Shell Midstream Partners, L.P.
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2018 Shell Midstream Partners' Earnings Call. At this time 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 Jamie Parker, Investor Relations Officer. You may begin your conference.

[Jamie Parker:]

Thank you, Nicole. Welcome to the third 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 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'll turn the call over to Kevin Nichols.

[Kevin Nichols:]

Thank you, Jamie. Good morning everyone and thank you for joining me for Shell Midstream Partners' third quarter earnings webcast. Let me start with our operating results. We had a very strong quarter generating $148 million of net income and $187 million of adjusted EBITDA. And our quarter-over-quarter trends continue to be very positive, with adjusted EBITDA growing some 20% from the second quarter. If I take a look at the key activities driving this performance, we saw increased volume through our major onshore and offshore systems. Evidence, our diversified portfolio of assets is delivering sustainable growth to the partnership. Starting with our onto our portfolio, quarter-over-quarter results were largely driven by our Zydeco system, where we continue to see robust volumes and increased offshore demand. The remaining onshore pipelines and terminals continue to deliver in line with prior quarter. Shifting to our offshore, we're seeing significant volume growth as our quarter strategy continues to deliver strong cash flows. In fact, in the third quarter our combined offshore portfolio transported some 2 million barrels per day, up 28% from the third quarter this time last year. These strong offshore results are driven by two key themes, organic growth and a return to normal operating levels. Focusing first on organic growth let me remind you from our last earnings call we define growth as coming from new fields and tiebacks that connect into our existing systems for little to no capital. And as I look at the individual systems let me start with Amberjack, our most recent acquisition in the second quarter of this year. I'm excited to share with you that Amberjack continues to deliver organic growth with 16% more volume than the prior quarter and we expect to see continued growth into the fourth quarter of 2018 as new production comes online. Shifting over to our Eastern Corridor, organic growth came from new volumes as we saw Crown and Anchor take first oil in June and we saw two new tiebacks, one in the Horn Mountain and the other one into our Delta Corridor, all evidence that our corridor pipelines are robust and growing in the Gulf of Mexico. Now coming back to the second theme of returning to normal operation, the Mars platform came back from a planned turnaround in May and we now project a good run rate on the system some 21% over this time last year. And in mid July the platforms connected to the Auger and Odyssey systems returned to normal operations bringing these pipelines up to historical run rates. So to summarize, I'm extremely proud of our offshore portfolios performance this quarter and as I look at ahead, we expect our portfolio to benefit from continued strong growth in the Gulf of Mexico Now, let me shift from our operations and give you an update on our re-contracting efforts on the Zydeco system. As you know we have two contracts that are expiring at the end of this year and another contract that expires in the second quarter of next year. We conducted an open season which closed in September, so let me walk you through the outcome of that process and how we plan to move forward from here. In the open season, we did not see the levels of interest expected at the specific terms and conditions that we offered. However, Zydeco continues to play an important role in the Gulf Coast and we continue to see robust demand on the system. Market dynamics in Texas and Louisiana are evolving and our view is that demand for capacity will continue to be driven by key market fundamentals, fundamentals such as growing Permian production that will land in Houston, constraints that exist in Houston today and will continue to grow for evacuation capacity out of Houston and strong refining demands in Louisiana for light barrels. Let me also say and remind you that we see the Zydeco system as a very competitive system and is one of the best connected systems in the Gulf Coast, tying many sources and origins of crude to refining centers and an export facility. So looking ahead we have decided to continue to monitor the market and continue with further discussions with our existing customers and potential shippers and this will guide our next steps which could include another open season. We believe this to be the most prudent approach to ensure maximum value for unit holders against the backdrop of an evolving market. Finally, let me touch on IDR's. Throughout 2019, we expect our sponsor to waive a portion of the IDR's which would essentially cap the IDR growth and cap the IDR's at quarter four 2018 levels. These waive distributions are anticipated to be approximately $50 million and the funds are expected to be used for the partnership for future investment. We believe this reflects strong sponsor support and further demonstrates Shell's commitment to grow the midstream footprint. So let me wrap up by saying our solid operating results, our diversified portfolio and our strong sponsor support, all lets me reiterate our guidance of 20% distribution growth for 2018 and mid-teens distribution growth for next year. With that I'll now hand it over to Shawn to walk us through the financials. Shawn?

