Shell Midstream Partners, L.P.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Good morning. My name is Kandes [ph] and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2015 Shell Midstream Partners Earnings Call. [Operator Instructions] We will now turn the call over to Courtney Selinidis, Investor Relations Officer. You may begin.

[Courtney Selinidis:]

Thank you, good morning and welcome to Shell Midstream Partners earnings conference call. With me today are John Hollowell, CEO of Shell Midstream Partners; Susan Ward, CFO; and Kevin Nichols, Vice President of Commercial. The presentation materials we will be using this morning can be found on our website, shellmidstreampartners.com under the events and conferences sections, and of course we will take questions at the end of the presentation. Slide 2 contains our safe harbor statement. We will be making forward-looking statements related to future events and expectations during the presentations and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to differ are included here, as well as in this morning’s press release and under risk factors and our filings with the SEC. Today’s call also contains certain non-GAAP financial measures. Please refer to this morning’s press release and Appendix 1 of the presentation for important disclosures regarding such measures including reconciliation to the most comparable GAAP financial measure. With that I will turn the call over to John Hollowell for some opening remarks. John.

[John Hollowell:]

Thank you Courtney and good morning everyone and thank you for joining today’s call and for your interest in Shell Midstream Partners. Before we get started on the results of the quarter, I wanted to just take a few moments to introduce myself and tell you why I am excited to be leading this business. I worked for Shell in the Executive leadership roles across the upstream and downstream, including previous experience in Shell Pipeline. I spent roughly a third of my carrier in the downstream and two-thirds of my carrier in the upstream for sale. Most recently, I lead the Americas Deepwater organization to a period of significant change and growth. While I was in Deepwater, we brought six new offshore projects on stream, including Perdido, Olympus, and Cardamom in the Gulf of Mexico and BC-10 Phase 1 and 2 and the Bijupira Salema redevelopment in Brazil. Floor assurance and the World Midstream Solutions plays in connecting upstream assets to downstream markets is absolutely critical to the success of any project. And that’s why I’m particularly happy to be here today as CEO of Shell Midstream Partners. This is an exciting space, I’m excited to be in the role and I believe Shell Midstream Partners is positioned to be a leader in the sector. Although I’m new to the role, the priorities and the strategy the partnership remain unchanged. As we’ve said before, our strategy is to be a top tier distribution growth MLP. We will focus on the predictable, stable, fee-based cash flow underpinned by long term contracts. We believe assets with these attributes provide the optimal cash flow to unitholders. We’ve put this strategy into action and we’re delivering on it. We have closed two dropdowns from our sponsor with a combined headline size of $800 million and our planning to complete a third dropdown by the end of the year. Because of our relationship with our sponsor Shell, we believe we benefit from a rich inventory of assets that could be dropped into the partnership, but we intend to be much more than just a dropdown store. Once we reached scale, we will look for organic growth projects to take on at the Shell Midstream Partners, as well as M&A opportunities that fit within or existing footprint. Now, turning to current performance, I believe a strong safety culture is at the core of running a successful business, and I have expectations as CEO of Shell Midstream Partners and as Executive Vice President of US Pipelines for Shell that we will work in ways that result in no actions to people and no leaks from our assets. We call that achieving goal zero. And I’m proud to say that for the second quarter of the year, Shell Midstream Partners had not safety instruments. Now let’s talk about the operational performance of our assets for the second quarter. Zydeco’s mainline deliveries were 577,000 barrels per day, up 10% from the previous quarter. And Shell Pipeline Company’s operator continues to pursue opportunities to optimize the system. The Mars Pipeline system, a key quarter of pipeline to on-stream markets continues to benefit from strong demand along the system. In the second quarter, the system outperformed expectations with volumes of 322,000 barrels per day, up 7% over the previous quarter despite a plant producing maintenance shutdown. The increase was due to strong volume growth on the amberjack system and greater demand for shipments to Oakville [ph]. Now as a result of this strong performance, the board of our general partner announced a distribution of $0.19 per unit which is 8.6% above the previous quarter’s distribution and 16.9% above the minimum quarterly distribution, which is in line with our intent to deliver top tier distribution growth. Susan Ward will go into further detail on the financial performance of the partnership later in the webcast. I would also like to take this opportunity to highlight the dropdown we recently announced. Shell Midstream Partners purchased a 36% equity interest in Poseidon Oil Pipeline for $350 million on July 1. Poseidon is an attractive asset sales for several reasons. Like Mars, the system is a major offshore highway to onshore markets; and in addition is well positioned to take advantage of new production from the Central and Western Gulf of Mexico. For example, Poseidon owns the South Marsh Island 205 platform, which has been recently expanded to serve solutions field and is ready to accept other growth projects slated to come online in the coming decade. And folks, that means growth on this pipeline has already paid for. Once onshore Poseidon flows through the home of terminal with connection points into the Zydeco system for ultimate delivery into St James and Clovelly. So I believe the acquisition of Poseidon, which was immediately accretive to the unit holders is an excellent addition to our portfolio. It’s strategically positioned to attract new growth and diversify as a partnerships cash flow, while maintaining strong integration with the existing portfolio. I will now turn the call over to Susan Ward to discuss the financial results of the quarter. Susan?

