U.S. Markets open in 5 hrs 15 mins

Edited Transcript of BKEP earnings conference call or presentation 12-Mar-19 3:00pm GMT

Q4 2018 Blueknight Energy Partners LP Earnings Call

TULSA Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Blueknight Energy Partners LP earnings conference call or presentation Tuesday, March 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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.

================================================================================

Conference Call Participants

================================================================================

* Joshua Golden

* Kevin Roth

Allstate Investments, LLC - Senior Portfolio Manager

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Blueknight Energy Partners Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. James Griffin, Blueknight's Chief Accounting Officer. Mr. Griffin, please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Anita, and good morning. It is 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 ended December 31, 2018.

Mark Hurley, our Chief Executive Officer, will update you on our operational performance as well as external factors influencing our business. After which, I'll provide a brief update on financial results for Blueknight. We'll 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 our 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 materializes 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 statement, whether as a result of new information, future events or otherwise.

Blueknight Energy Partners is a publicly traded master limited partnership with operations in 26 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 storage services; crude oil pipeline services; and crude oil trucking services.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, James. Good morning, and thanks to everyone who dialed in today. I will update you on our operational performance, projects, opportunities and external factors influencing our business. James Griffin, our Chief Accounting Officer, will then provide you an update on the financial results.

2018 was a year that presented us with challenges and change at Blueknight. However, as we sit here today, we have a highly contracted business that should generate consistent cash flow in 2019 and allow us to meet our objectives of both reducing leverage and improving distribution coverage.

I will begin my detailed comments with a look at our Cushing crude oil storage business, our second largest segment. As we have covered in recent communications, the storage market was weak in the first half of 2018, mainly driven by a backwardated crude oil forward price curve and very low inventories at Cushing. This led to lower demand for storage, lower throughput, lower rates and, as a result, lower revenue.

The storage market reversed, however, beginning in the late third quarter. The crude oil price curve went back to a contango structure. Inventories began to build in Cushing and demand for storage increased. Today, the spread in the forward curve is supportive of the storage market, and inventories are steadily increasing. As a result, we have had a successful recontracting effort, and we are fully leased through the end of 2019.

Another positive, we are seeing increased throughput in our facility. Throughput is a revenue-generator for us in addition to the base storage fees. We have returns on operation where we are seeing full tanks and high throughput, and we are confident this segment will see an earnings improvement over 2018.

Switching to asphalt. This business predictably had another solid quarter and a good year. We no doubt have some challenging weather in 2018, specifically wet conditions along the East Coast and 2 hurricanes in the Southeast. However, as we have communicated many times, a substantial portion of the revenue in this business is locked in when we begin the year. We do get a boost in situation where volumes are high, and we are expecting a strong market in 2019.

The industry is forecasting a 7% year-over-year growth in demand, and we are seeing increased infrastructure spending in some of our key markets, particularly in the West.

In addition, the facility we acquired in Muskogee, Oklahoma in April of last year has performed well, and we are very happy with the investment.

Together, these 2 businesses have historically made up more than 90% of our operating margin. As of today, we have approximately 92% of the revenue from these segments contracted on a take-or-pay basis for all of 2019 with highly credit-worthy customers. So we are expecting strong predictable cash flow for the year.

I will move on now and cover some detail from our crude transportation segments. Yesterday, in our earnings release, we mentioned that volumes have been ramping up on our Oklahoma pipeline systems. We are expecting approximately 40,000 barrels a day to be shipped on the 2 systems combined in March. If the forecast holds, it will be our highest volume month since we started up the second line.

Current crude oil prices in the $55 to $60 per barrel range seem to be supporting higher volumes into our pipes. We did experience some crude price-related impacts in the second half of the year, however. As we started up the second line and executed plans to get the system running at higher volumes in Q4, we were carrying a higher-than-normal amount of inventory in the system when crude prices dropped significantly in October and November. This impacted pipeline segment earnings in the fourth quarter.

As we have transitioned to higher third-party volumes over the last few months, we have been able to reduce working capital by approximately 75% from the fourth quarter of last year. We intend to continue this trend in the second quarter.

