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Edited Transcript of BKEP earnings conference call or presentation 26-Mar-20 3:00pm GMT

Q4 2019 Blueknight Energy Partners LP Earnings Call

TULSA Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Blueknight Energy Partners LP earnings conference call or presentation Thursday, March 26, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Andrew Woodward

Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C.

* Mark A. Hurley

Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C.

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Conference Call Participants

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* Glenn Gardipee

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Presentation

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Operator [1]

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Good morning. My name is Claudia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blueknight earnings conference call for the fourth quarter and year-end results of 2019. (Operator Instructions)

I would now like to turn the conference over to Andrew Woodward, Blueknight's Chief Financial Officer. Please go ahead, sir.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [2]

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Thank you, and good morning. It's my pleasure to welcome you to today's conference call where we will discuss Blueknight's financial and operating results for the fourth quarter and year-end 2019. Mark Hurley, our Chief Executive Officer, will update you on our operational performance as well as external factors influencing our business. After which, I will provide a brief update on financial results for Blueknight.

In addition, we will provide guidance for 2020 and discuss how Blueknight is uniquely positioned in this market. We will also take this opportunity to showcase the strength and stability of Blueknight's current assets and its new refined go-forward strategy. We will then take your questions after our prepared remarks.

As a reminder, the earnings release, which can be found on our website, includes financial disclosures and reconciliations for non-GAAP financial measures that should help you analyze our results. Our comments and answers to questions during the call will include forward-looking statements that refer to management's expectations or future predictions. These statements are made as of the date of this call, and we are under no obligation to update these forward-looking statements in the future. They are subject to risks and uncertainties that could cause actual results to differ from our expectations.

With that, I will now turn it over to Mark Hurley, our CEO. Mark?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [3]

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Good morning, and thanks to everyone who dialed in today. I will be updating you on our business, operational performance and external factors influencing our business for the fourth quarter and year-end 2019 results, along with our new and refined long-term strategy. Andrew will then provide an update on financial results for 2019 and our guidance for 2020.

For the fourth quarter, we finished the year strong, and I'm very proud of our team and performance over the entire year. Our objectives for 2019 were to run the business as efficiently as possible, to remain disciplined on capital, generate positive free cash flow and improve our leverage and distribution coverage metrics. I can now say confidently, we accomplished all of these objectives and not only positioned Blueknight to settle the Ergon put payment at the beginning of 2020 but also positioned the company to handle the challenging market dynamics we're now experiencing.

Different than perhaps many of our peers, Blueknight has had well over a year to improve its business, manage its capital spend and strengthen its capital structure to prepare for moments like these.

Before I discuss our financial performance, I want to briefly address these unprecedented times related to COVID-19 and our proactive response to it. Our commitment to the health and safety of our employees and the communities we serve is our most important objective. These are fluid times, and our approach as a management and as a company is to be vigilant, nimble and quick to act. We've implemented best practices received from CDC guidance across the entire company and implementing working remotely where we can, along with putting in place customized health and safety practices and contingency plans in areas we can. We're monitoring the states and regions in which we operate, and as of now, our operations are excluded from mandatory closings due to the essential designation of our assets. Our entire business remains open for service, and we'll continue to keep our stakeholders, including investors, where if any significant material changes impacting the business and our guidance for the year.

Additionally, as we have communicated before, we are committed to health, safety and the environment. Our performance in 2019 was no exception, and I'm proud to share it was our best year on record. As a testament to this recently, Blueknight received the first place safety award for the third year in a row from the Oklahoma Trucking Association. Again, our leaders and people in the field deserve all the credit here, and I look forward to building upon this momentum going forward.

Lastly, on this topic, we are using our success and commitment to HSE and the culture we built around it to challenge ourselves to become a leader in our space in environmental, social and governance practices, better known in the industry as ESG. We feel operating in this manner is already a part of who we are but also know we can make significant progress here similar to our HSE program. We believe we already have a unique story to share, and we'll continue to keep our investors and stakeholders apprised of our plans and actions within ESG.

