Shell Midstream Partners, L.P.
Q4 2017 Earnings Call Transcript

Published:

  • 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 Fourth 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, Brian. Welcome to the fourth quarter earnings conference call for Shell Midstream Partners. With me today are John Hollowell, CEO; Shawn Carsten, CFO; and Kevin Nichols, Vice President, Commercial. 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. Good morning, everyone. As always, thank you for your interest in Shell Midstream Partners. Fourth quarter results were strong, with the business generating some $86 million in net income and $190 million in adjusted EBITDA, certainly, a good quarter to finish off an important year for Shell Midstream Partners. But before we go to the results, let’s discuss some recent events and portfolio activity we have recently completed. Last November we held our first Investor Day, which also marked our third anniversary as a publicly-traded entity. During the Investor Day we reiterated our strategy, which is rooted in three important pillars; a resilient framework. This is really about the strength of our sponsor, in terms of their commitment, their financial strength and their continued investment in the U.S., particularly as they navigate through volatile markets. It’s this framework that creates the opportunity to diversify our portfolio. We have high quality assets across Shell’s integrated footprint and we’re building scale through drop downs, organic growth and third-party acquisitions and was like the most important you as the investor at Shell Midstream Partners’ how our diversified portfolio and the dynamic run way the assets we have enable sustain growth providing strong array of long-term cash flows, which ultimately delivered reliable distribution growth to our unitholders. Now the common thread to each pillar is Shell, our sponsor. The size and scale of Shell enables our delivery the strategy and it’s the single most important differentiating factor for Shell Midstream Partners. And so to that end in 2017 we acquired about $1.5 billion of assets. In May, we purchased interest in the Delta and Na Kika Pipelines, which combined with the Odyssey Pipeline completed our ownership in the Eastern Corridor in the Gulf of Mexico. In that acquisition we also purchased 100% of the Refinery Gas Pipelines serving Shell’s Chemical business along the U.S. Gulf Coast. In October we closed on an acquisition of a Gas Gavin system in the Permian, supporting our sponsors’ upstream onshore footprint in the Basin. And just recently in December we purchased strategic assets from Shell for $825 million, our largest acquisition yet. In that acquisition we further diversified our portfolio and the purchase -- with the purchase of five refined products terminals from Shell’s trading and supply business. The acquired terminals have a combined capacity of 4.5 million barrels and provide storage, blending and truck lifting for various grades of gasoline, diesel, ethanol and jet fuel for potential delivery the nearby metropolitan markets. Each terminal is under a 10-year contract with minimum volume commitments from Shell and options to extend up to an additional 10 years, which provides reliable and ratable cash flows. Three terminals sit in the Pacific Northwest and are integrated with Shell’s Refinery in the State of Washington, and serve the large marketing presence in that area. With this acquisition our portfolio now serves key markets expanding both coasts. The Des Plaines terminal primary serves O’Hare International Airport and support Shell’s position as one of the top branded gasoline fuel suppliers in the Chicago area. And finally, the Colex terminal is integrated with Shell Deer Park refinery and sits in an accurate trading hub with connectivity to Explorer, Colonial, Magellan and [ph] Tapco (5
  • Kevin Nichols:
    Thanks, John. In our onshore portfolio Zydeco volumes reached an all time high since reversal of the system in 2014. This was largely driven by committed shipper volumes sourced from Houston and Nederland, as demand on the system continued to be strong. The remaining pipelines in our onshore portfolio saw steady performance in line with third quarter. In the offshore, total volumes were lower than the prior quarter largely due to producer outages impacting the Auger Pipeline and the Eastern Corridor. The Auger platform resumed operations in mid-February and the Enchilada platform is expected to become back online mid-2018. The Auger platform makes up about half of the total revenue on the Auger system. The impacted fields flowing into the Eastern Corridor are expected to be down to the first quarter. However, beginning in the second quarter we are anticipating increased volumes from [inaudible] well development and first oil at [inaudible] anchor which will partially offset the impact. Finally, let me take a moment to update you on a progress of the Zydeco integrity work we have underway. At the end of 2017, our team has successfully completed the in-line inspection tool runs and we completed all the necessary repairs. Throughout January the crews prepared the site in advance for the hydro test and on February 1st we began the hydro test as planned. We are currently testing the final segment of the line and we expect the system to be restarted mid-March. Based on current estimates we believe the first quarter impact to project will be about $60 million. The majority of which is a combination of lost revenue and operating costs. This was a material project for Shell Midstream Partners and I am pleased with the execution and the dedication of our operational staff throughout the entire project. We took proactive steps to ensure the integrity and reliability of the system well into the future and we believe this is the right thing to do to meet the needs of our customers, our investors and communities in which we operate. So, with that, let me hand it over to Shawn to walk you through the financials of the quarter. Shawn?
