for distribution. This value delivery is evidence that our portfolio remains strong. And in 2020, we were able to showcase our resilient framework and diverse portfolio, which serves vital production and manufacturing hubs. While we closed on our latest transaction, acquiring certain logistics assets at the Shell Norco Manufacturing Complex and an interest in the Mattox Pipeline, both of which added de-risk cash flows and further diversify the portfolio.

[Steve Ledbetter:]

Thanks, Kevin. I can agree more with the points that you made 2020 was an unprecedented year in many ways, but despite all of the challenges our organization truly prevailed. On the off shore, the partnership saw an overall increase in throughput at 14% when compared to the prior quarter, which is primarily related to our producers returning to normal levels following the hurricanes and plant producer turnarounds.

[Shawn Carsten:]

Thanks, Steve. As I reflect on the fourth quarter and the full year, I’m pleased with our assets have performed in a very difficult macroeconomic environment. So first, let me cover a few of our key financial metrics for the quarter. Our total revenue was $130 million, an increase of $20 million from the third quarter. This increase was primarily related to increase throughput on the Zydeco system as well as lower impacts from hurricanes and plan turnaround in the fourth quarter. Our operating expenses were $82 million, up about $7 million from the prior quarter, mostly related to the timing of Norco maintenance expense and as severance grow as we continue to advance our cost savings initiatives. Income from equity investments was $87 million down about $22 million from the prior quarter, mostly related to the continued impacts of both hurricanes and planned producer turnaround activity. With all of this, adjusted EBITDA attributable to the partnership was $188 million and after interest expense, maintenance capital and other adjustments, total cash available for distribution was $162 million. Our partnership declared a distribution of $0.46 for LP unit. This resulted in a coverage ratio for the quarter of one times. Finally, we incurred $2 million of maintenance CapEx in the fourth quarter, mostly related to Zydeco. So now let me turn to the partnership’s balance sheet and liquidity. As of December 31, the partnership had total debt outstanding of $2.7 billion, which equates to a debt to EBITDA ratio of 3.6 times based on an annualized Q4 adjusted EBITDA. We’re comfortable with our balance sheet and we believe it allows us the desired flexibility to continue to effectively navigate these turbulent times. So now let me turn to guidance for the year. In the offshore, we expect to have several producer turnarounds during the year. Now based on the current plan turnaround schedule, we expect an impact to both net income and cash available for distribution of approximately $10 million, primarily in the second quarter. In the CapEx space, we plan to spend about $21 million in 2021 of which about $4 million will be growth capital related to our continued expansion of the Permian gas gathering system. And looking forward as mentioned previously by Kevin, we anticipate exiting 2021 with between $30 million to $40 million reductions in our operating costs run rate. And as I close, we’re pleased to have a suite of high quality midstream assets, which provide affordable and stable cash flows from which to work. And we believe that these assets coupled with our strong balance sheet enables us to whether the uncertainties in the current markets. As we work to make Shell Midstream Partners sustainable for years to come.

[Kevin Nichols:]

Thanks, Shawn. As many of you know, at the end of March, I’ll be retiring from Shell after more than 29 years with the company. I must say that it’s been a true privilege for me personally to have had the opportunity to lead Shell Midstream Partners over the last three years. And I’m really proud of what we’ve been able to accomplish in that time. In my opinion, we’ve built an incredible company and we’re delivering against a well-founded strategy. I believe we have the right management team in place to lead into the future and I have the utmost confidence in Steve and Shawn to do that. I truly believe that the best days for Shell Midstream Partners are yet to come. And lastly, I’d like to say, thank you to you all our investors and the investment community. It’s been a pleasure to get to know you and to build relationships over the past few years. And I just want to say thank you for that and your support. So it’s time to turn the range over to Steve and to – let Steve take Shell Midstream Partners’ forward. So Steve, any closing remarks.

[Steve Ledbetter:]

Kevin, on behalf of the partnership and honestly the entire team, I want to thank you for you for your leadership and guidance that you’ve given us over the last several years. And as you’ve mentioned, Shell Midstream Partners has grown considerably and we really have achieved a lot. You’ve helped set a solid foundation on which we can grow, and I look forward to leading Shell Midstream into the future. So with all that, we will now take your questions. Operator?

[Operator:]

Ladies and gentlemen, Our first question comes from the line of Shneur Gershuni with UBS. Please go ahead.

[Shneur Gershuni:]

Hi, good morning everyone. First, to start off, Kevin, congratulations on your upcoming retirement well-deserved and hope you enjoy it well and be safe out there. Maybe to start off a little bit, I kind of wanted to go back to the beginning of your prepared remarks, where you were talking about the cost savings achieved and how you’ve stood up a different organization. When I sort of like put all the pieces together here, right? You had a lot of changes docs to your – in negative impacts, obviously from COVID in the byproducts, the hurricane. Trying to understand without asking for a specific guide, what are the more normalized environment looks like when refined products return, whatever quarter that is or whatever year that is. Do the cost savings achieved become permanent and provide a push and if the new normal is a little different than the old normal. Could the new normal runway, their earnings actually be higher because of these cost savings? Just any color that you can give on this hypothetical and not tying it to a specific guide if possible.

