Shell Midstream Partners, L.P.
Q2 2019 Earnings Call Transcript

Published:

  • Operator:
    Good morning. My name is Kevin and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2019 Shell Midstream Partners Earnings Conference Call. [Operator Instructions]I will now turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.
  • Jamie Parker:
    Thank you. Welcome to the second quarter earnings conference call for Shell Midstream Partners. With me today are Kevin Nichols, CEO; Shawn Carsten, CFO; and Steve Ledbetter, VP Commercial and Business Development.Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here, as well as in yesterday's press release and under Risk Factors in our filings with the SEC.Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and appendix one of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation.With that, I’ll turn the call over to Kevin Nichols.
  • Kevin Nichols:
    Thanks Jamie. Good morning, everyone. Thank you for joining me for the Shell Midstream Partners second quarter webcast.On today's call, I will take you through our second quarter performance. We will focus on our most recent acquisition. I’ll then speak about the results of Zydeco open season, and I’ll close with an update on our key strategic position in the Gulf of Mexico. I'll hand it over to Shawn after that, and he will walk you through the second quarter financials and provide you with updated guidance with regards to tropical storm Barry, which as you know impacted the Gulf of Mexico last month.So let’s get started. Starting with the onshore. Quarter-over-quarter results were largely driven by the increased distributions related to the Colonial and Explorer acquisition which closed earlier this June, and these are two of the premier refined products pipelines in the United states which combined deliver approximately 3 million barrels a day through a network of over 7,300 miles of pipe. And this represents roughly 21% of total U.S. refined products supply.Both Colonial and Explorer enjoy strategic advantages while serving key markets in the Midwest and the Northeast and these include access to advantage supply from the Gulf Coast and diversification of services like that of diluent on Explorer. And with this acquisition, Shell Midstream Partners has acquired all of the sponsors’ ownership interest in both of these companies.The acquisition was immediately accretive to unitholders completed in an attractive multiple of seven times forward forecasted EBITDA. This is yet another example of our ability to access high quality midstream assets from our sponsor, which enables us to deliver on our commitments.Now let me turn to Zydeco. As announced in June, we successfully completed the Zydeco open season, which resulted in the pipeline being fully subscribed. We are pleased to have demonstrated the competitiveness of the asset by matching the services of Zydeco with the marketplace and the needs of our customers.And in addition to Zydeco’s connectivity to key training hubs onshore, we expect Zydeco to play an important role in the evacuation of crude through an efficient and competitive export route via LOOP, which as of today is the only export hub capable of loading VLCCs.Our assets in this area are some of the most flexible and well positioned assets to take advantage of this dynamic marketplace as it unfolds. And as always, we will continue to evaluate new business opportunities in the Texas and Louisiana Gulf Coast to provide maximum optionality for our customers and long-term value to our unitholders.Switching to the offshore, a key differentiator for our partnership, we saw our corridor strategy continued to deliver value as volumes grew yet again in the second quarter, despite previously announced planned producer turnarounds.Our total volumes were 2.1 million barrels per day, up 8% from the prior quarter and we saw new production come online contributing to our growth story line. LLOG announced First Oil from Buckskin, which is expected to have peak production of 30,000 barrels per day connecting into the Poseidon System and in May, Shell announced the initial production from Appomattox, which is expected to have peak production of 175,000 barrels per day connecting into the Proteus and Endymion pipelines.Now this is exciting news as it opens up a new production frontier in the Gulf. As appraisal work continues on fields such as Rydberg, Vicksburg, Dover, Fort Sumter, all of which could tie into Appomattox in the future. Long-term I continue to remain bullish on the Gulf, as the opportunity funnel continues to be replenished.In addition to the previously announced Shell Vito project, two new projects took FID this quarter. VP announced the 50,000 barrels per day Phase 2 Thunder Horse expansion which will flow into Proteus and Endymion and just yesterday Shell announced the 35,000 barrels per day PowerNap development located in the Mars corridor. Along with Vito both of these projects are expected to be online by 2021 or in 2021As I've discussed in the past, producers are continuing to find innovative ways to accelerate production and drive down breakeven prices. In fact, Shell was able to accelerate the expected first oil date of PowerNap by two years and the expected breakeven price on the field is less than $35 per barrel.I continue to be encouraged by what the Gulf of Mexico holds for our partnership. The region remains competitive to the other producing basins and provides the types of crude that the refining industry needs. This combined with our strategic footprint and extensive operating experience leaves us well positioned for the future.So with that, I'll now turn the call over to Shawn to walk you through the financial performance for the quarter. Shawn?