Now I'll turn it back to our financial highlights. As we have stated throughout 2019, our top priority was to strengthen our balance sheet and credit metrics and improve the stability of our business and underlying cash flows. Our performance in the fourth quarter continued to demonstrate progress in these areas. Distribution coverage for the fourth quarter was 1.36x and for the entire year, 1.2x on all distributions, including both the preferred and common units. These values compare to 0.68x in the fourth quarter of 2018 and 0.83x for the entire 2018 year, a substantial year-over-year improvement.

Let me take a moment to talk about our current distribution and the coverage we were able to maintain over the course of 2019. We made a very hard but correct decision at the beginning of 2019 to cut the distribution on the common to an annual level of $0.16 per unit. We targeted this level because we felt it was sustainable in all markets and still strongly believe that's the case today and going forward. Over the course of 2019, maintaining coverage of 1.2x on all distributions displays that confidence. Many companies do not report coverage on all distributions like we do. So let me break that down further for each of our investors.

If your preferred investor 1.2x coverage on all distributions implies a preferred coverage of greater than 1.5x or a cushion above 1.0x of approximately $13.5 million for the year since those holders received priority on their distributions. Looking at coverage on the remaining common distributions, 1.2x coverage on all distributions implies a remaining coverage post distributions paid for preferred of approximately 1.9x or cushion above 1.0 of approximately $6.5 million for the year. For 2020, based on our current outlook, in the same distribution rates for both the common and preferred, we expect to be above these coverage levels for the year. Annual share of 2020 financial guidance in full, but I want to emphasize these points here since it highlights the stability of our operations.

Moving next to our leverage for the fourth quarter. We continue to see improvements here as well. Our debt-to-EBITDA leverage ratio ended the year at 4.05x, down a full turn from the year earlier. At the beginning of 2019, we have guided to leverage of between 4 and 4.5x, so it's a great achievement to be at the bottom end of our guidance.

More importantly, due to our financial position at the end of 2019, we were able to satisfy the put payment on January 3 with Ergon. I can now confidently say that both the put and all other obligations to the Cimarron Express pipeline project are now behind us.

As we stated before and feel it's important to reiterate, our long-term targets are to reduce our leverage to approximately 3.5x and maintain coverage comfortably above 1.2x. However, before I go into our long-term objectives, including our new and refined strategy, let me first turn to our operational performance for the fourth quarter and full year 2019.

As always, I will start with our biggest segment, asphalt terminalling, which represents 80% of our total operating margin. Before diving into asphalt's specific performance, I want to use this opportunity to remind our investors about the strength and stability of this segment. Our asphalt revenue is incredibly stable with over 95% of it supported by take-or-pay agreements with predominantly investment-grade counterparties. The remaining 5% of revenue occurs on our customers' throughput, more volumes beyond a minimum level due to increased demand for road construction projects. We also carry no direct commodity exposure here. As of March 23, the average term for these contracts was approximately 5 years, and we recently extended 19 of our 53 facilities to 7-year terms.

Lastly, I'd like to emphasize that the services we offer in asphalt terminalling fully support infrastructure and roadway construction. Again, this is 80% of our total market, so well over half of our business is directly linked to the infrastructure sector. We believe this differentiates us as a midstream entity as compared to others of more leverage and exposure to more traditional oil and gas markets. And I don't believe we've done a great job emphasizing these points to our investors in the past, but it's important than ever in this volatile market.

Let me repeat, Blueknight's core business, asphalt terminalling, supports our U.S. infrastructure and roadways. From here and going forward, we'll be talking about our business a little differently and sharing more trends and developments in this market since it is such a key driver of our business.

Now turning to our asphalt terminalling segment for the fourth quarter and full year 2018. As you will remember, the first half of 2019 was challenging due to the extensive flooding experienced in Oklahoma, Kansas and Missouri. The second half of the year represented more normal operations. However, we experienced higher costs related to repairs and maintenance from the floods. The fourth quarter was no exception where we had higher-than-normal repair costs related to the floods, and we also moved up repair and maintenance expenses and capital from the first quarter of 2020 to the fourth quarter since our first quarter tends to be seasonably our lowest earnings quarter. This was the primary reason why our earnings were lower year-over-year.

