USD Partners LP
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP Second Quarter 2017 Results Conference Call. At this time, all participants have been placed in a listen only mode. The floor will be open for your questions, following the prepared remarks. [Operator Instructions] It is now my pleasure to turn the call over to Ashley Zavala, Director of Finance and Investor Relations, for opening remarks. Please go ahead.

[Ashley Zavala:]

Good morning, and thank you for joining us. Welcome to our second quarter 2017 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, 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 six months ended June 30, 2017. 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, August 8, 2017. 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, Ashley. Good morning, and thanks everybody, for joining us. We’re pleased to report another positive quarter along with the Stroud acquisition and our ninth consecutive quarterly distribution increase. We received positive feedback from our new format that we used last quarter for the calls, so we will continue with that approach. Adam will start us off with the review of the financials for the quarter and we would like to discuss several recent developments including our Stroud acquisition, equity offering as well as address several questions we expect that audience might have. So, with that Adam, why don’t you go ahead and start us off with the review of the financials?

[Adam Altsuler:]

Thank you, Dan. And thank you for joining us on the call this morning. For the second quarter, we reported net cash provided by operating activities of $9.3 million, adjusted EBITDA of $15.1 million, and distributable cash flow of $11.7 million. Net cash provided by operating activity decreased by 31% relative to the second quarter of 2016, while adjusted EBITDA and distributable cash flow both decreased by 7%.These decreases were primarily result of the discontinuing operations at the San Antonio terminal during the second quarter of 2017 following the previously announced termination of the related customer contract and were partially offset by lower operating costs. Additionally, the Partnership received a smaller benefit from the settlement of its derivatives contracts during the second quarter relative to 2016 as the Partnership’s 2017 foreign exchange hedges have lower exercise prices than its 2016 foreign exchange hedges. Over the past few months, the Canadian dollar has strengthened relative to the U.S. dollar, and we expect to see that benefit in our Canadian operations during the third quarter. During the quarter, we revised our estimated Canadian income tax expenses for 2016 and 2017 based on our actual 2016 Canadian taxable income and recorded a $2.4 million benefit from income taxes during the quarter. As a result, net income for the second quarter of 2017 increased by 60% relative to the prior quarter. Additionally, distributable cash flow for the second quarter of 2017 benefited from an approximate $700,000 decrease in cash paid for income taxes relative to the second quarter of 2016, which was partially offset by higher cash paid for interest. The Partnership expects to receive a refund of approximately CAD3.4 million during the second half of 2017 and we received approximately CAD1.5 million of that refund during the third quarter and expect to receive the balance prior to the end of the year. For the remainder of 2017, we expect to pay reduced amounts of Canadian federal and provincial income taxes, based on our revised estimates. Moving onto the Stroud acquisition. I’ll address some of the financial highlights of the transaction and Dan will comment on the strategic implications during his comments. So, as previously announced, on June 2nd, Partnership acquired a 76-acre crude oil terminal in Stroud, Oklahoma, to facilitate rail-to-pipeline shipments of crude oil from its Hardisty terminal to Cushing, Oklahoma. The all-in $25 million purchase price, which includes closing cost and additional CapEx, represents approximately 2.5 times the estimated 2018 adjusted EBITDA expected to be generated by the approximate three-year take-or-pay contract signed concurrently with the transaction. The new take-or-pay contract was signed with an investment grade rated multinational energy company for use of approximately 50% of the available capacity of the Stroud terminal, from October 2017 through June 2020. In addition to growing the Partnership’s cash flows, this transaction also resulted in the extension of the contracted term for approximately 25% of the Hardisty terminal’s capacity to June 2020, in order to originate barrels for our customer at Stroud. We expect to incur approximately $1.2 million of growth capital expenditures to retrofit the Stroud terminal to handle heavy grades of crude -- of Canadian crude, of which approximately $245,000 was spent in the second quarter. Also as a side note, we incurred approximately $283,000 of operating expenses related to the staffing and integration of the facility into our network during the second quarter. On July 27th, the Partnership declared a quarterly cash distribution of $0.34 per unit or $1.36 per unit on an annualized basis, which represents growth of 1.5% relative to the prior quarter and about 8% relative to the second quarter of 2016. The distribution is payable on August 11th to unitholders of record as of the close of business on August 7, 2017. With regards to liquidity, the Partnership had total available liquidity of just over $200 million as of June 30th, including approximately $7 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $194 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 senior secured credit facility until October 2019. Also, in June, we issued 3 million common units in an underwritten public offering at a public offering price if $11.60 per unit. We received proceeds net of operating cost of approximately $34 million which we used to repay amounts outstanding under our revolving credit facility including amounts used to fund our purchase of the Stroud terminal. And with that, I would now like to turn the call back over to Dan.

