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Edited Transcript of BPMP.N earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Bp Midstream Partners LP Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bp Midstream Partners LP earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Sullivan

BP Midstream Partners LP - VP, IR

* Craig W. Coburn

BP Midstream Partners LP - CFO & Director of BP Midstream Partners GP LLC

* Robert P. Zinsmeister

BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC

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Conference Call Participants

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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Derek Bryant Walker

BofA Merrill Lynch, Research Division - VP

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the BP Midstream Partners Second Quarter 2019 Results Conference Call and Webcast. (Operator Instructions) Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Brian Sullivan, Vice President of Investor Relations. Sir, please go ahead.

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Brian Sullivan, BP Midstream Partners LP - VP, IR [2]

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Welcome everyone to BP Midstream Partners Second Quarter 2019 Results Presentation. I'm Brian Sullivan, Vice President of Investor Relations, and I'm here today with our Chief Executive Officer, Rip Zinsmeister; and our Chief Financial Officer, Craig Coburn. Before we begin, I would like to draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our SEC filings. We also refer to non-GAAP financial measures. Please refer to our SEC filings and supplemental information in this presentation for important disclosures related to these measures. These documents are also available on our website.

And now, over to Rip.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [3]

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Thanks, Brian. Good morning, everyone. Thanks for joining our call today. I'm pleased to be here for our second quarter results. As Brian mentioned at the outset of our call last quarter, we have moved to a model where I'll join our second and fourth quarter results calls with Craig leading our first and third quarter calls. We believe this new results reporting approach and cadence is one that will serve us well going forward, as it has for our sponsor, BP.

Craig did a great job last quarter keeping the duration of our prepared remarks concise, and we intend to do the same again today. I'll share a few words with you first, then hand over to Craig to take you through our second quarter results, leaving plenty of time for your questions. We are just past the midpoint of our second full year of operation since the IPO. And we continue to demonstrate the underlying strength and robustness of our high-quality asset portfolio. The graphs on this slide show our consistent strong performance delivery since IPO, and the first 6 months of 2019 are no exception. We have grown quarterly adjusted EBITDA since the first quarter of 2018 by around 30%, and cash available for distribution by around 20%. And last year, we delivered mid-teens distribution growth and we are on track for delivering the same again this year. That's real growth and resilience.

These graphs are powerful visualization of the solid track record we have established and evidence that we are delivering on what we said we were going to do. Considering the performance of our asset portfolio during the first 6 months of this year and the growth in EBITDA and cash available for distribution we see through the second half of the year, we have today raised our full year cash available for distribution guidance to $165 million to $175 million.

Craig will talk more about this in a moment. We have demonstrated cash flow resilience of our asset portfolio going up first half of 2019, comfortably absorbing the impacts of maintenance activity at offshore production facilities in the Gulf of Mexico, maintenance at BP's Whiting Refinery and continued pipeline apportionment on Enbridge's main line. This resilience, which can be attributed to the balance between our onshore and offshore cash flows, the stable fee-based nature of our revenues, including MVCs, the continued organic growth in offshore volumes and our strong sponsor underpins the confidence we have in our financial frame and revised guidance.

Other than the increase to our full year cash available for distribution guidance that I just mentioned, there are no changes to our financial frame, and we will address guidance later this year. There are no changes to our investment proposition, including drop-downs and distribution growth. We still believe in the one-drop-down-a-year cadence provided that market conditions and other factors permit the transaction to be done in a manner that furthers the interests of the partnership. Although we have not yet committed to a drop-down in 2019, we are in action to be ready to execute and have identified the assets we would like to drop.

Equity markets remain challenged and we continue to look for opportunities should they become available. We will continue to listen to our investors watching closely the evolving MLP landscape. We are learning from the actions of others on how to or not to navigate a transition that BPMP may need to make over time, a transition that we will address proactively and pragmatically in the future.

With that, let me hand over to Craig to take you through our second quarter results.

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Craig W. Coburn, BP Midstream Partners LP - CFO & Director of BP Midstream Partners GP LLC [4]

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Thanks, Rip. Good morning, everyone. Our second quarter total pipeline gross throughput was a record 1.7 million barrels of oil equivalent per day, our highest throughput since our IPO. This was higher than the first quarter reflecting significantly higher throughput on Proteus and Endymion with the BP-operated Thunder Horse facility returning to normal operations following maintenance activity during the first quarter as well as startup of the Shell-operated Appomattox facility in May. This was partially offset by lower throughput on BP2, primarily due to maintenance at Whiting Refinery during the quarter ahead of IMO 2020 and lower throughput on Diamondback as seasonal diluent demand returned to more normal levels.

