Shell Midstream Partners, L.P.
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Operator:]

Good morning. My name is Karen and I'll be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter 2015 Shell Midstream Partners Earnings Call. All participants are currently in a listen-only mode. Later we'll conduct a question-and-answer session [Operator Instructions] I will now turn the call over to Courtney Selinidis, Investor Relations Officer. You may begin the conference.

[Courtney Selinidis:]

Thank you. Good morning and welcome to the 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, Commercial. The presentation materials we will be using this morning can be found on our website, shellmidstreampartners.com, under the events and conferences section. 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 differ 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 press release and Appendix I of the presentation for important disclosures regarding such measures, including reconciliation to the most comparable GAAP financial measure. We will take questions at the end of the presentation. With that, I'll turn the call over to John Hollowell.

[John Hollowell:]

Thanks Courtney. Good morning, everyone, and thank you for joining the Shell Midstream Partners Q4 2015 earnings announcement. Today I’d like to start off by reviewing our successes in 2015 supported by our different shaded portfolio of assets. Then I’ll spend just a couple minutes discussing the opportunities set from our sponsor which will fuel our growth into the future and finally Susan and I will review the operational and financial performance of the fourth quarter. 2015 was a successful year for Shell Midstream Partners. As you can see on Slide 3, we materially grew the partnership across key metrics. This was achieved through dropdowns from our sponsor and organic growth. In 2015, against the back drop of a very volatile industry, we demonstrated ratable growth while maintaining a conservative balance sheet. All of this underpinned by stability in our cash flows. In our initial public offering, which closed over a year ago, we launched the partnership with a flagship portfolio of high quality assets in strategically advantage locations. At that time, we told you that our dropdown strategy was to build on that portfolio with accretive fee-based assets and we accomplished that by completing $1.2 billion of dropdowns, which deepened our footprint in key locations and began to diversify our portfolio and asset class and geography. We said, we will maintain a conservative balance sheet throughout the year and we did so by completing two equity offerings in May and November to partially fund the dropdowns. In addition, our ability to access the equity markets allowed us to stay well within our targeted leverage ratios and speaks to the quality of our asset base. We said we wanted to deliver top tier distribution growth and we did. Our fourth quarter distribution was $0.22 per limited partner unit and that represents a 35% increase from our pro forma Q4 2014 distribution. The resilience of our assets was at the core of our success in 2015. For example Zydeco, our onshore crude system is strategically positioned as the only pipeline originating Houston with delivery into key Louisiana refining markets such as St. James. Total crude making its way into the Houston area is currently projected to be about three million barrels per day, which exceeds Houston’s refining capacity and creates an evacuation demand. So while there may be slowing production in some onshore fields given the current commodity prices, Zydeco remains a highly utilized route to get crude out of Houston and into Louisiana. Another good example is our offshore assets serve as major highways transporting volumes from several producers to independent onshore refining markets. We benefit as the aggregator with several individual fields tied into our corridor pipelines. The outcome as you can see on Slide 4 is stable and at times growing total throughput. When you take all this into account, the reliable nature of our portfolio allowed us to consistently grow distribution since the IPO. In addition we maintained healthy coverage ratios each quarter, which we believe is the prudent approach given current market conditions. Now before moving into the results of the quarter, I’d like to take just a minute to discuss the potential inventory of assets available to drop into Shell Midstream Partners from our sponsor, which we introduced in December of last year. The EBITDA of assets owned and/or under development by Shell in North America is currently estimated to be $3 billion to $3.5 billion. Now this is made up of the remaining assets at Shell Pipeline Company, existing assets in other parts of Shell in North America and future opportunities that are currently in the project funnel. While I expect this number to be dynamic as assets move in and out of the Shell portfolio, this is a good indication of the opportunity size available to Shell Midstream Partners at this time. From the total opportunity set we highlighted, our growth in 2016 will look similar to 2015 both in terms of quality of assets and the total headline size. While we can’t provide details about our dropdown plans for 2016, at this time we are committed to maintaining a portfolio of high quality diversified fee-based assets and we expect to deliver distribution growth in line with high growth MLPs in 2016 just as we did in 2015. Now let’s turn to the operational performance in the fourth quarter. First and foremost, I’m very pleased to report that there were no safety incidents in this quarter, thanks to the focused efforts of our people day in and day out. Our onshore pipeline systems Zydeco, Bengal and Colonial pipeline performed well in the fourth quarter. Bengal and Colonial’s results continue to outperform expectations primarily due to high refined utilization across the Gulf Coast. Zydeco also saw strong demand along the system and the segment between Houma to St. James continued to be prorated as it has been since 2014. In December, we commissioned three new tanks. These tanks optimized Zydeco and increased opportunities for spot volumes from Houston and Nederland. We added the Lockport terminal to our onshore portfolio beginning in the fourth quarter. Volumes were 100% contracted with take or pay commitments. We expect stable demand at the terminal as connected refineries use the Lockport facility as a key source of crude. In our offshore business, we had the benefit of Auger acquisition generating cash flow for the entire fourth quarter. Auger connects with our existing integrated footprint in the Gulf of Mexico, providing another complementary quarter of pipeline. Auger volumes exceeded expectations in the fourth quarter and we anticipate similar volumes on the system through 2016. And finally Poseidon and Mars were also strong for the fourth quarter as produced volumes from our offshore customers remained stable. With that I will now turn the call over to Susan Ward to discuss the financial results of the partnership in greater detail. Susan?