  • Shawn Carsten:
    Thanks, Kevin, and good morning, everyone. Revenue in the fourth quarter was $127 million, up about $32 million from the prior quarter. The increase revenue in the quarter was due to Zydeco operations returning to pre-Hurricane Harvey rates plus the addition of new consolidated assets as part of the December acquisition. This increase revenue was offset by a lower throughput in our offshore portfolio, as Kevin mentioned earlier. In total adjusted EBITDA attributable to the Partnership was approximately $119 million, up about $27 million from the prior quarter. Underlying results of the business prior to the acquisition were generally in line with expectations. Adjusted EBITDA from Zydeco was about $13 million from the third quarter, offset by outages in the offshore fields. The acquisition completed in December accounted for approximately $20 million of EBITDA in the fourth quarter. After interest expense, maintenance capital and other adjustments, total cash available for distribution was $97 million, up $13 million from the prior quarter. The Partnership declared a distribution of $33.3 per L.P. unit representing a 4.7% increase over the third quarter and a 20% increase over the fourth quarter of 2016. The resulting coverage ratio for the quarter was a healthy 1.2 times. So now looking ahead to the first quarter, the total impact related to offshore outages will be about $10 million and the impact of the Zydeco integrity work and other related projects will be about $60 million based on our current project plan. We have filed a claim under our business continuity insurance coverage and could partial recover losses associated with Auger outages later this year. As Kevin mentioned, the Zydeco integrity work was a proactive measure to ensure the long-term reliability of our pipelines, undoubtedly important project to complete. However, we are not changing our previous distribution guidance of 20% CAGR through 2018. We intend to use cash on hand and borrowings under existing credit facility to cover the Q1 distributions as guided. So, finally, let me close with the Partnerships balance sheet and liquidity. As of December 31st the Partnership have total cash and cash equivalents of $138 million. Total debt outstanding were about $1.8 million, all this equate to about 3.6 times net debt to adjusted EBITDA at the end of the year. As previously guided, we intend to acquire between $1 billion to $1.4 billion of assets from Shell in 2018. In addition, we plan to spend about $85 million in capital this year, of which about $55 million will be growth capital. The growth capital is primarily related to our new tanks at the Houma terminal and expansion of the Permian gas gathering system. To prefund this growth we raised about a $1 billion in common equity earlier this month, including material portion of common unit sold to our sponsor. We plan to use cash on hand and capacity under our debt facilities at the time of future acquisitions. We do not intend to raise additional equity in 2018. So, with all that, let me hand the call back over to John for some closing remarks.
  • John Hollowell:
    Thanks, Shawn. We certainly covered a lot today, but here are the key messages I want to leave you with. We continue to deliver against our growth strategy as evidence by our latest acquisition. We are taking proactive steps to ensure the long-term viability and reliability of our assets and we have taken actions to delever our balance sheet in a prudent fashion to ensure financial flexibility for the future. And finally, as many of you know, at the end of March, I will be retiring from Shell after over 38-year career. I must say though it has been a true privilege for me personally to have the opportunity to lead Shell Midstream Partners for the last three years and I’m really proud of what we have been able to accomplish over that time. We are building an incredible company in my view point and we are delivering against a well-founded strategy. I believe we have the right management team in place to the take the next leg in the journey, I have utmost confidence to in Kevin and Shawn to do that, and I truly believe the best days for Shell Midstream Partners are yet to come. And then, lastly, I just want -- on my behalf personally say thank you to all of you and investment community. It has been personal pleasure to get to know you and build relation with you after all this time and I just wanted to simply say thanks for that. So, Kevin, at this time I will turn the reins over to you for Shell Midstream Partners. Best of Luck.