[Susan Ward:]

Thank you, John. Good morning everyone. Our second quarter results fully reflect the partnerships first dropdown comprised of 19.5% additional interest in Zydeco and an additional 1.388% of Colonial as the transaction was effective April 1. As shown on slide 6, total revenue for the period which is comprised of 100% of Zydeco is a fully consolidated entity was up 11% above the first quarter, largely due to the strong transportation volumes that John previously mentioned. Our equity investments also had strong delivery over the quarter, the continued ramp up of volumes from new Gulf of Mexico Deepwater projects underpin much of the growth in volumes on the Mars system. Increased Mars volumes were offset by higher expenses in the second quarter, due to $1 million physical inventory reconciliation. Mars also had $1.2 million of higher expenses related to the cavern maintenance repairs, which were discussed in the Q1 earnings call of which $1 million was indemnified above the deductible. That indemnity payment was recognized as other income at the Shellex level. Bengal's strong performance was due to increased volumes and higher storage revenue linked to high refinery utilization and demand for pipeline transportation to the South East and Mid Atlantic. The increase in dividend income which represents Shell Midstream Partners interest in Colonial is largely due to the increased ownership percentage following our first drop down and after adjusting for non-controlling interest net income attributable to Shell Midstream Partners for the second quarter was $32.2 million. On slide 7 you can see that cash available for distribution was $36.6 million after adjusting for interest, Zydeco maintenance capital and minimum volume commitment. Total cash distributions were $27.7 million resulting in 1.3 times coverage ratio. And as we stated before, our targeted coverage ratio going forward is 1.1 times, but this will fluctuate quarterly depending on activity. Now, looking to our balance sheet on slide 8, as of June 30, 2015, Shell Midstream Partners had $130 million of consolidated cash and cash equivalents on hand. On June 29, we increased the partnerships borrowing capacity to $500 million in connection with the Poseidon drop down. And as of the end of the second quarter, there was roughly $71 million drawn down on the revolvers to partially fund the first drop down. As of July 01, an additional $350 million was drawn to fund the second drop down. So as of July 01, the total debt drawn on the revolvers totaled roughly $421 million. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from Brian Zarahn of Barclays. Your line is now open.

[Brian Zarahn:]

Good morning.

[John Hollowell:]

Good morning, Brian.

[Brian Zarahn:]

John, given your deepwater experience, how do you view obviously you’re seeing volume growth on Mars and Poseidon now. But if we are in this low priced environment for a longer period of time then people originally expect, does this impact your meeting in the long term view of Gulf of Mexico volumes?

[John Hollowell:]

Brian, when you look at the Gulf of Mexico type projects that we undertake, they are long cycle time in nature. So you invest in these willing to go through the ups and downs of pricing cycle. So I think there is number of projects under construction in the Gulf of Mexico across industry that could be and will be attracted to our assets in our systems for future volume growth and future cash flow growth. So I think if you look at the near term with the projects under construction, we can expect to continue to see growth in offshore volumes for a few years to come.

[Brian Zarahn:]

Are we somewhat onshore or is offshore production seeing or trying to achieve cost savings?

[John Hollowell:]

There is no doubt. All the projects that are being undertaken in the offshore world are going through an effort to reduce cost and CapEx associated with the cycle, low prices whether it’s through the value chain or through the supply chain or whether it’s through how we work or changing the ways we work, everyone is focused on trying to reduce cost associated with these big projects.

[Brian Zarahn:]

That’s helpful. And then turning to drop downs and this will be a busy year for drop downs with three, the third one later in the year. Should we expect an update on the drop down to inventory side at some point this year or how do you think about updating that original drop down number?

[John Hollowell:]

Yes, Brian. Thanks for the question. We are still planning on giving more update on that towards the end of the year like we’ve already said. So expect more information on that as we approach the end of the year.

[Brian Zarahn:]

And then last one from me. With RDS selling its stake in the Elba Island LNG facility which would seem to have been a nice addition to the drop down inventory for Shell Midstream Partners, how should we think about the MLPs asset mix I guess longer term or gas and LNG assets or something that could be considered if they are fee based or is this going to be more of a – continue to be a crude refined product type MLP.

[John Hollowell:]

No, Brian, I think that the announcement of the Elba doesn’t really change the strategy for Shell. We will continue to review assets like these going forward in the future and for potential opportunity and inclusion to the MLP. And I think a good example of that is an offshore project, but there is still capital being invested and opportunities to be pursued like Appomattox and we will continue to look for opportunities like that, the drop into the MLP slot. I don’t view the Elba case as a trend as much as maybe a one off event given the current circumstances.

