Shell Midstream Partners, L.P.
Q1 2017 Earnings Call Transcript

Published:

  • Operator:
    Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2017 Shell Midstream Partners Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's program maybe recorded. I would now like to turn the conference call over to Courtney Selinidis, Investor Relations Officer. You may begin your conference.
  • Courtney Selinidis:
    Thank you. Welcome to the first quarter earnings conference call for Shell Midstream Partners. With me today are John Hollowell, CEO of Shell Midstream Partners; Shawn Carsten, CFO; and Kevin Nichols, Vice President, Commercial. The presentation materials shared this morning can be found on our Web site, shellmidstreampartners.com, under the Events & Conferences section. Slide two 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 this morning'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 John Hollowell.
  • John Hollowell:
    Thank you, Courtney, and good morning, everyone. Our business continued to deliver strong results as we execute against our strategy to build and grow a mainstream/midstream portfolio of assets. In the first quarter of 2017, Shell Midstream Partners generated $70.8 million of net income, up about $1 million from the fourth quarter. Total cash average for distribution was $90.5 million, which was an increase of $7.8 million or 9% from the prior quarter. Shawn will walk through the financial results later in greater detail in the presentation. I want to start off today's conversation by discussing safety. And as I have said before, safety is a value to Shell and I'm committed to working in ways that result in no actions to people, and no leaks from our assets. And I'm pleased to report that we are off to a good start in 2017. I will spend some time this year visiting some of our field locations. We will have an opportunity to discuss our recent safety trends and set expectations for further safety in premise in 2017 with our frontline staff. It's always a pleasure to go to the field and I always enjoy these engagements. Next week, we are holding our Annual Field Supervisor Conference in Lake Charles Louisiana, and I will have a chance to attend the conference along with students [ph] from each of our assets across Shell Midstream Partners and Shell Pipeline Company. We have a session planned [ph] and we will continue to learn from each other how we can improve our collective performance in areas of personnel safety, process safety, and driving safety. And I look forward to the event, because I always want these type of sessions about how to be a better leader for safety. Now let's move to recent activities. As announced this morning, Shell Midstream Partners entered into an agreement to purchase the Delta and Na Kika pipelines from Shell Pipeline Company. And the refinery gets pipelines from Shell Chemical for $630 million. The purchase price represents an approximate 8.4 times multiple of the forecasted net 12 months of adjusted EBITDA and is expected to be immediately accretive to the unitholders. The partnership will fund the acquisition with a combination of cash on hand and borrowings under our existing credit facilities, which was the most prudent form of funding for this transaction. Since we lost the MLP, we have focused on growing our cash flow base and increase the materiality of our business. We've done that by acquiring assets from Shell Pipeline Company, which is a wholly-owned subsidiary of Royal Dutch Shell, and which we acquired about $2.3 billion of assets since 2015. Now, each Shell Pipeline asset is a business in its own right with significant third-party volumes, credit-worthy customers, and stable fee-based cash flow. So, these assets made a lot of sense as the first to be acquired by the MLP. And of course, we still have a long runway of assets remain at Shell Pipeline that are attracted to Shell Midstream Partners, and will continue to be an important part of our drop-down strategy as we move forward. But today, we achieved an important milestone as we mature the MLP. The acquisition of the Refinery Gas Pipelines is important, because this is the first drop-down from outside of Shell Pipeline Company signaling the next phase of our strategy to acquire assets from the larger Shell portfolio. It highlights the expense of sort of assets at Shell to eventually make their way into the MLP, and it deepens our already-robust portfolio of assets onshore. Now, Refinery Gas Pipelines include a network of 100 miles of pipe connecting Shell's chemical sites to multiple refineries along the Gulf Coast. And importantly, as part of this acquisition, Shell Chemical has committed to use these assets under our long-term contract with [indiscernible] which provides long-term stable cash flows to Shell Midstream Partners and also continues to signal strong support from our sponsor. In addition to the acquisition from Shell Chemicals, we purchased two pipelines that now complete the Eastern corridor connecting offshore production to key onshore markets. The Delta pipeline has a capacity of over 400,000 barrels per day and aggregate volumes from five offshore pipelines including Shell Midstream Partners, Odyssey Pipeline, and the newly acquired Na Kika pipeline. Delta delivers volumes into Shell's Norco refinery and the Phillips Alliance Refinery as well as into key trading hubs at Chevron's Empire Terminal and Zydeco's Houma Terminal. The Na Kika pipeline is anchored by the Na Kika platform which serves as a host to eight different subsea fields that connects to the Delta Pipeline at Main Pass 69, the pipeline is about 75 miles in length with the 160,000 barrels per day of total capacity. As we discussed previously, the Eastern