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Edited Transcript of BKEP earnings conference call or presentation 1-Nov-18 3:00pm GMT

Q3 2018 Blueknight Energy Partners LP Earnings Call

TULSA Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Blueknight Energy Partners LP earnings conference call or presentation Thursday, November 1, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James R. Griffin

Blueknight Energy Partners, L.P. - Interim CFO & CAO 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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* Christopher Bertrand Cook

Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager

* Jeff Bailey

* Josh Golden

* Michael Christopher Gyure

Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs

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Presentation

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Operator [1]

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Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blueknight Energy Partners Earnings Conference Call for the Third Quarter ended September 30, 2018. (Operator Instructions)

I would now like to turn the call over to Mr. James Griffin, Blueknight's Chief Accounting Officer and Interim Chief Financial Officer. Please go ahead, sir.

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [2]

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Thank you, and good morning. It is my pleasure to welcome you to today's conference call, during which we will discuss Blueknight's financial and operating results for the third quarter ended September 30, 2018.

Mark Hurley, our Chief Executive Officer, will update you on operational performance, projects and opportunities, as well as external factors influencing our business; after which, I'll provide a brief update on financial results for Blueknight. We will then take your questions after our prepared remarks.

Before we begin, I would like to remind everyone that information on this call may contain certain forward-looking statements. Statements included in this call that are not historical facts, including without limitation, any statements about future financial and operating results, guidance, projected or forecasted financial results, objectives, project timing, expectations and intentions and other statements that are not historical facts are forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties relating to the partnership's debt levels and restrictions in its credit facility, its exposure to the credit risk of the partnership's third-party customers, the partnership's future cash flows and operations, future market conditions, current and future governmental regulation, future taxation and other factors discussed in the partnership's filings with the Securities and Exchange Commission. If any of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those expected. The partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Blueknight Energy Partners, L.P. is a publicly traded master limited partnership with operations in 27 states. We provide integrated terminalling, storage, gathering and transportation services for companies engaged in the production, distribution and marketing of crude oil, asphalt and other petroleum products. We manage our operations through 4 operating segments: asphalt terminalling services, crude oil terminalling services, crude oil pipeline services and crude oil trucking services.

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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Thanks, James, and thanks to everyone who dialed in today.

As we discussed in our recent earnings release, it was an active third quarter for both the partnership and in the markets in which we operate. Early in the third quarter, we completed the sale of 3 of our asphalt terminals to the general partner Ergon, which we covered in detail in our last call. Since then, our asphalt business has continued to perform well. We've also been very active on the crude oil side of our business, where we have seen improved market conditions both for transportation and storage.

Covering asphalt first. The performance of the segment was in line with our expectations after adjusting for the divested terminals. As is typical, the third quarter was the peak earnings period for the year. Volumes in general were in line with budget. We did have 2 markets in which we experienced lower volumes. The first was the East Coast market, where business has slowed throughout the year due to very wet weather conditions. This region was also obviously impacted by hurricanes Florence and Michael. We did experience some wind damage at 2 of our sites, Wilmington, North Carolina; and Bainbridge, Georgia. Both terminals are now back in operation, however, with repairs planned for the fourth and first quarters. Total cost of repairs for the 2 terminals is estimated at approximately $700,000.

The other area of lower volumes was the Colorado market. This market was impacted by lower spending on state-funded projects. The state, however, has announced an increase in funding for 2019, so we expect volumes to improve next year. Overall, barring any unusual weather situations, we expect another good year in asphalt in 2019.

Switching to crude oil. We're encouraged by the trends we see in this part of our business. As we have reported in previous calls, the storage market has been challenging for us this year and the weak market resulted in a decrease in operating margin of approximately $7 million year-to-date. As we indicated in our previous guidance, the third quarter is expected to be the low revenue point in the cycle. The weakness in the market was due to declining crude inventories, particularly in Cushing, in addition to a backwardated structure in the forward crude price curve, where future prices are lower than prop prices. The backwardated structure lasted for approximately 10 months but has now flipped back to a contango market, where future prices are higher than prop prices.