[Susan Ward:]

Thank you, John. Good morning everyone. As John just mentioned as of October 1, 100% of Auger and Lockport, which are wholly owned by Pecten Midstream LLC were included as a fully consolidated entity of Shell Midstream Partners. Total revenue for the period was $84.6 million, an increase of approximately $12 million from the prior quarter actual results. This increase in revenue was largely due to the inclusion of Auger and Lockport our third dropdown in 2015. In addition to the increased revenue from this acquisition, Shell Midstream Partners recognized $5.5 million of deferred revenue in the quarter compared to $13.4 million in the third quarter. As noted last November deferred revenue recognized in the third quarter was higher than normal following credit expiries that occurred over that period. We currently anticipate that committed shippers will ship at or near their contracted volumes on a monthly basis going forward in 2016. So we do not foresee a large bank of credit impacting 2016 as it did in 2015. Equity and dividend income, which represents Shell Midstream Partners interest in Mars, Poseidon, Bengal and Colonial was $25.3 million in the fourth quarter, comparatively flat to the third quarter and as John mentioned we saw steady demand across all of our systems, which you can see throughout our financial performance in 2015. After adjusting for non-controlling interest, net income attributable to Shell Midstream Partners for the fourth quarter was $57 million, an increase of approximately $3 million from the prior quarter. Cash available for distribution for the fourth quarter was $67.9 million driven by our stable asset base and accretive dropdown in the fourth quarter and non-recurring cash payments recognized in the periods. The partnership recognized $12.9 million of one-time payments in its cash available for the distribution in the quarter. $4.5 million related to a waiver from a joint venture partner and $8.4 million for certain indemnified and reimbursed cost and expenses from our sponsor. Cash available for distribution excluding those non-recurring items was $55 million. Total cash distributions for the period were $35.3 million resulting in a coverage ratio of 1.9 times or 1.6 times if you exclude the one-time payment. This demonstrates our ability to increase distributions in line with our high growth peers while maintaining conservative coverage despite volatile conditions. Now turning to our balance sheet on Slide 10, at the end of the fourth quarter Shell Midstream Partners had $93 million of cash and cash equivalents on hand including Zydeco which is a consolidated entity. On the debt side, $458 million was drawn down on the revolvers at the end of the year. This equates to approximately a 1.7 times debt to adjusted EBITDA on a Q4 2015 annualized basis. Currently, total capacity under all of our affiliate revolving debt facilities is $610 million with the ability to upsize if required. In closing as John mentioned earlier, 2015 gave Shale Midstream Partners the opportunity to demonstrate stable cash flows, ratable growth and a conservative balance sheet. We delivered what we set out to do and we look forward to continuing on the same path. We'll now open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Brian Zarahn from Barclays.

[Brian Zarahn:]

Good morning.

[John Hollowell:]

Good morning, Brian. How are you doing?

[Brian Zarahn:]

I'm okay. How's everyone.

[John Hollowell:]

We're good.

[Brian Zarahn:]

I guess just leading off with the balance sheet obviously it's in good shape. As you look for financing for this year, how do you expect you expect the balance sheet to be this under levered or you expect to more balance that equity mix for this year?

[Susan Ward:]

Brian thanks, this is Susan. We expect to continue along the path that we have been foreseeing maintaining conservative balance sheet.

[Brian Zarahn:]

Okay. And then on obviously you're maintaining your top tier distribution growth outlook. Any change to how you view top tier in this environment versus your IPO which is a different commodity price environment?

[John Hollowell:]

We just -- it's the same peer group Brian. We continue to follow that peer group and compare ourselves as we go forward.

[Brian Zarahn:]

Okay. And then on Zydeco understanding it is largely contracted, how do you view the impact I guess on the spot volumes from the competing pipeline and during service?

[Kevin Nichols:]

Yeah so while you see maybe some production slowing and everything else, I think John highlighted this is Kevin by the way. John highlighted in his comments that there is over three million barrels coming into Houston. And today Zydeco remains really the only pipeline to export crude from Houston, which can't consume all of that crude over to the Lusitania. So we continue to see Zydeco be strong and often on allocation coming out of Huston.

[Brian Zarahn:]

I guess looking ahead how do you assess the impact of the competing pipeline that's going to eventually reach the same markets in Lusitania?

[Kevin Nichols:]

Are you referring to by your bridge is that which are?

[Brian Zarahn:]

Correct.

[Kevin Nichols:]

Well, we think that there is significant demand at San James, its underserved today. Our 18 inch is on allocation in terms of way business and we move a bunch of business on our 24 inch. So we continue to be cognizant of the competition, but we're also working to capture that business going forward.

[John Hollowell:]

And we think we offer competitive flexible route brand with the flexibility to Clovelly and other markets is important to remember in the competitive place.

[Brian Zarahn:]

Appreciate that. And last one from me is more of a housekeeping item. On G&A expense is the fourth quarter as is reasonable run rate?

[Susan Ward:]

G&A in the fourth quarter increased largely due to the reversal of a FERC settlement indemnity that was recognized in the second quarter. So I think G&A maybe a little bit less going forward.

[Brian Zarahn:]

Thank you.

[John Hollowell:]

Thank you, Brian.

[Operator:]

Thank you. And our next question comes from the line of Faisal Khan from Citigroup.

[Faisal Khan:]

Hi good morning guys.

[John Hollowell:]

Good morning Faisal. How are you doing?

[Faisal Khan:]

All right. Hanging in there. Thanks for the call. Just going back to I guess Slide 6 and just looking at the infrastructure EBITDA the sponsor. I just want to make sure understand from these buckets correctly that the joint venture assets that you're looking at here these are just product pipeline joint ventures you're in, is that correct in the first bucket is to below?

[John Hollowell:]

That's correct.

[Faisal Khan:]

Okay. Got it. And then in the second bucket the downstream owned infrastructure, so is this -- are these the storage assets at your -- at the refineries in North America just a little bit more color around what in some of these?

[John Hollowell:]

Yeah so these are the other lines of business within Shell. And indeed what you're talking about its not necessary the tanks are one-off refineries, it's more or less the supply locations and terminals is what they entail and then it also includes the chemical assets that qualify to be included in the MLP. That's basically what that means Faisal.

[Faisal Khan:]

Okay. Got it. And so the terminals in that second bucket, those are the racks in the terminals associated with the Shell's wholesale business and marketing business is that fair?

[John Hollowell:]

Yes it is. And it does not include Motiva. So it's an important…

[Faisal Khan:]

Okay. And is Motiva included in any of these numbers at all?

[John Hollowell:]

No not included in anything.

[Faisal Khan:]

Okay. Got you. And on the chemicals pipeline is that ethylene and propylene lines and stuff like that is that what you're talking about?

[John Hollowell:]

Yes you got it.

[Faisal Khan:]

And then LNG infrastructure, is this all North American LNG infrastructures or is it outside of North America would include LNG vessels as well.

[John Hollowell:]

No, all these categories Faisal is North American only. We focused on North America at this time.

[Faisal Khan:]

Okay. Got you. So then what would LNG infrastructure be then? Is that I guess you've already sold your joint venture in Elba back to Kinder, so I was trying to understand like what it was that include in terms of the LNG infrastructure?

[John Hollowell:]

Well we have some things in Trinidad and Tobago that's included in those types of the things.

[Faisal Khan:]

Okay. And the Canadian infrastructure is that just gathering and processing?

[John Hollowell:]

Yes.

[Faisal Khan:]

Okay. Understood. Okay. And then a question going back to the credit side of the equation, do we seen the widening out in credit spreads between sponsors and MLPs. What do you guys see is right now the difference in the -- if you had to issue 10-year paper at the MLP how much different would that be versus the sponsor?

[Susan Ward:]

So Faisal this is Susan. We're currently floating our debt is LIBOR based. And we've locked in that spread to LIBOR under the five-year facility for five years. So it's quite attractive.

[Faisal Khan:]

Okay. So the facility obviously, is that how you're going to finance the debt portion of all dropdowns over the next two years. Or would you -- I thought also you were looking at the long term debt market, so the bond market also fund some of that capital.

[Susan Ward:]

We'll consider whatever markets are most efficient and most economic for us at the time but right now we're benefiting.

[Faisal Khan:]

Okay. Makes sense. Thanks guys. I appreciate the time.

[John Hollowell:]

You bet Faisal. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Anish Kapadia from TPH.

[Anish Kapadia:]

Hi. Just had a few questions please. I know you can't give guidance on the level of dropdown this year, I'm just wondering what were key factors for you that will determine the level of dropdowns and how are you seeing investor appetite at present if you were to as your new equity to funds dropdown?

[John Hollowell:]

Well we're going to mainly be focused on mainstream midstream assets Anish and those assets similar to what you saw in 2015. So 2016 will look very similar to 2015 from a headline size, with the same kind of quality assets, fee-based stable cash flow assets that we introduced in 2015.

[Anish Kapadia:]

Okay. And just from a evaluation standpoint, we've seen the EBITDA multiples on the asset drop downs you've been doing, been falling and not surprising over time. What are your expectations in terms of the EBITDA multiples for any acquisitions you do this year?

[John Hollowell:]

It’s difficult to answer. We look at each transaction independently Anish and it’s a transaction and negotiation between us and our complex committee that take into account a number of factors for each assets and arrive at the appropriate multiple. So, don’t really give guidance in that way because each and every drop that we've done so far is a bit unique in how the valuations done by our conflicts committee.

[Anish Kapadia:]

Okay. Fair enough and just one final one, so just given that the current oil price environment at the moment, when do you think you could see potentially some of your pipeline volumes falling if I suppose if oil prices stay this level given infill drilling, maintenance drilling will start to come off in the Gulf of Mexico. Just wondering how you think about I know you said falling to be stable this year but what's the potential impact of low prices over the next few years?

[John Hollowell:]

Let me start and I'll ask Kevin to fill in the gaps, but overall speaking when you look at our onshore crude system Zydeco as we said in the remarks, we really have a situation where the demand for that pipeline irregardless of some production declines in onshore fields will still be strong given just the oversupply of crude into the Houston area versus creating that evacuation demand that we talked about. When you look at the offshore system and particularly in the near term '16 to '17, we actually think we’re going to see stable volumes over the course of the next couple of years primarily on the back of developments that have been completed in the recent time. If you look at it little closer, that's another reason why I think our offshore systems are strategically placed where aggregators are production. So while some individual fields may be declining like you talked about due to infill drilling or lack of field work that they're doing because of low prices we still have to see other fields ramping up or coming online that creates a more stable throughput rate including maybe some growth in certain areas. So when you look at our overall portfolio and you think about the low price environment, I think in some respect it differentiates us a bit and that we have the market-to-market opportunities in the onshore with Zydeco that are wells [whatever] wells we've got to and then in the offshore we have this aggregate corridor pipeline strategy that kind of offsets growth versus declines based on where we are.

[Kevin Nichols:]

The only thing I would add to that, this is Kevin, is that onshore we're also underpinned by our contracts and so when you’re looking at it from just a 2016 perspective, our contracts run longer than that on average for Zydeco for example we have seven years remaining on our contracts and other systems are underpinned by take or pay commitments. When you’re looking for offshore, I would just reemphasize the point that John made that I think the real impact if it continues to be a low commodity price over time is really going to be more out in the 2019, 2020, 2021 when we see new developments that haven’t taken investment decision move to the right and get pushed out or delayed. I think our funnel is quite robust offshore for the short term. So the new fields coming online and our assets set to benefit from that as an example just to give you some specifics, there is a new field coming on in April in Julia into one of our other systems that feeds into Mars. So we'll see some volumes start to come in, in April there and then we have Stampede, which is another field that will come into our system that feeds Mars longer term. So I think short term our funnel is robust. Longer term we could see some softness if this continues two projects that haven’t taken investment decision.

[Anish Kapadia:]

Very helpful. Thank you.

[Operator:]

Thank you. And 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. For additional follow-up questions, please direct all questions to me. My contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com.

[Operator:]

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