  • Kevin Nichols:
    John, on behalf of the entire staff I want to thank you for your leadership and your guidance that you have given us over the last several years. As you had mentioned, Shell Midstream Partners has grown considerably over the last couple of years and we have achieved a lot. You set a solid foundation for which we can grow upon and we have a fair strategy and look forward to executing on that strategy. On personal note, I want to tell you that it’s been a real pleasure to work for you over the last couple of years and I really truly want to wish you the best as you begin this next chapter call retiring. So, with that, Brian, I’ll turn it over to you for questions.
  • Operator:
    Thank you, sir. [Operator Instructions] And our first question will come from line of Brian Zarahn with Mizuho. Your line is now open.
  • Brian Zarahn:
    Good morning. I’d like to echo Kevin’s comment John and congratulations on navigating the Partnership through the ups and downs of the MLP market and wishing you all the best.
  • John Hollowell:
    Thank you, Brian. Certainly appreciated, Brian.
  • Brian Zarahn:
    Sure and congratulations to Kevin on your new role. I guess, looking at the Zydeco maintenance, I appreciate the updated impact, understanding this is concentrated in the first quarter, but additional color on the -- how view the distribution coverage impact in the first quarter?
  • John Hollowell:
    Yes. I mean, I will turn that over to you Shawn as far as coverage.
  • Shawn Carsten:
    Yeah. So, Brian, we want to tell you, specifically, certainly, our coverage ratio will be below 1.0 time, but as I said earlier, we will be fulfilling our distribution needs and we reiterate our guidance to 20% CAGR for 2018.
  • Brian Zarahn:
    And then, on the basis your expectation would be above 1 times for the year for 2018?
  • Shawn Carsten:
    On the full year basis, yes.
  • Brian Zarahn:
    Okay. And then, excuse me, on the terminal assets that were acquired, did they have any inflation escalators in addition to the 10-year take-or-pay contracts?
  • Kevin Nichols:
    Brian, I will have to get back to you on that one, I think, the -- I mean, the commercial terms are fixed for the 10-year period of time, but I do believe they have later, so I will confirm that with.
  • Brian Zarahn:
    Okay. And then, given recently loaded first VLCC for export, how do you think about the growth opportunity for export at LOOP and the impact to your asset base?
  • John Hollowell:
    Well, Brian, that certainly say, that the LOOP export are positive sign for us, particularly as it relates to Zydeco. As you know, in Zydeco system, we have that system as one that can connect to it a number of opportunities and LOOP will be one of them. So to the extent that LOOP begins to export volumes more regularly, certainly, we think, Zydeco is well positioned to serve that and get barrels from say Permian or other locations to the LOOP facility. So we view that as a positive opportunity for Zydeco in the future should that be the case as well as some of our other assets in the Gulf Coast area.
  • Brian Zarahn:
    Thanks very much, John.
  • Operator:
    Thank you. And our next question will come from line of Jeremy Tonet with JP Morgan. Your line is now open.
  • Jeremy Tonet:
    Good morning. John, I wanted to wish you the best from retirement as well and Kevin congratulations.
  • John Hollowell:
    Thank you.
  • Kevin Nichols:
    Thank you, Jeremy.
  • Jeremy Tonet:
    Just want to turn over to answer lot of there in given the level of time could be out of service. I was wondering if you might quantify a bit more with the EBITDA impact might be for that situation?
  • Shawn Carsten:
    So, Jeremy, this is Shawn. We don’t provide forecast specifically on this asset. As you know, it’s still down and we are working on it right now. So it is included in our first quarter of the $10 million of the offshore part of that number.
  • Jeremy Tonet:
    Okay. Thanks. Is there any other turnaround activity that you guys can see over the course of the year beyond what’s been mentioned so far that we should be thinking about when modeling earnings?
  • Shawn Carsten:
    Yeah. The only things that, we have -- there are some regularly scheduled maintenance by the Mars production field in the second quarter, but that is planned and as we do normal course.
  • John Hollowell:
    We don’t know the extent of the scope yet, Jeremy, upstream has total what that would be, so there will be some for future information for you once we get a better angle of what the scope is, how long the plan will be down. But it’s a normal turnaround that plan.
  • Shawn Carsten:
    And this material will give you some guidance in quarter one on that.