Gulf of Mexico is a highly active for upstream activity. So this acquisition positioned us to capture future growth in and around the corridor. Now turning to the operational results of the quarter, across our portfolio, overall operation results were stable quarter-over-quarter on the volumes basis versus the fourth quarter, there are three assets I'd like to discuss. Throughput on margins up over 10% from the fourth quarter and this marks the first straight quarter of increasing underlying performance on the Mars system and demonstrates the resiliency of our corridor strategy in the Gulf of Mexico. The increase in throughput volume is related to the continued ramp-up of production from the connecting Amberjack pipeline and a new well from the Olympus platform that came online during the fourth quarter. In Auger, volumes were slightly down due to ongoing market dynamics and well issues for connecting producers. And at Zydeco committed volume was slightly down quarter-over-quarter but remember Lower Zydeco volume did not impact cash provided for distribution given the existing take or pay contracts in place. Now looking ahead to Q2, there are a couple of things we'd like to highlight. We recently closed a transaction to divest the small segment of Zydeco pipeline in connection with the larger Motiva JV separation; earlier this year, our sponsor of course on the interest to divest a 5.5 mile segment at Zydeco which connects the Port Neches Terminal to the Port Arthur Refinery. We determine that the segment was not strategic to the overall Zydeco system and as a result we were able to negotiate favorable terms for the sale which generated good value for the unitholders. The total transaction price was $21 million which will be reflected in the second quarter results. In addition we're anticipating some maintenance activity during the second quarter that's worth noting. As we've seen in previous years, planned maintenance activity tends to be concentrated during the summer months. On our Auger system two connected platforms are currently scheduled for producer turnarounds that could last up to 45 days each. Now this will result in a revenue impact as volume is expected to be about 60,000 barrels per day lower than the first quarter. In addition, several maintenance projects at Zydeco are scheduled to occur in the second quarter with total forecast to spend of about $10 million up, $5.5 million from the first quarter. So in total, the maintenance activity at Zydeco, the producer turnaround activity affecting Auger volumes and other small maintenance projects is expected to have a combined impact of $9 million to $12 million to cash for distribution compared to the first quarter. Now I want to make sure it's clear that this does not change our previously announced maintenance budget and the spin is managed well within our existing distribution coverage. With that, I will turn the call over to Shawn to walk you through the financials for the quarter.
  • Shawn Carsten:
    Thanks, John, and good morning everyone. This is my first quarterly earnings announcement since transitioning with Susan earlier this year and I'm of course very excited to be joining John and his team as we continue to grow Shell Midstream Partners and deliver against our strategy. In the first quarter, net income attributable to the partnership was up 2% from the fourth quarter primarily driven by strong storage volumes at Mars. Revenue for the period was $70.2 million down about 7% from the prior quarter, now as John mentioned earlier Zydeco committed volumes were lower this quarter which resulted in an increase in deferred revenue. The resulting credit build-up from shipments was about $10 million. This amount is reflected as an add-back to cash available for distribution. Net of credits used or expired within the quarter. Income from equity investments was $38.7 million compared to $30.9 million in the previous quarter up about 25% primarily due to higher storage revenue and ramp up of new wells on our Mars system, however shippers begin to drawdown on inventory in March, so storage revenue is expected to be lower in Q2 based on current forecasts. At Colonial, quarterly dividends were more aligned with this historic performance which is about $6 million up about $3 million from the fourth quarter. Total adjusted EBITDA attributable to the partnership was $86.6 million up $2.3 million or 3% from the fourth quarter. Total cash available for distribution was $90.5 million after adjustments for interest, volume deficiency payments and net maintenance capital expenditures. The partnership declared a distribution of $0.291 per LP unit for the first quarter, this was a 5.1% increase over the prior quarters distribution, 24% higher than the first quarter of 2016 and almost 80% above the minimum quarterly distribution. The resulting distribution coverage ratio for the quarter was 1.4 times. This distribution was in line with previously communicated guidance to deliver distribution growth of at least 20% CAGR through 2018. So finally let me close by discussing the partnerships balance sheet and liquidity; at the end of the first quarter, the partnership at total cash and cash equivalents of $155 million and total debt outstanding of $686 million. On March 1, our partnership entered into a five year fixed rate $600 million debt facility with our sponsor. So at the end of the first quarter, total equality available to the partnership was approximately $858 million. And with our most recent acquisition on a pro forma basis the partnership debt-to-EBITDA will be approximately 3.1 times which remains well within our targeted leverage ratios. And with that, I'll turn the call back over to John for some closing remarks.