In addition, inventories at Cushing has started to build, as was forecast by several industry analysts. Inventories have increased the last 6 weeks at an average rate of 1.6 million barrels per week and now stand at approximately 32 million barrels or 46% of the historical maximum inventory at Cushing of approximately 70 million barrels. This changing market dynamic has increased demand for storage. And as a result, we have new customer agreements for approximately 2.6 million barrels of storage becoming effective over the next 2 months. We have secured contracts for 4.4 million barrels of storage as of January 1, 2019 and an agreement in principle with another counterparty for an additional 665,000 barrels of storage that we expect to execute this month. These contracts taken together represent approximately 90% of our total storage capacity available for contracting. We continue to see strong demand, and we now anticipate being fully contracted in 2019.

Moving over to our pipeline business. Our second Oklahoma crude pipeline resumed service in July as planned and volumes are increasing steadily. There was some expected expense and working capital associated with the restart that is included in our third quarter results. We initially provided the necessary linefill to restart the line, which appears on our balance sheet and consumes working capital. Now that the line is up and flowing, the linefill requirement will be shared among all shippers reducing Blueknight share going forward. Returning the line to service has had a significant impact on our crude business. Our total November pipeline volumes are expected to be 38,000 barrels per day, more than double our volumes at the end of the second quarter. Our crude oil pipeline services segment was cash flow positive in September for the first time in over a year. Total Oklahoma crude production is now approximately 540,000 barrels per day and has increased 23% over the last year. It is expected to continue to climb. With the robust drilling activity in Oklahoma, we are optimistic about this segment in the fourth quarter and throughout 2019.

Further on pipelines. The previously announced Cimarron Express Pipeline project is progressing well, on time and on budget. This will be a 16-inch diameter, 68-mile pipeline to transport crude from the STACK region in Oklahoma to our Cushing terminal. The fundamentals are favorable for this project as analysts are forecasting SCOOP and STACK takeaway capacity to become constrained in 2019 and early 2020. We are constructing the project on behalf of a joint venture half owned by our general partner Ergon. We expect the pipeline to start up mid-2019, flowing 40,000 to 50,000 barrels per day of crude oil on the back of a 2 county acreage dedication from Alta Mesa Resources. Once it is generating cash flow, the partnership plans to acquire it from Ergon in late 2019 or early 2020.

The high level of drilling activity in Oklahoma has also led to an increased demand for crude trucking services, and volumes have increased steadily this year. We're confident the increased demand for trucking services will lead to improved margins in the fourth quarter and in 2019. In fact, the rate increase went into effect on October 1. So we expect our crude trucking services segment to return to positive cash flow during this period as well.

In summary, we're very encouraged by the trends in our crude business segments. We think these 3 segments, storage, pipeline, and trucking, could add approximately $10 million of EBITDA to our business in 2019. Together with another solid year expected in our asphalt segment, we are optimistic we can achieve our goals of increasing EBITDA to the mid-$60 million range, improve distribution coverage to over 1.0 and reduce the leverage ratio to approximately 4.0 by the end of 2019. With the improved financial conditions, we will then be well positioned to acquire the new pipeline from our general partner with no additional equity fund raise.

I will now turn it back over to James Griffin, our Chief Accounting Officer and Interim CFO. James?

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [4]

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Thank you, Mark. Yesterday, we reported financial results for the third quarter ended September 30, 2018.

Net income of $2.4 million on total revenues of $133.2 million for the 3 months ended September 30, 2018, as compared to net income of $9.8 million on total revenues of $47.5 million for the same period in 2017.

Operating income of $6.7 million for the 3 months ended September 30, 2018, as compared to operating income of $12.2 million for the same period in 2017.

Adjusted EBITDA of $14.5 million for the 3 months ended September 30, 2018, as compared to $21.6 million for the same period in 2017.

Distributable cash flow of $9.0 million for the 3 months ended September 30, 2018, as compared to $16.6 million for the same period in 2017.

We provided a reconciliation of our non-GAAP measures in the non-GAAP financial measures section of our earnings release.

Keep in mind that net income, adjusted EBITDA and distributable cash flow for the 3 months ended September 30, 2018, were adversely impacted by the previously disclosed sale of 3 asphalt terminals to Ergon in July 2018.

The distribution coverage ratio for the 3 months ended September 30, 2018, was 0.92x.

Additional information regarding the partnership's results of operations will be provided in the partnership's quarterly report on Form 10-Q for the 3- and 9-month period ended September 30, 2018, to be filed later today with the Securities and Exchange Commission.