Let me take a moment to talk a little more about BP2. April and May volumes were impacted by maintenance at Whiting as expected. During early and late June, we saw throughput on BP2 at rates well above the MVC level, reflecting the performance of the Whiting Refinery. These higher rates were offset by a temporary throughput restriction caused by a building fire at our Griffith Station in the middle of June. After the restriction was resolved, throughput returned to the higher levels and we continue to see the pipeline perform at rates above MVC level during July. This is encouraging as we move into the second half of the year.

Second quarter average revenue per barrel on a portfolio basis was broadly flat compared to the first quarter. Looking ahead, we expect pipeline gross throughput in the third quarter to be broadly flat compared to the second quarter, primarily reflecting higher throughput on BP2 with the Whiting Refinery expected to continue performing strongly following the completion of maintenance during the second quarter, offset by weather impacts in the Gulf of Mexico associated with Hurricane Barry, which affected all of our offshore pipelines. We estimate the impact of this single event to our offshore portfolio to be around 90,000 barrels per day for the third quarter, and seasonal maintenance activity by offshore producers in the Gulf of Mexico.

Moving to our financial results. Net income attributable to the partnership for the second quarter was $37.3 million, broadly flat compared to the first quarter, reflecting higher income from equity method investments, primarily due to significantly higher throughput on Proteus and Endymion pipelines during the quarter. This was largely offset by lower revenue from BP2 and Diamondback pipelines due to lower throughput as previously mentioned and higher operating costs during the quarter relating to an insurance deductible of around $1 million relating to the building fire at our Griffith Station as I previously mentioned.

As you will be aware, the revenue line in our financial results includes only our 3 onshore pipelines. And we have minimum volume commitment arrangements in place with BP with respect to the throughput on these 3 pipelines. While we did not recognize any revenue from minimum volume deficiency in the second quarter, we did record around $3 million of deferred revenue on the balance sheet in the quarter related to volume deficiency on BP2 and Diamondback.

Taken together, revenue and deferred revenue related to our onshore pipelines totaled $31.6 million for the second quarter, in line with revenue consensus estimates. For the first half of 2019, we have recorded around $3.6 million of deferred revenue related to volume deficiency.

Adjusted EBITDA attributable to the partnership was $45.6 million for the quarter and cash available for distribution was $42.9 million, both higher than the first quarter. In July, the Board of Directors of the general partner declared an increased quarterly cash distribution of $0.3237 per unit for the second quarter. This represented an increase of 3.6% over the first quarter 2019 distribution per unit. After factoring in the increased distribution, our distribution coverage ratio for the second quarter was 1.25x.

Looking to the third quarter, we expect cash available for distribution to be slightly higher than the second quarter. As Rip mentioned earlier, our results this quarter demonstrate, again, the resilience of our asset portfolio. During the first half of 2019, we have absorbed the impacts of maintenance activity at offshore production facilities in the Gulf of Mexico, maintenance at BP's Whiting Refinery and continued pipeline apportionment on Enbridge's main line. Notwithstanding these impacts, we've continued to grow our adjusted EBITDA and cash available for distribution.

During our fourth quarter 2018 results call, we described the profile for adjusted EBITDA and cash available for distribution as building across the year with a ramp at the back end of the year. This profile reflects the increase in volumes from the Mattox pipeline, the forecast performance of the Whiting Refinery post maintenance through the second half of the year and the forecast recognition of deferred deficiency revenue relating to the first half of the year and the second half. This last factor will impact adjusted EBITDA only.

The resilience of the portfolio together with the continuing performance momentum across the portfolio, as I just described, gives us the confidence to raise our full year cash available for distribution guidance to $165 million to $175 million. With that, I will hand back to Rip.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [5]

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Thanks, Craig. So that's another quarter of solid performance from a high-quality asset portfolio that continues to perform very well. And be assured, Craig, myself and the entire BPMP team remained fully engaged and focused on delivering the targets we have set out to you. We have demonstrated the strength and resilience of our portfolio's cash flow generation. We have shown that we can convert our organic growth potential to increase cash available for distribution with more organic growth opportunities to come. For example, in early May, BP announced final investment decision on Thunder Horse South Expansion Phase 2 project adding an estimated 50,000 barrels of oil equivalent per day of production at its peak with first oil expected in 2021. Production from Thunder Horse is transported on the Proteus and Endymion pipelines. And only last week, Shell announced that it has taken final investment decision for the PowerNap project with production to start in late 2021, and transported on the Mars pipeline.

We mentioned during our fourth quarter 2018 results call that we have clear visibility to continued organic growth in the offshore Gulf of Mexico through the early part of the next decade, and Thunder Horse South Expansion Phase 2 and PowerNap are evidence of this. Our drop-down inventory is robust. And we are exploring financing options for our next drop-down, but any such transaction must work for both BPMP's unitholders and our sponsor.