Overall, despite weather-related issues, I'm very pleased with our asphalt earnings for the full year once you adjust out the impact of the July 2018 divestiture and spring 2019 floods. Andy will provide more details on those adjustments. Longer term, we continue to see encouraging fundamentals in the business. From what we are hearing, our customers are still planning for an active asphalt season despite potential economic slowdowns due to the coronavirus. Many states are looking at this season as an opportunity for potentially more construction since roadways could be less busy. We continue to monitor the situation closely.

One of the advantages we have in our asphalt terminalling operation, and you saw it with the floods in early 2019, is the geographic and earnings diversification of having a network of 53 sites spread across the country in different states and regions. If we do experience disruptions to a site or collection of sites similar to the floods, it's typically not meaningful to our entire operation.

I will now turn to our Cushing crude oil storage business. Similarly to asphalt, I'll talk at a high level about this business before jumping into the quarter. Our Cushing storage facility, which includes approximately 6.6 million barrels of crude oil storage, represents approximately 15% of our total operating margin. Together with asphalt terminalling, these segments represent over 95% of our total operating margin, so a substantial part of our business. The contracts at Cushing are very similar to asphalt, and that the revenue received is predominantly take-or-pay. The one primary difference is these contracts are shorter in duration since many of our customers want flexibility when storing crude oil to take advantage of contango markets when the forward WTI oil curve is rising in the outer months.

As of March 23, our facility was fully contracted at approximately 5.5 million barrels. We had excess capacity of less than 500,000 barrels prior to the price of oil dropping dramatically over the last month that we were able to contract at rates more than double the renewals seen prior and for longer terms. We'll also use this opportunity to further derisk the business and extend the contracts previously expiring within 2020 at much higher and attractive rates. The current contango market environment will likely lead to incremental revenue for both 2020 and 2021 and significantly derisk the business over the next 2 years.

I'll let Andy share full guidance, but this has been a very positive development over the last month that's important for us to share. While the negative demand impacts of the coronavirus and flood of supply from the Saudi, Russia dispute at disrupted oil markets, the one area within the supply chain that benefits from the sharp swing to contango is the crude oil storage market. Thus, we are positioned very well with our Cushing terminal should the current dynamics extend longer term.

Together with the stability of our asphalt earnings, these combined factors, which represent 95% of our total operating margin, contribute to differentiating Blueknight in this market today.

Turning back to our operational performance during the fourth quarter and full year of 2019, our facility ran fully contracted, a big improvement over the prior year. For the fourth quarter, contracted storage was approximately 5.4 million barrels, approximately 1.1 million barrels higher than the prior year. Although forward crude oil curve for much of 2019 was flat, we continue to see a very active customer base in terms of throughput and blending where we capture additional revenue beyond just the storage rate. For the fourth quarter, our throughput volumes were up 41% from the same period last year. Overall, our Cushing business was strong over the course of 2019, generating almost $12 million of operating margin for the year, which was a significant improvement over 2018.

Moving now to our crude oil transportation segment, which represents both pipeline and trucking services. Together, these businesses represent less than 5% of our total operating margin. I would like to emphasize that point, especially in today's commodity price environment and the worries legitimately so that investors have with this type of activity and the inherent exposure they have to upstream production and counterparty risks. Again, these segments together represent less than 5% of our total operating margin. And the primary long-term contract we have here is with XTO, which is arguably one of the best upstream counterparties in the space. As one would expect in today's commodity environment, we continue to see a challenging outlook. But unlike some of the higher-growth basins, we've been experiencing challenging volumes and drilling economics in the SCOOP and STACK region for some time now and have been preparing the company for lower volumes and activity for some time. This preparation has included, for example, intentionally allocating resources and growth capital away from this segment to improve overall cash flow. I'll spend more time on our strategic direction for this business shortly.