While we are encouraged by the increased utilization of our pipeline system, the operating margins recently experienced in the pipeline segment led us to assess our pipeline system for impairment. Based on that analysis, we concluded that an impairment charge of $40.7 million was warranted, and we took this charge in the fourth quarter.

As we communicated on February 26, work has been halted on the previously announced Cimarron Express pipeline project due to economic considerations. As of December 31, 2018, Cimarron Express had spent approximately $30 million on the pipeline project. Both Blueknight and Ergon are currently evaluating the status of investment in Cimarron Express.

To the extent that Ergon exercises its right to put its interest in the Cimarron Express project to Blueknight, Blueknight will be responsible for 50% of the total amount spent by the pipeline project plus interest at 9% per annum. Blueknight anticipates the principal cost of Ergon's put could be reduced by $4 million to $7 million upon the sale of the assets of the joint venture for a total net cost to Blueknight of $8 million to $11 million plus interest.

Looking forward, our 2 highest priorities in 2019 are strengthening our balance sheet and improving our distribution coverage. With a high degree of contracted revenue we have in 2019, we are confident we have a plan in place to accomplish these goals. With those objectives met, we can again target acquisition opportunities that fit our business strategy of growing our footprint, particularly in the asphalt business.

Current guidance is that 2019 adjusted EBITDA will be in the low $60 million range while deleveraging down to around 4.5x and coverage in the 1 to 1.1 range. Any variability in these earnings will primarily be driven by crude oil volumes on our pipeline system.

The next quarterly distribution decision will be made by the board in the second half of April, with the above balance sheet objectives in mind: leverage and coverage. And it is possible we will do a reduction in the distribution at that time.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Mark.

Yesterday, we reported financial results for the fourth quarter and year ended December 31, 2018. Net loss was $50.7 million for the 3 months ended December 31, 2018, as compared to net income of $0.4 million for the same period in 2017. Net loss for the fourth quarter of 2018 was impacted by a $40.7 million asset impairment charge related to our crude oil pipeline services segment and a $10 million asset impairment charge related to the Cimarron Express pipeline project.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was $13.8 million for the fourth quarter ended December 31, 2018, as compared to $14.1 million for the same period in 2017. Distributable cash flow was $6.5 million for the quarter ended 12/31 of '18 as compared to $8.6 million for the same period in 2017. Adjusted EBITDA and distributable cash flow, including a reconciliation of such measures to net income, are explained in the non-GAAP financial measures sections of the earnings release issued yesterday.

Net loss was $42 million for the 12 months ended 12/31/18 as compared to net income of $20 million for the same period in 2017. Net loss for the 12 months ended December 31, 2018, was impacted by the previously mentioned $40.7 million asset impairment charge related to our crude oil pipeline services segment as well as the $10 million asset impairment charge related to the Cimarron Express pipeline project.

Adjusted EBITDA was $60.3 million for the 12 months ended December 31 of '18 as compared to $70.1 million for the same period in 2017. Distributable cash flow was $34.8 million for the 12 months ended December 31, 2018, as compared to $48.2 million for the same period in 2017.

Our distribution coverage ratio for the 12 months ended December 31, 2018, was approximately 0.83x.

Additional information regarding the partnership's results of operations will be provided in the partnership's annual report on Form 10-K for the year ended December 31, 2018, to be filed with the SEC on March 12, 2019.

A few highlights for each segment. In our asphalt terminalling services segments, operating margin, excluding depreciation and amortization, increased by $1.7 million or 3% for the year ended December 31, 2018, as compared to the year ended December 31, 2017, primarily as a result of additional revenues generated at the 2 asphalt facilities we acquired in December of 2017 and March of 2018, partially offset by the sale of 3 asphalt facilities to Ergon in July of 2018.

Moving to our crude oil terminalling and storage services segment. Operating margin, excluding depreciation and amortization, decreased by $9.2 million year-over-year, primarily as a result of a 2.2 million barrel storage contract that expired on April 30, 2018 and a 0.7 million barrel storage contract that expired on October 31, 2017.