  • Shawn Carsten:
    Thank Kevin.This quarter we again demonstrated our flexibility to meet our commitments to unitholders. Despite some headwinds, our unique access to our sponsors high quality midstream assets coupled with the diversified portfolio contributed to another strong quarter.So let me cover a few of our key financial metrics for the quarter. Our total revenue was $121 million, down about $10 million from the prior quarter. Now this was primarily related to lower Zydeco transportation revenue due to a third contract expiring in May, fewer deferred cash being utilized this quarter and finally planned producer turn arounds in our eastern corridor.As of June 30,the majority of Zydeco credits associated with the three expired contracts have now either been used or have expired. Our operating expenses were $73 million, an increase of about $7 million from the prior quarter. Now as expected, this increase was primarily related to higher project spend on Zydeco in our terminals, as we typically experienced higher spend in the second and the third quarters. All this was partially offset by a lower cost of goods sold on [indiscernible] oil and not having an asset retirement obligation adjustment as we had in the first quarter.Our income from equity investments was $80 million, up about $2 million from the first quarter, primarily driven by an additional interest we acquired in Colonial and Explorer and as a result of the recent transaction, Colonial and Explorer are now accounted for its equity method investments. For the quarter we recognize our share of income on these investments from the closing date of June 6.Dividend and other income were $12 million, down about $2 million for the quarter. Now again this difference is primarily related to Colonial and Explorer now being classified as equity method investments. This impact was partially offset by the receipt of the final [other] [ph] business interruption insurance related to a producer outage in 2017.In total, adjusted EBITDA attributable to the partnership was $187 million, up about $17 million from the prior quarter. And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $162 million. Our partnership declared a distribution of $0.43 per LP unit, representing a 3.6% increase over the prior quarter and all this resulted in a coverage ratio for the quarter of 1.2 times.So now let me move onto a few updates. With regard to tropical storm Barry, we experienced various degrees of volume impacts in and around our asset in the Gulf of Mexico and the Gulf Coast. We anticipate the impact to net income and cash available for distribution to be approximately between the range of $8 million to $10 million in the third quarter. Now while we do not suffer any material damage to our assets, the bulk of this impact is the result of producers shutting in production in advance of the storm.And also let me remind you the previously guided producer turnaround impacts in the Gulf. We now expect an impact of around $5 million for the second half of 2019 as some turnarounds expected in the third quarter have now been delayed until the fourth quarter.And finally in the CapEx space, we incurred $13 million in the second quarter, of which $8 million was related to growth capital. The growth capital is primarily related to continued expansion on the Permian gas gathering system and [Houma tanks] [ph].And now for the partnerships balance sheet and liquidity. As of June 30,the partnership had total debt outstanding of $2.7 billion, which equated to a debt to EBITDA ratio of 3.6 times based on an annualized Q2 adjusted EBITDA. We’re comfortable with our balance sheet which allows us flexibility as we continued to grow our business.So with that all of that, we will now take your questions. Operator?
  • Operator:
    [Operator Instructions] Our first question comes from Jeremy Tonet with JPMorgan.
  • Joe Martoglio:
    This is Joe on for Jeremy. First I wanted to ask about IDRs and still recognize that the waiver goes through 3Q, is it fair to think you guys would kind of as soon as the waiver expires want a solution in place and could you talk about how you're thinking about timing for that?
  • Kevin Nichols:
    I understand this is not a new question and that it’s on the minds of all of our investors as to what happens with regards to the IDRs. And frankly also, we haven't given guidance beyond 2019. So you're looking for guidance in 2020 and beyond.Specifically with regards to the IDRs, that’s the sponsor's decision. So at this time I'm not going to give guidance as to the timing or the decision or anything related to the IDRs. I will say that as soon as we have something to say in that space we will but I’ve no further guidance with regards to timing at this time.