Operationally, for the fourth quarter, pipeline volumes were 20,000 barrels per day versus 34,000 barrels per day during the prior year. Trucking volumes for the fourth quarter were 23,000 barrels per day versus 28,000 barrels per day for the prior year. Despite the lower volumes, I'm very pleased that we're running these businesses more profitably than in 2018.

Now I'd like to spend a few minutes discussing our new and refined long-term strategy at Blueknight. For some time, but now with more focus than ever, Blueknight has been transitioning into a pure-play terminalling company focused on specialty niche services serving tomorrow's infrastructure and transportation end markets. We believe this renewed direction and focus represents the best of Blueknight, including leveraging our core strengths and competencies, our unique value proposition and leading asset platform and our ability to compete and win over the long term.

With Asphalt and Cushing terminalling, this already represents 95% of our total operating margin. Of this margin, 93% is supported by take-or-pay revenue at a weighted average remaining term of approximately 5 years, and over 50% of the revenue is supported by investment-grade counterparties. In addition, these 2 segments have no direct commodity exposure and are not dependent on a single-basin drilling or counterparty risk. We believe these characteristics provide strength and stability in our cash flows and are ideal for the midstream model.

Although it will likely be challenging to capture investors' full attention in today's current market, we still believe this is our moment to showcase our portfolio and the direction we're headed. Within asphalt, we believe we can leverage the positive trends we're seeing in the U.S. infrastructure and highway construction sector, along with better utilizing our existing footprint of 53 sites to potentially bring in more niche products and services.

We're only in the early innings of this strategy, but already, we're seeing potential interest from customers outside of asphalt. With Cushing, we continue to see opportunities to work with strategic partners or customers who value storage over the long term for strategic purposes and looking to improve our connectivity to bring in more business and volumes going forward.

As for our crude oil trucking and pipeline segments, we're undergoing a review of strategic options for the business, which may include a potential joint venture or ultimate sale. We have a great team that continues to support these assets and have built an attractive and competitive crude oil network in Oklahoma. We are actively seeking out strategic partners and players who value local crude oil production transported out of the Oklahoma region for their integrated operations. As we communicated in the past, we believe our system, location and contract dedications are ideally suited for these players.

Lastly, our decision to review options for this business rests mainly on Blueknight's ability to compete effectively in this area over the long term, especially as we direct more resources and attention to Blueknight in becoming a pure-play terminalling company. We also look at this as an opportunity to reduce leverage meaningfully, maintain or strengthen our coverage and improve liquidity to support future growth in terminalling.

This probably goes without saying, however, we'll only choose to transact, and we're happy with the value and potential owner and ultimately to achieve both at this point in time.

With that, I will now turn the call over to Andy Woodward, our Chief Financial Officer. Andy?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [4]

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Thanks, Mark. Yesterday, we reported financial results for the 3 months ended December 31, 2019, and full year 2019. Before sharing our financial results, I would like to inform our investor community that we changed our adjusted EBITDA and DCF definitions to now exclude noncash gains or losses from asset sales. We believe this change better reflects the ongoing cash operations of our business and should help our investors better assess our results.

Now on to our financial results. Adjusted EBITDA was $16 million for the fourth quarter as compared to $13.9 million for the same period in 2018. This represents a year-over-year increase of 15% for the quarter. Looking at the full year 2019, adjusted EBITDA was $63.6 million versus the prior year of $60.1 million. If you remove the impact from the July 2018 asphalt divestiture, for comparability purposes, adjusted EBITDA was higher year-over-year by $8.9 million or 16%. As Mark mentioned earlier, we had a great year all around for the business, and it significantly outperformed the prior year on all measures.

Distributable cash flow was $11 million for the fourth quarter as compared to $6.7 million for the same period in 2018, a 66% increase year-over-year. For the full year, distributable cash flow was $38.9 million versus $34.6 million during the prior year. Similarly to EBITDA, if you adjust for the July 2018 asphalt divestiture, distributable cash flow was higher year-over-year by approximately $9 million or 30%. These figures are a considerable improvement over the prior year and further supports management's disciplined approach to better managing maintenance capital and lowering costs through debt reductions from generating positive free cash flow.

