Shell Midstream Partners, L.P.
Q3 2019 Earnings Call Transcript

Published: 2 Nov 2019

[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 Third Quarter 2019 Shell Midstream Partners Earnings Call. At this time, all participants are in a listen-only mode. [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 third 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 1 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 will turn the call over to Kevin Nichols.

[Kevin Nichols:]

Thanks, Jamie. Good morning, everyone and thank you for joining me for the Shell Midstream Partners third quarter webcast. On today’s call, I will discuss a few of the highlights for the quarter and as always, I will turn it over to Shawn to walk you through our financials.I am pleased with our third quarter performance as Shell Midstream Partners generated $141 million of net income, up from $115 million in the second quarter. Total cash available for distribution was $153 million, down $9 million from the prior quarter primarily due to the one-time impact of Hurricane Barry. Our assets continue to demonstrate resilience and we continue to move our commitments to unitholders as evidenced by our distribution for the third quarter. This puts us well on our way to delivering our mid-teens distribution growth engines for 2019.Across our portfolio, demand remains strong in and around our major onshore and offshore systems. As I look at the onshore systems, quarter-over-quarter volumes increased and were largely driven by the Zydeco system as this was the first full quarter with the new contracts in place. The remaining onshore pipelines and terminals continue to deliver in line with the prior quarter.If I switch to look at the offshore, we continue to see strong activity in and around our footprint. Across our major corridors, we continue to deliver value. Volumes were roughly even with prior quarter despite the previously mentioned impact from Hurricane Barry. As you can see on the slide, we increased on Proteus and Endymion as the Appomattox fields continue to ramp up. And volumes were in line with the prior quarter on Amberjack and in the Eastern corridor, while we saw slightly lower volumes on Mars and Auger mainly related to Hurricane Barry. It is important to note however that we did not experience material damage to any of our assets as a result of this hurricane. And volumes ran back up to normal as soon as the producers restart and all impacts were within the guidance that we provided you last quarter.Looking longer term, I remain bullish on the Gulf of Mexico. Let me pause and focus for a moment on the Mars corridor. We continue to see high utilization rates with the quarter running at an average of over 90% of capacity this past year. And with the anticipated new volumes from fields such as Vito, PowerNap and other nearby prospects, we expect Mars to be reaching capacity. To meet this increased expected demand and other opportunities that we see, we recently announced a solicitation of interest for an expansion offering priority service on the new incremental capacity for Mars. This demonstrates yet again that our corridor strategy is working, providing the partnership with cost effective organic growth opportunities and we remain well positioned to capture the growth in the Gulf of Mexico.And finally, before I turn it over to Shawn, let me touch on IDRs. I understand this is an important topic to you, our investors and what I can offer is that our sponsor is aware of the market sentiment around IDRs and discussions are ongoing. As a reminder, the IDR waiver that we have put in place three quarters ago continues to provide benefits to the partnership through this quarter. And as soon as I have more guidance, I will let you know. But let me finish with this, we continue to have strong sponsor support and Shell believes in the partnership and the value that it provides.So with that, let me turn the call over to Shawn to walk you through the financial performance of the quarter. Shawn?

[Shawn Carsten:]

