Shell Midstream Partners, L.P.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2018 Shell Midstream Partners’ Earnings Call. All participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I will now like to turn the call over to Courtney Selinidis, Investor Relations Officer. You may begin your conference.

[Courtney Selinidis:]

Thank you, Michelle. Welcome to the Second Quarter Earnings Conference Call for Shell Midstream Partners. With me today are Kevin Nichols, CEO; and Shawn Carsten, CFO. 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 this morning’s earnings press release and Appendix 1 of this presentation for important disclosures regarding such measures including reconciliations to the most comparable GAAP financial measures. And, of course we will take questions at the end of the presentation. So, with that, I'll turn the call over to Kevin Nichols.

[Kevin Nichols:]

Thank you, Courtney. Good morning. And thank you for joining the Shell Midstream Partners second quarter earnings webcast. The business generated about $110 million of net income and $155 million of adjusted EBITDA in the quarter. Our business performed well this quarter, delivering the stable and ratable cash flows as expected. There are three important themes that I’ll highlight in today’s call. First, we are continuing the benefit from the developments in the Gulf of Mexico. Second, Zydeco is operating at record throughput levels. And, finally Shell Midstream Partners completed the largest acquisition to date in May. So, before we discuss the results for the quarter. Let me start with that last point and spotlight the acquisition of the Amberjack pipeline system. We purchased Shell’s interest in Amberjack for about $1.2 billion. The pipeline system has a total takeaway capacity of 500,000 barrels per day and it’s strategically positioned in the Central Gulf of Mexico. This is an area that continues to see strong growth and development. The original pipeline was constructed in the mid 1990s with an expansion completed in 2008 to capture production from the Jack St. Malo and Julia fields. And, most recently Shell pipeline completed a further expansion of the system in 2016, as development continued in the Central Gulf of Mexico. The timing of this acquisition is strategic for our company. We chose to complete this acquisition after the most recent expansion project, allowing the MLP to take advantage of growing volumes without the capital outlay which was required for the expansion project. The key benefits of Amberjack can be characterized into three value drivers. First, sustainable growth which is expected to continue. Strong connectivity in the Gulf of Mexico. And. lastly a unique crude market optionality valued by our shareholders. So, let’s start with the sustainable growth. Amberjack currently transports roughly 310,000 barrels a day, this projection stance from the success of Jack St. Malo and Tahiti to Anchor platforms supporting the Amberjack pipeline. We are forecasting additional growth on the system as infield drilling continues and new platforms connect into the system. Currently we are forecasting the system transport approximately 400,000 barrels per day by the end of 2019. Examples of the new fields connecting into the system includes Stampede, which achieved first oil in January of this year as well as Big Foot and Claiborne which are expected to come online over the next 12 months. As we discussed in the press release this morning, we are forecasting organic dividend growth from Amberjack of around 18% by the end of this year, largely driven by the ramp-up of Stampede. Now let me remind you that the 18% does not include continued organic growth that we expect to see in 2019 on the system with Big Foot and Claiborne come online. So, let me pause here. I want to make sure our organic growth story is clearly understood, particularly when compared to significant capital projects or new bills. Amberjack is able to take advantage of growing production as new fields are connected into our pipeline often at the producer or customer’s expense. So, that’s our organic growth with little to know capital required; clear evidence of our corridor strategy in action. Moving onto the connectivity of the system, Amberjack pipeline is able to deliver barrels along the entire the Texas and Louisiana Gulf Coast including but not limited to the Houston and Louisiana refining centers, Clovelly LOOP, which is a key Gulf Coast storage location with export capability and St. James, a liquids trading company, all of which provide shippers the ability to maximize optionality and leverage arbitrage opportunities between these delivery locations. So, to summarize the value of the acquisition, Amberjack has a proven track record of growth from existing assets, a runway of expected growth from further infield development and new projects coming online. It also provides a unique value proposition to both producers and shippers making it one of the best position pipelines in the Gulf of Mexico. Now let me turn to the operating results for the quarter. In our onshore portfolio, results returned to normal operating levels following the completion of the Zydeco integrity project. In fact Zydeco volumes reached an all time record high in the second quarter, as committed shippers moved at their full rates and the pipeline saw significant demand for spot volume sourced from Texas. The remaining pipelines and terminals in our onshore portfolio continue to deliver steady results in line with the prior quarter. In the offshore quarter-over-quarter variance was largely driven by a planned producer turnaround of the mars platform. As we discussed last quarter, the mars platform was down for 28 days to complete planned maintenance activity, which resulted in lower volume on the mars pipeline. The turnaround was completed on schedule and the platform returned to service in May. We’ve also began benefiting from two new fields that came on during the second quarter. The Kaikias field which is connected to the mars pipeline achieved first oil in May. And the Crown and Anchor field which connects to the Delta pipeline achieved first oil in June. Finally, Enchilada platform which connects to the Auger pipeline resumed operations in mid July. In addition, Delta House which connects to the Odyssey pipeline also resumed full operations in July. Therefore we are forecasting both pipelines to ramp-up to normal rates by the end of the third quarter. With that, I’ll now hand it over to Shawn to discuss the financial results for the quarter. Shawn?