Adjusted EBITDA and distributable cash flow, including a reconciliation of such measures to net income, are explained in the non-GAAP financial measures section of the earnings release issued yesterday. Additional information regarding the partnership's results of operations will be provided in the partnership's annual report on Form 10-K for the 12 months ended December 31, 2019, to be filed today with the SEC.

I'll now go into a few highlights for each segment. Within asphalt terminalling, total operating margin, excluding depreciation and amortization for the fourth quarter, was $15.9 million versus $16.7 million for the prior year. The year-over-year decrease was primarily due to shifting up repair and maintenance expenses from the first quarter of 2020 into the fourth quarter since the first quarter tends to have lower earnings overall, and we are actively trying to manage spend during those months.

For the full year, asphalt terminalling operating margin was down versus the prior year by $6 million. However, once you adjust for the July 2018 asphalt divestiture, it was only slightly lower mainly due to the flooding earlier in the year.

For 2019, the total impact of the flood on EBITDA was approximately $700,000. And net of insurance was $1.7 million in total cash flow, which includes both expenses and maintenance capital.

Moving to crude oil terminalling and storage. Total operating margin, excluding depreciation and amortization, was $2.6 million for the 3 months ended December 31, 2019, an increase of $0.6 million or 27% compared to the same period in 2018. This was due to higher contracted storage and increased throughput and blending at our facility. For the full year, crude oil terminalling operating margin was higher by approximately $3 million or 34% over 2018.

Now on to our crude oil pipeline and trucking segments. Total operating margin, excluding depreciation and amortization combined for the fourth quarter of 2019, was $3.1 million higher versus the same period last year. The growth for the quarter was primarily due to better margin capture within pipeline and longer hauls in trucking despite lower overall volumes than the prior year. For the full 2019 year, total operating margin was higher by $7.8 million versus the prior year.

I'll now move on to our key financial metrics and liquidity position. During the fourth quarter and benefiting from solid operations, coverage for the fourth quarter of 2019 was approximately 1.36x and 1.20x for the full year, a significant improvement over last year. As Mark mentioned earlier, we believe we found a distribution level that is sustainable in all markets.

Similarly, we continue to drive down our debt and corresponding leverage ratio. Our debt balance was $256 million, leverage was 4.05x as of December 31, 2019. As Mark mentioned, due to our improved financial position and corresponding leverage, we were able to satisfy the put payment on January 3, 2020, for $12.2 million in full. As of March 23, our net debt balance was approximately $272 million.

As for our capital investments, net capital expenditures were $3.3 million for the fourth quarter, which included $1.7 million of net maintenance capital. As mentioned already, we've been very disciplined about our capital spending in 2019, which has contributed to both lowering borrowing costs and our ability to pay down debt over the course of the year.

As of the fourth quarter of 2019, we had availability under our credit agreement subject to covenant restrictions of approximately $60 million. With that said, please note that our leverage covenants did step down at the end of the year from 5x to 4.75x, so our availability at the start of the year was approximately $44 million.

Finally, let me walk you through our guidance for the 2020 year. First, let me start with a few important points as it relates to our first quarter earnings. With the recent drop in crude oil prices, this is expected to impact our financial results for the quarter since we do carry inventory as fixed assets. This is in the form of crude oil line fill and tank bottoms in our pipeline business and a small portion of inventory in our crude oil marketing business. We do mark to market the price of this inventory at the end of the quarter.

The line fill and tank bottoms will be a noncash impairment that will be below EBITDA but flow into net income. As of February's inventory level and current WTI prices today, we're expecting approximately a $4 million noncash impairment. For the remaining inventory within crude oil marketing, the inventory write-down, which is also noncash, will flow into our gross margin. So the EBITDA impact for the quarter for this noncash adjustment would be approximately $400,000.