Craig and I will be at the Citi Midstream/Energy Infrastructure Conference in Las Vegas later next week. So if you're attending, we look forward to seeing you there. With that, let's open the phone lines and take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Barrett Blaschke from MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [2]

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Just with the capital markets remaining challenged, and I know we're kind of rapidly using up 2019 here, how do we start thinking about financing options assuming that there is some sort of a 2020 drop-down?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [3]

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Well, good morning, Barrett. Thanks for the question. I've had River's inbounds. There are folks that are interested in this vehicle. So I believe the market opportunity is there. It's the choppiness and the tape that makes it difficult currently to think sensibly about doing something. Makes a lot of folks nervous. I can only reassert that the stability of our business is really impressive. My onshore business, I have MVCs on all of it. Basically, I continue to be a bit perplexed why we trade with oil the way we do. A $10 swing in oil will change our FLA income by $2 million annually, right? So the latest, what, oil's off 20% since April and it won't really impact our business materially. So I continue to reassert that on various calls, but the market is what it is, a bit of a herd. So I can envision if the trade noise relaxes a bit and we get more stability. There is -- I'm an M&A guy. There is a deal to be done there. Balanced against, got to get the conflicts committee on site, got to hit a sensible price that makes sense both for the seller, our sponsor as well as accretive to the unitholders. But all options are on the table.

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Operator [4]

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(Operator Instructions) Our next question comes from Jeremy Tonet from JP Morgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Maybe just picking up with the last point there. When you say all options are on the table, are you able to kind of share with us which options you see is kind of more likely or kind of favorite at this juncture?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [6]

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Jeremy, thanks for the question. I think the simple answer is no. Like a lot of CEOs and M&A professionals, I got a rolodex of bankers. I have 3 different banks with 3 different ideas of how to go about this, right? So I'll soberly reflect on that and, of course, will optimize the choice when we hit the market. Okay?

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Fair enough. Just wanted to kind of come back to, I guess, distribution growth at this juncture and noting kind of how the unit price doesn't really seem to reflect the value proposition as you describe it there, and just wondering if there was any thought going forward? The capital that's going to be put into distribution increases as you guys have talked about. Would it make sense at all to apply a portion of that to unit repurchases in any sense to support the unit price or any thoughts about that?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [8]

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Well, I have been around for a long time, Jeremy. The kind of powder it would take to move the price is probably a bit misaligned versus investing in organic growth opportunities. So I have spent the last quarter working with our teams, not only dealing with the Griffith's circumstance, which was an amazing response by both industry and the U.S. pipeline team to get BP2 back online basically in less than 48 hours. We have also been looking at organic growth opportunities, the cash on hand and what we're inclined to reinvest internally to grow distributions that way. So I'm more trying to pivot to growing distributions as opposed to reducing the denominator of how many shares are outstanding.

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Operator [9]

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And ladies and gentlemen, at this point, I'm showing no additional questions. I'd like to turn the conference call back over to Rip Zinsmeister for any closing remarks.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [10]

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Well, thank you. Somebody snuck in at the post.

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Operator [11]

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We do have a question from Derek Walker.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [12]

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Better be an easy one, Derek.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [13]

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Maybe just a little bit on Diamondback. Can you just talk a little bit about some of the third-party opportunities there and just sort of the competitive dynamics that you are seeing on that pipeline?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [14]

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Okay. We are actually in the market now in discussions. So we are interested in renewals. I think the heavy oil crowd, as long heavy oil to stay. As a consequence, diluent will still make sense. So we can still see moderate growth in volumes over time to the extent Canadian producers still reinvest in their business. We are looking at that shipping opportunities for products other than diluent, and that's one of the organic opportunity that's in our hopper.

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Derek Bryant Walker, BofA Merrill Lynch, Research Division - VP [15]

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And is that something that is second half of '19 for development or is that sort of a 2020?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [16]

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Certainly, not this year. Okay? There is a bit of -- if you build it, they will come. You still have to develop the customers to take the optic. So you do need to sink things up to have a prudent investment.

All right. I think we are ready to wrap. So thanks everyone for joining today. Hopefully, you have come away from today's call with a few impressions. First, we've got a lot of confidence in our ability to deliver the investment proposition. Second, our portfolio is very resilient. The onshore business is rock-solid underpinned by MVCs. Offshore, we have excellent visibility on the growth profile. With Appomattox coming online, for example, we are in flight for next year's growth because their exit rate in December versus where they started in May underpins our confidence in the delivery. And third, we are ready to drop more assets, market conditions permitting, to same caveat I have given you repeatedly. MLP sentiment, conditions can change in this market relatively quickly before it outlook for interest rates in all likelihood is supportive to the MLP universe and our proposition. And lastly, about 25% of our float will be in Vegas next week. So we really look forward to talking with you further. And don't forget to follow up with our IR team if you have any additional questions that you didn't get a chance to ask or you didn't get the content you were looking for today. Their contact info is on our website. Take care everybody. Have a safe day.

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Operator [17]

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Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.