USD Partners LP
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to USD Partners LP Third Quarter 2018 Results Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to Jennifer Waller, Associate Director, Financial Reporting and Investor Relations for opening remarks. Please go ahead.

[Jennifer Waller:]

Good morning, and thank you for joining us. Welcome to our third 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 and nine months ended September 30, 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 in last night's press release applied to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, November 6, 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 a 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’d like to turn the call over to Dan Borgen.

[Dan Borgen:]

Thank you, Jennifer, good morning, everybody. And as a great entertaining actor, Matthew McConaughey once said, all right, all right, all right. We've got a lot of great things to talk about today. And we're excited to be here. Thanks everybody for joining us. So that wasn't scripted remarks, so I'll go to more scripted remarks now. So we're pleased to announce another positive quarter at the Partnership and continued momentum in our recontracting efforts at our Hardisty terminal. We're also pleased to announce the successful refinancing of our credit facility with slightly improved pricing. Adam will go to that in more detail later. The Western Canada macro continues to provide tailwinds for our business and specifically for our terminalling assets. Current spreads between a WCS and WTI barrel are around $40 to $50, respectively, today, and the forward curves indicate a continued imbalance between supply and takeaway capacity for the next several years. As a result, activity as well as demand has picked up around our strategically located assets. Since our last evenings call, we have announced the execution of a four year extension with a Canadian-based oil infrastructure-focused company at Hardisty, whereby the customer significantly increased its position by more than doubling its contracted capacity at the terminal. Second, the execution of another four year extension was Cenovus Energy, which also significantly increased its previous position from 7% to 25% of the Hardisty terminal's capacity. Today, we renewed and extended approximately 65% of the capacity at our Hardisty terminal through mid-2022, with approximately 42% extended through mid-2023. These contract renewals will generate a meaningful increase in revenues for the Partnership and are estimated to replace approximately 80% of the Hardisty terminal's current cash flows on an annualized basis over the next three years, starting in July 2019. We continue to work with the balance of our customers as well as our new customers on contracting the remaining limited available capacity at our Hardisty terminal and our Hardisty South expansion. Turning to Hardisty South. Quick update on that expansion. USD Group, the Partnership sponsor, recently confirmed, pursuant to its development rights at the Hardisty terminal, it is moving forward with our Hardisty South expansion. The existing terminal, which is owned by the Partnership, has design capacity for two unit trains per day or approximately 150,000 barrels per day. The expansion will add one additional unit train per day or approximately 75,000 barrels per day of takeaway capacity to the terminal by modifying the existing loading rack and building additional infrastructure and trackage. The project is expected to be in service by January 1 of next year, and Josh will give us a project update on all of our active projects here momentarily. Today, approximately 67% of Hardisty South's capacity has been commercialized through take-or-pay agreements with minimum volume commitments, which are expected to generate an average of approximately $11.1 million of cash flow over the next four years for USD group. Once it is in service and fully contracted, we believe the Hardisty South expansion could present an attractive drop-down opportunity with the Partnership. Adam is going to start us off with an update on the Partnership's latest operating financial results, our distribution coverage and our liquidity position, then we'll jump back into recent market and commercial developments. Go ahead, Adam.

[Adam Altsuler:]