[Kevin Nichols:]

Yes. I’ll start that one, Steve, and then I’ll get it back to you. I think without giving you specific guidance, the sustainable cost savings on a like-for-like basis, truly would be incremental to the business under the normal operating conditions against all of the systems and the rest. These are costs that we’ve taken out of the business, finding ways to operate more efficiently, effectively without sacrificing the long-term value or without taking away growth.

[Steve Ledbetter:]

Yes, I think just to add to that, this is Steve. This is not a one-time go after this without looking at the long time under – our long-term underlying sustainable approach. And while we’ve made great progress, as mentioned earlier, with the $10 million, we do expect to be in the $30 million to $40 million range exit in 2021. But we have to go do the work and ensure that we can run safely and responsibly and that these things can be done and are sustainable. And so I would expect that to be a sustainable outcome moving forward, as we get to the end of 2021.

[Shawn Carsten:]

And Shneur, this is Shawn. Just to pipe in as well. I think, like, we’re not going to write future guidance of course, but if you think about it, we have a Mars growth coming on in 2022, which is positive. We do have this $30 million to $40 million, we expect to take out through the course of this year. And then of course, indeed, we expect our clean product systems to return to more of a normal run rate once COVID is behind us. But it’s still much too early to say, when kind of balance because back to the U.S. and European markets.

[Shneur Gershuni:]

Yes. I know, it was a hypothetical really, it was just trying to think about adjusting Zydeco and everything else, like, could we end up in a better position. And it sounds like you’re saying whenever that quarter happens, it potentially could be. So appreciate the color there. And then maybe it’s a follow-up question, sort of a longer-term discussion, in your conversations with Shell in the – from a parent to SHLX relationship. What’s the direction going forward once we stabilize and if we operate in a post-COVID world. Are there going to be more assets available for SHLX to acquire? Is that kind of the path that we should be thinking about or alternatively, one of your peers recently made an offer to buy in their MLP? Just kind of wondering how that discussion is currently unfolding within the RDS SHLX world.

[Steve Ledbetter:]

Hey, Shneur. This is Steve, and I’ll take. A lot to unpack on that one, so I’ll try to take it bite by bite. As it relates to the announced market roll up, that’s a decision that would take place at the sponsor level and not a conversation that we would be part of, but I’m certainly not aware of any discussions taking place at this time. But we are focused on is continuing to drive the competitiveness nature and the cost out, making sure that these things are sustainable and moving forward on a longer term basis and opportunistically looking at growth and leveraging our strategic footprint both onshore and offshore and our refined products systems and believe in the capability the underlying assets. As it relates to a drop, at this point, the current environment doesn’t necessarily make sense for that right now. But we still believe that that’s one of the advantages we have access to growth alongside our sponsor and where there’s an infrastructure need. We stand ready to take a play in that.

[Shawn Carsten:]

And I might just bolt onto Steve’s comment Shneur is that, we do have – and we’ve always operated fairly conservative balance sheet. And this also gives us plenty of opportunity and firepower for small value added kind of bolt-ons from third parties or opportunistic growth CapEx. So I think we’re in a relatively good position as we go forward. As Steve highlights, we’re really focused on just driving the business and making this base business.

[Shneur Gershuni:]

Got it. That makes perfect sense. Really appreciate the colors today guys. Stay safe and Kevin, once again, congrats on getting retirement.

[Kevin Nichols:]

Thank you.

[Operator:]

Your next question is from the line of Derek Walker with Bank of America. Please go ahead.

[Derek Walker:]

Good morning, everyone. And again, they’ll look at the same comments that Kevin congrats on your retirement and pleasure working with you and Steve congrats in the role, and certainly look forward to continuing working with you. Maybe just start off ESG question. I guess, how you guys looking at some of the scope one, scope two mission, where do you see some of the opportunities and where do you really see some of the challenges in and around your asset base.

[Jamie Parker:]

Derek, you broke up a little bit. Could you state the question, again, please?

[Derek Walker:]

Sure, Jamie. Just on ESG, I guess as far as really reducing scope one, scope two missions, where do you see some of the opportunities across your asset base and where do you see some of the challenges?