The expired contracts were not renewed or replaced until the fourth quarter of 2018 due to the backwardation of the crude oil forward price curve at the time the contract expired. As of today, we have approximately 5.7 million barrels crude oil storage under services contract with remaining terms up to 34 months.

Next, in our crude oil pipeline services segment, operating losses, excluding depreciation and amortization expense, increased by $1.9 million from 2017 to 2018 and primarily the loss is in our crude oil marketing business.

In our crude oil trucking segment, operating losses, excluding depreciation and amortization, remained flat at $0.4 million in both 2018 and 2017. While the volume transported in our trucking segment increased, the average distance hauled was shorter in 2018 than in 2017, which resulted in lower revenue and operating margin per barrel transported.

Our general and administrative expenses were $16 million for the year ended December 31, 2018, compared to $17.1 million in 2017. The decrease from 2017 to 2018 is primarily due to decreased compensation expense related to lower headcount and reduced incentive compensation in 2018.

Asset impairment expenses in 2018 included $40.7 million related to the market on our Oklahoma pipeline system to its estimated fair value and also a $10 million impairment on a pushdown basis related to Ergon's investment in Cimarron Express as well as $1.7 million related to an impairment of our crude oil pipeline linefill due to the recoverable value of the linefill as indicated by market rates dropping below our historical average cost per barrel.

During 2017, we recorded fixed asset and intangible asset impairment expense, including impairment of goodwill, of $2.4 million related to a write-down of the producer field services business that was subsequently sold in April of 2018.

Moving to our liquidity and capital investments. Our consolidated total leverage ratio was 5.09:1 at December 31, 2018. Net maintenance capital expenditures for the year ended December 31, 2018, totaled $8.7 million. Our net expansion capital expenditure -- expenditures totaled $24.8 million for the year ended December 31, 2018.

We currently expect our expansion capital expenditures or organic growth projects to be approximately $3.5 million to $4.5 million and our maintenance capital expenditures to be approximately $9.5 million to $11 million, each net of reimbursable expenditures in 2019.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from TJ Schultz with RBC Capital.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Just as you talk about deleveraging and coverage as the priorities understandably, how are you thinking about the ability to finance asphalt acquisitions? That seemed to be the path forward you indicated, correct me if I misunderstood that. But would you consider to focus more exclusively on that business and use asset sales of some of the other businesses as the funding source? Just kind of any more color on the strategic path forward.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, absolutely, TJ. First of all, we like the asphalt acquisitions that we have done in the past. Well, looking back over the history of this, I think between 2015 and 2017, we acquired several terminals sites that cost us in the $15 million to kind of $25 million range, and those have been very successful for us, immediately generating cash. The size of investment that fits the company well, and we wish there were more of them out there. So we do want to focus on that because it's been a real winner for us. And as we look out with the EBITDA forecast that we have, we do see us kind of ramping down to a point at the end of next year or early 2020 where we have the room to make those kinds of investments. Our revenue is really baked in on a take-or-pay basis, as I mentioned. And so we will get some variability in the -- or the variability that we get in the earnings will really be driven by the volumes on our crude system. And if the crude market remains strong, we will delever faster. If the market gets weaker, it may be a little bit slower. But in any case, we do see ourselves getting to a position within the next 3 or 4 quarters where we can go out and do those kinds of acquisitions. But right now, we don't plan to do asset sales to fund those.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. It makes sense. And then just on the put option on the cost for the Cimarron Express. What's the time line for that? Like, how long would it take you to sell some of those assets? I'm just trying to understand what the interest carry may be for you all.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [5]

--------------------------------------------------------------------------------

Yes. Any sale of assets, we think, could be done reasonably quick if we decide to go that route. The hard assets that are owned by the JV are very common kinds of materials used in the industry, so there's usually a market for those kinds of assets. And then the exercise or the put, obviously, is an Ergon decision, and the timing around that would be an Ergon decision. But we think that whole situation is very manageable in terms of the cost exposure that we might have. And Ergon have been very supportive of any plans we have along those lines going forward.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question comes from Josh Golden with JPMorgan.