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our third quarter 2018 earnings release, which included the details of our operating and financial results for the quarter, and we plan to issue our third quarter 10-Q with additional details after the close of market today. For the third quarter, we reported net income of $5.9 million, net cash provided by operating activities of $12.6 million, adjusted EBITDA of $14.5 million and distributable cash flow of $11.6 million. The Partnership ended the quarter with distribution coverage of approximately 1.2 times. The Partnership's results during the third 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 a customer agreement at the Partnership's Casper terminal in August 2017. In addition, as a result of a substantial increase in customer activity at our Hardisty terminal, we incurred incremental operating cost during the third quarter of 2018. Net cash provided by operating activities decreased by 17% relative to the third quarter of 2017, primarily due to the conclusion of a customer agreement at the Partnership's Casper terminal in August 2017, and the timing of receipts and payments on accounts receivable, accounts payable and deferred revenue balances. Adjusted EBITDA increased by 9%, and DCF decreased by 14% relative to the third quarter of 2017. The increase in adjusted EBITDA was primarily a result of the commencement of operations at the Stroud Terminal, as previously mentioned, and the decrease in DCF, which is due primarily to a cash refund of approximately $2.6 million that the Partnership received during the third quarter of 2017. Net income for the quarter increased by 12% as compared to the third quarter of 2017, primarily as a result of the operating factors already discussed above coupled with a non-cash gain associated with the five year interest rate derivatives instrument that we entered into in November 2017, partially offset by increased interest expense incurred associated with higher interest rates during the third quarter of 2018. As of September 30, the Partnership had net leverage of 3.5 times, LTM adjusted EBITDA and total available liquidity of $206 million, including $7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $199 million, subject to continued compliance with financial covenants. Today, the Partnership is in compliance with its financial covenants. On November 2, the Partnership amended and restated its senior secured credit facility with a syndicate of lenders. The new facility is a four year committed facility that matures in November 2022, with a borrowing capacity of $385 million, subject to the limits set forth therein. The new agreement includes a reduction of 25 basis points to the applicable margin the Partnership is charged on LIBOR-based borrowings to a range of 2% to 3%, which is based on the Partnership's net leverage ratio. The new agreement also provides the Partnership with the ability to request two, one-year maturity date extensions, subject to the satisfaction of certain conditions and allows the Partnership the option to increase the maximum amount of credit available up to a total facility size of $500 million, subject to receiving increased commitments from lenders and satisfaction of certain conditions. We plan on filing the amended and restated credit agreement on Form 8-K later this week. On October 25, we declared a quarterly cash distribution of $0.3575 per unit or $1.43 per unit on an annualized basis, which represents growth of 0.7% over the prior quarter and 3.6% over the third quarter of 2017. The distribution is payable on November 14 to unitholders of record at the close of business on November 6. With that, I'll turn the call back over to Dan.

[Dan Borgen:]

Thank you, Adam. I appreciate the lot of exciting stuff there as well. So I'm going to ask Brad and Josh to give us an update on the exciting things that we're doing at Texas Deepwater, our Houston Ship Channel development, our progress there as well as our development activity in Mexico, which we're very proud of and is performing extremely well.

[Brad Sanders:]

Thank you, Dan. Maybe prior to that, I'll go ahead and give a quick update on the macro in Canada and Josh can give an update on our development project at Hardisty South. We've talked about a lot of these things in the past. But as a reminder, as we experienced this imbalance between growing supply and takeaway capacity, the first indicator that this market is real is the export pipelines out of Canada go through apportionment. Currently, we're at historically high levels again for heavy Canadian apportionments north of 40%, closer to 41%. But something new has occurred and a bit historical is light capacity is also apportioned. So we're also experiencing apportion levels – apportionment levels in for light crude as high as 40% as well. So it's clear indication that we've got takeaway constraints for all grades out of Canada. This of course leads to stranded barrels, which find new tiers of demand and seek inventory options or opportunities, and the indicator there that we follow is that the level is not only at Hardisty, but everywhere in Canada, and they are at historical high. So inventory levels at these locations are at historical highs. And what we would directionally describe as full. So then that requires prices to discount and seek a new tariff demand, and that's what Dan spoke to earlier in the comment that here in the fourth quarter, the WCS spread to WTI has widened to historical levels between $40 and $50 per barrel, and this is an increase from $16 to $36 per barrel that we experienced in the third quarter of 2018. As just for your information, today's or last night's close prices, the differential, the spot differential, the prompt differential was trading at $44. So it's pretty significant. Going forward in the short term, we think one of the key drivers for this extraordinary event for discounted heavy and light sweet crude is that the refiners in the Midwest have experienced their traditional seasonal turnaround periods. They should be coming out of those now, and that should provide some support on that spread. But as Dan has mentioned, and given the current spreads, the current macro situation, we do expect that spreads will remain at such a level, that it will require or allow for an exit strategy out of Canada that includes crude by rail. As an indication of that, the spreads for the next five years, as published by Bloomberg, so we're talking about spreads through 2023, indicate levels of $25 to $27 per barrel. So pretty significant incentive for CBR for the next five years. So that's material. What it simply indicates is that the imbalance could last longer than pipelines can solve. So moving on from that, we've talked many times in our conference call, how critical our partnership is with the railroads. We're happy to report that their support has been recently significantly improved. Their allocation of resources to support the growing demand of CBR has been good and given that we anticipate the railroads will be able to service the capacity at our Hardisty terminal by the end of the fourth quarter. Josh, do you want to comment on the railroads and/or give an update on Hardisty South, if you don't mind?