Now on to full year guidance. As Mark mentioned earlier, we believe 2020 is our opportunity to showcase the strength and stability of Blueknight despite the significant drop in crude oil prices that has impacted so many entities within the midstream sector.

In addition, we continue to monitor closely the potential impacts from the coronavirus but currently are not aware of any falloff in demand or impact to our business. Again, if any new information or evidence would impact our outlook, we'll be quick to inform our investor community. With that said, our outlook for 2020 adjusted EBITDA is roughly in line with 2019. This does include the contracts we've executed recently in Cushing that will be in effect next quarter. The incremental revenue has offset some lower renewal rates on existing storage and the other expected cost increases to our business.

We expect throughout 2020 to be cash flow positive after fully funding both our distribution payments and total expected capital expenditures of $9.5 million to $10.5 million, which includes net maintenance capital expenditures of $7.5 million to $8 million.

Please note that this is a reduction of capital spend from the prior year of approximately 20%. As a result of these key components to cash flow, we expect coverage for 2020 for the full year to be greater than 1.2x and our leverage ratio to be 4 to 4.25x by the end of the year.

Strategically, as Mark mentioned, we're continuing to evaluate options for our crude oil pipeline and trucking business and believe that any potential monetization opportunity there would drive our leverage below 4x while also maintaining our current coverage.

We're very excited about the prospects for Blueknight, including displaying to our investors the strength of our portfolio and our new refined direction and feel business is well positioned in 2020 and beyond.

Operator, that concludes our remarks. I will now turn the call over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from [Tom Forbes], a private investor.

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Unidentified Participant, [2]

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Yes. Given the current price of your units, my question is whether you've considered repurchasing some of those on the open market with any excess cash flow.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [3]

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Yes. Thanks, Tom. I appreciate the question. It's something that we have talked about and obviously, with the current dynamics, could be advantageous to us. But as of right now, we have not made the decision to do that, but it is something that we'll continue to think about going forward.

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Unidentified Participant, [4]

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Related to that, it would seem to me that, that might be the most opportunistic investment out there for you, guys.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [5]

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Yes, Tom, this is Andy. Yes, we don't necessarily disagree. I think for us, we're going to be super focused on getting our leverage down, first and foremost, from where it is today to -- closer to our long-term targets. And then certainly, once we feel comfortable with our leverage metrics at that point, yes, at these levels, it's hard to disagree that potentially purchasing units is going to be our best return.

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Operator [6]

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Our next question is from Glenn Gardipee with Northern Systems.

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Glenn Gardipee, [7]

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I had a question regarding the asphalt plants. And I was wondering if you could explain more in detail exactly the process that you go through in leveraging those units and distributing the material with customers.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [8]

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Yes. I'll give you a brief exclamation, Glenn. And then if you'd like to get into it in more detail, we'd be happy to set a call with you individually. But basically, we have 53 sites around the country. These are fee-for-service kinds of sites, so we don't own the molecules and own the asphalt at the sites. Each site is leased to a customer. Some sites are operated by Blueknight, and others are operated by the customers. And so the activity through the sites is really related to construction activity in the area. And so our customers contract with road construction companies and local governments and so forth in supporting construction activity.

Typically, these contracts are -- have a very high percentage of take-or-pay revenue. So however as the customer pays us regardless of the volume that goes through the site, and in times, when volumes are high, there is an additional fee that customer pays on a per ton basis.

We love the business because we think it fits the MLP model perfectly in terms of not having direct commodity exposure. We like the business, in particular, now because of the infrastructure needs across the U.S. and the fact that there's a lot of talk of more funding to infrastructure projects.

Now with where the market is, and it might be instinctively the wrong direction, but we're actually seeing a very high level of interest and activity because states are recognizing that, number one, asphalt prices are lower, so they can buy more per -- with their dollar. And with the reduction in traffic around the area, they're seeing this opportunity to do more construction. And so the feedback that we have gotten so far -- and again, it's a very fluid time, obviously, but the feedback we've gotten so far is that we think this is going to be just a very robust business for us for this year.