--------------------------------------------------------------------------------

Joshua Golden, [7]

--------------------------------------------------------------------------------

Yes. Can I get an updated debt number, either post quarter-end, where you're at right now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. James?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [9]

--------------------------------------------------------------------------------

Yes, TJ -- I'm sorry, Josh. We've come down off of the 12/31 number by about $14 million through today.

--------------------------------------------------------------------------------

Joshua Golden, [10]

--------------------------------------------------------------------------------

Okay. One comment, Mark, there was a point in time last year where there was a discussion about taking incremental risk. And the reality of it is, is I don't see a problem with anything that's happened, and I encourage the partnership to continue doing business and to look at developing further organic projects. It is what it is, and I appreciate that.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [11]

--------------------------------------------------------------------------------

Well, with that, thank you, Josh. We're certainly going to be on the lookout for both acquisitions and organic projects. And I appreciate your comments. Thanks.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question comes from [Jeff Bailey] with [Beach Capital].

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

Mark and James, can you hear me?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, absolutely, Jeff.

--------------------------------------------------------------------------------

Unidentified Analyst, [15]

--------------------------------------------------------------------------------

Staying on the topic of Cimarron. What is the liability at 3/12/19, including imputed interest? You gave it for the end of the year of '18. But what's the liability right now, including the 9% carried interest?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [16]

--------------------------------------------------------------------------------

Yes, it's still in that same range. There haven't been any incremental expenditures on the part of the JV.

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

Okay. So I mean, give or take, $16 million, $17 million, somewhere in that ballpark, with the interest?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [18]

--------------------------------------------------------------------------------

That's right, yes. I mean, that's where we anticipate it remaining.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

Okay. And then you talked about selling the assets. Can Blueknight -- if the put is exercised, can Blueknight unilaterally sell those assets? I mean, doesn't Alta Mesa own half of them? What would the process be for selling those assets?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [20]

--------------------------------------------------------------------------------

You're right. Good question. Well, right now, of course, because we did this project and the debt cost structure, the assets are owned by both Alta Mesa or Kingfisher Midstream and Ergon. So any decision to sell assets will obviously come between those 2. So it would be a joint decision there. And so in all likelihood, Ergon -- I'm sorry, Blueknight would help facilitate the process as construction manager, but the assets will actually be sold by Ergon and Kingfisher Midstream.

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

So there is an unfavorable scenario where Alta Mesa doesn't want to sell the asset. Maybe they want to hold out for higher oil price or something like that, and you're not able to liquidate the assets. Is that true?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [22]

--------------------------------------------------------------------------------

Well, it's a joint decision between the 2 parties. I don't see that happening, frankly. I don't see that scenario playing out. But it's between the 2 for sure.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

Okay. Yes. And then what would happen, if there's a change of control at Alta Mesa, what would happen to the acreage dedication that Cimarron enjoys? And what would happen essentially to the JV? Would the JV just transfer over legally to a new buyer?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The acreage dedication is owned by the joint venture, right? It's dedicated to the joint venture. And if you change the control on the other side, I assume it would transition through to the other partner in some fashion. I'm not sure what the mechanics of that would be, depending on the situation obviously. But the acreage dedication is owned by the joint venture.

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

Okay. So almost like -- as far as you know, if there is a change in control at Alta Mesa, the acreage dedication wouldn't get yanked out from under the JV. Or is that a possibility?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I don't see that being a possibility. But obviously, I don't know what the circumstances might be on the Alta Mesa side. We really can't speak to that. But today, the acreage dedication is clearly on the joint venture.

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Okay. Well, I guess I'll take that one off-line, if you don't mind. And then do you expect in the event that the put is exercised, does the JV have to be dissolved first for Ergon to put the project back to Blueknight?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

There are -- the JV does not have to be dissolved for them to exercise the put. It's not a requirement. No.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

Okay. And then I think this one is for James. In the event that the put is exercised, James, for accounting purposes, I take it there will be a charge running through the income statement on that quarter, is that right, for the amount of the liability plus the carried interest?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [30]

--------------------------------------------------------------------------------

The charge actually shows up in that fourth quarter impairments of $10 million that I referenced earlier. It's done on a pushdown basis. So that's -- Ergon's investment into the JV was written down to its estimated fair value and now flow down into Blueknight. So that -- at the time that the put is exercised, to the extent that there is incremental interest, that would be recognized in that quarter.