  • John Hollowell:
    Thanks, Shawn. In today's presentation Shawn now covered three important points, we continue to build and grow a mainstream/midstream portfolio of assets that delivers stable, valuable and predictable cash flows and this is evidenced by another quarter of positive results both financially and operationally. The acquisitions from Shell Chemical signals a move to the next phase of our dropdown strategy opening up the full opportunity set of our runway which is the single most important differentiator for Shell Midstream Partners. And final, we are in a diversified portfolio of assets both on shore and offshore and refiner gas pipelines is a great addition to our highly robust onshore portfolio and it's well aligned with our strategy to maintain a balance asset base to create an even stronger MLP for the future. With that, let me open up the call for your questions.
  • Operator:
    [Operator Instructions] Our first question comes from the line of Jeremy Tonet from JPMorgan. Your question, please.
  • Unidentified Analyst:
    Good morning, this is Bill on for Jeremy.
  • John Hollowell:
    Hi, good morning.
  • Unidentified Analyst:
    Good morning. Could you provide any additional color on Gulf of Mexico activity for the rest of 2017 and 2018 in terms of any wells or tiebacks that will come online and [indiscernible] on your pipeline?
  • John Hollowell:
    Let me start, and then I will ask Kevin to come and add some color to the details. We continue to be encouraged by the activity in the Gulf of Mexico in and around our existing assets and that activity is characterized what you say as tiebacks et cetera, we continue to see ramp up of volumes as I mentioned earlier on Amberjack due to positives they have been started up previously which is always good and those continue to be active in the Eastern Corridor but maybe Kevin shed a little bit more color on some specific projects that we're looking to be bringing to the system here in the next 12 to 18 months.
  • Kevin Nichols:
    Yes I will start, thank you, John. First of all with the assets that we're dropping at this time, we look at those assets and we see some growth on those assets in the near term, focus on Na Kika there are couple of fields and some new business that will be coming on, [indiscernible] North Kepler will go into Na Kika which will ultimately flow into the Delta system as well and we're looking at some volume coming from Crown and Anchor and Horn Mountain Deep which are fields that producers are looking to bring on and flow new business to. So we think that we will continue to see those volumes grow up of these assets in an area that's a growth area for the Eastern part of Gulf of Mexico. I will also probably note that the Gulf of Mexico just reached an all time high production in 2017 and public sources are estimating that high to continue to grow and reach a new all time high in 2018 so for the near term the Gulf of Mexico is very robust and like John said existing businesses connected to pipes continue to grow and bring on additional wells. I guess my final comment with there would be that producers are finding new ways to lower their breakeven cost in these different ways to tie new business back to existing infrastructure. We have data points that are showing the tiebacks can be some $20 breakeven and even some of these fit for purpose platforms like Delta House which was connected to Odyssey have a breakeven point below $27.
  • John Hollowell:
    Thanks. Kevin, I'll also add to all this activity in and around existing platforms is good for us because it really alliance and integrates well with our corridor strategy in the Gulf of Mexico and it really results in an essential free growth so, all these tie-backs and development tie-back existing platform or existing platforms which are connected to our existing corridor systems so growth is without CapEx. Thanks Bill.
  • Unidentified Analyst:
    Thanks. That's very helpful and then one more for me any update to the leverage target falling the drop and how do you think about funding for the future cut downs.
  • Kevin Nichols:
    John, you want to take that?
  • John Hollowell:
    Sure, so thanks Bill so, I think when we think about our funding for future dropdowns look we have a lot of options and our sponsors very supportive of us and you are one of the benefits is really that we can, we can you know have a conservative balance sheet allows us to work with whatever the market offers us and if we look we thought that cash and depth it was a better choice, Which is why we've.
  • Kevin Nichols:
    And our leverage ratio for debt is approaching.
  • John Hollowell:
    3.1 our pro forma basis.
  • Kevin Nichols:
    But we're still got some room basis on what, how we talk about the upper limits of what we're.
  • John Hollowell:
    Absolutely.
  • Unidentified Analyst:
    Thanks very much. That's it for me.
  • Operator:
    Thank you. Our next question comes from the line of Brian Zarahn from Mizuho. Your question please.
  • Brian Zarahn:
    Good morning.
  • John Hollowell:
    Good morning Brian.