  • Joe Martoglio:
    And then you talked a little bit about the Barry impact and turnaround in the Gulf but maybe could you kind of expand there and what type of - what should see for the fourth quarter there.
  • Kevin Nichols:
    Yes, so I think - if I understand your question it’s not so much the impact of Barry, if you do want to have some further detail or follow-up question I’ll ask Shawn to answer that but if you are asking about kind of future weather events in the Gulf of Mexico, look there's inherent risks to operating anywhere and of course in the Gulf of Mexico one of the risks is weather.I am not going to predict or forecast forward weather events, but I will say that I am confident that there's no operator operating in the Gulf of Mexico that has more capabilities, more expertise and knowledge of operating the Gulf than Shell. And I'd also like to remind everybody about the benefits of operating in the Gulf of Mexico which is a strategic advantage for our partnership.There is growth in the Gulf of Mexico and it aligns very nicely with our corridor strategy and our existing footprint. And I expect we’ll be able to continue to take advantage of that and capture that growth for little to no capital expenditure. And also we've been diversifying our portfolio to include things not just in the Gulf of Mexico, but elsewhere as an example the Colonial and Explorer acquisition that we did which further mitigates the risk across the portfolio.
  • Joe Martoglio:
    Okay, thank you I appreciate that and I appreciate the Gulf of Mexico growth. That's all from me.
  • Operator:
    [Operator Instructions] Our next question comes from Derek Walker with Bank of America.
  • Derek Walker:
    There is a couple from me. I appreciate the color and saw the impacts for 3Q. But maybe I know you don't give quarterly guidance, but perhaps should we see 3Q directionally above or below 2Q just given some of these impacts. And just how you’re seeing some of the volume growth as well.
  • Shawn Carsten:
    Thanks Derek, this is Shawn. So a couple of items I think the guidance hasn’t changed so we still continuing on plan for mid-teens growth in 2019. With regards to Q3 specifically we have an $8 million to $10 million impact from Barry after the tropical storm. And then also we have this $5 million turnaround that we thought was in going to be in Q3, some of that seems to be pushing into Q4. So I would expect the bulk of that would now hit in Q4 versus Q3.
  • Derek Walker:
    And then maybe just - Kevin you mentioned the IDR color, maybe I’ll ask you a little differently just given some recent sector transactions - that have been out there. Have you had conversations with Shell just given the, I guess, the recent transactions and just how that process may unfold remaining of the year?
  • Kevin Nichols:
    Yes, thanks, what we said in the past hasn't really changed and the activity and actions are the same. Shawn and I have continued conversation and dialogue and that flows both ways between the leadership of the company back up to the sponsor. The sponsor watches the marketplace and the segment they are well aware of what Phillips 66 has done or P66 PSXP and as well as other things that unfold.And I know this is really important to everyone and we've asked this question you’re looking for an answer here. I would also point to you though that in this period of time while you are waiting for this answer from the sponsor for us to communicate that, that we have seen strong sponsor support in the form of the waiver which are currently under. The recent transactions that, we've acquired, these high quality assets at very reasonable multiples.And then the sponsor being willing to take back units with these transactions. So as I would just say that we continue to have open dialogue and conversation they are well aware of what’s taken place in the marketplace.
  • Derek Walker:
    And maybe one last one from me, you mentioned that first oil on a couple of projects and some of the recent FIDs. Do you see anything from your end as far as whether it’s on Proteus, Endymion or Mars that you need do to receive these barrels or there is enough excess capacity there to just take this on it's not much from an operational perspective that you need to do?
  • Steven Ledbetter:
    Yes so, I’ll take that one. This is Steve Ledbetter, it is good to be with you all. I appreciate the question. What I’d say about our approach in the Gulf of Mexico is we continue to look at where we have any constraints and work towards de-contraining those effectively as the profiles continue to grow. At this point, we feel like we planned appropriately for the flows coming into Proteus and Endymion system.
  • Operator:
    Our next question comes from Shneur Gershuni with UBS.