[Shawn Carsten:]

Thanks Kevin. Our revenue was $129 million, up about $30 million from the prior quarter, which was primarily due to the Zydeco system returning to normal operations. Income from equity investments, plus the distribution from Poseidon, now classified in other income was $57 million, up about $16 million from the prior quarter. The increase is largely driven by the inclusion of Amberjack partially offset by the mars turnaround. As guided last quarter, the mars turnaround had a total impact of about $7 million in the second quarter. We are not anticipating any other significant maintenance projects for the remainder of this year. Dividend income was $13 million lower from the prior quarter due to onetime increased dividend from Colonial in the first quarter. In total, adjusted EBITDA attributable to the partnership was approximately $155 million, up about 60% from the prior quarter. After interest expense, maintenance capital and other adjustments total cash available for distribution was $137 million. The partnership declared a distribution of $36.5 per LP unit representing a 4.9% increase over the prior quarter and 20% over the second quarter of 2017. This resulted in a healthy coverage ratio for the quarter 1.2xs. So, final let me close with the partnerships balance sheet liquidity. As announced this morning, the partnership placed a new $600 million fixed rate facility in place with a seven year term at a rate of 4.06%. And, in addition the partnership extended and re-priced the existing $760 million variable facility for an additional five year term at a rate of LIBOR, plus 99 basis points. Now this is down from a rate of LIBOR, plus 126 basis points in the prior facility. In total, the partnership now has approximately $3 billion of debt capacity, all through our current which provides the partnership additional flexibility at very competitive rates. As of June 30, the partnership have a total debt outstanding of about $2.1 billion, which equates to debt EBITDA ratio of 3.4xs based on annualized Q2 adjusted EBITDA. And, we expect our leverage ratios to continue to improve as the various organic growth projects Kevin referenced come online throughout the remainder of this year. We continue to be very comfortable with our debt levels. We are well within our targeted range, which affords us ample flexibility as we continue to grow in line with guidance. And, finally before we begin with the questions, I want to take this opportunity to welcome Jamie Parker to the team as our new Head of Investor Relations. And, I also want to thank Courtney for her commitments and dedication to our partnership over the past four years. She’s been an integral member of our team from the early days of Shell Midstream Partners. We wish her well as she transitions to a new role within Shell. So, with all that, we will now take your questions, operator?

[Operator:]

[Operator Instructions] Our first question comes from Jeremy Tonet of JP Morgan. Your line is open.

[Unidentified Analyst:]

Good morning, this is Bill on for Jeremy. Just curious on the Gulf of Mexico production, certainly few turnaround and things during the quarter, just curious over the course of the year, if there’s anything that you’re looking out for on the production side?

[Kevin Nichols:]

Yes. Thanks, Bill. I appreciate the question. If I think your question was asking relative to the mars turnaround, if there’s any other anticipated planned maintenance projects that would kind of feature in the forward quarters. We see no further planned maintenance turnaround or significant maintenance turnarounds for the rest of the year.

[Unidentified Analyst:]

Okay, thanks. And, then on Zydeco that the revenue per barrel increased quite a bit, I’m just curious how you see that and volumes trending over the course of the year and what the driver was there?

[Kevin Nichols:]

Yes, we have different rate structures for the different volumes coming in, so it’s always going to be a little bit variable, but part of that was driven from our strong onshore volumes that we saw, a lot of business from our existing customers, their space as well as the spot business that we saw originating out of Texas and we see that continued strength and demand going forward in the near term.

[Unidentified Analyst:]

Great, thanks. And, then just one last one, can you update us Permian base in JV and your growth plans there?