I'll now go through the highlights for each segment. Starting with our asphalt terminalling services. Operating margin, excluding depreciation and amortization, decreased by $2.9 million or 14% for the quarter ended September 30, 2018, as compared to the quarter ended September 30, 2017, and remained consistent for the 9 months ended September 30, 2018, as compared to the 9 months ended September 30, 2017. These results were positively impacted by the acquisition of 2 asphalt facilities in December 2017 and March 2018, respectively, and were partially offset by the sale of 3 asphalt facilities to Ergon in July of 2018.

Furthermore, the adoption of the revenue accounting standard, ASC 606, resulted in a decrease of $1.6 million in throughput revenues during the quarter ended September 30, 2018, as compared to the quarter ended September 30, 2017, as certain contractually guaranteed minimum throughput revenue that in the prior year under the previous accounting standard had been recognized in the third quarter of the year as minimum throughput levels were exceeded and is now being recognized throughout the year on a straight-line basis.

Moving on to our crude oil terminalling services. Our operating margin, excluding depreciation and amortization, decreased by $2.9 million for the quarter ended September 30, 2018, as compared to the quarter ended September 30, 2017, due primarily to the expiration of a 2.2 million barrel storage contract on April 30, 2018, and the expiration of a 0.7 million barrel contract on October 31, 2017. The expired contracts were not replaced during the third quarter of 2018.

As of October 25, 2018, we had approximately 4.4 million barrels of crude oil storage under service contracts, including a recently executed contract for 2 million barrels that commences November 1, 2018. As Mark stated, we have agreed in principle the terms for an additional 0.6 million barrels of storage that we expect to execute soon with an expectation that the contract will commence in January of 2019.

In our crude oil pipeline services segments, our operating margin, excluding depreciation and amortization expense, decreased by $0.1 million for the quarter ended September 30, 2018, as compared to the quarter ended September 30, 2017. Keep in mind that the third quarter of 2017 included a gain of $1.1 million from the sale of our interest in Advantage Pipeline.

During the quarter ended September 30, 2018, we continued to increase the utilization of our Oklahoma pipeline system for our crude oil marketing services operations. For the 3 and 9 months ended September 30, 2018, approximately 56% and 34%, respectively, of the total volume transported on our Oklahoma pipeline system was comprised of barrels that we purchased from producers in the field and transported to our Cushing terminal to support our crude oil marketing operations. And as the percentage of barrels transported for our crude oil marketing operations increased, we increased our balance of the total linefill requirements of the pipeline system, which resulted in the total volume of crude oil we purchased exceeding the volume of crude oil we sold during the quarter ended September 30, 2018. We reached our linefill requirements during the 3 months ended September 30, 2018, and we expect our operating margin in this segment to increase in the future periods as a result.

In our crude oil trucking services segments, our operating margin, excluding depreciation and amortization, increased by $0.1 million when compared to the quarter ended September 30, 2018 versus the quarter ended September 30, 2017, as volumes increased approximately 45% due to the growth of our crude oil marketing operations. We continue to see volumes increase as we proceed further into the year, and we expect results to continue to improve in this segment.

Regarding liquidity and capital investments. As of September 30, 2018, our consolidated total leverage ratio was 5.39:1. While we were near the maximum permitted leverage of 5.5x under our credit facility, our current projections is impacted by the improving crude oil storage market conditions that Mark discussed indicate we will steadily delever over the course of the next year. We are targeting to be at or near 4x leverage at the end of 2019 as well as to increase our distribution coverage back to above 1.0x.

Expansion capital expenditures for organic growth projects, net of reimbursable expenditures of $0.3 million, totaled $23.3 million in the 9 months ended September 30, 2018, compared to $6.2 million in the 9 months ended September 30, 2017. Expansion capital expenditures for the 9 months ended September 30, 2018, included $13.1 million related to the crude oil purchases for pipeline linefill and storage tank fills at the Cushing terminal associated with our crude oil marketing operations. We currently expect our expansion capital expenditures for growth projects to be approximately $24.0 million to $25 million, inclusive of the crude oil purchases for the Cushing terminal and pipeline linefill and net of reimbursable expenditures for all of 2018.