[Shawn Carsten:]

Thanks, Kevin. As shown in yesterday's press release, the third quarter was a good quarter for Shell Midstream. Our business continues to perform. We're well supported by our strong organic growth in the offshore corridors and solid onshore asset performance. So now, let me cover a few of our key financial metrics for the quarter. Our revenue was about 154 million, up roughly 24 million from the prior quarter, which was primarily due to new fields coming online in the Eastern corridor and offshore fields returning to normal operations. Our revenue was also impacted by allowance oil sales during the quarter. Income from equity investments was about 73 million, up about 24 million from the prior quarter. The increase is largely driven by the inclusion of Amberjack for a full quarter plus the incremental growth on Amberjack and Mars as previously discussed by Jamie [ph]. Dividend income was about 15 up, some 2 million from the prior quarter, primarily due to increased quarterly dividends from colonial and Explorer. Now, our other income was about 8 million that's down about 3 million from the prior quarter. This decrease is primarily due to insurance proceeds received in the second quarter. So on total adjusted EBITDA attributable to the partnership was some 187 million, up about 20% from the prior quarter. After interest expense, maintenance capital and other adjustments, total cash available for distribution was about 164 million. Our partnership declared a distribution of $38.02 per LP unit representing a 4.7% increase over the prior quarter and 20% over the third quarter of 2017. All those resulted in a healthy coverage ratio for the quarter 1.4 times. So now let me turn to the partnerships balance sheet and liquidity. As of September 30 the partnership had total debt outstanding of about 2.1 billion, which equates to a debt to EBITDA ratio of 2.8 times based on annualized Q3 adjusted EBITDA. We continue to be very comfortable with our debt levels which combined with the anticipated IDR growth waiver from our sponsor in 2019 affords us significant flexibility as we continue to grow our business. Finally, before I close I like to make you aware that we will be filing shelf registration statement later today. We are doing this as our current registration statements will expire in the near future. So with all that we will now take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our 1st question comes from the line of Jeremy Tonet of JP Morgan. Your line is now open.

[Unidentified Analyst:]

Hi, this is Joe on for Jeremy. So my first question is around Zydeco, you mentioned demand there has been really strong. So [indiscernible] are there expansion opportunities there and what type of things could you do to the system that would expand that?

[Kevin Nichols:]

Yea, Joe this is Kevin. Thanks for the question. As you mentioned demand has been strong. The system has been over nominated and run full since we came back up on Q2 and we see that demand strength in Q3 and going into Q4. As far as expansion we'll continue to optimize the system. We're looking at new connections. Again, the sources of crude and new destinations, there is not at this time a major expansion so to speak of twining the line or significantly increasing the mainline, but we continue to look for different connections as we go forward.

[Unidentified Analyst:]

Okay, thanks. That's helpful. And then you also mentioned that new Crown and Anchor fields contributed to Q 3 earnings. Are you also expecting them to ramp in Q4 and contribute again?

[Kevin Nichols:]

Yeah, it's hard for me to speculate on individual fields, but we see continued strength and growth in the Gulf of Mexico in both of the corridors that we highlighted in this earnings call. So we expect the Amberjack corridor to continue its growth and we do see new production coming online late in the fourth quarter there with the big platform and we'll see continued - there are several other tiebacks that we're looking at in the Eastern corridor as well. The timing as to when they come on and exactly what those volumes will look like, I'm not able to forecast that at this time.

[Unidentified Analyst:]

Okay, thank you. That's all I had.

[Kevin Nichols:]

Thanks, Joe.

[Operator:]

Thank you. Our next question comes from the line of Theresa Chen of Barclays. Your line is now open.

[Theresa Chen:]

Hi, thank you for taking my questions, great to see the strong volumes speed through. Follow up question on Zydeco, so I'd understand that you're still in discussion that could turn into another open season, but if that doesn't wrap up by the end of the year with the two contracts that capacity just go to spot availability, how should I think about that?

[Kevin Nichols:]

Yeah. Theresa thanks. Now, I'm glad you brought that up because I wanted to make sure that everybody understands that. Our existing customers and potentially even customers that have not had the ability to ship on the line because our existing customers from the space may get the opportunity to ship and that's exactly what will happen to the extent that - when the contracts for a lot [ph]. Our existing shippers will have the ability to nominate on historical volumes. If they choose not to go on their historical volumes that will leave room for new shippers to go on the line, but everybody will move on slot until such time that we decided it's the right time to go out for another open season and to look at contracting of the volumes.

[Theresa Chen:]

Got it and in relation to the IDR waiver announcement, looking beyond 2019, is it something that you will reassess every year or are you looking to use this stop measure in 2019 given that you have the distribution growth guidance out there already, but look for maybe a more permanent solution beyond 2019?