[Dan Borgen:]

Thanks, Adam. And as Adam mentioned, I want to follow up with our Stroud acquisition. Obviously, we are very pleased with that acquisition; it fits our rail-to-pipe strategy perfectly. And it not only proves up the capability of rail to be flexible, pivotable and able to meet demands for the customers but it also allows us to utilize their underutilized pipeline capacities, to be able to deliver product into it and also to preserve the quality of the product. You’ve heard us said before that rail does a number of different things, right? It obviously moves the product effectively and efficiently and safely, but it also protects the quality aspect of the product. And that’s exactly what’s happening here. So, the customer -- one of the reasons why the customer wanted to commit to the term that it did on a take-or-pay basis is they could see that quality enhancement that they could have and therefore get additional dollars at the delivery point. So, giving it access, giving the customer access to the Cushing hub and the multiple market opportunities there, the refining centers including the Gulf Coast is something that is very appeal. Also, as you heard Adam say, it renewed and extended the commitments that at our Hardisty hub. We now have no more available capacity at the Hardisty hub for new activity. Therefore, any new activity will be driving new expansion at Hardisty. We look forward to talking a little bit more about that. But that will drive more -- should drive more expansion there at our Hardisty facility. Again, as Adam said, 50% of the Stroud capacity is available, and we are in current discussions because this announcement created a commercial catalyst in Canada for customers looking for this opportunity. And so, we were obviously very quiet until we made the acquisition, and now we are in discussions with several customers who are meeting the same kinds of alternatives and opportunities to move the product ratably and to protect their quality and get a better price point. So, also given the importance of Cushing and our established connectivity there, we’re also looking at additional opportunities in an around that area that fit our rail-to-pipe strategy as well as our new connectivity opportunities there in the Cushing hub. So, again, very excited about that, looking forward for it to come on line. I’ll ask Josh to bring us to speed on the -- where we are in our project to retrofit that as Adam said, to be able to handle a heavier grader of products. So, Josh, with that, can you give us an update on the project?

[Josh Ruple:]

Sure, absolutely. Dan, thanks for that. As Adam mentioned, we’re deep down the path on the on -boarding process of the Stroud asset. We are nearly complete with our operations planning and on-boarding process, to handle heavies is also a deep down the path. We expect to be completed about two weeks ahead of schedule and on budgeted and on time to meet our customer needs at October 1.

[Dan Borgen:]

Okay, great. Josh, thank you for that. Another project that we will bring on on-time or under that and on budget. So, we appreciate that. One question that you probably ought to be asking yourselves, I mean we ask ourselves that and so we will throw it on the table and try to answer it. And question being how have supply disruptions over the last 12 months, including the recent spin [ph] crude instrument in Canada, the harsh winter, the Fort McMurray fires, impacted the projected production growth in western Canada, and how does that impact our thesis around that demand our strategies? So, Brad, I’ll ask Brad Sanders, to answer that question. Brad?

[Brad Sanders:]