Maintenance capital expenditures totaled $5.4 million, net of reimbursable expenditures of $0.6 million, in the 9 months ended September 30, 2018, compared to $6.1 million in the 9 months ended September 30, 2017. We currently expect maintenance capital expenditures to be approximately $8 million to $9 million, net of reimbursable expenditures, for all of 2018.

Chad, that concludes our prepared remarks, and I'll now turn it over to you for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be from Josh Golden with JPMorgan.

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Josh Golden, [2]

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Just couple of quick questions. Can you give me the current debt on the balance sheet? I don't think there was one released with the press release.

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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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Go ahead, James.

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [4]

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Sure, Josh. So as of September 30, our debt balance was, let me pull this up, it was sitting at $271.6 million.

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Josh Golden, [5]

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And that's obviously reflective of the proceeds from the terminal transaction to Ergon?

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [6]

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It is Josh. I will tell you that as we mentioned, as we were growing the percentage of the total volume shift on our pipeline systems for our marketing efforts, we were building linefill during that timeframe and so there was an increase in working capital draw, as a result of that. And as Mark indicated, as we begin to have a larger percentage of third parties on the system, we would expect that linefill carry to decrease on our books.

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Josh Golden, [7]

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Okay. James, also real quick, you mentioned $5.4 million of CapEx 9 months to date and expectations of $8 million to $9 million for '18. Can you give us -- you discussed sort of the prospect of mid-60s EBITDA for '19. Can you give me just a rough estimate of what you think maintenance CapEx maybe for 2019?

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [8]

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Josh, I'm not really looking at anything out of our usual run rate for '19, so I suspect it's going to be consistent with what we've experienced over the past couple of years at this point in time.

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Josh Golden, [9]

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Okay. James, next question is, I just want to refresh Cimarron. What kind of multiple are you targeting on that? Just given a [stress case on] volumes and pricing of crude, what type of multiple either -- let's just call it the 2020 time frame?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [10]

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Josh, it's got a payback period of about somewhere between 5 and 6 years.

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Josh Golden, [11]

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Okay. What type of multiple -- I can figure that out. Okay. And then my last question is sort of along the partnership, the structure. I think the assets are great assets. We're pretty happy. But Mark, from the standpoint of Ergon, just quite [candidly], I think there's a concern in the marketplace given the corporate governance issues that come to -- come along with the MLP sector. Is that the limited partners could end up losing ownership of the partnership? Looks like everything is moving in the right direction linearity, talked about the storage with the crude, and the project is certainly an excellent project for the partnership. But perhaps you could give us a little bit of color on the commitment by Ergon to the partner set?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [12]

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Yes, absolutely. First of all, it's been a very positive thing for us moving from the previous ownership to this ownership. Ergon has been very supportive in terms of obviously being our biggest customer -- one of 2 biggest customers. They have really stepped up and helped with growth with the Cimarron Express Pipeline project. So I see nothing but positives there. When you -- and so Ergon, I think, sees the investment being very long term, it's a big part of their portfolio. In terms of losing ownership, I don't understand. I guess, I should say, I think it's not a concern that the common units owners should have. It's not something that we have talked about. Ergon sees it as a long-term investment. They want these projects in these market to be -- markets to be successful. They want the unit price to grow, they want the distributions to grow. And I think all those things should be very well aligned with the owners of both the common units and the preferred units. So I think that concern that they would lose ownership is [unparalleled] right now.

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Josh Golden, [13]

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Mark, I think that's excellent color, and I think that will put a lot people at ease and look forward to a bright future, I feel.

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Operator [14]

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The next question will be from Jeff Bailey with Beach Capital.

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Jeff Bailey, [15]

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In lieu of what the previous questioner just asked, I find it interesting that Blueknight management owns a considerable number of the common units, as well as a few of the Ergon members of the Board of Directors. So it seems to me like their interest would be aligned in maintaining a partnership as healthy as possible. That's just a comment I would throw out.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [16]

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I agree (inaudible).

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Jeff Bailey, [17]

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My questions mostly relate to the Cushing story. I know just a couple days ago, CBR, the refiner, announced that they were going to reverse the Red River pipeline and they were going to curtail their purchases from Cushing, but they didn't announce how many barrels they were going to leave stranded there at Cushing by that reversal. Do you have any idea how many barrels that leaves back in Cushing?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [18]

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I do not. It's not one of the major pipelines leaving Cushing, but I do not have -- not privy to that kind of data, no.

