Shell Midstream Partners, L.P.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good morning. My name is Brian and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2017 Shell Midstream Partners Earnings Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-session and our instructions will be given at that time [Operator Instructions]. I will now turn the call over to Courtney Selinidis, Investor Relations Officer. You may begin your conference.

[Courtney Selinidis:]

Thank you. Welcome to the third quarter earnings conference call for Shell Midstream Partners. With me today are John Hollowell, CEO; Shawn Carsten, CFO; and Kevin Nichols, Vice President, Commercial. The content covered this morning will be largely focused on financial and operational results of the quarter. 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 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. And we will take questions at the end of the presentation. But before I turn over the call to John, I would like to remind you that in two weeks, Shell Midstream Partners will be hosting our very first ever Shell Investor Update at the New York Stock Exchange. During this event, we will be providing a full business update, a refreshed run away of opportunities from our sponsor, and future of distribution growth guidance. With that, I'll turn the call over to John Hollowell.

[John Hollowell:]

Thank you, Courtney. Good morning, everyone and thanks again for joining the call. We’re talking to you today this morning from Houston, Texas, home of the World Champion Houston Astros. Underlying performance across Shell Midstream Partners in the third quarter was good. Throughput volumes increased across the portfolio, distribution growth remain in line with our promise, and we achieved 1.1 coverage ratio for the quarter. And these positive results were accomplished despite the impact of hurricane Harvey, which as everyone knows, was a significant event for the Texas Gulf Coast. For Shell Midstream Partners, the impact from hurricane Harvey was mainly felt on the Zydeco and Colonial systems. Due to unprecedented flooding, Zydeco claims Force Majeure beginning of August 30th. Our maintenance crews quickly assessed the integrity of the system following the storm, and safely returned Zydeco back to service on September 14th. The Colonial pipeline was impacted in September by constrained supply from Texas Gulf Coast refineries as they recovered from the storm and return to normal operations. All our offshore systems remained online throughout the storm and normal throughput rates into Houma and Covelli. In total, cash available for distribution was down about $10 million in the third quarter due to hurricane Harvey. Of which, about $8 million was lost revenue at Zydeco. Now, there will be some additional expenses associated with the tank repair, which is about $2 million that will extend over the next couple of quarters. So in total, we expect the Harvey impact to be about $12 million, which is less than the $15 million originally estimated. Now I would be remised if I didn’t say that I’m extremely proud of the Company’s response to the storm and the relentless focus on safety of our people and the communities we serve doing what will prove to be a very, very difficult time. With that, let me move to the operational results for the quarter. Throughput volumes across the portfolio increased compared to the prior quarter. In the offshore, all of our volumes ramped up following the completion of a producer turnaround in the second quarter. And in our Eastern corridor, which includes the Odyssey, Delta and Na Kika pipelines, volumes increased as new well came online from multiple fields connected to these systems. In our onshore portfolio, we experienced a steady increase in our committed shipper demand on Zydeco, largely driven by Bakken crude supply into Nederland, volumes on Zydeco from the offshore also returned to normal following the completion of the Caillou Island project. And finally, as discussed last quarter, we plan to conduct a hybrid test for Zydeco main line in the first quarter of 2018. In September, we kicked off the project by running a series of inline inspection tools between Houston and Houma in preparation for the hydrotest. The project plans have continued to mature and we expect the hydrotests and any associated repairs to take between 30 and 60 days, which we expect to be completed during the first quarter of next year. The total cost range for the project has narrowed to $45 million to $60 million. Now, this includes about $10 million, which will be spent in 2017. Of which about $3 million was spent in the third quarter. And as a reminder, we do not anticipate any change to our distribution growth guidance of 20% CAGR for 2018 as a result of the project. Now with that, let me hand the call over to Shawn to walk you through the financials for the quarter. Shawn?