[Josh Ruple:]

Sure, Brad. I would just echo the comments in regards to the railroad support. We've seen our terminal operating metrics, as volumes have increased in our facility, the railroad's been right there with us to support the volumes. And as you've mentioned, in discussions with the railroad and improved by our facility throughputs, I think the railroads are there to help support our customers, our collective customers at Hardisty. As it relates to Hardisty South, as Dan mentioned, we are well down the way of executing that particular project. Uniquely, we preplanned in the original phase the ability to add an additional train for a total of three. That project is 100% permitted, as we've mentioned in the past. We are 100% engineered. We're 100% procured. And we're about 50% complete with the construction activities. Really proud of the team and all the work that they've put forward to put us in this position, which is to deliver the project on time, within budget, on January 1 and to do so safely.

[Brad Sanders:]

Great, thank you Josh. And so as Dan - before I leave Hardisty, as Dan has reported that both at our original facility and our – as Josh has given an update on Hardisty South, we're significantly contracted forward on both Hardisty One or initial Hardisty investment in Hardisty South. And we are in detail discussions to complete to the capacity or the utilization for both assets as we move forward. So that's really good news. Casper, let me comment just briefly on Casper. We continue to service spot business at the terminal during the third quarter and are currently negotiating term agreements with those customers for potential ongoing use of the terminal. So we're excited about how people are asking for the ability to use the facility from a spot standpoint, getting comfortable with the risks and – associated with that type of business and are wanting to now talk about term business. So we're thankful for that. Also we have mentioned in the past that we're pursuing a hub strategy through existing and potential additional connections to other downstream pipelines in the area, and we look forward to reporting more on this in the near future. So we feel good about Casper's position. We feel good about the participants who value Casper. And we look – or we feel really good about the investments that we are making that improve its competitive position. Finally, a few comments on Stroud. And just a reminder to the people on the call, Stroud is the rail destination terminal that's connected with the Cushing terminal or the Cushing hub in Oklahoma. Stroud has been a – is now running at basically full capacity, which means that it is aligned with our customers at Hardisty as a destination – as an advantage destination for refinery opportunities, blending opportunities, all of which are critical at the Cushing facility. As for your information, we talked that the current spread between WCS and WTI as a marker is $44. The current spread between Hardisty WCS and Cushing WCS, so now we're using light grades is $36, so significant. And the opportunity to rail into Stroud is very, very significant. Finally, in conjunction with our Hardisty, finalizing our renew and extending discussions at Hardisty, we are in discussions with light customers to complete, renew and extend discussions at Stroud. Dan, you asked us then to Josh and I may be to give a high-level update on Texas Deepwater in Mexico. As a reminder, Texas Deepwater is our Houston Ship Channel opportunity that we're very excited about for a couple of key macro reasons. One is, the Canadian story we just told. So there is a need for crude-by-rail export for Canadian heavy and lights. And ultimately getting into Houston is an advantage destination given access to water, given the distribution opportunities that we've been working hard on to create at our Texas Deepwater facility and given the refining center in Houston, which has the ability to run both heavy and light crudes. So that becomes priority No. 1. How do we monetize Texas Deepwater in support of the Canadian need to evacuate both heavies and lights. So we've been working on that and making lots of progress. Secondarily, Canadian has got a light sweet story, but so does the U.S. The U.S. is looking for outlets for production growing in both Permian, South Texas, Mid-Continent. So we're pretty excited about the discussions there and the opportunity to provide distribution opportunities to refiners and water for those major pipelines that are coming into the Houston area, looking for those type of outlets. Finally, as we know, light products continue – exports continue to grow. And we're uniquely positioned to participate in that opportunity again consistent with the crude story because of our access to water, but also our connectivity and access to refiners who actually create the option of it, either exporting crude or exporting light products. So we're excited about that. And then finally, with all the domestic production that is going on and Canadian production that is going on, there are associated natural gas and natural gas liquids that go with that. And uniquely – we are uniquely positioned from a location standpoint with Mont Belvieu as the NGL hubs to reach out to gatherers, processors, folks who fractionate the Y grades and to potentially creating opportunities for export with the NGL products. Josh, do you got anything to add to that?

[Josh Ruple:]

The only thing, Brad, that I would add kind of using your term uniqueness, we also fortunately are unique in regards to our permitting capabilities and our – in a sense our status and ability to execute. Texas Deepwater, as we've mentioned in the past on past calls, we are fully permitted at that location, land, water and air to develop all of the assets that are required to service the commercial opportunities that Brad mentioned. So we've got real scale, real potential and we're unique in regards to our ability to do it now, which has been a good opportunity for us from a commercial development perspective. We're deep down the path on all the traditional things technically, engineering, planning and procurement, all of those things are right where we want them to be and are aligned with our commercial development time line goals.