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Jeff Bailey, [19]

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Okay. And then in previous calls, you mentioned how you were going to change marketing strategy a little bit to target more of operators at Cushing as opposed to traders. Can you talk about what your go-to-market strategy is to attract that different clientele for your Cushing storage?

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [20]

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Yes, absolutely. What we want to do -- our objective is to get more diversity in the types of customers that we have at Cushing and as much diversity as possible in the contract durations, right. So now is actually a good time to go execute that strategy when demand for storage is higher, right. So it's something that we're paying a lot of attention to. And I would say, in general, we want to attract customers who have more of an operational need for storage and so -- because we generate revenue in 2 ways at storage, one is just by leasing space, leasing tanks; and the other is by generating service revenue, and that's both throughput revenue and blending services and that sort of thing. Right now, or over the last couple years, we have been light on the services revenue. We've seen that not as high as we want to see it. And so as we're talking to customers for this remaining amount of storage that we have, and there's not a whole lot at this point honestly, those are the kind of customers that we'd want to attract. The other thing we want to do is keep our pipelines full, because those pipelines flow into Cushing, and every pipeline that flows in -- I'm sorry, every barrel the flows in, flows out and that generates revenue. And a great example of that is the STACK pipeline. That -- when that pipeline starts up, we expect it to flow about 40,000 barrels to 50,000 barrels a day. And that volume is going to flow through our terminal regardless of whether it's a backwardated market or a contango market. And so we want to try to insulate ourselves a little more from just what's happening in the markets going forward. And so that's why that project was so attractive to us, because it's not only, on its own merits, a good cash generator at a reasonable cost, but it brings more throughput revenue to Cushing and it opens the door for new customers. There will be customers or potential customers flowing barrels on that pipe that we don't do business with today. And so it allows us to expand the customer base. And so projects like that, we have to go after aggressively, and we have a couple of others that are more in the conceptual phase, so I can't talk about them right now. But it's those kinds of projects that we want to go after to try and diversify that cash flow. So I hope that answers your question. If not, happy to expand on it.

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Jeff Bailey, [21]

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Yes. But just along those lines, do the operators -- did they pay a slightly bit lower rate for their storage as opposed to traders and marketers, because the operators are obviously more of a constant client?

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James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [22]

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Not markedly so. I mean, the storage rates generally tend to be about the same. And obviously, we will do -- we will negotiate different rates for different lengths of time. And in looking at the type of customer, we may take into consideration the amount of throughput revenue we likely see from that customer site. It has some impact, but I wouldn't say it drastically changes the storage rates that we get.

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Jeff Bailey, [23]

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Okay. Do you see the Colorado Proposition 112 affecting Cushing at all, if it were to pass?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [24]

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I don't see any direct connection now. No, I don't. Not for us. I mean, not for us.

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Jeff Bailey, [25]

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But aren't a lot of barrels coming from Colorado into Cushing? And so if it would pass, then I've read that over 50% of drilling could potentially -- 50% of production could potentially go away within a year or 2?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [26]

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Well, I mean the barrels that come into Cushing come from West Texas. We get a lot of barrels from Canada, we get a lot of barrels from North Dakota, Wyoming. And so Colorado makes up a portion of that. But if you were to break down the percentage that's coming in from Colorado, I don't think it would be significant enough to drastically change the dynamics around Cushing. That's my view.

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Jeff Bailey, [27]

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Yes. Okay. And then how wide does contango have to get, in your opinion, before there's really more a rush for storage? We know it has crossed from backwardation, but how wide it had to be to cover storage and interest cost to where the traders really get active?

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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, we're already seeing a pickup in demand. And so we've had -- we're dealing now 6 or 7 potential customers, and so the pickup in demand has already been there, because I think they're looking at the same forecast that we are. And in fact, the contracts that we have already executed, that as James mentioned, we executed before the market swung back to contango. So I think they're looking at -- they're getting pretty bullish on storage right now. And so it's just a good opportunity for us to be able to take this time to be able to diversify our customer mix, but we see the demand being there. And no doubt, if -- today the spread is $0.10 to $0.15 a month, no doubt that if it goes to $0.50 a month, you'll see that demand strengthen, no question about that.

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Jeff Bailey, [29]

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Okay. And then do you have any models as far as basin, how -- the basin line, how fast that will ramp up and how many barrels that's projected to bring into Cushing?