[Steve Ledbetter:]

Yes. Derek, this is Steve. I’ll take that one. We continue to look to make sure that we’re operating in an environmentally responsible manner. To the extent that we can improve and ensure that we don’t have any unplanned or fugitive emissions. We’re looking at opportunities to improve how we – what our footprint really looks like. And that’s from not only technology, but looking at alternative source to go power some of our things. We continue to have that as a cornerstone for what we’re doing moving forward. And we feel confident in our ability to continue to play an environmentally and safely responsible manner.

[Derek Walker:]

Got it. And then also – go ahead.

[Shawn Carsten:]

Sorry, Derek. I just also add that, look, there is no more environmentally friendly way to transport hydrocarbons since through the pipeline system versus moving on a truck. So we also feel good about that, but kind of fundamental for the infrastructure.

[Derek Walker:]

Makes sense. And then maybe just a quick one on the $10 million of DCF impacts related to plan turnaround. Is that – any of that coming from maybe shifting of activity from 2020. And I guess, when do you actually expect to see that $10 million impact? Thank you.

[Steve Ledbetter:]

Yes. That’s not any from shifting from last year. We expect the majority of that to be a second quarter.

[Derek Walker:]

Yes, I appreciate it. I’ll hop back in the queue. Appreciate it guys. Thank you.

[Operator:]

Your next question is from the line of Theresa Chen with Barclays Bank. Please go ahead.

[Theresa Chen:]

Hi. I’d also like to congratulate Kevin on your retirement and express my thanks for your substantial insight and guidance and hard work over the years and shepherding this partnership and growing it over time. We wish you the best. And congratulations. You’re welcome. Congratulations, also to Steve for stepping into the new role, we look forward to continuing to work with you. I just have one quick question for Shawn actually, related to the uptick in OpEx and your comments from the prepared remarks on the Norco maintenance, the severance accruals of just looking at the step up from 39 to 53, how much was each piece, how often does the Norco maintenance happen? Are there other lumpy maintenance items we should think about in 2021, and as we move forward from the 2053, what should be a readable quarterly run rate for this item?

[Shawn Carste:]

Yes. So Theresa, without providing a kind of for guidance, look at this, it’s much more readable as we move forward, part of the Norco piece was of course, seven screw one-time events. We right size our organization. The Norco maintenance was partly due to COVID and kind of things getting pushed because of make being safe in the plant. And so I think we’ll probably see a much more smooth kind of OpEx as we go forward, assuming COVID, we’re – we get past this COVID challenge.

[Theresa Chen:]

Got it. And when you say smooth OpEx going forward, are we talking about kind of like the 40s range that we’ve seen in second quarter, third quarter as an average? Is that a good rule of thumb?

[Shawn Carsten:]

Yes, I’ll slight – you can always talk to Jamie, he might be able to help you think through whatever model you’re working on.

[Theresa Chen:]

Thank you.

[Operator:]

Your next question is from the line of Joe Martoglio with JPMorgan. Please go ahead.

[Joe Martoglio:]

Hi, good morning.

[Kevin Nichols:]

Good morning.

[Joe Martoglio:]

I guess just kind of thinking about the distribution going forward. And wondering if you can talk about based on your internal forecast, whether you expect to maintain kind of sufficient distribution coverage as the partial waiver expires this year. And also kind of if not, would you be willing to run sub one-time coverage? If you’re kind of have good visibility to growth and recovery for the remainder of the year.

[Steve Ledbetter:]

Hey Joe, this is Steve. Yes. Thanks for the question. Look, I can appreciate the need for you and the market to have clarity on forward guidance. But given the uncertainty and the volatility in the operating environment, we – the Board just feel at this point, we’re not going to go out with guidance and it’s the best course of action to manage the business on a quarter by quarter basis. Now having said that, we’re comfortable in our underlying business. We’re going to be focused on the competitiveness measures, taking cost out, make sure that’s sustainable the growth around some of our strategic footprint in areas like the Gulf where we had the expansion going on ahead of Vito and PowerNap. And in the onshore looking at opportunities, where the evolving landscape fits nicely into our concentration of assets and then taking some opportunities in our ventures. And then the other thing I’d say is we feel very good about our balance sheet and the available liquidity to help us weather turbulent times, whatever they may be.

[Joe Martoglio:]

Got it. That’s helpful. Thank you. And then also just kind of maybe a high level question, I think refinery rationalization has been topical the past year or so. And I recognize SHLX maybe doesn’t have as much exposure to some others, but kind of can you just talk about how refinery rationalization kind of you think SHLX, both over the near-term with any impact from the convent refinery closure and also kind of over the long-term and how your assets are positioned there.

[Steve Ledbetter:]

Yes, I’ll start, maybe Shawn if you want to come in, as far as the refining rationalization goes, that’s a very tricky one in terms of production, not only from different basins and in the refinery needs to meet customer demand and where that makes sense. But what we see is we stand in a very good position with our exposure to the current basins who have weathered the storm very well with resilient base exposure from the Gulf of Mexico, despite the demand patterns and having a good portion of refinery cuts. And then we also have access and investment in the refined products that premier refined products systems that can go efficiently, competitively compete to fill those customer needs.