Yes. Thank you, Dan. So, as you mentioned, there have been three significant unplanned events over the last year which have materially impacted the amount of production and/or supply available in western Canada. There was Fort Mc fires last summer, the extreme cold had negative impact, issues to production this past winter and then the upgrader issues which started around March and only now getting fixed and coming back on line, all have had significant impact to supply, which of course drives prices for Alberta heavy crude higher, and we have seen all of that as spreads have narrowed up in Canada. The impact of all of that is first and foremost, inventories in Canada had drawn, they have drawn materially. Over the Fort Mc incident, we saw inventories draw as high as 11 to 12 million barrels. And recently, as we have gone through the upgrader issue, the inventories, we have seen them draw approximately 18 million barrels. So, that’s material and significant, but it’s not the total impact. We have also seen pipeline utilization rates drop materially. As you might know, it was right when the upgrader issue began, we were at the highest apportionment levels on our pipelines that were taking production from Canada to markets either on the West Coast or into the U.S. and Gulf Coast. So those apportionment levels were as high as 40%; today, they are zero. So, it’s had a significant impact from a supply standpoint and from a operation and takeaway standpoint. So, where do we go from here? We still remain confident that the cycle is coming where we will be back to high inventory levels which drive higher apportionment levels which ultimately drive demand on for rail takeaway. So, we will see all the upgrader issues fixed and back on line that can have an impact as much as we have seen reports, 400 to 500 barrels a day. And then, I’ll remind folks on the phone that between now and the end of Q1 2018, we expect an additional 350,000 to 500,000 barrels a day of new production to come on line. So, given those two likely events, assuming the upgrader comes on, on time and the production comes on as outlined, then we are very confident that we will move into a rail parity cycle by the end of the year or first quarter 2018.

[Dan Borgen:]

All right. Thanks, Brad. I think as a follow-up to that, a couple of things, additional fact points. One, the fact that we’re seeing support the thesis, right. When you have production off, simply said, when you’ve production off, inventories draw. Therefore, you’ve available capacities inventory. Customers -- spreads have narrowed, therefore customers will refill inventory, then they will back into a takeaway option. However, during this period of time, we have continued to see increase, probably a more solid ramp-up in activity at our facilities than we have historically. So, those are additional signs that the market is moving towards what our thesis is based on. So, we like that fact and obviously we like the fact that we have take-or-pay contracts that give us that length of time to allow for any blips in market production, takeaway capacity and so forth. But the facts do support it. So, said another way, if -- and you can always ask the big ifs, but if the fire hadn’t happened, if the upgrader wasn’t offline, if it wasn’t a hard winter, where would we be today. We believe the macro and the fact support that we would be in a very tight market and there would not be enough takeaway and everyone would be -- pipelines would be on allocation and so forth. So, facts do support, and we like the position where we are and we look forward to a continuing ramp up, as we’re seeing today. So, with that, let me move on and talk about transition in our current spreads and what is our outlook for recontracting at Casper and Hardisty, and what do we expect to rates to look like relative to current contracts. So, given all of those things we just talked about, how does that translate into commercial activity? So, Brad, go ahead and walk us through that if you would.

[Brad Sanders:]

Yes. So, again, as you go through the thesis, with all these disruptions, we’ve seen spreads narrow and we know prices are the catalysts that drive effective recontracting discussions that drive real utilization of assets. But, to Dan’s point, couple of things that we can point to that are positive as we think about our opportunities on a go forward basis. One is, our utilization has increased, and that’s increased for a number of reasons. One is quality, and we’ve talked about quality a lot and the role that rail plays in identifying and preserving qualities for customers, particularly for customers who don’t have pipeline access, so East Coast, West Coast. So, in that regard, we’ve seen activity grow, specifically to those two markets, as a function of one, quality; and two, as we know there’re some disruptive events in the marketplace as it relates to alternative, heavy supplies, whether it be advance crude specifically. And because of that we’ve seen alternative for heavy crudes grow. So, people who need to seek out alternatives are doing so today, even though prices are strong and are at levels that historically would not drive that kind of interest and utilization increase. So, we’re very positive that our thesis and model works when it’s supposed to. And we feel very fortunate that we’re positioned where we are from a recontracting standpoint because we’re heading right into the meet of a cycle where takeaway capacity will be less than supply, significantly. So were excited about that. The other thing that we just simply point out is that at the end of the day, our ability to commercialize Stroud, really validates all of this, validates our thesis that maybe not today but in the coming future, as Dan said, without the disruptions we likely would be in rail parity today that new customers, new people or producers who are exposed to this risk have decided to make new commitments to ensure that they have takeaway options and have access to the strongest markets as a function of optionality and location. So, we’re excited about our ability to not only commercialize fully Stroud but to recontract our CCR and Hardisty assets, and as Dan said the potential to actually grow at Hardisty, so.