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

Okay. So you expect to adjust based on the related figures at the time that the put is exercised and then adjust it again at the time of sale?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [32]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

Okay. Understood. James, I'm wondering if you could explain a little more in detail the accounting justification for the Oklahoma pipe write-down. If I understand correctly, $1.7 million, that's a lower cost or market adjustment for the inventory of the linefill?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [34]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

Okay. And then the other -- I mean, that's a pretty -- if I remember correctly, there's about $118 million in invested capital. So you took essentially the fair value down by more than 1/3. Maybe you could talk about the economic and accounting justifications for a write-down that size?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [36]

--------------------------------------------------------------------------------

Sure. So anytime we have an indication of an impairment, and in this case, it was the operating loss generated in the segment, we evaluate the recoverability of our carrying amount of those assets. And we look at our projected future cash flows on a discounted basis as well as market exit multiples for those types of assets and determine a fair value at that point in time. And so based on our projected discounted future cash flows for that system, that was the result of -- it resulted in that impairment charge.

--------------------------------------------------------------------------------

Unidentified Analyst, [37]

--------------------------------------------------------------------------------

So going forward, is it fair to say that you see the economics of the pipeline situation significantly worse than you did, say, 6 months or a year ago? I mean, if I'm understanding correctly, you're saying the economics of that operation have deteriorated.

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [38]

--------------------------------------------------------------------------------

I think that's a fair statement. If we were to wind the clock back a year, our estimates were very different than they are now. But I think we're encouraged by what we're seeing going forward we're seeing increased utilization of the system. And again, as Mark indicated, it's going to be heavily dependent on what crude prices are and what kind of volume is being produced in the area that we serve.

--------------------------------------------------------------------------------

Unidentified Analyst, [39]

--------------------------------------------------------------------------------

Yes. So if you had to attribute the write-down of the impairment, would you say it's mostly due to crude prices? Partially due to crude prices? Or what would you -- broader picture, what would you attribute it to?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [40]

--------------------------------------------------------------------------------

Yes. Let me address that one, Jeff. It's really highly dependent on volume, right? The more volume we have flowing through the 2 pipes, the higher earnings are, and it's very sensitive to volume. And of course, what drives volume is crude price. And as I indicated in my earlier remarks, we're seeing good volumes today. These prices that are in the 50s are supporting drilling in the area. And so we're seeing pretty good volumes. But if you were to get into a very weak crude market, presumably, we'd see volumes decline and you would see the impact on the earnings. And conversely, stronger crude prices would be a pretty good story for us on that system.

--------------------------------------------------------------------------------

Unidentified Analyst, [41]

--------------------------------------------------------------------------------

So in other words, the impairment is due mostly to the crude price change and not so much to an introduction of competing pipelines or permanent lack of future activity in the basins?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [42]

--------------------------------------------------------------------------------

Well, that's right. And of course, activity in the basin kind of goes back to what crude price is at the time. But no, it's not so much a competitive issue with other pipelines in the area. It's more what is the price and how is that supporting drilling in the basins where our pipelines are located.

--------------------------------------------------------------------------------

Unidentified Analyst, [43]

--------------------------------------------------------------------------------

Okay. And then in the press release, Mark, you talked about at the end of the year, you're hoping for a leverage ratio of 4.5x and distribution coverage of 1.1. Does that assume that Ergon exercises the Cimarron put?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [44]

--------------------------------------------------------------------------------

No, it doesn't make any assumption about the exercise of the put. It -- we do expect that the put will be -- or we plan for the put to be exercised, but I think the timing of that payback will be very flexible going forward.

--------------------------------------------------------------------------------

Unidentified Analyst, [45]

--------------------------------------------------------------------------------

So you don't expect -- so you're not going to put them out on -- it will be a transaction between you and Ergon and not -- you won't just put it onto the revolver and then...