  • Brian Zarahn:
    I guess, I'll stay on the topic of the dropdown can you elaborate a bit on the cash flow mix onshore versus offshore.
  • John Hollowell:
    Yes, Brian when you look at the EBITDA associated with the drop it's just more towards refinery gas pipelines than it is toward the offshore assets so, the refinery gas pipelines as I said an important drop down source we're really excited about the fact that, we've now reached out into the other areas of Shell signaling as we talked to you many times going to the extended reach portion of our strategy. And I'm happy to see it happen I'm glad to see the impact that will have on our performance going forward and also add to our portfolio on shore and diversified our portfolio even more so, the lot of things like about the refinery gas pipelines from a strategic standpoint as well from a portfolio standpoint.
  • Brian Zarahn:
    I guess on the refinery gas pipeline is there, on the pipeline is there supported by contracts do you elaborate bit on duration and is most of the expected cash flow contracted or how should we think about that.
  • John Hollowell:
    Yes, Brian we don't talk about the term link of contract but the need to say they are long term contracts would take a paper vision so this goes a long led to securing the cash flow for a long period of time. And also, with Shell chemical coming forward and that and we get were rotten at the arrangement that we had I think it is another sign of strong sponsor support as it relates to our drops and reaching into the other business at Shell.
  • Brian Zarahn:
    And then how should we think about maintenance CapEx for the dropdown.
  • John Hollowell:
    Maintenance CapEx for the dropdown Brian as far as the offshore systems go it's not too similar from the other offshore systems I think we've given you guys balance of around 5% EBITDA the good number to use refinery gas pipelines could actually be lower than that. I'm not anticipate lot of maintenance CapEx associated with those over time and it wouldn't on my mind be is staying as some of the offshore stuff so, I'd say it's a lower number for maintenance CapEx associated with refinery gas.
  • Brian Zarahn:
    And then for refinery gas pipelines any potential related organic opportunities.
  • John Hollowell:
    Well, the big parts are connected to several refineries and they supplied the OP gas his feedstock to the crackers and these pipelines are sufficient for what chemicals needs in order for feedstock for the crackers or the repairs that as it is today.
  • Brian Zarahn:
    And then last one for me, should we think that the next drop is should be similar, roughly similar in size to this one to get to on your target for your Objective.
  • John Hollowell:
    You still want to know what the final drop size would be but caution people did not necessarily take drop, couple drop here and divided by forward to get to two years where we're looking at our asset base now deciding which assets to drop and how to put it there we are on scheduled though to deliver the $2.4 billion to $2.5 billion that we have in our growth plans through 2018.
  • Brian Zarahn:
    Thank you. Operator Thank you. Our next question comes from the line of Selman Akyol from Stifel. Your question please.
  • Selman Akyol:
    Good morning. Couple quick ones for me; first of all, in your prepared comments you talked about where you said there was some well issues, could you elaborate, maybe how long those issues are going to take and kind of what you see on a go forward basis?
  • Kevin Nichols:
    Yes, this is Kevin so, the well issues have been resolved I mean there's some work over the producers are doing on wells and such they're played into the performance of Augur and the volume looking back I think John signaled in quarter two, there are some planned turnaround by producers on augur for their production platforms and that's going to lead to some lower tariffs revenue in the second quarter while those turnarounds are ongoing.
  • John Hollowell:
    But the well issues have been solved and when they come back of after in Q2 we should see that production come back in Q2.
  • Selman Akyol:
    All right and then, I appreciate you giving the capacities on the Delta pipeline and Na Kika pipeline but can you just talk about maybe what utilization is and how you see their ramping going forward.
  • John Hollowell:
    One of the advantages of our corridor pipeline strategy is that the pipes are on sufficient side that we can accommodate growth into the future and these capacities on these two systems certainly have room in space to accommodate additional growth but Kevin may have a few additional comments to add as relates to.
  • Kevin Nichols:
    Yes, so we don't talk and said about the utilization but what I can say because this is what I think people are going after as well there are many don't need to expand the systems to go after the growth that we see in the Eastern Gulf of Mexico. The answer to that is no we have enough capacity to chase the business that we see out there that said to come on.
  • Selman Akyol:
    Okay, that's all for me. Thanks.
  • Operator:
    Thank you. We have no further questions. I'll turn the call back to Courtney Selinidis.
  • Courtney Selinidis:
    Thank you very much for your interest in Shell Midstream Partners. For additional follow up questions, feel free to give me a call, my information can be found on the presentation materials as well as on our website.
  • Operator:
    Thank you. Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.