[Brad Sanders:]

Great, thank you. So finally Mexico update, and we'll try to get through this quickly now. But in support of again the macro that is light products need to be exported, Mexico is in a position where light products need to be imported. So we're uniquely focused on creating destination terminals there that provide for export opportunities for refiners here in the U.S., in particular. So we've gone live on our two existing terminals at Queretaro and Cuauhtemoc, and our strategy there is to make sure that they work the way that we planned for them to work, that they're meeting the needs of our customers and then to grow them. So that's specifically what we plan to do. We're excited about the fact that we've got two operating. And then once we get them maximized and at full value, then our strategy is to create a network – grow a network consistent with those assets and the railroad relationships that make those assets successful. And then finally, we want to leverage that capability, that destination capability by developing origination capability here at our Houston Ship Channel, Texas Deepwater property where we have the ability to build both from a rail standpoint and support those destination terminals. Josh, any update from your standpoint.

[Josh Ruple:]

As you mentioned two facilities completed on time, within budget. We're already working on expansion plans for those two locations at Queretaro and Cuauhtemoc. And to Brad's point, our network goal, as we grow in Mexico, we've got all the pre-due diligence activities and the works at many of those locations. The railroad activities and relationships are strong, and we are poised to meet goals in Mexico.

[Dan Borgen:]

Great guys, appreciate that update. Let me – before we move to Q&A here, let me kind of start with a couple of things as we usually do to ask ourselves maybe some challenging questions about things that are happening in the industry. So with that, let me start with our diluent recovery unit. All right, Dan, you have talked about that for probably three quarters. Is that something you're going to do or not? And the answer is, yes, we are going to do that. And we're in deep discussions now with team assignments with two existing customers, who are at the table with us to reach a DRU conclusion – commercial conclusion. We feel very strongly about that. It's the right – the industrial logic is completely sound. The time for it is now. The drivers are in completely. Just to summarize, it takes – it creates additional availability in a tight market. It creates a heavier product, which our refining customer wants. It produces a non-haz, non-flammable product that can be efficiently transported at best rates. And the terms for that business are in excess of 10 years. So we really like where we're in that, and we feel extremely confident about that. Brad, more to add on that?

[Brad Sanders:]

Yes. I would simply say the catalyst is we're at rail parity. And so since people are committed to rail takeaway, their question has been is there a better rail solution, and the DRU is a better rail solution. So that's the catalyst there.

[Dan Borgen:]

Government support growing in Canada for these types of solutions that really solve the challenge of moving a heavier product, and that product wants to go to the goal to our big refining community down there that once have a – to be able to blend with a preferred light intermediates. So happy to answer more questions about that as necessary. Another thing that recent development in the market in the industry, how are some of the production shut-ins affecting our business? Brad, do you want to answer that?

[Brad Sanders:]

I can. So the announcements, all we can do is rely on two things, and that's the factual announcements themselves. First thing I would say is they're not material. There may be 50,000 barrels a day, and that makes sense. I mean, it's – when you consider what variable costs are to produce and what the risks are on shutting in existing production, I'm assuming producers would be very diligent about those decisions and very careful about what they do, and why they do it. So the second thing that is indicative that they're really not material is our commercial discussions, which are very indicative of demand being greater than the three trains a day that we can produce at Hardisty. So just from a commercial perspective, those would be the two comments I would make.

[Dan Borgen:]

All right. So obviously, from a – in these types of environments, when you have producers looking for maintenance opportunities and taking some things offline, the opposite side is you typically have refiners looking to run and delay as much as they can to continue to take the cheap feed. I think you've seen the public announcements from some of our refining customers as well stating the same. And additionally, they're securing more long-term assets to better store and position themselves for long-term procurement of cheaper feeds. So we continue to see that both at Hardisty and at Casper. So – but we do think that it's certainly not impactful to our take-or-pay business and – but we look forward to discussing more in the future. I can again answer more about that as need be. In terms of the MLP structure, the market, what's happening publicly on that? We will – as we've said before, we are looking at opportunities there, and we constantly look at what's the best thing for unitholders. We don't have any answers today. We've been announcing in the past two or three months very strong activity at our terminals. We will continue to be able to do that. We trust that the market will favorably react to that. But there are some certain things we just cannot control out there, but we'll continue to work hard every day to try to create the value that our unitholders expect. And we're – I'm very proud of our team. They're working extremely hard in terms of delivering those results and commercializing very favorable terms and extensions and new agreements, and expanding at most of our terminals. So – but we will continue to look at options as they present themselves to maximize those returns. All right. With that, I'll open up the floor to questions and look forward to hearing from you.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Derek Walker of Bank of America.