[Dan Borgen:]

Very good. Thanks, Brad. So, let me transition to something that Adam mentioned and you’d seen in some previous announcements around San Antonio. We took the financial impact of that and went ahead and wrote that asset down. But, we are seeing some renewed interest in the facility there. So, we are in negotiations with a very solid, high-quality, investment grade customer that we have worked with before, who is interested in growing their business there; they’re in that space. They are a big player in that markets, and we are working with both the servicing railroads and the new customer to get that back on line. So, there could be some very positive development, very good momentum on that. And we think -- and again, we look at the macro drivers around the market. Is it required, is it needed in the markets? The affirmative answer is yes, it absolutely is needed in that market. And the customer and the railroads are being supportive to help create that solution with us, to put that in place and bring that on line. So, we could have some very positive things on future calls to talk about there, albeit small relative to the rest of the company size, but it is something that we’re seeing a turnaround in that market. Moving on to a next question that we thought you might want to hear some input on is, what was the rationale regarding the timing of the equity offering? And I’m going to let Adam speak to that, our CFO. And so, Adam, go ahead and jump into that.

[Adam Altsuler:]

Sure. So, obviously, it’s been a challenging market. We announced Stroud, the Stroud acquisition during the quarter which we are very excited about. It is obviously a very accretive transaction to the partnership at 2.5 times EBITDA. We funded it with our revolver, and that was an opportunistic time to raise capital, to pay down debt, improve our liquidity and give us some dry powder for organic growth but also M&A opportunities going into the next cycle. We’ve been very active on the M&A front. Also, we achieved one of our goals of increasing our average daily trading volume. Since the offering, our average daily trading volume has increased about, I think 125%, 150%. So, I think we achieved our goals of strengthening our balance sheet, improving our liquidity and also increasing our daily trading liquidity.

[Dan Borgen:]

I appreciate that, Adam. Given that what do we think the impacts of our distribution growth policy are going to be? Adam, I’ll let you hit on that as well.

[Adam Altsuler:]

Sure. So, we’ve built in some flexibility in the range we have given. We gave 5% to 10% for this year. If you look at what we have done year-to-date, that basically yielded 6% year-over-year distribution growth rates. We are within that range. We are very comfortable with that range. Like I said, we’ve built in that flexibility really -- there is potential upside at Stroud. If we could show up the capacity at Stroud, that could be as much as another 25% on our annual EBITDA at the facility. So, like I said, just wanted to build some flexibility. We are right within that range and we feel good about that. We will obviously discuss 2018 distribution growth policy towards the beginning of next year, as we’ve always done but that’s ultimately a Board decision and we will be reviewing all of the businesses and segments over the next year.

[Dan Borgen:]

Thanks, Adam. So, let me transition to growth and what we are looking at, at the parent in terms of potential dropdowns and how we are spending our time t the parent. And I’m going to ask Brad to comment on this and lead us to this discussion. But obviously, you’ve seen Texas, our announcements around Texas deepwater. We have had our investments there for almost two years, we have been working actively everyday on that asset, in terms of permit growth and the things that we need to be able to do engineering and so forth to bring that on line. But it really fits our macro strategy really, really well. And I’ll let Brad talk a little bit more about that. Brad?

[Brad Sanders:]