Thanks, Kevin. As I reflect on the full quarter results, I am encouraged that our diversified portfolio has delivered the expected returns for our partnership, but let me cover a few of our key financial metrics for the quarter.Our total revenue was $125 million, up about $4 million from the prior quarter. Now, this is primarily related to higher Zydeco transportation revenues due to new contracts being in place for a full quarter along with higher allowance oil sales, which compared – when compared to the second quarter. Our operating expenses were $76 million, an increase of $2 million from the prior quarter. As expected, this increase is related to seasonal project spends in our terminals as well as higher cost of goods sold for the allowance oil. Income from equity investments was $115 million, up $35 million from the second quarter. This was mostly driven by a full quarter’s income related to the additional interest we acquired in Colonial and Explorer. And other income was $8 million, down about $4 million primarily related to the final Auger business interruption insurance payment that we received in the second quarter. In total, adjusted EBITDA attributable to the partnership was $186 million, down about $1 million from the prior quarter. And after interest expense, maintenance capital and other adjustments, total cash available for distribution was $153 million. Our partnership declared a distribution of $0.445 per LP unit. This represented a 3.5% increase over the prior quarter. And all this resulted in a coverage ratio for the quarter of 1.1x.But now, let me move on to a few updates. First, let me remind you of the previously guided producer turnaround impacts in the Gulf. We expect an impact of around $5 million in the fourth quarter as some turnarounds previously planned for Q3 were delayed to Q4. Also in the fourth quarter, we expect to receive approximately $9 million from Shell Pipeline Company. And this was related to the agreement entered into when we acquired an additional interest in Mars in 2015. At the time of that transaction, the assets we are experiencing – I think we are experiencing historic highs on storage revenue. So we – the partnership negotiated the ability to recoup certain amounts from Shell Pipeline as storage fees did not meet certain financial thresholds. Now, subsequent to the transaction, storage revenues did revert to long-term trends integrating the settlement with our sponsor. And finally, in the CapEx phase we incurred $11 million in the third quarter, of which $6 million was related to growth capital. And our growth capital is primarily in the continued expansion of the Permian gas gathering system. And now, for the partnership’s balance sheet and liquidity, as of September 30, the partnership had total debt outstanding of $2.7 billion, which equates to adjusted EBITDA ratio of 3.6x based on annualized Q3 adjusted EBITDA. We are comfortable with our balance sheet which will allow us flexibility to continue to grow our business.So, with that, we will now take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Shneur Gershuni with UBS.

[Shneur Gershuni:]

Hi, good morning guys. Maybe we can sort of touch on the IDRs that you sort of talked about in your prepared remarks, it’s obviously taking longer than what’s been a typical practice within the industry. So I really kind of have two questions with respect to the IDRs before getting into growth. The first is can you concretely confirm that there will be some sort of resolution in one form or another before the next declaration?

[Kevin Nichols:]

Yes, thank you. Appreciate the question. Understand everyone’s desire to have some directional on this. At this time, I am not going to provide a timeline or date. Certainly, the IDRs and the approach to IDRs is a sponsor decision, but broader than that, the management teams looked at the strategy of the business and other forward guidance that we will be looking to provide and when we put that holistic strategy together, I will come back and provide that when ready.

[Shneur Gershuni:]

Okay. So absent that, when you think about the option is that you are putting together for a holistic strategy, what options are you considering and scenarios that you are running and evaluating? Are you considering a C-Corp conversion or you just thinking more about an IDR conversion versus an extension of waivers?

[Kevin Nichols:]

Yes. So, you have a couple of things mixed in there. With regards to the approach to the IDRs, I am not going to comment on the various different things that are ongoing in discussions or the sponsors considering. With regards to the forward guidance for the strategy of the company, I think you can look for similar type guidance that we have provided in the past and that would include things like distribution growth rates funding strategy, update on the runway based business growth and those types of sets of guidance.

[Shneur Gershuni:]

Okay. Maybe transitioning a little bit here, you mentioned in prior calls about the fact that Shell-X growth oriented MLP and that you have a line of sight to the growth. Can you walk us through how that will materialize with respect to Shell-X, kind of given the line of sight that you have and I know that you mentioned Mars, for example, but what kind of EBITDA uplift are you kind of thinking that this line of sight actually does for EBITDA? As I think on a 2 to 3-year basis versus now, is it up 30%, 40%, how you define as line of sight of growth?

[Kevin Nichols:]

Yes, I appreciate that. I think you are looking for clarity with regards to the go forward strategy 2020 and beyond. We are not going to provide the specific forward guidance at this time. With regards to the types of growth opportunities, I mean, one of them is example of it today is the margin expansion. We have seen organic growth opportunities in the offshore with new fields connecting into our existing systems. And we have said all along that Shell continues to invest in the United States. It’s the single largest investments place for Royal Dutch Shell. And with that there is infrastructure opportunities and needs that will come with that similar to Matics that we recently commissioned the Falcon pipeline that we are building and other opportunities. So those are the kinds of things that we will have in the future, but giving specific guidance at this time, I will just refer you back to when we are ready we will give that holistic strategy.

[Shneur Gershuni:]

Okay. So, I guess we are waiting for a lot at this point. That’s all of my questions. Thank you very much.

[Kevin Nichols:]

Thank you.

[Operator:]

Our next question comes from Theresa Chen with Barclays.

[Kevin Nichols:]

Hey, Theresa. Good morning.