[Derek Walker:]

Hi, good morning, guys.

[Dan Borgen:]

Good morning.

[Adam Altsuler:]

Hi, Derek.

[Derek Walker:]

Congratulations on the progress thus far. Just have a couple of questions here. Dan, you mentioned the – and I appreciate the color on the capacity around Hardisty and sort of what the revenue increases. If I just do the quick math around the renewal, it seems like there is a 23% sort of increase on rates. Am I thinking about that right? And then the follow-up to that is, how does that compare to the contract at the USD level? You mentioned the $11 million of annual cash flow there. It seems like there is a bit of a difference. I just want to make sure I'm thinking about those numbers right.

[Adam Altsuler:]

Hey, Derek. It’s Adam. So great work on the math. It's very consistent with the way we're trying to communicate it and the way we're thinking about it. It's basically taking the EBITDA attributable to the Hardisty terminal. We obviously disclosed that we've replaced about 80% of the revenue after July 1, 2019, and that's just based on 65% of the capacity at the terminal. So if you were to gross that up, you get pretty much the number you gave us, precisely. So nice work on that. On Hardisty South, we wanted to give a little bit more color on the relative size of the growth project. And so in that case, we obviously don't have anything to compare to because it's a new project, but we disclosed that 67% of the capacity has been contracted. So if you gross that up then you can get to somewhat of an implied full capacity, I guess, EBITDA number there.

[Derek Walker:]

Right. And then I guess I'm just trying to figure out does that – is that less than what's being renewed currently?

[Adam Altsuler:]

That's our Hardisty South. Those are two different things. So the first one we talked about was the Hardisty terminal. Hardisty South is the expansion project, which is about 30,000 barrels a day – I'm sorry, 75,000 barrels a day relative to Hardisty One, which is 150,000 barrels a day.

[Derek Walker:]

Okay, okay. Thanks Adam. Then just switching gears to Casper. You mentioned you're in kind of negotiations right now to term out some of that. Do you see that happening by year-end? I think there is a contract that ended in October, I didn't know sort of how that kind of plays into it. Any thoughts around the contracting around Casper right now?

[Brad Sanders:]

This is Brad. Derek, how are you?

[Derek Walker:]

Good, Brad.

[Brad Sanders:]

So that customer decided not to renew that contract. And for good reason, given the uncertainty, what's happening from a railroad standpoint. In other words, there's lots of changes going on in the U.S. railroad space, where car safety is becoming heightened and critical and given that that's driving new demands on car requirements, new costs, new freight costs, one going higher, two, differentiating between certain car types. So given all that uncertainty, it was very difficult for that customer to make a decision until they could work through that uncertainty. In exchange for that, what they asked for and what we've agreed to is to create an agreement – a bridge agreement that gets us between the October cancellation date to early next year, which allows them to figure out how they create a solution that meets the needs of the railroads and then be prepared to go into contract discussions with us. So we feel good that the industrial logic in use of CCR with that customer will continue and that we will get a contract with them.

[Dan Borgen:]

Further to that, Derek, the customer continues to use the facility. Again, just to re-echo, it's the rail car type differential on the availability of those cars in between now and the end of the quarter. Our USD marketing arm has some of those cars coming available, which we're going to help support the Casper market with and to try to help bridge this customer into their new cars as they come online starting in next year. So it's basically a time lag of car availability on that particular railroad that services that facility, which is the only railroad that is requiring that car type at this time. A reminder, the industry standard for and the approved rail cars are being utilized by that customer and others. And the servicing railroad of Casper, the Burlington Northern Santa Fe, a Berkshire company, has stipulated an additional type car called a 117J car versus a 117R car, which is currently the industry standard. So we've continued to work with our customers. Obviously at USDP, we want the most modern and safest car possible. We have procured some of those cars, as I said earlier, and will be looking to put those into the marketplace to help support our customers.

[Derek Walker:]

Appreciate the color. And just a quick follow-up on that. The bridge agreement, should we expect any implications for the fourth quarter there? I'm just not sure how the bridge agreement works relative to the contract that was previously with that customer?