  • Jeremy Tonet:
    Great. Thanks for that. And just turning to the Permian, I was wondering if you could maybe expand a bit more as far as Shell X’s ability to kind of capture growth there, especially with what Shell was doing, seems like there is a lot of large-scale infrastructure being built there, any other thoughts that you can provide there as far as how much an avenue for growth there is could be for Shell X?
  • Kevin Nichols:
    Yeah. Jeremy, we are excited about that. We saw the acquisition of the Gas Gavin is a good entrée into the Permian. It help serves our ability and activity, you well said, our ability is going to be very active in the Permian Basin over the course of the next couple years, in fact, about a $1 billion of investment to be spending in the Permian area itself for the Shell portfolio which is good. With the entrée into the Gas Gavin system, this certainly opens the door for other growth opportunities for us, not only on that system itself but for other areas like oil gathering, water handling and things like that. So as our upstream affiliate grows we will certainly will plan on growing with them in the midstream to serve those needs for them.
  • Jeremy Tonet:
    That makes sense. And then, just a last one I guess for me, it’s seems like in the MLP marketplace there is just a very intense focus on IDR elimination and just wondering if you guys could provide us or any thoughts there, it seems like that turned into a large impediment for some names out there that are kind of little bit deeper in the spilt that you guys are?
  • John Hollowell:
    Yeah. Jeremy, we are certainly watching this space carefully and we do recognize the increase in cost of capital because of the IDR no doubt about it. So, cash in the GP for us is increasing, because of the growth we delivered to our L.P. unitholders quite frankly. We got to be thoughtful about how we approach this and so here at Shell X, we will take the action at the appropriate time, take into account how we approach it. So that’s the guidance we gave you right now. We do recognize the impact and we would be in thoughtful about how we manage it and we will take care of it at appropriate time.
  • Jeremy Tonet:
    Great. Thanks for my question.
  • John Hollowell:
    You bet Jeremy.
  • Shawn Carsten:
    Thank you.
  • Operator:
    Thank you. Our next question will come from line of Theresa Chen with Barclays. Your line is now open.
  • Theresa Chen:
    Good morning. I’d like to echo everyone’s comments and congratulate John on your retirement, as well as Kevin on the promotion. Best of luck to both of you in the next phase. My first question…
  • Kevin Nichols:
    Thanks.
  • John Hollowell:
    [Inaudible] leisure in heaven. Go ahead.
  • Theresa Chen:
    Sure. I guess a follow-up on the IDR question, given the recent offering, clearly the GP cash flow has grown. How is that or if that has changed your view on economics and valuation on when you do finally [ph] Roland (22
  • John Hollowell:
    No. Theresa, I will just -- I think this is a same answer that I gave, Jeremy. We certainly appreciate the increase in cost of capital because of the IDR effect. We certainly do and we are going to be very thoughtful about how we approach the IDR situation here at Shell X and we will take the appropriate action at the appropriate time as it relates to it. That’s about as far as we will go at this time.
  • Theresa Chen:
    Sure. Turning to the Permian, in terms of potentially getting more involved on crude fight with the midstream entity and I believe at your Investor Day the production at the parent was about 60 or so. Do you have an updated number for that currently?
  • John Hollowell:
    No. There is no more guidance, what Shell has given in their market days, so we will -- we know it’s growing. They continue to have rig activity and they are expanding their footprint there in the Permian. Again, as they expand their footprint, we will, as I said earlier, they plan on spinning about a $1 billion a year in the near-term on that -- on the Permian footprint. So it’s a growing material part of the upstream portfolio at Shell and the best way for me to explain it to you is at that volume grow, certainly Shell Midstream Partners will be there to grow with it to support the affiliates’ upstream needs in the midstream space.
  • Theresa Chen:
    Got it. And in terms of LOOP and potentially being a major export center in the future and all varying meaningful clearly given the lower cost of transportation provided by GP or you, but when I think about the demand centers and the perceiving, and do you know how many ports and such can actually perceive the -- on the other side?
  • Kevin Nichols:
    No. Thanks. This is Kevin. Not familiar with all the various different destinations. I mean there are lot of destination that take VLCC and ULCC vehicles. LOOP is the only one today that can have access to unload or load in United State. I am not familiar with the U.S., not sure how many ports can take the large vehicle or vessels level it is my view.
  • Theresa Chen:
    Okay.