[Shawn Carsten:]

Thanks John and good morning everyone. In total, adjusted EBITDA attributable to the partnership was $92.2 million, up almost $2 million from the prior quarter. Increased EBITDA was due to strong underlying performance across the portfolio and a full quarter of results from the acquisition completed in mid-May. As John previously mentioned, the impact of hurricane Harvey was about $10 million, primarily due Force Majeure on Zydeco and impacted dividends from [Codell]. Maintenance expense for the quarter was up roughly $3 million compared to last quarter, largely due to spend associated with the Integrity project on Zydeco. Our maintenance capital decreased about $4 million compared to last quarter. Now we expect it to be within the previous guidance given for 2017. Looking ahead to the fourth quarter we intend to take cash available for distribution to be roughly flat with the third quarter. Now this is related to Hurricane Nate, unplanned producer downtime connected to the Eastern corridor, and approximately $7 million of spend for the Zydeco hydrotest. For Q3, the Partnership declared a distribution of $0.318 per LP unit. This was 4.6% increase over the prior quarter and almost 21% higher than the third quarter of 2016. We had demonstrated our commitment to predictable and strong distribution growth since our IPO, and we plan to continue to deliver on that promise. Now, let me turn to the Partnership’s balance sheet and liquidity. At the end of the third quarter, the Partnership had total cash and cash equivalents of around $172 million and total debt outstanding of about $1 billion. In September, we successfully raised with the high quality long-term investor equity at favorable terms. We primarily used these funds to pay down one of our loan facilities which has brought our leverage ratio for the quarter down to a very healthy 2.2 times net debt to adjusted EBITDA. And finally as announced last quarter, Shell Midstream Partners exercised the option to buy into the Permian Basin gas gathering system, providing the midstream solution to Shell’s most important unconventional asset. The initial build-out of the system includes 60 miles of pipe, gathered gas from the majority of Shell-operated production under a long-term 20-year contract. And on October 17th, we closed on this acquisition, which marks the first of a number of growing opportunities in the Permian Basin with high organic growth potential for Shell Midstream Partners. So with all that, let me open the call for questions.

[Operator:]

Thank you, sir [Operator Instructions]. Our first question will come from the line of Brian Zarahn with Mizuho. Please proceed.

[Brian Zarahn:]

Any additional color on the lower-than-expected impacts as it just related to the estimates for tank repairs, or…

[John Hollowell:]

No. Brian, it was, basically -- when we did the work to -- we gave you that estimate. There is early estimate in the middle of the thing. And as we wound up the work and got it done, we got it done for little less cost and time than what we thought we would have. And that’s primarily a credit, I believe, to the folks who responded to the event and were able to quickly assess. As you know, we have lot of water that we had to work our way through to make sure we had the system. And again I just credit my staff and my operations staff for the heroic efforts they made to make sure the system had full integrity, and we’re able to get it online. So we got it online a little faster than what we thought given all the flooding, all the water that we had to deal with.

[Brian Zarahn:]

And then on the Zydeco maintenance, I appreciate the update. And one more detail on some of the cost allocation. Just to clarify, is that $45 million to $60 million in total revenue, more of a DCF impact or is more of a cost impact?

[John Hollowell:]

It’s more of cost impact, Brian. The total cost to get all the repairs done, not repairs, but the testing done, it's a cost driver.

[Brian Zarahn:]

Will the contracts cover some of the loss revenue during that period [indiscernible] time period?

[Kevin Nichols:]

Brian, this is Kevin. It's actually going to be a combination, it's a combination of both. And I think when we originally talked to you we kind of said it was 50-50. And so during the time that we’re doing the hydrotest we will have lost revenues.

[Brian Zarahn:]

And then on the dropdown target of $2.5 billion to $2.9 billion in total for this year and next. Now we’re getting near the end of this year, should we be assuming that next year the dropdowns will be backend loaded or is there some potential for that number to change?

[Kevin Nichols:]

No, the $2.5 billion to $2.9 billion, Brian, we’re still on schedule to deliver that. And as you know, we’ve been fairly ratable and have to do drops. But we feel confident that we’re going to deliver on the $2.5 billion to $2.9 billion by the end of 2018.

[Brian Zarahn:]

And because of the recent equity raise, you said -- which has reduced your leverage and I guess we should assume that the next transaction will likely be debt finances?

[Shawn Carsten:]

Brian, this is Shawn. So we will forecast on how we fund from the markets. As you know, we’re a long term investment and we have a very long- term growth story, both from a combination of drop down and organic. So we’re going to fund this. And over the long term, we’re going to fund with the combination of equity and debt. But how we approach the market in the short-term we’ll see as we go through the markets. But as you point out, we do have a very strong balance sheet. But we’re going to keep in mind to be prudent with how it impacts our unitholders. Just to remind everyone, our sponsor still owns 48%, including the GP units. So we’re very interested to make sure we don’t upset what our already go to markets.