[Adam Altsuler:]

Yes, the bridge agreement right now is for a lesser amount of volume on a take-or-pay basis. So there will be a downward adjustment there. We'll give you more color once we sign the longer-term contract in January – or towards the early part of next year.

[Derek Walker:]

Okay, all right. Thanks Adam. And then maybe just last one from me is just around the DRU. Dan, you mentioned, you're in discussions with two customers. Is that just for one DRU unit – one unit or will that be multiple units? And then, I guess, when do you sort of expect to get that sort of firmed up?

[Dan Borgen:]

Yes, we’ve got – thanks, Derek, on that. So yes, it is for – it could be for two different DRUs at two respective areas. It could be two at one area. We're working through that currently. We are active in that discussion and the commercial discussions around that and as I said earlier, with teams meeting on a monthly basis to try to resolve the remaining issues around that. We've got all of the engineering completed. We're ready to go from that standpoint. Obviously, we would prefer not to launch that in the dead of winter. So it would probably be something that would be a little bit after the first of the year and as we get into the summer. But we look forward to announce something on that sooner than later. And Brad, do you have more to add on that?

[Brad Sanders:]

No. Again, the catalyst is we're in rail parity. So this is the time to get it down. And the benefits are significant. Secondarily, one of the benefits is the balance sheet commitment required to do a DRU as much lower than some of the commitments that the pipelines are asking. So our customers are really interested in trying to manage their balance sheets as effectively as they can. And we're seeing more take-or-pay asks from competing pipelines. So this kind of timing is really good, and the circumstances support the kind of discussions, the quality of the discussions we're having right now.

[Dan Borgen:]

And it's impactful to their business as well as ours, obviously. It's 100,000 barrels in and 70,000 barrels out of DRU – of what we call DRUBIT, the trademark name for the product. And so you can see that if there's pipeline shortage over the next several years and pulling that out on a better netback to the producer, that's a very strong indicator of why they're at the table and why they need to get that done sooner than later.

[Derek Walker:]

Great, thanks guys. Appreciate the color.

[Dan Borgen:]

Sure, Derek.

[Operator:]

Thank you. [Operator Instructions] And your next question comes from the line of Michael Gyure of Janney.

[Dan Borgen:]

Good morning, Mike.

[Michael Gyure:]

Good morning, guys. Thanks for all the color on everything today. Can you talk a little bit – I think you touched on the Stroud capacity being almost fully utilized and, I guess, what opportunities or what expansion plans you guys have sort of on that asset moving forward?

[Brad Sanders:]

Yes I think from a macro – I'll speak from a macro standpoint. I think all of this is supported by Josh on that we can do whatever is necessary. We've got the infrastructure to grow. We would have to – one of the key issues would be, if we want to grow capacity, we've got to grow our capacity with our pipe, but we can do it. And if it makes sense, we can. What's really interesting is, – so we've got a Canadian heavy story in the Stroud, but there is also Permian light story in the Stroud. There is also a Bakken story in the Stroud of light crude. But there's also people worried about being able to get – once you get to Cushing, how do I get out of Cushing, so there is an export story out of Stroud. So there is a lot of uncertainty, Mike, right now on what that needs to be and why. So it can happen now. And it's unique in the sense that you're at Cushing and it's the hub and it's where things, it wasn't but six months ago that we were at historically higher inventory levels at Cushing and today, we're at historically low inventory levels at Cushing today. So it's not uncertainty on our part. When I answer the question the way I'm, it's just there is a lot of moving parts here, and we're trying to figure out which one makes the most sense because it will require some kind of investment to grow, whether it's handle lights versus heavy, whether it's handle more volume, whether it's import versus export. So anything Josh?

[Josh Ruple:]

No, the only thing maybe that I would add is, to your point Brad, there isn't any physical restraints or constriction to our development potential at Stroud. And we have plans in place to target really any of those commercial opportunities that you described. And as we do with all of our development, our goal is to in a sense engineer the time lag out of our ability to execute. So as these commercial realities become real, we'll be in a position to quickly execute and be able to capture those opportunities.

[Brad Sanders:]

Yes, and I think our strength is that we're open to any and all of the above because our ability to buy that asset when most people, if not all people, viewed it as a light sweet solution and the macro wasn't supporting that, we saw it as a heavy solution. So we challenge ourselves to be open to any and all.