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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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I do not. I would refer to the study done by Barclays. If you dig into the model there, that's probably the best number that you can get.

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Operator [31]

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The next question will be from Mike Gyure with Janney.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [32]

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Yes. Appreciate the color, Mark, on the asphalt side of the business. Can you maybe talk about, or I guess the markets maybe did see strength as opposed to the weakness? And then, I guess, with the ones that you did see weakness, do you think that is really sort of moving stuff from the third quarter to the fourth quarter? Is that really, like you said, just pushing out till next year?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [33]

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I think -- 2 area that we saw weakness, as I mentioned, one was on the East Coast and one was on -- in Colorado. And so I think there will be different situations as far as how those markets catch up. Construction -- on the East Coast, construction did get behind this year. And those of you who live on the East Coast know that it's been a very wet year. And so we have several terminals right along the coast where we've seen lower volumes than we expected. And I think, if the weather permitting, we could see some of that catch up or being done here very quickly. I think the situation in Colorado is just different, because it was really a state-funding issue, and so we are expecting and we've been told by people who are close to that market that we will see an uptick. But that uptick is probably going to be more in the calendar year 2019 and anytime sooner than that. And then, inventory -- I'm sorry, demand and volume across the rest of our network has been pretty strong, and our network covers a lot of geography. And so infrastructure spending, in general, has improved. We think if they do something at the federal level, it's just going to make that situation better. And so, knock on wood, we're pretty optimistic about 2019 across the entire network.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [34]

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Okay, great. And then on the crude storage that you talked about being near 90% capacity, or you're going to be by 90% capacity by the beginning of the year. Can you talk about, I guess, how long those contracts last and maybe what the pricing, if it's better or worse than it was sort of this year?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [35]

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Yes. As far as contractor duration, I mentioned that we're trying to get more diversification in the contract -- the term length. And so as of January 1, with everything we have contracted and the one contractor we expect to sign here imminently, we have a small contract that expires at the end of June next year. And we feel -- with market conditions we expect to see, we feel confident we'll be able to renew that one, and again it's a pretty small contract. And then the rest of the contracts expire at different intervals -- integrals all the way out to the end of 2021. And so we've got -- we have decent diversification there in the contract direction. We do not talk rates, Mike. So I apologize for that, because we're always on constant negotiation. I will say that if I look at the contracts that we have done and are in the midst of doing now, they're very typical kinds of rates if I look back over the last 5 years. So we're within kind of the normal band. We're coming out of a soft market. So we're not -- they're not going to be at the high end of the band, but they are in kind of the historical norm that we see for this type of business.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [36]

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Okay. And then maybe one last one on the Cimarron Express Pipeline project. You talked about being on time and on budget. Can you maybe just talk about, I guess, what's going on at this point in the project and kind of sort of what the next, I would say, benchmark is that you're looking for?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [37]

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Yes. Absolutely. We're in the -- we're right in the midst of a right away acquisition, and that's gone fairly well for us. We -- I think we cross almost 200 different parcels of land, and so it's quite a process to go through the right away acquisition with the various owners involved. But we are in the midst of that, and I would say that will probably come to a close here at the end of the year. And then, we're -- we have put out bids for construction, and so we expect to get those bids back here in early November. And then, we expect to go to construction, I believe, it's in February with startup planned for the June, July kind of time frame. We own the pipe, we've ordered the pipe has been secured, and we really will move into construction here in the next couple of months, and that's really kind of the last phase.

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Operator [38]

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(Operator Instructions) The next question will be from Chris Cook with Zazove.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [39]

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Yes. My questions have been asked and answered.

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Operator [40]

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(Operator Instructions) At this time, I'm showing no further questions. So this concludes our question-and-answer session. I'd like to turn it back to you Mr. 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. [41]

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Well, once again, thank you all for dialing in. I know the third quarter for us has been -- has had a lot of moving parts, and I appreciate you following the story and appreciate your attention to the company. I think that, as we pointed out several weeks back, we're doing the things that we need to do to get on the right path to increasing cash flow, reducing debt, and ultimately [down the road] increasing our distribution. And so we appreciate your time. And as always, if you have any questions following this call, you're welcome to call James or I. Thank you very much, Chad.

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Operator [42]

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Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.