[Theresa Chen:]

Good morning, Kevin. Thank you for taking my questions. So I would like to dig a little deeper into the Mars expansion, do you see this as kind of like a first inning of many expansions to your systems in the GOM given that continues to be a bright spot fundamentally looking past at the hurricane inventory or is this just more like a one-off thing to service the needs of the producers there?

[Kevin Nichols:]

Yes, thanks. Today, I have Steve Ledbetter here, who is our VP of Commercials. So maybe Steve you can kind of talk to the goal.

[Steve Ledbetter:]

Yes, sure. So, thanks for the – the question, Theresa, again this is Steve Ledbetter, Vice President of Commercial and I am happy to be here with you this morning. The question was really around a one-time element. This being the expansion, I think the way I characterize this is we continue to be very bullish about the golf and our corridor strategy is working and this is one example were we look to provide sustainable solutions or producer needs as we continue to see growth opportunities out there. So while I won’t characterize, it will be others we continue to look at these opportunities and we will announce to the market at the present time or at the time that we have good confidence about them.

[Theresa Chen:]

Thank you. And for this one particular do you have any sort of certain ranges in mind in terms of cost and economics.

[Kevin Nichols:]

Yes, so I can appreciate the desire to understand can of the structure and the financial outcome of the expansion, but what I would say is where are happy with where are in the solicitation of interest, but that is going to somewhat influence not only the approach we take to the expansion, but also likely the outcomes? And at this point, we prepared not to give guidance around that. What I will also say is given our corridor and the way we construct the commercial contracts we are able to de-risk the investment that insures, opportunities that we take on are automatically a creative partnership.

[Theresa Chen:]

Thank you very much.

[Operator:]

[Operator Instructions] Our next question comes for Jeremy Tonet from JPMorgan.

[Kevin Nichols:]

Hey, Jeremy.

[Jeremy Tonet:]

Hi, good morning. Appreciate that. Maybe not in a position right now to provide too much forward guidance but just wanted to touch on the philosophy for distribution growth in general. It seems like with Shell-X is having almost a 9% yield here. It seems like distribution growth really only benefits the IDRs at this stage. Just wondering what you can say as far as philosophically thoughts about returning capital?

[Kevin Nichols:]

Yes, thank you. And again, I appreciate the desire for folks to have forward-looking guidance, growth rate being one of those. I’m not going to be able to provide that today or even give an indication of where we ahead with that I think it’s better answered when we come back with the holistic strategy, which will take into consideration, current market sentiment, current market conditions and the base business and what we see going forward. We have a really diversified set of assets in the partnership already today, healthy base business, we have a strong Gulf of Mexico business that is capturing organic growth for little to no capital investment and we have flexibility in our balance sheet to do different things going forward. So I am confident that what I will say is we are going to be confident in delivering our promise to the marketplace and our distribution growth through 2019. And I’ll just ask that you be patient just a little bit longer until we can give you that holistic strategy.

[Shawn Carsten:]

And Jeremy, I might add, this is Shawn, just that as we – as always, the management team is committed to reach the guidance we provided the markets in the past, but that’s a long-term gain for this MLP is around creating a long-term sustainable entity for all of our unit-holders. And so we want to make sure that we have a cohesive holistic strategy that allowed that wheel to turnaround.

[Jeremy Tonet:]

That’s all for me. Thanks for taking my question.

[Operator:]

Our next question comes from Derek Walker with Bank of America.

[Kevin Nichols:]

Hey, Derek.

[Derek Walker:]

Hey, good morning guys. Just a quick one on Mars, Steve, I know you gave us a little bit of color there, but can you give me probably a little bit of scope, is it just pumps in DRAs I think before you said it wasn’t necessarily needed for – necessarily a new pipe around there, but just any sort of thoughts around what operationally you think that expansion could be?

[Steve Ledbetter:]

Yes, thanks for the question. What we are looking to do right now capacity wise is we are offering priority service around 65,000 barrels a day. And you are correct, this is – the scope of this does include some pumps as well as some piping modifications both top side and subsea. It is not building a large trunk line from the beach to the platform, which the outcome of that gives kind of win-win solutions for both the producers as well as the partnership as well.

[Derek Walker:]

Got it. And then on Slide 6 just that – is that really just the forecast there, is that really just coming from Vito and PowerNap, is there any other sort of elements there that we should be thinking about that’s driving that growth?

[Steve Ledbetter:]

I am sorry can you go ahead and repeat the question. I am not sure I didn’t fully understood what you asked?