The other thing we'd like about it is that, and I mentioned it in my comments, it's a very diversified footprint that we have. So we're all over the United States. We have multiple customers. The majority of our customers are investment-grade counterparties. So we don't carry a lot of credit risk here. And so again, we just think it's a fantastic business for MLP. We're very unique in this space as we don't know of any other MLPs that are predominantly focused on asphalt services.

So hopefully, that helps you out a little bit. And again, if you'd like to learn more, we'd be happy to spend some time with you.

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Glenn Gardipee, [9]

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Okay. Yes, you explained the asphalt plants very well here. I also had just one other question. You mentioned about a $4 million noncash impairment in the first quarter here. Could you explain a little bit more regarding why that's a noncash impairment when the actual market for crude oil has dropped so significantly?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [10]

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Yes, this is -- Glenn, this is Andy. I can briefly explain that. So within our pipeline business, we have inventory that sits within the pipeline to make it operational, along with some of the tanks. And so that inventory, as long as we're operating the pipeline, will always remain there. We're not actively selling that inventory. And so what we're doing at the end of the quarter is we assess what the new crude oil price is. And if it's lower than what we have on the books, we'll then lower it and mark to market essentially. And so it's just putting a fair value out for that crude oil inventory. So again, not -- we're not selling. It's a noncash impact as a result.

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Operator [11]

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(Operator Instructions) There are no further questions registered -- I'm sorry, we have a further question from [Jeff Bailey] with [Beach Capital].

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Unidentified Analyst, [12]

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Absolutely fantastic order. Thank you guys for all your hard work the last year. It's -- I was looking at the previous reports, and I think we have to go back to 2014 before we see Blueknight printing a 1.4 distribution coverage in Q4. So I know there's some great results.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [13]

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We appreciate hearing that, [Jeff].

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [14]

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Yes. Thank you.

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Unidentified Analyst, [15]

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I have a couple of numbers questions. First, probably for Andy. So do you all expect a proportional lift in Q1? You mentioned that the asphalt segment had some extra expenses and, therefore, a little bit less revenue. So is that going to lift Q1 results a bit?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [16]

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Q1 results, we're going to have, as I mentioned, related to my comments in my section around some of those noncash hits -- but Q1, as a reminder, tends to be one of our lower earnings just in terms of asphalt margins and throughput. So it should be in line with prior years. Related to asphalt, Cushing, similarly will be slightly in line with last year. Although before the crude oil prices dropping dramatically and the contango shifting into a much steeper curve, the rates on those contracts that expired at the end of last year were at lower rates than what we're seeing today. So you won't see that pick up until Q2 of this year starting in April.

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Unidentified Analyst, [17]

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Okay. The last communication we got from Blueknight on the debt level was on January 6 when it stood at $268 million after absorbing the put. And so now Blueknight is reporting growth of $275 million and net debt of $272 million. I would have thought it would have been less. Can you explain why the debt level actually rose from early January?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [18]

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Yes. So you're right. It's a little bit higher than the $268 million. And what you're seeing there is just really accrual accounting versus cash. And at the beginning of the year, due to bonus payments for management and the company, you're seeing some of those flow through. But that will work its way out over the course of the year. But it's just accrual versus cash accounting that we tend to see earlier on in the years.

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Unidentified Analyst, [19]

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Okay. I mean I'm a little confused as far as accrual versus cash accounting on the debt level.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [20]

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Well, if you have more -- if you're spending more cash, it's going to increase your debt.

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Unidentified Analyst, [21]

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Right. So essentially, so expenses in Q4 as far as management bonuses and other cash expenses, Blueknight borrowed to fund those?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [22]

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Right. Right. We keep a really low, just in general, cash balance. And so we're constantly kind of drawing on our revolver just to pay intercompany month transactions or events.