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [46]

--------------------------------------------------------------------------------

I'm not sure I understand the question. It would be an obligation that we would have to put back to Ergon.

--------------------------------------------------------------------------------

Unidentified Analyst, [47]

--------------------------------------------------------------------------------

Right. And I was under the assumption that you would bond it and pay that immediately. But you're saying you had put that liability on the balance sheet and carry the 9% interest rate.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [48]

--------------------------------------------------------------------------------

Well, we don't have the mechanics of that worked out. But what I will tell you is that Ergon have indicated that they'll be very supportive in how that obligation is paid back.

--------------------------------------------------------------------------------

Unidentified Analyst, [49]

--------------------------------------------------------------------------------

Right. But 9% is higher than what you're currently paying on your credit facility, right?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [50]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [51]

--------------------------------------------------------------------------------

So I'm having difficulty why you wouldn't put it on a facility as opposed to keeping a straight deal with Ergon.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [52]

--------------------------------------------------------------------------------

Well, that's maybe what we do, Jeff. We'll work that out at the time. That might be the way that we handle it, but we're not locked into any particular payback structure at this point.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

Okay. But so if Ergon does put an asset in Blueknight, we can expect that it's more -- it will be more difficult to reach the 4.5x leverage ratio and the 1.1 distribution coverage ratio by the end of '19 because if I understood you correctly, you didn't assume the put.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [54]

--------------------------------------------------------------------------------

Well, I mean, by definition, it would be more difficult. But I'll go back to my earlier comment, we think it will be very manageable, and we think those targets will be very achievable in any circumstance.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Yes. The 2017 10-K reported a material weakness in financial reporting. Is that going to also -- is that going to be included in the 2018 10-K? Or has that been eliminated during the year?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [56]

--------------------------------------------------------------------------------

As we disclosed in our 10-Qs throughout this year, that had been remediated. So there will not be moving forward into the 2018 10-K.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Okay. I missed that, James. And then Mark, as far as your CFO search, any news?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [58]

--------------------------------------------------------------------------------

It's going well. We've seen a number of good candidates here recently. And so I think we're very optimistic we'll have something done here in the next few weeks.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

The next question comes from [Jim Jenkins], a private investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [60]

--------------------------------------------------------------------------------

I was a little nervous. So I'm 80 years old and got 25,000 shares. Will we be able to complete the Cimarron? And what changed to cause Ergon to pull out?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [61]

--------------------------------------------------------------------------------

Well, right now, we're evaluating where we'll go with the project. We're looking at all scenarios. And obviously, that's why we've talked about the potential asset sales. And I would say what has changed is basically drilling economics in the area. And really, I don't think it's much more complicated than that. Obviously, the amount of volume that is produced is -- determines the amount of revenue on any future pipeline. And as drilling economics are better understood, those forecasts can change. And so that's really where we are right now. I'm sorry, did you have another question, Jim?

--------------------------------------------------------------------------------

Unidentified Shareholder, [62]

--------------------------------------------------------------------------------

Yes. If things improve, will you sell additional shares to work that pipeline? Or how will you continue to finance it?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [63]

--------------------------------------------------------------------------------

Well, if things were to improve, obviously, we do -- we'd execute some sort of project. But right now, we're in the evaluation step of that. The way we have financed this project to date has been with the support of our general partner who have been supplying the funding as the half owner of the JV. And were that to go, had that been planned to go forward, that would eventually be dropped down to Blueknight. But we're just in the evaluation stage now, Jim.

--------------------------------------------------------------------------------

Unidentified Shareholder, [64]

--------------------------------------------------------------------------------

All right. Good. I'll look forward to some comment on that in the future then. I'm still a happy investor, so let's hang in there.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [65]

--------------------------------------------------------------------------------

Well, thanks for your questions. We're going to hang in there. We're going to hang in there. Thanks.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

The next question comes from [Harrison Wreschner] with [Never Summer].