[Kevin Nichols:]

Yes, thanks for that as well. The Permian is hot kind of activity obviously and we’re continuing to grow as our affiliate accelerates their plans than we build-out. We have accelerated some of the capital associated with the project and the build-out of that model system and that’s been a response to the sponsor accelerating their growth plans in the area.

[Unidentified Analyst:]

Great, thanks for taking my question.

[Operator:]

Our next question comes from Theresa Chen of Barclays. Your line is open.

[Theresa Chen:]

Hi, I’m following up on Bill’s questions on Zydeco, can you give us an update on how the re-contracting efforts are coming along?

[Kevin Nichols:]

Yes, thanks Theresa. Appreciate the question. We’re in the process of the negotiations and re-contracting and putting that strategy in place. It’s a little early to give you the details and some guidance associated with that. But I will highlight a recent FERC ruling in one of the PDOs where they ruled on approach to contracts and re-contracting the contracts that we see as favorable and kind of key to our strategy for re-contracting, that is that you can go back out after our contract has finished and offer firm capacity back on the line. So, we expect to use that in our re-contracting process and go out for an open season year shortly.

[Theresa Chen:]

Great, and shifting gears a little bit with the competitor announcement recently about potentially developing deep water offshore export terminals in various locations from Texas that could possibly be capable for loading the VLCCs, can you offer any thoughts on how this would potentially affect the competitiveness of LOOP as an export facility given that its situated a little bit further east and further away from the growing production areas?

[Kevin Nichols:]

Yes, thanks Theresa for that. Yes, there’s been a lot of announcement and plans this moment time for various different projects. A couple of things, the existing infrastructure always competes fairly well with new infrastructure, which is quite expensive to put in, putting in a deep water port or dredging to accommodate VLCC is not cheap. So, we think that existing infrastructure has an advantage and then they’ll continue to work. It also fed by number of different areas that don’t necessarily feed Houston, if you see length in St. James and that refining center and up taking all of that length, you could potentially see some volumes wanting to come down from St. James and Louisiana too, export in Louisiana as well. And, of course we are always viewing our activity of our sponsor and where they working and to where there is a need for infrastructure and take weight capacity, whether it’s pipe or it’s terminal or any of these projects and we’ll stay linked with our sponsor and evaluate opportunities to participate a new place.

[Theresa Chen:]

Great, thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from TJ Shaw of RBC. Your line is open. TJ if your telephone is muted, please un-mute.

[Unidentified Analyst:]

Hi, this is [Ruhail] in for TJ. Can you provide us with an update on how you’re thinking about dropdown into 2019 and sort of funding strategy around that and kind of how you’re thinking about IDRs as well into 2019? Thank you.

[Kevin Nichols:]

Thanks Ruhail. Yes, let me start and then I’ll toss it over to Shawn to talk a little bit more about funding. But I suspected that somebody would ask the IDR question. We are aware of the take that is going to the general partner, we continue to watch the space and what appears and competitors and others are doing, of course we’ve got a lot of input that we get from time to time as well. What I would say on the IDR question is that we have opened an ongoing dialogue with our sponsor. But at this time we are not prepared to give further guidance as to kind of what we’ll do with the IDRs or when will do that with the IDRs. But as we said in 2017 and 2018 that we would do $2.5 billion to $2.9 billion worth of acquisitions and grow the company, and we’ve squarely landed in that guidance and we are committed to continuing to grow the company as we go forward. Maybe you want to talk about funding, Shawn?

[Shawn Carsten:]

Yes, Kevin, thanks. So, Ruhail with regards to the funding, of course we are pleased to have this new facility in place with our sponsor and that gives us plenty of liquidity to take advantage of any opportunities that may come up actually in 2018, although we don’t know anything at this point. With regards to 2019, we won’t provide any forecast about when or what we’re going to do, but I’m comfortable and happy to say that we have plenty of liquidity to manage our balance sheet as we go forward. As we’ve always guided in the past that we continue to maintain relatively conservative balance sheet, because we don’t want to be in positioned with our backs with the markets and so we want to be able to work off our balance sheet as we need to. And, as we’ve done in the past and we’ll also take advantage of the markets when those markets are there for us.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

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

[Courtney Selinidis:]

Thank you, Michelle. Thank you everyone for your interest in Shell Midstream Partners. If you have any additional follow-up questions, please feel free to contact either myself or Jamie Parker directly. Our contact information can be found on the presentation material, as well as on our website. Thank you again.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. And, you may all disconnect. Everyone have a great day.