[Shawn Carsten:]

Theresa this is Shawn. We're not providing any guidance beyond 2019. The waiver will go through the course of 2019 and we won't provide any comments around drops or sizes related to that. It will give us about $50 million that we contributed back to the partnership and we'll see where we are as the year unfolds. We run a conservative balance sheet. We can always do debt equity or sponsor take back and so we'll value the market - evaluate the markets as we go. So we will not provide any guidance beyond what we've done today.

[Kevin Nichols:]

And Theresa let me maybe - also specifically to the IDR's and what goes beyond 2019 from the sponsors perspective. We won't speculate as to what the sponsor may or may not do with regards to IDR's. Although they - I've always said, they're looking at the long-term solution in that space. Our sponsor has heard the market around this issue and continues to evaluate what's the right thing to do. I can say that they're pleased with the business performance and how the MLP has delivered to date. They're committed to growing the midstream business. They entered into this MLP taking a long-term view and have a long-term view, so they're looking to what is that long-term solution. And I think it really shows strong sponsor support that they listen to the market while they're considering what the long-term solutions or IDR's should be, they've offered something up to the unit holders in the interim.

[Theresa Chen:]

It's very helpful, thank you. And lastly within 2019 to achieve that mid-teens growth guidance, are you looking to fund the growth with a mix of debt and equity like in previous years?

[Shawn Carsten:]

And Theresa just to reiterate what I said earlier, I think that we'll see how 2019 unfolds, but for sure we have plenty of liquidity available between cash - the facilities, they have about 1.1 billion available to us and that - because we maintain a fairly conservative balance sheet allows us to have a lot of options as we approach 2019.

[Theresa Chen:]

Thank you very much

[Kevin Nichols:]

Thanks Theresa.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Spiro Dounis of Credit Suisse. Your line is now open.

[Spiro Dounis:]

Hey, good afternoon. Just had a quick one on Amberjack, if you guys reiterated the 40 million distribution here in the fourth quarter, I was wondering as we kind of look forward here if there's any other mile markers you can kind of set out for us?

[Kevin Nichols:]

So I think the only mile marker that we mentioned when we did the drop and that is the only one that will give out of this time is that we said that by the end of next year that Amberjack will be running at 400,000 barrels a day from where it runs today. So we didn't give any guidance as to the growth of the distribution or the earnings for the system next year, but we did say that it would continue to grow 400,000 barrels a day.

[Spiro Dounis:]

Got it and then with respect to the 50 million that could be reinvested back into the business. I - just could you just clarify, is that primarily going to be around organic growth or in other words that will necessarily flat back into a dropdown and should we start to think about you're pivoting a little more towards organic growth or is it still primarily more of a dropdown name?

[Kevin Nichols:]

Yeah, thanks. I wanted to - let me answer that two ways, we'll continue to look at organic growth opportunities, but - and so it could be used for that, it could be used for acquisition and I wouldn't exactly - necessarily only look at and then - a lot of people say, well you're dropdown story maybe that's not in favor today. Actually if you take a look at what we have contributed and the quality of the assets would sit in the runway and how those come down into the partnership. I think it's a very positive story. They're great assets sitting at the partnership level. You take examples of the Amberjack system which we dropped and continue to show organic growth, 16% growth over quarter last year continuing to grow in the next year at a very attractive multiple with no permit risk, no timeline risk, no capital risk with the customers and the dedication already committed. So we consider and we talk about organic growth slightly in a different way than most, but we'll have both forms of organic growth coming from assets we drop as well as opportunities we look to build within the partnership.

[Spiro Dounis:]

Understood, thanks for the color.

[Shawn Carsten:]

Tag on to Kevin's comment, don't forget also that have additional growth in the Gulf that comes to us at no - virtually no cost or in capital investment, so as the Gulf grows producers connect to our corridors and are traditional tariffs [ph] for us.

[Spiro Dounis:]

Yeah. No, that's fair. I appreciate the clarification.

[Operator:]

Thank you. Our next question comes from the line of Derek walker of Bank of America. Your line is now open.

[Derek walker:]

Hi, guys. Thanks for taking the questions. First one just on maintenance CapEx, it seems like it came in all delayed [ph] in the recent quarters I guess. How should we kind of think about that as a run rate?

[Shawn Carsten:]

Derek, we'll continue with the guidance we provided in the past around major capital for the full year we are getting towards the end of the year, but it's within the small material [ph].

[Derek walker:]

Okay and then just going back to Zydeco, you mentioned the potential for another open season I guess what are some of the sort of markers that you're looking for in order to start that process again?