  • John Hollowell:
    We remain optimistic that that should exports grow then we -- I think we are somewhat uniquely positioned to be able to serve that market through our Zydeco system.
  • Theresa Chen:
    Okay. And lastly, on the organic project, the $85 million, can you just talk a little bit about economics and expected returns or multiples related to that?
  • Shawn Carsten:
    So, Theresa, this is Shawn. When we talk about specific economics, but you can expect, we are looking at billable that we are happy about and we are happy to have the opportunity to be doing this organic projects inside Shell Midstream Partners.
  • Theresa Chen:
    Okay. Thank you.
  • Shawn Carsten:
    Just to remind you, from the earlier we expect about $55 million of investment in 2018 in the growth area.
  • Operator:
    Thank you. [Operator Instructions] And our next question will come from line of Vikram Bagri with Citi. Your line is now open.
  • Vikram Bagri:
    Hey, guys. Good morning. All the very best John and congratulations Kevin, looking forward to meet you both in Houston next week. My first question is, following up on Brian’s question on LOOP, is there a near-term impact to Mars from exports from LOOP terminal or any other opportunities that you can perhaps do connect Mars to LOOP to enable more exports?
  • Kevin Nichols:
    So more is connected to LOOP, it goes directly into caverns at LOOP. So coming from offshore Mars volume is primary location and destination is the LOOP cavern which is then connected to the offshore oil port. So to the extent that that the type of breed of crude…
  • John Hollowell:
    Very conveniently.
  • Kevin Nichols:
    Yeah.
  • John Hollowell:
    Very conveniently.
  • Kevin Nichols:
    To the extent that that type of grade of crude others around the world or other places would like to have is directly connected and with simply loading in vessels very easily.
  • Vikram Bagri:
    Does that impact volume that is on Mars system, if crude is exported directly from LOOP instead of growing all the weight onshore?
  • Kevin Nichols:
    Well, no, so actually the way the system is configured, getting two LOOP is actually through the whole destination. So the Mars tariff would not change at all going into the LOOP facility which is where a lot of the crude goes today and into the caverns. So it would just be a LOOP fee that would be charged coming out of the caverns and through the oil port.
  • Vikram Bagri:
    Okay. Okay. Understood. And IDRs and corporate governance has been sort of topic of discussion, there were number of questions on IDRs and to a certain extent both of them go hand-in-hand. In terms of corporate governance any thoughts on linking sort of the executive competition to Partnership units in any way or improving the existing or providing more of visibility or clarity on some of the metrics used in corporate governance at Shell Midstream?
  • John Hollowell:
    No. Vikram, I think, best way to answer that question is just to say that, as I said, we do recognize the impact and we are being very thoughtful about how we approach this. So that means we are looking at a number of options of how to address this when is the appropriate time to do it. And so just know that we are -- we don’t have our heads in the sand here. We do recognize the impact of this on the cost of capital and we are going to be working hard to be able to get approach it in the right way and deal with it at the right time and we should probably leave it there.
  • Vikram Bagri:
    Okay.
  • Kevin Nichols:
    So -- go ahead.
  • Vikram Bagri:
    Just lastly, longer-term you talk about doing more organic growth projects in addition to the big portfolio of organic growth projects you have, should we expect some level of organic growth associated with drops this year, $1.2 billion of drop down that you’re planning to do in 2018?
  • Shawn Carsten:
    So was your question organic growth or so in combination with drops or to get one…
  • Vikram Bagri:
    Yes.
  • Shawn Carsten:
    Okay. Yeah. It will be a combination of a lot of different things. We will announce that when it’s time for the drop, but we would see a substantial of the growth come from the drop.
  • John Hollowell:
    But remember some of the organic drop will come from existing platforms like Mars, where volumes will continue to grow. And also remember as new field tie into Mars, as we discussed, that growth comes at little to no CapEx to us, probably, no CapEx in the case of Mars. So we will continue to see organic growth from crude oil pipelines in the Gulf of Mexico areas and that growth will certainly complement our portfolio as it has in the past and we will continue to do in the future.
  • Vikram Bagri:
    Thank you. That’s all I have.
  • 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 reach out to me directly. My information can be found on the presentation materials, as well as on the website. Thanks again.
  • Operator:
    Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude our program and you may all disconnect. Everybody have a wonderful day.