[Michael Gyure:]

Great. That's perfect. And then maybe lastly, I'm not sure who this I'll aim at, but can you talk, I guess, a little bit about the competitive landscape for rail sort of out of Canada other than you guys? I know you have customers that already do a little bit or trying to do a little bit of rail out. But can you talk about, I guess, what the competitive landscape is looking like out there?

[Brad Sanders:]

Sure. I'll start and Dan and Josh certainly can contribute to my remarks. But I would say, one of the critical drivers that you need to think about are the railroads and what their objectives are and, therefore, that kind of defines what terminals are in play and what terminals are not. So if you think about the railroads and you think about their desire not to be surprised by a cycle like they were last time and you think about them trying to maximize their own bottom line through managing operating ratio and other things, they have been very purposed about where they're going to deploy capital to support locomotives, human capital, whatever required from a Canada crude-by-rail standpoint. And in that regard, they're naturally going to lean to or towards where there is efficient terminalling and unit train capability. There's only a handful of those that are both that and the line where the production is coming on. It’s really important, the production is kind of defining also where the opportunity is and isn't. There are terminals in Canada that have certain capability that just don't have production behind them. So certainly not new production and certainly not production that's creating the constraint that is evident by prices. So when you think about all those things, Edmonton fits that description. Certainly Hardisty does, because most of the production is coming into Hardisty, and we would put our asset up against any others. And then in between, there is the Cenovus facility, which to their credit, they support crude by rail, and they work hard to make that asset as competitive as possible. And I would say all of that together probably gets to 60% to 70% of the demand. So the bottom line is, there's going to be more demand for rail takeaways than the railroads are able or willing to support.

[Dan Borgen:]

Yes. Let me add to that. In these kind of market dynamics environments, every almost available vessel, truck, milk truck, anything is going to be utilized to haul crude and clear out of Canada. So even – and so we'll see some of the single manifest being used. We'll see some of those, but the efficiencies of those are not good and they're not generally large volume. So Brad mentioned Edmonton, and certainly that is not really an open third-party terminal, that's to clear one particular customer's barrels who controls all of that. So it's not a third-party true terminal. The Bruderheim facility is mostly consumed by single one, two producers. So we're once again at Hardisty, the true open multi-customer, true industry solution or industry terminal that's available for that and very strategically located, that can be – and on the most efficient routing system coming out of Canada. So when you look at all of those things, railroads are going to pick, if you will, winners and losers, and they're going to pick the ones that they can be most efficient with. Now as a common carrier, they have an obligation to pull traffic out of Canada as they can. But it's going to be very – they're looking at the best netbacks, best crew availability, power utilization, all those kinds of things. That's why we're having the continued and growing support from the railroads as well as some of the other terminals we mentioned to – because it's the right place, it's the right volume accumulation, it's the right customers, it's the right routing, and it's high speed and very efficient from a loading operation. So we can truly have a very ratable unit train operation that can move and clear product out of there, which is what everybody wants. Does that help you, Mike?

[Michael Gyure:]

Yes, that’s great. Thanks guys. Appreciate it.

[Dan Borgen:]

You bet.

[Brad Sanders:]

Thank you.

[Operator:]

Your next question comes from the line of Lin Shen of HITE.

[Lin Shen:]

Hey, good morning.

[Dan Borgen:]

Good morning.

[Lin Shen:]

Thanks for taking my call.

[Dan Borgen:]

You bet, how you doing?

[Lin Shen:]

Good, thanks. One thing I heard is that one of the bottleneck now is the lack of the railcars given we see that crude-by-rail volume ramping up across all locations in Permian, Bakken and Northern Canada. And also for the past couple of years, a lot of cars have been retired. So the railcars kind of bottleneck now. Can you talk a little about what do you see for the railcar supply?

[Brad Sanders:]

Sure. I think that question you have to break it down into two parts. First, you've got to really understand the volume of railcars capable of servicing the crude by rail space and then also you have to think about individual railroads and individual origin-destination pairs and the quality or type of railcar that's required to service those moves. From a railcar perspective, on the whole, there are a plenty of railcars capable and ready to service the crude-by-rail demand. For certain origin destinations relative to certain railroads, the specification, as Dan mentioned, the 117J, that specification, there is a need to build more cars to service that need. And right now, as Dan mentioned, the customers are working through plans to transition to those cars. The solution of building new cars is there. And come middle to end of next year, there will be plenty of 117Js to support the volumetric demand for crude by rail. So really it's not – but you can't make a blanket statement that there aren't cars available because there are. And for certain moves, our customers and many others are deploying those cars and we've got plenty in the system to support the need. For other moves that are specific to the 117J, those cars are currently in short supply and those folks building and/or leasing those cars are working hard to fill that need and they will do so come mid to end of next year.