[Kevin Nichols:]

Yeah, so our commercial team is continuing to have negotiations with customers and also look at the volatility and how the market evolves and what's the right time to do something like that. It's not a given that an open season would be the best way to maximize value for shareholders, but it could be. Things that we would look for is, how does the growth from the Permian unfold, there's a wide range of what people expect, how do those constraints in Houston play out and then what does the demand looks like from Louisiana. So as we look at all those dynamics together and we continue to have discussions with customers and potential customers around what they would accept as terms and conditions that will trigger whether we go out for an open season or we continue to run the system a little bit more on spot given the demand.

[Derek walker:]

Got it and then just one on the dropdown, so I guess just given the IDR waiver, have you - has the strategy changed around the central size and potential terms around dropdowns, just any color there would be helpful?

[Shawn Carsten:]

So Derek, it's Shawn, I mean, there is no change to our dropdown strategy. We will always have a lot of assets and I think uniquely we're positioned with that with unmatched set of assets on the runway. We will have a connection to some organic growth. As Kevin highlighted as we grow. We will guide that we are providing guidance of mid-teens for 2019 and we'll continue with that guidance.

[Derek walker:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Tom Abrams of Morgan Stanley. Your line is now open.

[Tom Abrams:]

Thanks. I'll probably follow up on the IDR question just the mechanics of it, but just from a fundamental standpoint, when we're looking at Zydeco re- contracting, how much of those conversations are up in the air based on like Cap line and Sea horse and other kinds of market link type increments that might throw more volumes down into that Houston Louisiana area?

[Kevin Nichols:]

Yes I think that's -

[Tom Abrams:]

Does that come up a lot?

[Kevin Nichols:]

Pardon, say that again.

[Tom Abrams:]

I just wondered if that comes up a lot in those discussions.

[Kevin Nichols:]

Yeah, I think you're hitting on exactly kind of the conversations that we had with customers throughout. When I kind of talk about market evolving it's - there are a lot of projects that have been announced to grow the Permian barrels that come into Houston. There are a lot of other projects landing in Houston, some actually dedicated to land as East Houston, which is the origin point for Zydeco. So as they look and they try to project what kinds of volumes they're going to need to move and where they can move on in conjunction with other kinds of solutions in the Houston marketplace, I think that played into all of those conversations, continues play into those conversations. But that's where I think the benefit of Zydeco comes into play, we have spent the last several years - my commercial team has spent the last several years really creating flexibility and optionality on the Zydeco system. No, other system is connected to origin points like Zydeco and no other system is connected to destinations. We're connected in Houston, we're connected in Needham, we're able to deliver to refineries coming out of Houston all the way to the refining center in Louisiana. This is also system that's connected to offshore and we've seen the offshore volumes increasing in coming into Zydeco. And then finally Zydeco is connected not only into St James but it's connected into Core Valley and Loop and anybody that wants to export using BLCC at Loop has that optionality. So that's why we've been building this flexibility to capture what we see coming and certainly there's a lot that still have to play out as far as what projects go forward and what volumes hit the market.

[Tom Abrams:]

Great, thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of TJ Schultz of RBC Capital Market. Your line is now open.

[TJ Schultz:]

Yeah, are there three radical contracts about 30% of runaway revenue and are there any other contracts expiring in there in 2019 or when do the next batch of contracts expire?

[Kevin Nichols:]

Yeah. Thanks, great question. So yes, you will see from our filing that the three contracts combined represent approximately 30% of revenue for the overall partnership. Now remember we don't record revenue on many of our assets because they come in from equity accounting and from joint venture. So it's not - not all of our income and our cash available for distribution is generated by revenue per se. As to the three contract expiring we have four main contracts that underpins 90% of what flows on Zydeco and that fourth contract is a long-term contract not expiring any time soon. When we first gave you the guidance of our contracts they range between five years and 15 years and here we are at the five year anniversary, so I'll let you do the math on the remainder.

[TJ Schultz:]

I can do that math. Okay.

[Operator:]

Thank you and I'm showing no further questions at this time. I'd like turn the call back over to Jamie Parker for any closing remarks.

[Kevin Nichols:]

No, thank you everybody else for joining.

[Jamie Parker:]

Alright, thank you very much for your interest in Shell Midstream Partners. And if you have any additional follow questions following today's presentation, please feel free to call me directly. My contact information can be found in the presentation materials as well as on our website shellmidstreampartners.com. So thanks guys

[Operator:]

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