[Derek Walker:]

Yes, there is – on Slide 6 there is an estimated throughput and just wanted to see what’s driving that forecast? Is it just coming from Vito and PowerNap or is there anything else that we should be thinking about?

[Steve Ledbetter:]

Yes. So these are with the currently sanctioned projects that will flow into our corridor.

[Derek Walker:]

Okay.

[Steve Ledbetter:]

And again, as you could look across the landscape, we’re in active conversations and continue to evaluate opportunities as we grow in our position in the Gulf.

[Derek Walker:]

Okay, great. And then maybe just a quick one on Anadarko, Kevin, now that you have one quarter under your belt, with the new contracts. Can you just kind of talk a little bit around how you are viewing Anadarko’s competitive dynamics given sort of the recent trends here that we are seeing?

[Kevin Nichols:]

Yes, let me start and then I’ll turn it over to Steve who manages the commercial aspect of it and the asset management. So I think the contracts and the business that we envisioned when we renegotiated those contracts and signed up customers are unfolding exactly how we expected. So the volumes are flowing. The system is full and of course, part of that is building an export highway that connects into LOOP as well as connected to the other refining centers, but maybe if there’s any more detail I’ll ask Steve.

[Steve Ledbetter:]

No, I don’t think there is too much more color, Kevin, but I just say that we are pleased with the outcome of that strategy and we are in active discussions right now about how we ensured we optimize what we can deliver and that is about being competitive, and efficient, and confident in flexibility through that route, so pretty pleased with where we are today.

[Derek Walker:]

Got it. Thank you. That’s it for me.

[Kevin Nichols:]

Thanks.

[Operator:]

Our next question comes from Selman Akyol with Stifel.

[Selman Akyol:]

Yes, thank you. Good morning. And I appreciate your comments in terms of delivering on the guidance that you have laid out in terms of distribution growth for this year and you are going to hit that. I think previously hadn’t you also said that you wanted – your distribution growth wanted to be in the top quartile for growth going forward? And I am just wondering is there any changes to that sort of longer term outlook?

[Kevin Nichols:]

Yes. First and foremost, you are right, delivery in the mid-teens distribution growth for 2019, I stand or we stand behind that. With regards to top quartile or where we want to position that distribution growth going forward, we are going to factor in all of the current market conditions, peers what our growth opportunities are going forward and we’ll build that into our holistic strategy. So I won’t update that guidance at this time.

[Selman Akyol:]

Okay, thank you.

[Operator:]

Our next question comes from Ryan Levine with Citi.

[Ryan Levine:]

Good morning. Understanding you want to optimize the IDR decision, are there any additional drop-down candidates that have become ready to drop in the last quarter that help in that process? And is that a key consideration in the timing of any decision making?

[Kevin Nichols:]

Yes. So again, I am not going to give forward guidance to drops or what will be a component of that strategy going forward. As far as readiness of asset, well that is a strength where we are uniquely positioned with our sponsor Shell. As you’ve seen in the past but high-quality assets that we have been able to acquire, they underpin significant integrated value for Shell. Their mainstream, midstream assets of a really high-caliber and we’ve talked to our runway before and these types of assets on the runway had not changed. So we have a quality set of assets. My team and organization continues to prepare a suite of assets that we could have available for us to execute on any strategy that we put in place.

[Shawn Carsten:]

And longer term, Ryan, this is Shawn. I’d also highlight that just has been discussed at Shell’s Management Day, there’s about $10 billion going into the U.S., so roughly 40% of the group’s capital investment is going into the U.S. So as new investment comes in new infrastructure goes along with that. So our runway continues to grow. So for longer-term, we are very comfortable, we have lots of assets to talk about.

[Kevin Nichols:]

Well, I would add one more component to that is that we have flexibility, has been demonstrated in the past that we have multiple different ways that we can access that runway.

[Ryan Levine:]

I appreciate the color. I guess one follow-up, so you mentioned that your team is working to ready those assets. Are there any challenges in that readying process whether it’s accounting or elsewhere that could complicate any future drops?

[Kevin Nichols:]

Nothing out of the ordinary, it’s what we have always been facing. In some cases you have to carve-out and put some financials behind them, but nothing has changed from our ability to prepare assets.

[Ryan Levine:]

Okay, I appreciate that. Thank you.

[Operator:]

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

[Jamie Parker:]

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

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.