So, as a reminder, Texas deepwater is our Greenfield property on the Houston Ship Channel, probably the last piece of advantaged Greenfield property in the ship channel. So, we are excited about that. And it’s really set up for the potential for traditional midstream infrastructure type assets that are backed by long-term contracts with naturally investment grade customers, given the Houston Ship Channel activity and the potential customer base there. So, what’s going on there? The critical catalyst for this opportunity and development opportunities are really a function of two things. One is, the North America supply story, which is we’ve just gone through what’s happening up in Canada. And over the past, between 2017 and 2018, the expectation is production growth out of Canada will exceed 1 million, 1.1 million a day. So, it’s significant material. The second one of course is what’s happening in the Lower 48 as it relates to production growth from the technology associated with shale. So, you have seen significant production growth in Permian and a lot of that technology being leveraged in other major production points, whether it’s even back in the Bakken or in the Wyoming area and of course Oklahoma as well. So, we are seeing significant growth from a North American standpoint, supply growth. But we are also experiencing material growth from a demand standpoint, internationally. So, the role of Texas deepwater is simply to match those two, those two catalysts up. One is the increased supply, looking for a point of demand and that demand being international. So, we’re excited because we think that will lead to increase in crude exports, product export, NGL exports, which will drive significant demand for docks, pipeline connectivity and rail. So, Texas deepwater uniquely is positioned for that. We think that growth will happen in phases, and could happen in any one of those value chains, as we’re having material and significant and meaningful discussions with potential customers in each of those. So, we’re pretty excited about that. The second material one -- in addition folks, we’ve got M&A activity that we’re doing but the second material growth opportunity that we think is sooner than later is we’ve talked often about the diluent recovery unit, DRU for short, that we think is the ultimate solution for advantaged heavy bitumen takeaway out of Canada that advantages the producers from a reduced cost and maximizing the amount of bitumen production that is moved from the Canadian markets to demand points. It also maximizes the value to refiners as they have the ability to take the bitumen need and blend with higher value type feedstocks into the refinery. And then finally given that it is a non-hazardous product, it’s a better product for our community, for our railroads and ultimately for our customers from a cost standpoint. So, we’re excited that we can deliver a takeaway solution that is competitive long-term to pipeline economics. And so, why are we more excited today than before, primarily because we think our customers have to experience the need for rail takeaway before they ask the question, what’s the better solution than the existing solution for rail takeaway. So, as we move into this cycle in late this year and in 2018, we will be purposed about marketing a DRU solution to folks who are using rail as a day-to-day solution for takeaway and accessing all markets. So, we’re pretty excited about that. And then, naturally as we talked about Texas deepwater and its rail connectivity, we’ll look to leverage Texas deepwater as a destination, a rail destination, given the U.S. Gulf Coast position as a heavy consumer of bitumen feedstock, given the complexity of our refineries here in the Gulf Coast. Naturally, it’s a fit for us to leverage any kind of rail takeaway solutions out of Canada into Texas deepwater where it makes sense. So, we’re excited about both of these opportunities.

[Dan Borgen:]

That’s great, Brad. I think that’s well said and we’re -- we have teamed up with a key partner in Canada that is a strong partner that has a strong presence in the market to work on our DRU strategy with. And we’re looking forward to be able to discuss that more in the future. So, with that I think we’ve covered a number of the -- I’ll say the hot topics or what we think should be hot topics. But, I would gladly open the floor, if there’s any questions that we didn’t address or we need to clarify further. So, with that, we’ll turn it back to the moderator to ask for any questions. Thank you.

[Operator:]

[Operator Instructions] And your first question comes from the line of Derek Walker with Bank of America.

[Derek Walker:]

I appreciate the format and all the color, really appreciate it. Just one for me, as your thinking about the remaining 50% of capacity at Stroud, do you -- I know you mentioned that at Hardisty you are kind of full there as far as the capacity contracting has gone. Do you need the expansion at Hardisty in order to kind of fill that other 50% at Stroud or can you just look at other opportunities outside of the expansion at Hardisty in order to fill that?

[Dan Borgen:]

Sure. Let met jump in and try to answer that. Dan, here; good question, Derek. So, certainly, there is other rail delivery points coming out Canada that could feed Stroud. We think that we have some more localized customers around Hardisty that will want to take advantage of that opportunity in that quality bet that we were talking about earlier that at the quality preservation there to be able to put in a railcar. And just to be specific around that, obviously putting a particular spec of product in a rail car holds that quality, all the way to market. You put that in a pipeline and that pipe, that spec cannot be assured at the delivery point. And so that’s a key, especially in these, I’ll say, lower commodity price environments where people are looking for every nickel. So, I think that that’s important. But to specifically answer the question, it could come from other delivery points, doesn’t have to come from our Hardisty or Casper assets. It could from third parties, and there are third parties available. But we have both of those customers at the table, looking at the remaining capacity of Stroud.

[Brad Sanders:]

What I would say, very directly and specific, Derek, is given Stroud’s unique, advantages, then our plan is to simply leverage that unique value into either better recontracting options at Hardisty or growth at Hardisty, we will exhaust all of those before we will contemplate other suppliers from other locations.