--------------------------------------------------------------------------------

Unidentified Analyst, [67]

--------------------------------------------------------------------------------

Just kind of 2 quick questions I wanted to ask. One was touched on earlier, but are you allowed to put $10 million more to make this payment to Ergon on the Wells Fargo facility?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [68]

--------------------------------------------------------------------------------

I'm sorry. Harrison, can you repeat that question?

--------------------------------------------------------------------------------

Unidentified Analyst, [69]

--------------------------------------------------------------------------------

Are you allowed to make the payment to Ergon off the Wells Fargo facility?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [70]

--------------------------------------------------------------------------------

There is not anything that would preclude us from drawing on our revolver to make a payment other than the covenant restrictions around our leverage that we work with today. There's nothing specific to that particular transaction.

--------------------------------------------------------------------------------

Unidentified Analyst, [71]

--------------------------------------------------------------------------------

I guess, my question is do you think you'll be within those covenants to make the payment if need be?

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [72]

--------------------------------------------------------------------------------

Oh, yes. And Ergon has indicated their plans are going to be supportive of us and to work with us around those covenants as well.

--------------------------------------------------------------------------------

Unidentified Analyst, [73]

--------------------------------------------------------------------------------

Okay. When you guys cut the dividend the last time, I think it was an April declaration. And Cimarron, I think, was announced late May. So when you came to the new level of $0.08, was there an anticipation that Cimarron would be a part of that going forward? Or with this lead the $0.08 going forward out that anticipation of the new Cimarron pipeline?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [74]

--------------------------------------------------------------------------------

The $0.08 -- both of those items were part of the plan at that time. However, the $0.08 distribution obviously took effect immediately and has gone into 2019. The drop down of Cimarron was anticipated to be around first quarter of 2020. So all of that was a part of the same plan.

--------------------------------------------------------------------------------

Unidentified Analyst, [75]

--------------------------------------------------------------------------------

Okay. So I guess, I'm saying when you decided on $0.08, I appreciate that absolutely there was a timing delay, but that $0.08 was dependent on, I would assume, on Cimarron being completed in Q1 '20. So Cimarron was within the math when you decided on the $0.08 going forward number. You had already factored that in, is that right?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [76]

--------------------------------------------------------------------------------

Yes, that's correct. That's correct.

--------------------------------------------------------------------------------

Unidentified Analyst, [77]

--------------------------------------------------------------------------------

All right. That is definitely helpful when I kind of look at that going forward. In terms of asphalt acquisitions, that's going to be the primary focus is what I'm hearing going forward. Does that make sense?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [78]

--------------------------------------------------------------------------------

I think that's correct, yes. It'll certainly be our top priority in terms of what we go look for as far as growth opportunities. We've had a great track record with those. And we think there are some more out there. Not as many as we'd like, but we think there are some more out there.

--------------------------------------------------------------------------------

Unidentified Analyst, [79]

--------------------------------------------------------------------------------

So looking at where we're levered and looking at the pipeline business, which is undersized, and the storage business, which is a good size for us but might be a better tack on, does it make sense to maybe sell those off, use the proceeds to delever and kind of just refocus around asphalts? Or do you think it makes sense to kind of keep those? Obviously, the market is much better than it was right now for the storage in particular. But is there a reason to keep you going forward? Or are these -- frankly, is it a good time to maybe put this on the block and refocus growth?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [80]

--------------------------------------------------------------------------------

Right now, we don't have any plans to put them on the block. But we do look at it quite frequently. I mean, we look at strategic options quite frequently. We think we have some assets sitting in a good place. And so we talk about things like joint ventures with some other companies where there might be -- combined assets might generate more value for both companies, looking at a bigger footprint. Those sorts of things. We're not expecting at this point to do any sale of crude assets (inaudible).

--------------------------------------------------------------------------------

Unidentified Analyst, [81]

--------------------------------------------------------------------------------

Okay. And obviously, we saw a drop in SG&A this quarter. Is that a -- should we anticipate -- I guess, what led to that drop? And is that a lower run rate we should anticipate going forward? I think it's more like a $12 million run rate, down from closer to $14 million, $15 million.