[Brian Zarahn:]

And last one from me, and I’m sure we’ll hear more about this topic during your Investor Day. But given the midstream sector is debating the balance of distribution growth versus capital market exposure. And I know you’re reaffirming your 20% distribution CAGR. But perhaps, post 2018, how do you weigh those two competing issues of growth versus retaining more cash flow to reduce your financing needs?

[Shawn Carsten:]

So as you know, Brian, we don’t provide forecast. But I do invite you to attend our Investor Day and look forward to providing little bit more around our strategy and our runway.

[Operator:]

Thank you. Our next question will come from the line Jeremy Tonet with J.P. Morgan. Please proceed.

[Jeremy Tonet:]

I was just wondering if you could update us on your thoughts currently with the Gulf of Mexico and activity there, and economics too that would underpin more activities. It seems like the tie-ins have really attractive breakeven. And wondering if you could just update us there on your thoughts? But also any thoughts as far as what WTI prices will be needed for new large scale platforms? Any color on that and how it impacts your volumes outlook for your GoM assets would be helpful.

[John Hollowell:]

Jeremy, we’re pretty bullish on the Gulf of Mexico and we remain that way. We continue to see new projects preparing to come online. We have said that our tying-in at next year in 2019 that’s in the Eastern corridor around our Na Kika platform and some in our Odyssey system. So we’re looking forward to that, as well some of the central Gulf. So yes, activity still remains in the Gulf of Mexico at these prices. You asked a question about what kind of price for are big projects. People are moving ahead even at these low prices, we’re finding ways to move ahead with these projects, and continue to develop those. [14.52] [Appo] is -- continues to lower their breakeven price and from Appomattox is now below $50 per barrel. So what we hear from the operators is they’re finding ways to make these projects work at these lower oil prices, led obviously by tiebacks, which is the most attractive to and to be able to tie-back production to existing platforms. And that’s great news for Shell Midstream Partners, because actually that gives us additional organic growth at no cost. And there is also supports our corridor strategy, where a lot of these platforms where activities occurring around are directly connected to our systems and really supports our corridor strategy, going forward. So bottom-line, still bullish on the Gulf of Mexico. Kevin plans on spending some time at the Investor Day in a couple of weeks, giving big more deeper dive into the Gulf of Mexico and what we’re seeing. So to the extent that you can come or anybody can learn more about the Gulf of Mexico and how our corridor pipelines fit, that would be a great opportunity for you to learn more.

[Jeremy Tonet:]

We will be certainly be there. And maybe just one follow-up question on this point, if I could. Just as far as turnarounds, is there any lumpy items like that, that we should be thinking about over the next years, just as we gauge our models at this point?

[John Hollowell:]

We haven’t really fully received the guidance yet. We’re not anticipating, Jeremy, anything out of the ordinary. But we just don’t have all the producers giving us their understanding and what they plan for next year and the year beyond. We’ll have more of that probably after the first year. And once we do, we’ll be able to update you more on that and maybe the next call. But right now, we don’t foresee anything out of the ordinary. That means there will be some, Jeremy. We just don’t know exactly where and what the extent is to this point. But we’re not anticipating anything out of the ordinary.

[Jeremy Tonet:]

Fair enough. And one just last one if I could, with regards to the dropdown inventory upstairs. I was wondering if you could refresh us as far as what percentage of those assets are in-service now versus things are under construction or could be in the future?

[John Hollowell:]

We’re going to cover the runway at depth, at the Investor call. I’m trying not to spoil my Investor Day, to be honest with you, Jeremy. But we’re going to cover that in detail. But you’ll get a good understanding of what that runway looks like in terms of existing assets in the portfolio, as well as how you classify the other one as those that are under assessment or maybe more immature in terms of the development. But we go into more detail as to where those assets are, what type of assets they are and certainly we’ll be a more and a better refresh runway for everyone to understand, which I hope is a bit of an advertisement to come to the Investor Day to learn more about it.

[Operator:]

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

[Courtney Selinidis:]

Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up questions, please feel free to call me directly. My information can be found on the back of this presentation, as well as on our Web site.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and we may all disconnect. Everybody, have a wonderful day.