[Derek Walker:]

I guess, I had another question unless you had more on that topic, but…

[Dan Borgen:]

I think that’s good. I think as Brad said, the market leverage that we possess, obviously we prefer to drive the growth at Hardisty and see that. But, we are unique in that position. So, to be able to give an OD, origination definition pairing, that optimizes rail freight and a variety of other things that make that more effective.

[Derek Walker:]

Got it. Just transitioning, Dan, and you mentioned this, just appreciate your comments around San Antonio. What was the actual impact in the quarter? And just going forward, I guess how quickly can those developments, you mentioned in your conversations, with investment grade customer there or potential customer, how quickly do you think that can develop, is that something this year or sometime in 2018?

[Dan Borgen:]

We look to be able to -- we are taking steps today, we are trying to document that and commercialize that today, but again, strong momentum on that. And we would like to see that that could be commercialize and in operation in 2018. And this is a customer who was utilizing the facility previously to another party, and now that that party has moved on, this customer is looking forward to growing their space in that market, and because the market needs better. So, this isn’t a brand new customer, this is an existing customer with a new contractual opportunity and a new commercial opportunity with us to be able to do that. So, the simplicity of the facility is such that we believe that we can bring it on timely and within -- when in 2018, I can’t give you that but we would be -- unless Josh, you have any clarity around the timing of that asset coming on line.

[Josh Ruple:]

Nothing more, Dan, than what you described.

[Brad Sanders:]

I would say that that we can actually think we can do in late 2017, so 4Q 2017. So, we are working with that customer, as you said to not only create permanent solutions but bridge solutions as well. So, the bridge solution should be available in 2017.

[Operator:]

[Operator Instructions] And your next question comes from the line of Jerry Xu with Citi.

[Jerry Xu:]

Just two quick questions. First about I think around what Dan said in the prepared comments about sort of more incremental volume coming on line, I think 400 to 500 barrels a day. Is that what was said? Just off of that number, was that just towards sort of for rail exports or is that more so for just overall production ramp?

[Dan Borgen:]

I think that was Brad’s comment. So, I’ll let Brad respond to that.

[Brad Sanders:]

Yes. So, I made two comments. One is that the upgrader issue actually comprises, when you calculate its full impact, it’s somewhere between 400,000 and 500,000 barrels a day of production that has been impacted by the upgrader. So, with the upgrader coming back on, this month we expect that type of significant improvement in supply. And then, from a new production standpoint, our expectation is that -- and we have got the list of producers, fields and how this production is gathered, we expect between 350,000 to 500,000 barrels a day of new production to come on between now and the end of first quarter of 2018. So, it would be new production. As a reminder, Jerry, we were -- and prior to the upgrader problem, we were at the highest inventory levels we had been at since 2012, which as a reminder in 2012, WCS differentials traded as low as $45 under WTI. And we are at apportionment levels on the major pipelines at their highest levels. So, we were near rail parity at that point. So, when we get the upgrader back on, our expectation is those pipes will go back to fully utilize; our expectation is that inventories will again grow to peak levels. And then ultimately this new production will push the industry over into a situation where the role of rail grows and is needed to solve takeaway constraints.

[Jerry Xu:]

And then my second question kind of within the same area is more so about just the overall crude export on rail. I think NEB [ph] disclosed back in April that they’re seeing around 150,000 barrels a day. Would you say right now, is that number still more or less around where you’re seeing right now?

[Brad Sanders:]

Yes, it is. And currently, the most significant consumers is Canada still today. So, we export a lot of barrels that simply go around the home [ph] and be consumed in Canada or the Come By Chance facility; on the margin what we’re really seeing increases are into Europe and ultimately into Asia. So, our expectations -- and you’re seeing -- if you look at, we try to -- well, I would say this, we have ideas that we think how the world works, so we’ve ideas on how the markets are solving but then we try to validate that stuff, Jerry, but looking at curves. And one of the curves that that would explain a bit of your question is the Midland since the incremental production, the marginal production is coming from Permian and its light sweet, and the light sweet balances, our supply is greater than demand in the U.S. Every new barrel of light sweet production has to seek export markets. And if you look at the Permian prices, Permian prices are actually discounting relative to the Gulf Coast, to ensure that it seeks a water-borne market. So, all the things we’re saying about exports need to grow, light sweet is the critical driver, in fact is happening and prices are indicating that in fact it’s happening. So, it’s validating the thesis. So, we do expect production to grow, we do think it’s somewhere around 150,000 -- not production, exports to grow a 150,000 barrels a day and growing, and the catalyst will be light sweet as a function of the underlying macro story. So, curves, they typically don’t lie; they tell you exactly what’s going on. And the curves today are saying that Midland is discounting relative to Brent to seek export markets, so.