--------------------------------------------------------------------------------

James R. Griffin, Blueknight Energy Partners, L.P. - Interim CFO & CAO of Blueknight Energy Partners G.P., L.L.C. [82]

--------------------------------------------------------------------------------

Yes, that's accurate. We've had some headcount reductions throughout the last year, and that's what you're seeing there.

--------------------------------------------------------------------------------

Unidentified Analyst, [83]

--------------------------------------------------------------------------------

Okay. That's helpful. Is there any talk with Ergon about repayment in securities as opposed to cash?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [84]

--------------------------------------------------------------------------------

We've looked at all the options and all the possibilities there. We prefer a cash payback just because we'd rather not dilute the current units any further.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

The next question comes from Kevin Roth with Allstate Investments.

--------------------------------------------------------------------------------

Kevin Roth, Allstate Investments, LLC - Senior Portfolio Manager [86]

--------------------------------------------------------------------------------

My questions have been answered, so I'm all set to go.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is a follow-up from [Jeff Bailey] with [Beach Capital].

--------------------------------------------------------------------------------

Unidentified Analyst, [88]

--------------------------------------------------------------------------------

I just wanted to come back around from what the previous questioner asked about, the Cushing storage assets. I mean, we know that 2018 was a difficult year, and that was partly what contributed to the distribution cut then. And the Cimarron pipe was intended to stabilize the Cushing storage going forward, and that was like a -- looks like a challenge, and it won't achieve its objective. So I guess, I'm asking if you would explain to investors why for a partnership of Blueknight's size the Cushing storage makes sense. It's an extremely volatile asset, and I understand that you have it mostly contracted out for '19. But aren't we subjecting a pretty small partnership to the vicissitudes of Cushing? It could -- given the crude market could go into backwardation really at any given time.

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [89]

--------------------------------------------------------------------------------

I understand the concern. But your premise around it being a volatile asset, I think if you go back in history, you'll see it actually has not been a volatile asset. It certainly was in 2018. But if you go back and look over 5 or 6 years of earnings at Blueknight, you'll see a business that consistently generates between $15 million and $20 million of EBITDA, I mean, year in, year out. We had -- it was kind of a perfect storm scenario last year where we had some contracts expiring in the middle of a very weak market. And so that's really what led to the lower revenue. However, we've experienced backwardated markets many times. And without the timing sequence there, we've been able to endure those. And it's been a very attractive cash-generating business for us. What we want to do to take the volatility out of it is keep working on diversifying the customer mix and diversifying the contract portfolio so that we're not -- we don't have too much volume expiring at one time, and then really work on finding customers who have operational needs for storage, right? And the STACK pipeline and Cimarron Express pipeline would have been one of those customers. That's why it was a really good fit for Cushing, but that will be the last pipeline built. And we talked to a lot of companies that are interested in pipeline projects, and the origins of destinations for pipeline is going in and out of Cushing. And so those are the kind of deals that we want to find and bring more stability to that revenue.

--------------------------------------------------------------------------------

Unidentified Analyst, [90]

--------------------------------------------------------------------------------

Is there any thought about hedging your bet with the Cimarron pipe in some way? I mean, if you're convinced that the rock that Alta Mesa has is a great rock, then it's only a question of oil prices to make Cimarron viable again. In addition, you've got Encana as your next-door neighbor over there in Kingfisher since they just bought new field. I mean, is there any thought about some way trying to hedge your bet with Cimarron? Or at this point in time, have you thrown in the towel and decided to sell?

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [91]

--------------------------------------------------------------------------------

Well, we're in the middle of the evaluation, so we have not come to any conclusion. But we obviously have looked at a number of scenarios, including the asset sale option. And we obviously look at that because we want to understand the exposure, which we think we understand well now. But we're in the middle of that, so we just haven't made any choices yet, Jeff.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [93]

--------------------------------------------------------------------------------

Yes. So thank you very much for all who dialed in today. We appreciate your interest in Blueknight. We appreciate all the questions. It was a good round of questions today. And as always, happy to speak with you following the call as well. So again, thank you, and thank you, Anita.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

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