[Shawn Carsten:]

And I think the only thing I might add to Steve comments is that look, it’s hard to know where rationalization might happen, but certainly, the refiners that are along the Gulf Coast are some of the most complex and most cost competitive in the world. And so I would think that you’ll probably see more activity elsewhere outside the Gulf Coast, and I think that positions us very well.

[Joe Martoglio:]

Okay, great. Thank you for taking my questions.

[Operator:]

And your final question is from the line of Michael Blum with Wells Fargo. Please go ahead.

[Michael Blum:]

Thanks. Good morning, everyone. I hope everyone and their families are safe and have power during this pretty crazy week for you guys.

[Kevin Nichols:]

Yes.

[Michael Blum:]

So I had a few questions. One, just as it relates to going back to an earlier question, as it relates to the waiver that you’re receiving now is I believe runs through the first quarter of this year. Does that signify anything in terms of timing like in other words, the you and the sponsor need to make some sort of decision around that at the end of that quarter, whether that be around structure or distribution or just really anything.

[Shawn Carsten:]

Michael, this is Shawn. Good to hear from you. I think that, no, actually there’s you shouldn’t read anything into it. At this point, we’re just continuing to run the business. I guess you’re correct. The waiver does go off after the first quarter of this year, but we have no further guidance. And as Steve highlighted earlier, we do have a very good balance sheet at $1.2 billion of liquidity and should there ever be a shortfall we can always pull from that, so.

[Michael Blum:]

Okay, great. And then I’m wondering if you can just provide some details on how you plan to achieve this the $30 million to $40 million of cost reductions, I guess $20 million to $30 million of incremental, if you look at like that.

[Steve Ledbetter:]

Yes. Michael, this is Steve. I’ll take that. It’s a combination of things. As we looked at and we took this on this challenge on about 18 months ago in terms of getting competitiveness driving more value to the partnership, we had to go really look at how we make sure we manage our business in a sustainable and environmentally friendly fashion, but at a competitive level that, that allows us to give thrive in the market. And that really came with a few things. One was how do we better leverage data. I think we heard people – we heard some comments about that earlier having real-time insights to be able to make clear decisions on what is absolutely needed and why. How we go procure goods and services. We had some opportunities to go leverage people to multi-skill and grow their own personal remit and have the capability to go do those things. We’ve actually gone out and been able to say whether or not we need certain third-party work to be done or those skills that we could do in-house. It has a range of things. And then as we’ve done that, we’ve stacked up the needed activities and right size our organization associated with that. So we’re making great progress on that. There’s still more work to be done, and we will be laser focused on that in 2021 to ensure we deliver what we’ve committed.

[Michael Blum:]

Great. Thanks for that. And my last question, so at the RDS strategy day, they clearly articulated an energy transition plan going forward, reducing upstream and downstream oil and gas, more emphasis on renewables, et cetera. My question is how does the MLP fit into this shift in strategy and basically how do you see the partnership playing a role here?

[Steve Ledbetter:]

Yes, it’s a good question. And it’s the one that’s on quite a few people’s minds with this transition is one that’s going to take time. This is not going to happen overnight. And it’s been clearly articulated that Shell is not moving away from hydrocarbons. They will be an important part of the mix in any scenario. And we have midstream assets that support our integrated value for Shell. And the assets that we do have or have exposure to some of the most competitive cost advantage and efficient basins in the portfolio. So we see large opportunities still within the U.S. and that’s not only as it relates to our business, not only as it relates to Shell, we also have exposure to some very large customers off shore who continue to put capital to work in these areas that will allow us to attract that business such as BP and Chevron. So this is a longer-term time and it’s going to move with the pace of society and we feel very good about our ability to be competitive and moving the hydrocarbons that are needed for the United States.

[Kevin Nichols:]

Yes. And Steve, I’ll add. The deepwater area is a core focus for Shell in that aspect, in the Gulf of Mexico part of that, and there’ll be significant while it’s more focused spend on hydrocarbon and exploration. It will receive the investment in the Gulf of Mexico and projects like Whale and other discoveries are still being progressed in the Gulf of Mexico even during the energy transition.

[Michael Blum:]

Great. I appreciate all the answers. Have a good weekend, everyone.

[Steve Ledbetter:]

Thanks a lot.

[Kevin Nichols:]

Thanks, Michael.

[Operator:]

Thank you. We have no further questions. I will now turn the call back over to Jamie Parker.

[Jamie Parker:]

Yes. Thank you very much for your interest in Shell Midstream. If you have any additional follow-up questions following today’s presentation, please feel free to call me directly. My contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines. Have a wonderful day.