[Jerry Xu:]

And then, just one more, quick one, just off the back of the previous question. In terms of sort of line of sight from Stroud, how long would it take for you guys to develop incremental build of the Hardisty asset, if you guys were to secure more capacity?

[Dan Borgen:]

So, Josh -- I’ll let Josh answer that in terms of the -- we’ve really jammed that construction. Remember when we built the first phase of Hardisty, we built some expansion space into it, so that we can ramp up very quickly. So, I’ll turn it Josh and let him specifically answer that.

[Josh Ruple:]

Yes. Dan, just following on, we’re very well positioned to expand our Hardisty asset. As Dan, mentioned our early development had plans for secondary growth. Today, we’re permitted; we have our procurement strategy, all of our engineering and contract planning is in place. So, literally based on our pending commercialization, we’re ready to begin constructive activity. At this point, pending timing of that commercial activity, we’re between seven and nine months development timeline.

[Operator:]

[Operator Instructions] We’ve reached our allotted time for questions and answers. I will now turn the conference back to Dan Borgen.

[Dan Borgen:]

All right. Very good. Thank you everybody. I think this was a good discussion. I hope everybody appreciates this format. I know I do, it’s just a good way for us to talk and really exchange the facts and opinions and kind of where we are. And I think hopefully you can agree that USDP is uniquely positioned. It’s got -- the facts support the macro, as we’ve discussed. The thesis is supported by what we’re seeing in absolute facts. We’ve got strong take-or-pay customers who again carry through some of these blips in the market. Reminder that drivers for refiners to be in the market space is cheap feed. Obviously when pipelines get full, inventories get full and you see that widening, that’s what the refineries love; that’s why the refiners are our customers, as well as producers. So, we see that market demand coming, it’s -- I get ask, we get ask all the time, when, when. I don’t know when we can tell you specifically, but the facts support that it is happening; it’s going to happen within a fairly short-term, unless there is some other dramatic event that happens in the marketplace, i.e., a fire or some dislocation of production. But with that being said, therefore you should see a widening or product, therefore pricing, therefore you should see refiners back at the table needing infrastructure to be able to be specific to their needs, which is all what we have in terms of our assets. Obviously with Stroud being another commercial catalyst, again proving the point of the flexibility of rail and uniqueness of rail to be able to deliver that, obviously shifting into more of a diverse strategy around our diluent recovery unit and really meeting the needs of our refining customers as well as our producing customers and delivering almost a 100% neat bitumen to market that is obviously safer, because it’s a -- we’ve got our stick codes already on that which would be nonhazardous, nonflammable. So we’d travel at a -- should travel at a more reduced freight rate as well as being a safer transportation to market and give our end refiners what they want and what they need. So, everything is full in terms of what we have. We have permitted capacity that we can expand. So, except at Stroud, we have obviously 50% capacity there and we’re looking to fill that but we have permitted capacity that others don’t have that we think grow and react quickly. You heard Josh say seven to nine months, which is a quick turn to be able to bring new capacity on, at Hardisty to be able to meet the need and help. And we’re going to be choosy about the commercial agreements that we do there and we’re going to use the strength in the market to be able to support that. So, we feel good about where we are. And obviously disappointed that the fires happened and things like that and where we would have been in a more of a demand cycle right now, but we are seeing a ramping up at our rail facilities, to be able to support again the thesis and the facts there. So with that I’ll wish everybody a great day. And I know there is a lot of choppiness out there in the market, so I appreciate the time that everybody can spend on the call with us today. So, thanks so much and everyday have a great rest of the week.

[Operator:]

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