[Lin Shen:]

Great. So of that 117J car requirement, which location are most impacted? To us, only the Gulf Coast are mostly impacted because they're 117J or which location are most impacted?

[Brad Sanders:]

I wouldn't say that there is a singular location that's most impacted. I would actually – I think you got to think about who the carrier is. And specific to the Gulf Coast, there are many carriers – many railroad carriers that can deliver cars to the Gulf Coast. I think it's more an origin that defines where the restriction or the constraints are. And for origins that are dealing with one particular railroad carrier, and as Dan mentioned, that's the BNSF, the BNSF is moving to towards a 117J spec. And for those origins that are serviced only by BNSF that really is where the constraint is taking place. And I think we got to be very careful. When we think about the constraint, we got to be careful thinking about the reality of timing here. As I mentioned earlier, the lessors and the builders of cars have been following this and tracking this, this isn't a new thing. We ourselves have been part of that process and planning for this transition to 117Js. And ultimately, the market, I'll call it, will be ready for this transition come midyear or next year. So I don't think it's a destination constraint, I think it's an origin constraint. And for some of those origins, there are plans in place to mitigate the short car supply.

[Dan Borgen:]

In addition to that, that conversion to the 117J is for new customers who didn't have an existing agreement with the railroads. So if you had an – if you were a shipper and you had an existing agreement – multiyear agreement with the railroad, you're grandfathered into that due to duration of your agreement. Therefore, plenty of time to transition over that into the new car, into the 117J car, if that's what you desire. Your option two is to change carriers if you like to do that. As I said, there's only one carrier that's – that has a current transition plan. So there's – bottom line is there's plenty of cars coming. It'll probably be overbuilt as usually happens and there will be a surplus of those cars starting in next year. And so those that can wait a little bit longer should see some softer costs in those cars. Those that are trying to be opportunist today will pay the highest price on some of those cars. So fortunately, most of our customers have the ability to hold and position themselves strategically to take advantage of the surplus of cars or the availability of those cars coming on mid to next year.

[Lin Shen:]

Great. Thank you very much. Appreciate it.

[Dan Borgen:]

You bet. Good question.

[Operator:]

There are no other questions at this time. I would now like to turn the floor back over to Dan Borgen for any closing remarks.

[Dan Borgen:]

Thank you. So as we've discussed, I hope you can sense on the call and those who listen afterwards that we're extremely bullish about the business today. I started the call with a bit of lightheartedness, but it is – we're serious about this business. But it's a great time to be in our business now. The lion is out the door. We have high demand, obviously echoed by others in the industry. But we're seeing high demand for assets. We're seeing higher margins. We expect that to continue. I think you all have seen through third parties that there's tremendous amount of lost opportunity, lost revenue in the market today by producers who don't have solutions. There's tremendous opportunities for refiners who are seeking cheap feed and utilizing our assets. That's why we know exactly why the customers are here. Now the beauty of this too is some of these customers have been through two and three cycles. And that's why I think you've heard them publicly say, rail will not leave our portfolio because we can't afford for it not to, and I think you can see the numbers. When they're losing reportedly $100 million a day in opportunity revenue, it's – we're a relatively small portion to secure takeaway and to have that as part of a balanced portfolio. Certainly, as we move to the DRU, that will leave and elongate that as well. So we continue to be very bullish. The market dynamics are there. The curve supported for several years. And we look forward to – it seems like weekly, we are getting new commercial agreements done. We look forward to being able to communicate that both at Casper, Hardisty, Deepwater Mexico, elsewhere in terms of the huge tailwinds that we have and the solid commercial agreements that we're working on today and should be able to announce relatively soon. Obviously, we're here humbly. This has been, I know – we said this was going to happen. Fortunately, it is happening. And again, proud of our team, proud of our strategy team, proud of our strategy team, proud of our operating, everyone in the business who works extremely hard to get us to a point today where we have these great opportunities, where we have positioned assets in the right place and – but we appreciate our investors, our banks, our people that continue to support and are committed to the Partnership and USDG in terms of just their level of confidence in the business and we appreciate that very much. So with that, I will say thank you again and we look forward to future announcements very soon. Thank you.

[Operator:]

That does conclude today's conference call. You may now disconnect.