  • Shneur Gershuni:
    I just wanted to circle back just to the IDR questions again, I am sure [indiscernible] all questions on it in general. But when we say that you're having conversations with the sponsor with respect to the IDRs, is it about which way to proceed with the IDRs as what premium to pay waiver extension or is there actually also part of the conversation that maybe you just [roll Shell back] [ph] into RDS?
  • Kevin Nichols:
    Thanks Shneur, this is Kevin. Look all options and things are under dialogue that’s not one that Shawn and I have actively had conversations around. I would tell you that as the sponsor looks back over the first five years of this entity, they are pleased with this performance. They are putting assets into this entity that are very strategic to the integrated value and performance of Shell in the United States. And we’re busy concentrating the midstream assets into one operating organization.So while I won’t give you guidance as to what the sponsor is going to do they take a very long-term view of this entity and playing in the space and that's not changed since the very first day that we went public.
  • Shneur Gershuni:
    So just to paraphrase the entity will continue to exist - what challenge really trying to figure out what they want from you on how investors can recognize the value and looking to add different options like you highlighted whether its IDR conversation or labors or kicking back works did I read that properly?
  • Kevin Nichols:
    Yes, so look I am not going to speak specifically for the sponsor concretely one way or another. I would say that RDS looks at this and looks at our strategy going forward is how do we win for the LP unitholders. How does RDS win as well and remember that the RDS owns a good chunk of the LP units and would like to see the stock price and the value grow just like the LP unitholders want?
  • Shawn Carsten:
    And Shneur I might add this is Shawn that - our sponsor work is around how do we make this MLP sustainable for the long run. So our hope is that once we have a few of our questions answered Kevin and I will be able to come out to the markets and give you kind of a better explanation about where it goes around.
  • Kevin Nichols:
    Yes, and I think to that point that’s a good point that you bring up Shawn. Well the IDR piece is a sponsor decision. Shawn and I and the leadership are busy putting together the holistic strategy for the entity going forward. So that we can kind of come back at the appropriate time and give you the guidance for the strategy of the entity.
  • Operator:
    Our next question comes from Selman Akyol with Stifel.
  • Selman Akyol:
    Let me start with a couple housekeeping and then may be larger one. So in Eastern Corridor you talked about the quarter being impacted by turnarounds have those ended in - have those sort of back up or is that some of the deferral you're seeing?
  • Kevin Nichols:
    So make sure I understand the question was the question around ongoing turnarounds or new emerging issues to?
  • Selman Akyol:
    Well just in the Eastern Corridor you guys referenced that volumes are lower due to turnaround and I am just kind of wondering if those complete is that part of what you see continuing into?
  • Kevin Nichols:
    Yes, so I would say that the turnaround work continues on schedule and it will extend into third quarter and then as mentioned earlier by Shawn the other turnaround activity we have some movement from third quarter to fourth quarter.
  • Selman Akyol:
    And then SG&A ticked up sequentially is there anything there anything unusual?
  • Kevin Nichols:
    Yes, nothing in particular I think it’s a little bit about some of the activity in the middle of the quarter for some of our assets, as well as some general corporate balance so nothing to read into that.
  • Selman Akyol:
    And then just kind of going back to your comments you guys are thinking about sort of holistic strategy and I guess when you think about the assets that you could acquire and I guess I'm not asking what is the sponsor necessarily want to drop down, but if you just on a blank piece of paper getting assets and you had your wish list, would you be looking for more onshore, more offshore, more pipelines, more terminals is there any sort of thoughts there?
  • Kevin Nichols:
    Yes, so thanks for that question. Yeah I can go back to our original markets data we did a couple of years ago. We look at things around a number of lenses, diversification is one. Diversification takes a number of forms, geographic, onshore, offshore, but also kind of a product types, crude oil products but also the types of commercial contracts, right, companies and entities that have upside growth like Amberjack and others that are very ratable and can provide ratable cash flow in fixed contracts like we have at the refinery gas.So you know we have a notional view at any moment in time as to what we would like to see given where we are in the markets and what's happening but I will tell you that as we see different things unfold back in shift, when the FERC made their announcement and there was some concerned around where will the FERC go.It made sense to add more things that work for regulated, so as we look at what the market is valuing and where we see the risk, we could diversify or change our view there but diversification is key on our strategy going forward.