[Brian Zarahn:]

Thanks, John.

[Operator:]

Thank you. And our next question comes from Faisel Khan of Citigroup. Your line is now open.

[Faisel Khan:]

Good morning. Thanks for the time. Just trying to understand a little bit on your prepared remarks on the Bengal pipeline system, so this strong performance was due to higher storage revenues linked to high refinery utilization. Can you describe that sort of element you are talking about there? I don’t understand how storage revenues are linked to higher utilization at the refinery.

[Kevin Nichols:]

Yes. So, this is Kevin. Thank you very much. Appreciate the question. I would say the bulk of Bengal’s over performance was from transportation revenue although it did have additional storage revenue. So based on the environment and people looking to move product sometimes, they will utilize in storage around their trades and their movements but the predominant Bengal over performance was from transportation revenue. You have the refineries high utilization and actually this is driven by demand for moving product on the pipe and we saw some conversion of waterborne traffic to the pipe where pipe had the capability to move it.

[Faisel Khan:]

So, you’re talking about waterborne traffic on, is it going on the water to say Florida, you were using plantation more aggressively or I mean how is that…

[Kevin Nichols:]

So we are seeing, of course I can’t kind of anticipate why all the various different shippers move their business but we saw some barrels traditionally moving not on the Bengal system but they are moving on over the water, now moving on the pipe. The pipe is the most efficient and cost effective transportation to the South East area and also the Mid Atlantic, and the demand for those two areas increased, that has increased for the first half of the year.

[Faisel Khan:]

Okay. Got you. Thinking about the future assets within Shell pipeline company that can be drop down, just looking at the California system, how is that system performing and hit the product pipeline system. So I’m just understanding what you guys are seeing in terms of demand growth and volume growth in that system as it eventually gets prepared to be dropped into the MLP sometime of time.

[Kevin Nichols:]

Yes. So we’ve actually seen an improvement in our California system. Recently this year, we brought on an additional connection. We are working on a couple of more connections. So we’ve seen some existing production that has shifted over to our system from maybe some of our competitors. So it has exceeded our performance from years past. We are busy obviously working on the system with the new growth opportunities. We’ve worked on a rail connection and we are also working on some maintenance project. So from a timing perspective and how to look at it as far as a drop candidate, we’ll put that into the overall consideration but we’ve been pleased with the California system so far this year.

[Faisel Khan:]

Okay. Thanks for the time. Appreciate it.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Timm Schneider of Evercore. Your line is now open.

[Timm Schneider:]

Hi, good morning guys. I guess it’s maybe little bit more of a short question but I guess it would impact you guys too. On the proposed northeast cracker I think FID for that was still at the end of the year. Is that still the timeline at this point?

[John Hollowell:]

Yes, Timm. That’s still the timeline and the planning to take FID towards the end of the year.

[Timm Schneider:]

Got it. And can you maybe talk a little bit about the opportunity that would bring for you guys on the MLP side?

[John Hollowell:]

Yes. Associated with the cracker is some transportation [indiscernible] to be built and that transportation network provides an excellent opportunity for Shellex and for the MLP.

[Timm Schneider:]

Okay. Got it. Thank you.

[Operator:]

Thank you. And our next question comes from David Campbell [ph] of TPH. Your line is now open.

[Unidentified Analyst:]

Hi, good morning. Just had a couple of questions. Just trying to get an idea of what’s the market capacity to absorb sales drop downs? Just wanted to have your view, do you see market capacity to take new units of Shellex and absorb new assets into it at around $2 billion, $5 billion per annum or even more? I mean I just want to have your view over there. And then just another one, the Shellex, you talked about M&A and not being just the dropdown story, is Shellex looking at assets outside of Shells dropdown, what are your plans going forward in that one.

[John Hollowell:]

I will answer the second question first David and then I’ll turn it over to Susan to talk about the first question you asked. With regard to dropdowns we are going to follow along our dropdown strategy that we have with our existing assets within Shell to begin with. We think it is important to do that to build scale and size as we go forward. Once we build the scale and size a bit bigger we will start to look for other acquisition types like bolt-on or small acquisitions that we can probably do at the partnership levels we go forward.

[Susan Ward:]

Yes, and I will answer the first question which was how much is the capacity of the market to handle our dropdown, so we’ve done two dropdowns this year for a total of 800 million. We said we are going to do a third dropdown and I think as in the past you will see our dropdowns be ratable and speaking at top tier distribution growth. So, so far we’ve had a very good reception from the market for our capital.

[Unidentified Analyst:]

Alright. Thank you very much.

[Operator:]

Thank you. And we have no further questions at this time. I will turn the conference back over to Courtney Selinidis for closing remarks.

[Courtney Selinidis:]

Thank you very much for interest in Shell Midstream Partners. For additional follow-up questions please direct all questions to me. My contact information can be found on the presentation material as well as on our website shellmidstreampartners.com.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone.