USD Partners LP
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Thank you for standing by, and welcome to the USD Partners LP First Quarter 2018 Conference Call. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the prepared remarks. [Operator Instructions] It is now my pleasure to turn the call over to Jennifer Waller, National Reporting Manager for opening remarks. Please go ahead.

[Jennifer Waller:]

Good morning and thank you for joining us. Welcome to our first quarter 2018 earnings call. With me today are Dan Borgen, our Chief Executive Officer; Adam Altsuler, our Chief Financial Officer; Brad Sanders, our Chief Commercial Officer; Josh Ruple, our Chief Operating Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three months ended March 31, 2018. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before we proceed, please note that the Safe Harbor disclosure statement regarding forward-looking statements and last night’s press release applies to statements of management on this call. Also, please note that information presented on today’s call speaks only as of today, May 8, 2018. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today’s call will include discussion of non-GAAP financial measures. Please see last night’s press release for reconciliations to the most comparable GAAP financial measures. And with that, I’ll turn the call over to Dan Borgen.

[Dan Borgen:]

Thank you, Jennifer. And good morning, everybody. Thanks for joining us. Let me go ahead and get started with a few prepared remarks and then as usual we’ll get into our more individual responses to [suited] questions. So as we previously reported in March, we are pleased to report that the market events we have been anticipating continue to play out in Western Canada. Western Canada crude oil production continues to grow straining available take-away capacity. Apportionment levels on the major heavy crude export pipeline system from Western Canada to the U.S. reached as high as 50% during the first quarter. Stranded heavy barrels remain pushed in the storage increasing inventory levels to historic highs. Uncertainty around future large-scale infrastructure developments continue to overshadow the industry. As a result, we have seen activity at our Hardisty origination terminal increase substantially, since the beginning of the year as strategically located rail capacity has provided an export outlet for growing oil sands production. We and our we and our general partner are actively negotiations with current and new potential customers to extend the terms of our existing take-or pay agreements as well as evaluating a potential expansion to meet near-term demand. In addition, we are proud to report that our sponsor has contracted on the remaining capacity at our Stroud terminal with the initial Stroud customer and investment grade rated multi national energy company who also increased its position at Hardisty to support the origination for those barrels. Adam is going to start us off with an update on the partnerships latest operating and financial results, our distribution coverage or liquidity position, then we’ll jump back into the recent market and commercial developments. With that Adam, take over.

[Adam Altsuler:]

Great, thank you Dan and thanks for joining us on the call this morning. Yesterday afternoon, we issued our Q1, 2018 earnings release which included the details of our financial results for the quarter. And we plan to issue our first quarter 10-Q with additional details after the close today. For the first quarter, we reported net income of $6.6 million, net cash, provided by operating activities of $8.1 million, Adjusted EBIDTA of $15.5 million and distributable cash flow of $11 million. Relative to the first quarter of 2017, net income increased by 30%. Net cash provided by operating activities decreased by 37% and adjusted EBITDA and distributable cash flow decreased by 10% and 8% respectively and the partnership in the quarter with approximately $203 million of available liquidity and distribution coverage of approximately 1.2 times. Partnerships results during the first quarter of 2018 relative to the same quarter in 2017 were primarily influenced by additional revenues and costs related to the commencement of operations at the Stroud terminal in October 2017 and the conclusion of customer agreements at our San Antonio facility in May 2017 and at our Casper terminal in August 2017. In addition, as a result of the substantial increase in customer activity at our Hardisty terminal, the partnership incurred additional operating cost during the first quarter of this year. Effective January 1, the partnership adopted ASC or ASC 606 with regard to its accounting for revenue arriving for contracts with customers. The partnership adopted ASC 606 by applying the full retrospective approach resulting in the restatement of prior period finances to comply with the new standard. As Dan said, we continue to be very excited about 2018 and I’ll give a quick update on some of the recent developments. Customer activity at our Hardisty Origination Terminal has increased substantially over the last several months. Current market demand for the services provided at our terminal continues to exceed the available capacity and substantially all the terminals capacity was previously contracted by customers under multiyear agreements. Adam and Brad will give more detailed updates on our recontracting efforts at Hardisty later on the call. Moving to Stroud. As we have discussed previously, the Stroud’s terminal successfully commenced operations in October of 2017. Concurrent with our acquisition of the terminal, we entered into a multi-year, take-or-pay terminalling services agreement with the Stroud customer for use of approximately 50% of the terminal’s available capacity through June 30, 2020. For the original agreement, the contracted take-or-pay volumes with the Stroud customer increased to 30,000 barrels per day on January 1, 2018 from 20,000 barrels a day during the fourth quarter of 2017. That increases reflected in our first quarter financial results. Also, this increased volume supports the initial guidance of approximately $10 million of annual adjusted EBITDA of the terminal. During March and April of this year, the Stroud customer secured the remaining available capacities at the Stroud terminal for periods beginning in the second quarter of 2018 and ending in June 2019 and January 2020. This capacity was contracted to USD marketing LLC, pursuant to the Marketing Services Agreement established with the Partnership at the time of the Stroud acquisition. Under this agreement, the Partnership receives a nominal fee per barrel for these volumes. And currently, the Stroud customer increased its position at our Hardisty terminal from 15 slots per month to 29 slots per month by attending origination from two or the initial customers of Hardisty at the same economic terms as the initial customer agreements. The Hardisty origination capacity was contracted for corresponding periods beginning the second quarter of 2018 and ending in June 2019 and January 2020 and later representing a seven month extension over the original Hardisty contract term. For a little more color, five of the recently obtained slots per month at Hardisty were extended through January of 2020 and the other nine were left unchanged contracted through June 2019. Also the terminalling services agreement related to the portion of the Stroud customers origination and destination capacity through June 2019 contemplated deadline of August 31 of this year to extend the terms of these agreements at the Hardisty and Stroud terminals. Including these new the agreements management estimate that the Stroud terminal will contribute approximately $11 million of adjusted EBITDA for the full year of 2018, and approximately $12 million of adjusted EBITDA in 2019 with no further extensions. With regard to Casper, the partnership is continuing to see increased activity in the second quarter of 2018. We continue to use tank capacities to support spot shipments for several customers with whom we are negotiating term agreements for potential ongoing use of the terminal. Additionally, the Partnership is pursuing a hub strategy through existing and potential additional connections to other downstream pipelines in the area. Brad will give an update more on that as well. As of March 31, the Partnership had net leverage of 2.3 times LTM adjusted EBITDA, including pro forma adjustments for the Stroud acquisition and total available liquidity of $203 million, including $6 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $197 million on its $400 million senior secured credit facility subject to continued compliance with financial covenants. The Partnership is in compliance with its financial covenants and has no maturities under a senior secured credit facility until October 2019. With regard to cash tax, the Partnership made approximately $200,000 net cash taxes in the first quarter and estimated total net cash taxes for the full year of 2018 to be in the range of $750,000 to $1 million. On April 26, we declared a quarterly cash distribution of $0.3525 per unit, or $1.41 per unit on an annualized basis, which represents growth of 0.7% relative to the fourth quarter of 2017 and 5.2% relative to the first quarter of 2017. The distribution is payable on May 11 to unit holders of record at the close of business on May 7. And with that, I would now like to turn the call back over to Dan.

[Dan Borgen:]

Thank you, Adam. Obviously one of the significant questions as the market changes and the big shift in the – what’s happening with crude production in Western Canada, so with that I’ll have Brad walk us through that.

[Brad Sanders:]

Okay, thank you Dan. So as we’ve talked about on previous calls, we’ve seen supplying [ph] Canada grow materially. Pipeline uncertainty remains high, so apportionment levels have increased from levels as low as 20% during the first quarter we saw as high as 50% but mostly trading somewhere around 40% to 50%. That led to inventory builds in Canada into historically high levels, which ultimately drove price differentials for Canadian heavy into price ranges discounting between $25 and $30 allowing for profitable take away for heavy Canadian by rail. So today as we move through and into the summer, we’ve seen those apportionment levels decline a bit, but still trading somewhere between 40% and 45%. Inventory levels remain high, differentials have tightened some, but remained at levels that allow -- by rail movements out of Canada into the West Coast, East Coast and U.S. Gulf Coast. With this kind of macro environment, as Dan and Adam have said our activity has picked up with our existing assets, and we’ve been able to accomplish a number of things. As mentioned, we’ve been able to fully commercialize our Stroud capacity. We’re currently in renew and extend discussions with all our relevant customers up at Hardisty with an expectation to be able to accomplish both renewing and extending, given that they are desiring to keep their positions at Hardisty, and given participants who are desiring positions at Hardisty, not only volumetrically to solve their problems, but sooner than later than we also have opportunities to grow our position at Hardisty. And as mentioned, we’re in discussions with customers to do that. And then finally our objective is to leverage that activity ultimately, not only to Stroud, which we have but also in developing a heavy oil solution in the U.S. Gulf Coast at our Texas Deep Water asset. So we are excited about that potential on likelihood. As it relates to Casper, activity is by our term customers is higher as well for the reasons that we’ve stated, but we’ve also seen a number of new participants at Casper. Wyoming’s sour producers, shippers on express who’ve got take away constraints. We’ve seen both spot activity and term discussion opportunities grow for those reasons are we are excited about the likelihood of something happening with both of those types of customers. Remember the Salt Lake City areas is typically short, Salt Lake City and I’ll say U.S. mid-continent is short, pipe capacity to get access to heavy also were excited about the potential of solving that with investments to allow us to do that by rail truck and/or pipeline. We call that our Casper hub strategy and we’re excited about the potential of that and the progress we are making there.

[Dan Borgen:]

Thanks Brad. All right, let me talk a little bit about the current status of the Canadian rail roads and what that means to us, I know a number of you have questions around that or have seen comments by both producers rail road’s and so forth about their involvement and crude – and the growing crude business. So we feel very pleased with where we are with the rail road performance. There has been a substantial improvement in terms of crew availability as well as locomotives that are handling our business. The Canadian Pacific has done a very good job of continuing to ramp up, to support the growing demand out of our Hardisty terminal, as well as the BN coming out of our Casper facility as well as interchanging with the CP. So that has continued, that continues to be on track for a [Indiscernible] I guess for a full volume support in late June. And as our customers are now completing their both existing customers and new customers are completing their freight agreements for multiyear. With rail roads they are now releasing fleet to start loading and so we see – we have a high degree of confidence, and feel strongly that will be at full capacity for Hardisty and Casper. So from a rail road support standpoint, so we feel very good about that. The – as I said the customers are completing those agreements now some have, some are in the process of finalizing those freight agreements, therefore as Brad said, then we’ll have the opportunity to we’d say board [ph] engaged with us for renewals, for our existing customers as well as non customers, non current customers coming to the table to seek long-term multiyear agreements with us as well. So we like where we are from our market, we like where we are from a railroad support position and we continue, we look forward to continuing to grow with that. Let me talk, I’m going to shift quickly and talk a little bit about although maybe you’ve seen some of the press releases around some of our growth initiatives. Let me talk through those a little bit and what those mean to us, and potentially to the Partnership. Obviously our demand at the Hardisty terminal continues to exceed our rail road capacity. I mean we just do not have any more capacity available for anyone else at the terminal. So we are – and remember just a reminder, those agreements, those existing agreements are through 2019 and 2020 with our existing customers at Hardisty. We have been very strategic in our discussions with our customers at Hardisty and we feel very strongly, we’re going to be able to win new and extend those as I had said previously. And I firmly believe that we will be in a place to be able to announce very soon the expansion of that facility to three unit trains a day from two unit trains a day, we are permit in hand, we are -- we have negotiated construction contracts, we are very close to releasing that to commence construction of which we would like we would see coming online in late this year November, December weather dependant. We expect within a few days or coming weeks, week, to announce a new five-year take-or-pay strongly supported contract by a large refiner to off take and support additional growth at Hardisty. As Adam mentioned, we are proud to report that our sponsor has contracted the remaining capacity at Stroud with the initial Stroud customer to also increase their position at Hardisty from 15 slots per month to 29 slots per month, almost doubling the volume commitment at Hardisty. So again, a network value coming to the partnership. As we continue to be in discussions with customers who want to reach the Gulf Coast and many of our existing customers and new customers have an increased interest in going to the Gulf that bodes very well and we are in active discussions and term sheet discussions what we call term sheet network discussions with at the sponsor with -- from our sponsor at Texas Deep Water to receive that growing volume of heavy crude that wants to go to the Gulf Coast. We are uniquely situated on the Gulf Coast. We have over 600 rail cars pass today, and could be in position to start receiving and blending and offloading to barge and distributing via pipe in the market to support the refiner demand, therefore bringing a true network solution to a producer and/or refiner. So both the recently contracted capacity at Stroud and Hardisty expansion, as we previously mentioned, could be a drop down to the partnership within this year. We’re looking at a mid-to-late summer on Stroud and potentially end of the year for the expansion at Hardisty. And let me just say in a minute the – many question of how will that be done, how will that be financed, Adam will address that a little bit later, but we will do it in friendly terms, and this is we are being very strategic about making sure that the partnership assets continue to be sustainable, continue to be termed with solid customers and counterparties, and we look forward to talking more about that. So given all of these things that are happening in the marketplace today, it’s reasonable to ask what kind of rates, what kind of volumes, what kind of terms are you seeing? I’m going to ask Brad again to discuss that and bring us up to speed on kind of what we are seeing in the market.

[Brad Sanders:]

Yes, thanks Dan. So first and the macro story determines the point that people are at the table to negotiate and want to use our assets, because growing supply, limited take away, you have to price to allow for rail take-away. What determines terms and rates though is, is what the market perceives the future to be, and when we look at an indicator of that, we look at simply what the WCS differentials look like not only today, but what they look like out for in the future and there are transparent prices out there, so you can actually do that. And today, we might, we’d spot these trading somewhere around 1650, but in winter 2018 we are trading closer to 24 differential, starting in 2019 through 2023 we are seeing differentials that are somewhere between $21 and $22. At those types of levels, that would support first of all, rates at our facility, at least what we’ve been able to achieve historically, but even higher and at those type of levels, then we can expect to commercialize a term into 2023. So we’re actively pursuing three and – three to five year renew and extend and any kind of new business at our facilities.

[Dan Borgen:]

Okay. Good. Brad, appreciate that. Let me also just add one thing to that. We are not surprised by the tightening of the curve if you look at our short curve. If you look at the -- our investor deck online on our website you'll see that we had suggested that that would becoming – that's a traditional tightening of the curve in the summer months when there's traditional turnarounds done in Canada. Therefore in WiFi susparity [ph] producers often look to do additional maintenance during that time. And whereas on the other side refiners who have the option to buy a cheaper feed will look to run full-out and perhaps differ some of their maintenance be able to accept a lesser cost feed. So that's our traditional move exacerbated by obviously the widening of that going in the summer months. So again we expect that and as full curve later in the year suggest that be absorbed back on once the turnarounds are completed and we'll see a continuing widening into the mid-20s and supporting that for a few years to come. So, appreciate Brad covering that. Let me go over now our more longer-term -- mid to longer-term opportunity with our DRU and our partnership with Pembina on building that. Again, we feel very strongly that that is the best solution, the best industry solution for a heavy barrel. It provides a freeze up existing pipeline capacity, said easily is if you took €100,000 out of the pipe we would give you 70,000 barrels of what we called DRU bit our trade market name which is a highly valued 98% plus bitumen product run by rail, non-hazardous, nonflammable, its better for the railroads to handle. It's what our refining customers in the Gulf want. Remember 74% of the refiners in the Gulf are heavy. They want the heavy barrel. They want to blend it with a preferred blend, not necessarily a diluent or a condensate. The diluent and condensate that we will remove in Canada, we will simply cycle back and return to the producer. Therefore creating cost efficiencies there and we feel extremely good about that. We have active, very active discussions going with exiting customers and new customers seeking to move towards that more quickly, simply to -- because it’s a better net back for producer and a good opportunity as we see a shrinking imported heavy barrel coming from places like Mexico and Venezuelan barrel and elsewhere. So we -- again we feel very, very good about that and we are in active discussions around that. Therefore taking us from I'll call multi-year contracts to long-term 10 plus year contracts that continue to make the assets more sustainable long-term sustainable and as a reminder once the barrel goes into a DRU bit form is no longer pipelinable. So it avails existing pipeline capacity to other product. It moves a heavier barrel more safely and efficiently and gives a refiner what they want all at a better net back than a long-term pipe commitment that the producer has the option to do today. So that's why the customers are at the table. That's why they are being aggressive around looking to make commitments on that and we feel very good about that. And the quality of the customers that are there. So I wanted to cover that just to remind folks that we do have – our vision is to move multiyear to greater length of contract longer-term, more sustainable increase the distance in terms of committed revenues. So appreciate the time on that. So let me ask Brad to give some update on two of the primary development projects that we've been talking about which is a Texas Deepwater, our Joint Venture in U.S. Gulf Coast and the Houston Ship Channel and then our Mexico update that we're excited about. Brad?

[Brad Sanders:]

Yes. So our Houston Ship Channel project or potential opportunity is underpinned by the macro that I think most people are familiar with which is North America, the U.S. in particular, their role is shifting to become the major exporter of energy products whether its crude oil light products NGOs, and/or pet cams to meet that growing global demand and the demand for infrastructure that that uniquely solves for each one of those is high and requires a reinvention of current assets and on the margin new investments to make sure that happen. So we're uniquely positioned to participate on that. So from the priority standpoint we been working hard, from a crude standpoint to make sure our inbound and outbound connectivity options are identified, pursued and completed and we would great progress on that and look forward to making some announcements soon on that, in particularly as they align nicely with our network of heavy oil assets. We talked about the roll of Casper and Hardisty, being advantage from a origin standpoint Stroud been advantage from a destination standpoint. We firmly believe that Canadian production that leaves by rail why they go to east coast, west coast. Maybe a train a day Stroud for sure, train a day, and then there will be the ability to put at least one train a day in the U.S. Gulf Coast and as Dan said, we're currently have infrastructure at Texas Deepwater to accept that and given the work that we've accomplish from a connectivity standpoint. We think we can be uniquely advantage in supplying Gulf Coast customers who import having today with Canada heavy, so we're excited about that. From a life products standpoint we're working on a specific export solution. It’s a hub solution that provides one export option provides options to our potential customers. We're finding customers in the U.S. Gulf Coast, Houston in particular and instead of solving for all, it creating a industry solution that meets the need of all those. We think that's advantage and the likely outcome is high. And then there are some pretty public information out there, it relates to the rest of the world trying to get access to cheap Petchem fee, and because of that there's a lot of things going on in terms of new inventions on how to move our train as an example, as well as traditional NGLs, including C5 plus as Petchem feedstock, the demand for facilities to do that to meet that growing Petchem demand is exciting and we hoping expect to play a role on that. So lots going on the Texas Deepwater all supported just by the macro story that I just went through. Consistent with that of course is Mexico. Mexico is our closest potential demand point certainly as it relates to light product. We've recently announced that we are gone live with a first terminal in Keitro [ph] supporting our customer there for re-refining feedstock and blend stock, as well as meeting the growing demand for light products in that regions, so we're excited about that. We're also – we've recently announced our intentions to develop two more projects in the [Indiscernible] area and we expect to go live on the first one late summer and excited about that as well and of course both of those or all three of those tied into our macro story that I just went through as it relates to Texas Deepwater with an expectation with our facility there. We'll be able to create a light products origin solution that is advantage not only to meet our own destination and advantage real terminals, but the needs for other in Mexico, so we're very excited about that.

[Dan Borgen:]

Okay. Thanks Brad. With that, we'll open it to some questions. You always have good questions. So, all good questions we won't eat on musket, we’ll -- all good we'll be happy to answer. So anyway -- so we'll open up to the questions.

[Operator:]

[Operator Instructions] Your first question is from Mirek Zak with Citigroup.

[Mirek Zak:]

Hi. Good morning everyone.

[Brad Sanders:]

Good morning.

[Mirek Zak:]

So, when you speak with producers and shippers it seems that possibly more of them are little more inclined to talk about contract extension options rather than new longer-term contracts. Are they just confident in new ample pipeline capacity coming online on time or sort of your discussions with them? What is the commentary you're getting from them regarding sort of their outlook and expectations for getting your crude out of region in the next over like two to three years?

[Dan Borgen:]

Yes. That's a good question. I think – let's be clear. Our extensions should mimic those of the new customers as well. So when we say multiyear we're suggesting, we were terming three to five to six years on those type agreements. We have some customers that are more bullish around rail continuing to play a greater role for them. And then, so I think there is – I think that's probably the best way look at it our newest customer at the table which we should be able announce here within the next just few days, is a five-year deal. This is someone who obviously understands the market very well. I got in early and was able to get a similar long-term freight agreement with railroad. And so they were little bit ahead of the curve and saw it coming to their credit. So I think that we feel very good about. The commentary is certainly around customers as continued delays of pipeline cause us concern whether it would be Minnesota, whether it would be the West Coast of Canada, whether it would be Nebraska, whether it would be no matter what it is, we are certainly a supporter of pipe for certain types of commodities and certain markets, but again the flexibility of rail has been proven. I think the customers have learned that and as the railroads are engaging in more multi-year agreements I think the ratability, sustainability and operating performance continue to improve, which I think are all good things for the producer and/or refiner. Brad, you got more to add.

[Brad Sanders:]

Yes. I would say in addition to what Dan said, I mean the indications from customers is uncertainty is high to answer your question, but secondly the railroads are requiring term contracts, so that's driving renew and extend discussions. And then as we said earlier we – it's hard to predict any of this, but it's the velocity and the quality of our discussions with our customers. It's the indication that the markets providing as it relates to forward curves or the prices in the future. Yes. It's leading to extended term on not only renew and extend, but on all new customers for sure.

[Mirek Zak:]

Okay.

[Dan Borgen:]

And we have more demand and interest for the spots than we have today. So we certainly want to give a good option to our customers -- existing customers to renew and extend, and extend at some term, but there is market pressure for those spots and I've heard customer commentary from customers where they can afford to not have spots especially as they serve in $23, $24 or more and if you can't move that barrel you're going to continue to be disadvantage, so that the overall impact for the relative small amount, tumbling fee that they pay is a great backstop for them to be able to move product under normal conditions as well as under wide variance in price.

[Brad Sanders:]

And at the risk it sounds like I'm doing the sales job here and I want to apologize for that, but uncertainty on this with the pipelines is also led to the potential and likelihood of higher cost. We've already said we quote with these with the pipeline, so this is a commentary going anything different than that. But as cost go up rail is a more efficient solution from a capital expenditure standpoint and that's becoming critical to our customers, producers out there, anybody who is going to make any kind of extended term contract. So we like the fact that we can meet people's takeaway needs from a capital standpoint efficiently and timely. So those are critical drivers and why people are interested in rail takeaway.

[Dan Borgen:]

No. And we're seeing the Canadian government to engage more in longer term logistics solutions that our pipe that will meet – that will meet the growing demand that they have for their own sovereign barrel as well as going on non-sovereign barrels in Canada much like our DRU project.

[Mirek Zak:]

Okay, great. Understood. And then just secondly, around your DRU discussions what type of feedback or potentially pushback might you'll be getting around that when you speak with them? And are you seeing any actionable traction around that just yet? And just if I can tie into that, based on your initial assessment and talks with producers right now, Is there sort of a WCS netback price estimate that you can provide that make sort of the economic equivalent to either rail or pipe for the producers themselves?

[Dan Borgen:]

That's great powerful question. I think let me try to address it in a couple of different ways and I'll ask Brad to comment as well and perhaps Josh as well. Certainly about traction we have as good attraction, as we've ever had. We have a very active customer group engage in this discussion. And we look – so we look forward to continuing to be able to because we have week over week meetings on the DRU. We have our engineering. We spend sizeable dollars in our engineering to be able to support that and I think we will have very good things to talk about very soon on that. Now it relates to netback Brad, I'll ask you to cover that.

[Brad Sanders:]

Yes. I'm going to say it, pretty simply. First and foremost the DRU it's our estimation that DRU can compete with new build pipe. That's pretty important. Secondly, if it's our estimation if you can compete with new build pipe given that the differential that forward as we've stated you'd be materially in the money relative to those spreads. So from a netback standpoint you improve significantly your netback. So, again we're not trying to predict anything. What we want to do is build something that's an industry solution competitive and sustainable and looking at the forward curves and what opportunities are out there for our potential counterparties and customers is it in the money, at the money, out of money, its in the money, significantly, materially, so we're excited about it. And it gets back to this whole capital expenditure how do I most efficiently and effectively use my capital to create takeaway solutions that allow me or fit my schedule of when my production comes on. So a lot of people are recognizing that, a lot of people understand that the savings in that value chain and traditional ways of doing business potentially need to change. And all the interface that we've recently seen from the government is clearly their royalty is at risk every time a barrel doesn't move and they want to ensure there are sustainable solutions to bridge this material uncertainty between production schedules and building pipes. So we feel pretty good about it.

[Mirek Zak:]

Okay. Great. Thank you.

[Brad Sanders:]

Josh can give a quick update as to timing of that project from a start build time and Josh do you want to.

[Josh Ruple:]

Sure. Ultimately the assets involved with DRU are pretty simple in nature. And overall timelines associated with building those assets are around 24 months. And just to underpin the question around, the quality of our discussions with our customers, they've been at levels that have been very detailed and those detailed discussions have enabled us to continue to refine our DRU strategy, not just the DRU assets itself but the entire logistics network and that solution now is better than it was 12 months ago.

[Brad Sanders:]

And cheaper.

[Josh Ruple:]

That's the better. Ultimately logistics all in are more affordable and more competitive with the pipeline alternative.

[Mirek Zak:]

Okay, great. Thank you. Thank you for the time.

[Brad Sanders:]

Sure.

[Operator:]

Your next question is from Derek Walker with Bank of America.

[Brad Sanders:]

Hi, Derek.

[Derek Walker:]

Hey, Good morning guys. Congratulations on the commercial extension there in Stroud and Hardisty.

[Brad Sanders:]

Thank you.

[Derek Walker:]

Just a couple of clarification questions. You mentioned that the 15 to 29 slots there, was there – was that's just a change in here and there with another customer or is that part of the 13 [ph] a train day extension or expansion?

[Adam Altsuler:]

That was basically the Stroud customer getting origination slots from existing customers at Hardisty and then filling the rest of the capacity at Stroud. So, matching up the at slot of Stroud with origination slots of Hardisty, they had already had 15 slots from Hardisty, they need to increased that position to 29 slots per month so they can gave the original slots to deliver to Stroud.

[Derek Walker:]

Appreciate that. Thanks Adam. And then, to the five -- the potential kind of five-year agreement, that's going to before the expansion?

[Adam Altsuler:]

Right now, that's where we're contemplating that.

[Brad Sanders:]

We're contemplating that because demand for renew and extend is occupying the capacity of our current Hardisty asset. We're contemplating it because as there is more demand than supply.

[Adam Altsuler:]

And there's not the space that Hardisty want.

[Derek Walker:]

Okay. So that sort of depends on what the extensions look like to kind of balancing that out?

[Adam Altsuler:]

Well, given the near term demand that's kind of where it's falling right now. But as Dan said we feel strong that we'll able to extend our existing customers if Hardisty want.

[Dan Borgen:]

Yes. If we didn't -- Derek let me just say, if we were not strongly confident and the market demand for existing space we would seek to try to delay or something, but customer needs those spots immediately. We don't have them. We've got to be able to provide those spots to the customer and therefore we're not looking to throw more capital out there unless we have to – we have to in this particular case to grow the assets, that's why we're here, that's why the permit were in place, we're able to do that and so we want to be able to build that to support that customer while at the same time renewing and extending for multiyears with our existing customers base and we're actively engage in that literally as we speak.

[Derek Walker:]

Thanks, Dan. And then just a little color on you mentioned the [Indiscernible] maybe late this year, what else would be kind of require to kind of put that in service over the next few months?

[Dan Borgen:]

Sure, Josh – I'll have Josh answer that.

[Josh Ruple:]

From a technical perspective nothing is required. We're ready to go. We're working right now finishing up as Dan mentioned earlier that our commercial process as soon as the commercial process is complete our team is ready to begin construction of the expansion.

[Dan Borgen:]

And Derek, the reason I gave a little bit more color on EBITDA from Stroud in 2018 and 2019 because there's a ramp up this year. So it gets fully ramped up in Q2. So cash flow projected EBITDA for 2019 for Stroud is slightly higher than what the remaining of 2018 looks like.

[Derek Walker:]

Okay. Got it. And then just a last one from me. You mentioned the August 31 deadline. Is there obviously the appetite is to get that extended on a multiyear basis so that sort of how you're kind of having those discussions right now. Seems like its going in that direction?

[Brad Sanders:]

That is our objective. As we've moved through the cycle and coming into a new cycle participants are the people who support this kind of activity, it's changing. So what I would tell you as we expect that customer to renew and extend volumetrically uncertain whether they will do more or less or equivalent, but we've got new participants who are also interested in term deal. So we're certain that the asset will be utilized and to what extend should be determine. Spot activity, Derek, has been quite high. Spot activity has led to term discussions. Spot activity has led to redefining what asset needs to be and why is function of asks by day-to-day participants in that market, so we're actually excited about where we think we're heading, where we're going to end up to where our ultimate objective is to continue to be the solution provider of choice especially during the cycle where heavy oil is asking for take away capacity, but also to create an asset that is sustainable during periods when it's not. So we're excited about that.

[Derek Walker:]

Thanks, Brad. That's it from me.

[Dan Borgen:]

Thank you, Derek.

[Operator:]

[Operator Instructions] Your next question is from Mike Gyure with Janney.

[Mike Gyure:]

Yes. Can you guys talk a little it about this Stroud assets specifically and the expansion capabilities that you have there. It sounds like now we're at full capacity. So I guess what would you need to do there, I guess as far as trends in storage that kind of stuff?

[Brad Sanders:]

Go ahead, Josh.

[Josh Ruple:]

Absolutely, Mike, good question. With any asset within our network, mean really any anywhere there's always drivers and capacity and what those drivers are typically for assets like Stroud are the upstream oil capacity associated with the rail provider serving the facility. Our actual facility itself unloading, tankage and pipeline capability pushing it in this to crushing. And then also downstream considerations and in this case for Stroud Enbridge, tankage and ability to move that barrel beyond that tank. At Stroud today with our current assets configured as their – configured upstream at terminal and downstream we are at capacity. We as we do with every one of our facilities and network are constantly working on plans to increase that capacity. And specifically at Stroud we have options to do that. Those options entail working with the railroads to make some very minor improvements to short line railroad and its ability to serve our facility. At Stroud itself there is minor improvements as well that are required to enable us to store more volume in tank at terminal and ultimately increase our ability to utilize our existing pipe pushing barrel to Enbridge. So we have the ability to increase volume of Stroud. We're currently working on finalizing those plans on a step function basis and as the commercial demand warrants will be in place to be able to execute.

[Dan Borgen:]

Yes. Mike, and also as follow-on. Dan here. The --- not only are we getting increased demand from Canada, but also obviously as I think as folks have seen there is a takeaway challenge from West Texas and as you see growing supply there that want to had cushing, we're getting inbounds on what additional capacity can we take there. So we're looking at that just to put that all in the kitchen to see what we can come up with to further expand that and certainly not taking away from our network optimization program between the Hardisty, Casper and Stroud, but looking at those opportunities. So there is continuing demand growing from not just Canadian or Casper.

[Brad Sanders:]

And relative to that to Dan to your point, moving a segregated barrel through Stroud is doable. So we've always had a plan or a vision that would be important to the terminal serving cushing and we've got ideas around how to implement new infrastructure to support a segregated movement. And fortunately all of these proposed expansion alternatives are very efficient from a capital perspective.

[Mike Gyure:]

Great. Thanks very much, guys.

[Dan Borgen:]

Sure, Mike. Thanks.

[Operator:]

There are no further questions. I would hand the call back over to Dan Borgen for closing remarks.

[Dan Borgen:]

Okay. Well, thanks everybody. I know the call ran long and we appreciate all the questions always spot on and I hope this information I have given them shows the confidence that we have in the market. We'd look very forward to been able to announce. So look for announcements quickly coming out of U.S. team, our USDP on what we're doing. But I look to the renewal and extensions actively engage. Remember as we said before the customer needed to get their rail freight [ph] agreement completed. That is now and some as I said completed. and now for –and therefore we are now engaged with them on existing customers on the multiyear renewals with them. And even for more capacity than they have with us today, which causes other challenges for us quite frankly in terms of being able to support that growing demand in the business. Therefore again why we need to expand the facility sooner than later. And so with the demand that we have in both in Hardisty and in Casper and then a destination, remember every one of those, departing train need their location to land at. Stroud as we’ve said are full, we are looking to expand that to support the additional volume there and the demand that we need there, therefore the Texas Deep Water facility is perfectly situated to be able to handle an additional train coming out of Hardisty and/or Casper to move to that location, and optimize in the efficiencies that our customers get to be able to blend on our product there and do what they want to do. So, and so we are very very bullish around that. So, and let me just say, look we are very thankful for you all on the call, we are thankful for our unit holders who continue to support USDP who have had the confidence and the vision, confidence that the market was going to be as we had suggested and it’s really nice to see that come to fruition and we look forward to continuing to grow on trading value for all of our unit holders and we appreciate again the support from our analyst community and the following of USDP. With that, I’ll close the call. Thank you again. Have a great rest of the week, and we look forward to talking again soon.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.