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Unidentified Analyst, [23]

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Okay. Okay. Andy, what are you predicting for interest rate going forward for 2020? Do you have a forecast?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [24]

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It's a good question. I think even over the course of the month, we've seen the LIBOR rate fall almost 100 basis points. We ended last year on an average rate of around 6%. Maybe a best guess kind of going forward is perhaps 100 to 80 basis points below that for 2020.

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Unidentified Analyst, [25]

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Okay. So if we model 5%, we'll be somewhat in line with what the situation looks like today, huh?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [26]

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That will be in line with what you see today.

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Unidentified Analyst, [27]

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Okay. Mark, this isn't your first contango with Cushing. What are you -- what do you typically see as far as variable revenue in a market like this? What can we think of as far as oil storage variable revenue for 2020?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [28]

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Well, I mean, generally, [Jeff], you do expect to see customers just hold barrels more so than they normally do. We have -- and so some of the customers we brought on, we think we'll probably be less active than what we have had in the past. However, we use it as an opportunity to really try and diversify our customer base and align ourselves with those who we think will be more active in the future. And so these markets give us an opportunity to do that.

Having said that, our most active customers have not shown any sign of letting up over the next couple of months, at least with what we're seeing as far as combinations and so forth. So I think we're just going to have to wait and see. The main thing for us is that it just improves the market tremendously. And obviously, it's more of a seller market in this situation, and everyone knows that.

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Unidentified Analyst, [29]

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Absolutely. Okay. The discussion about the strategic option -- truck and the truck -- hello?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [30]

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Yes, we can hear you there.

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Unidentified Analyst, [31]

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The -- previously, Blueknight has said that the pipeline in the trucking segment offered a lot of synergies into the Cushing storage, and now we're talking about divesting of them. And it's kind of -- I mean, I guess, there's 2 questions. I mean first of all, why now after the talk of the synergies? And then secondly, it's kind of an interesting environment to be selling any gathering assets and essentially what are midstream assets. So why now, given those 2 considerations?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [32]

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Well, obviously, with the new -- with what's happening to prices in general, oil prices in general, and how we think that will play out over the long term and then specifically, economics in Oklahoma around the SCOOP and STACK and our inability to get more scale in this business because it's been very, very competitive in trying to expand the business, and so we just think strategically, we have much more strength around the terminalling businesses that we have. We have scale. We have competencies that we want to try and take advantage of. And our pipeline operations, we just think could be more valuable to an off party than they are through us, frankly. And whether that means doing something with the pipeline and trucking together or separately, we'll learn more about that as we go forward. And obviously, we've been having discussions already around this. Those things tend to slow down in these kinds of markets with these kinds of distractions, obviously. But we're going to continue that, and we'll -- we're going to continue to evaluate options, and we'll keep the investor community apprised. If we do something, obviously, it's going to be something that we're comfortable with and not giving away too much value.

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Unidentified Analyst, [33]

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Yes. Okay. And then my line cut out when you were commenting, but I believe you said that proceeds would go to debt pay down if and when that occurs, right?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [34]

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That's right. That's right.

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Unidentified Analyst, [35]

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Okay. My last question is slightly unfair because you -- Mark and Andy aren't in control of this, but you guys have done a phenomenal job of turning the business around, and there's a very optimistic scenario going forward. Operations haven't been better in a long time. Do you all have conversations with the GP board about improving the corporate governance?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [36]

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I mean we're aware of the interest out there and the changes taking place in the governance area. But obviously, it's a Board decision and a GP decision, primarily. And so we'll do what the Board thinks is the right direction for us.

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Operator [37]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mark Hurley for any closing remarks.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [38]

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Thank you, Claudia. Well, thank you, first of all, to everyone who called in. We appreciate your interest in Blueknight. These are very difficult times, but we do feel very good about our results. We feel good about the year of 2020. And I think, more importantly, we feel good about the strategy that we're implementing. We think we've got a good future ahead of us.

And then finally, we wish the best to everyone in dealing with the virus situation and you and your families, and please stay safe. And so thank you for the call. And Claudia, that will wrap up for us.

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Operator [39]

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Thank you, sir. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.