  • Operator:
    Our next question comes from Gab Moreen with Mizuho,
  • Gab Moreen:
    Just to maybe a little bit of multifaceted question on Zydeco in the open season results. Can you maybe talk about sort of your medium to longer term view on the pipeline and the shifting dynamics there.I know that you went but there were some shorter-term contract renewals whether that was your decision, shipper decisions and then also whether or not there's a possibility to shift tariffs along the pipe, let's call it maybe in Louisiana market, where there may be higher demand for friend delivery to some other refiners and offshore ports in the area, so maybe if you could speak to that a little bit. I mean, aftermath of the open season?
  • Steve Ledbetter:
    Yes, thanks for the call, again this Steve Ledbetter, I am going to break the question just to make sure I answer on completely. Let me talk a little bit about our approach to the open season first and trying to give you a little color we cannot talk about the near, medium term.As you mentioned there's quite a bit of volatility still out there in terms of supply demand balances at various projects that are being announced will come to fruition and indeed our customers took a shorter-term view on that.But we have strong belief in the system and what it can do. The flexibility and the connectivity being connected to multiple training hubs, the refineries like and as well being an important piece have an efficient export route through the only functioning Deepwater VLCC capable hub.And we believe in our ability to demonstrate that was justified with us being the fully contract the system. If you move longer-term, we believe that our ability that continually demonstrate the capability allows us to play in this marketplace. But if you think if even in total around our asset footprint, we have quite a bit of flexibility in this area and we will be able to leverage that to match the needs of the customer for whatever may unfold in the marketplace in the future. There's probably pieces of that?
  • Gab Moreen:
    Yes, I was just wondering in terms of can you break down the pipeline a little further for example in terms of whether you see further demand, a greater demand on one piece of the pipe, whether its coming out of the open season or prospectively whether there’s the opportunity to shift tariffs higher for example, down the line if that things are happening?
  • Shawn Carsten:
    Okay. Appreciate that. So the way we approach this in terms of building the right value proposition matching to what our shippers needed what indeed flexibility. Whether they wanted to move to important trading hubs such as St. James or have a refinery need, who or have the optionality to play in the export market, that’s the way we frame the terms of the open season and was part of our successful outcome. And we see that being a valuable proposition move into the future, we continued to have conversations with the current shippers about that.
  • Kevin Nichols:
    This is Kevin. One thing I might add is a demonstrable piece of proof to that and our flexibility is you know, if I rewind a few years ago, the market was concerned about the ability to get to St. James and we’re being constrained we were over nominated on our 18-inch.And we were able to look at pieces that we had and put a solution in space against the backdrop of competitive offer or projects that were announced and create a winning solution by offering an additional route on Zydeco and putting a tariff in place on Zydeco through LOOP and little cap up in the St. James. So that's just an example of how we can work with the different pieces of the system to create value.
  • Gab Moreen:
    And I guess maybe one last on Zydeco I decided to hop on it so much. Would ever be a circumstance where you just say, hey look we don't want to be contracted here we’re just kind of take the risk and go on spot volumes or is your viewpoint hey you much rather take contracts here even if they are shorter term and see what the - my spot market may end up kind of giving you is that make sense?
  • Kevin Nichols:
    Yes, I think it’s a fair question and it was also part of our evaluation of how we wanted to position. The best use of the assets for ultimately meeting the needs of the customers and driving the most value for the unitholders. And as the market continues to unfold, we will again evaluate those opportunities and decide whether it make sense and we get the fair value that we believe this is some offers and can put that in terms of the contract when we decide to run in the spot market.
  • Operator:
    Thank you. We have no further questions, I will now turn the call back over to Jamie Parker.
  • Jamie Parker:
    Thank you very much for your interest in Shell Midstream Partners today. If you have any additional follow-up questions after today's presentation, please feel free to call me directly. My contact information can be found in the presentation materials as well as, on our website shellmidstreampartners.com. So this concludes our call for today, and have a great weekend. Goodbye.
  • Operator:
    Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.