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Edited Transcript of BPMP.N earnings conference call or presentation 27-Feb-20 3:00pm GMT

Q4 2019 Bp Midstream Partners LP Earnings Call

Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Bp Midstream Partners LP earnings conference call or presentation Thursday, February 27, 2020 at 3:00:00pm 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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* Gabriel Philip Moreen

Mizuho Securities USA LLC, Research Division - MD of Americas Research

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Presentation

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Operator [1]

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Good morning. And welcome to the BP Midstream Partners' 4Q '19 Results Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to your host today, Brian Sullivan. 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' Fourth Quarter and Full Year 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, please take a moment to review 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 the 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.

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, and thanks for joining our call today. 2019 was the second full year of operation since our initial public offering and another year in which our asset portfolio performed well. More on this in a moment.

I'll start today's presentation with a review of some highlights from 2019. Craig will then take you through our operational and financial results for the fourth quarter and full year. I'll come back and share with you our thoughts on 2020, and Craig will then provide guidance for the year. And we'll have plenty of time at the end for your questions.

First, let's look at the highlights from the past year. In 2019, we delivered unitholders mid-teens distribution growth without another dropdown transaction, consistent with guidance. Our operational results were consistently strong, growing throughput to around 1.7 million barrels of oil equivalent per day, demonstrating resilience to the effects of weather in the Gulf of Mexico in the third quarter of 2019, offshore producer maintenance throughout the year and continued apportionment on the Enbridge mainline. The throughput increase was driven by organic growth from both our onshore and offshore pipelines. In fact, BP2 and River Rouge both achieved record quarterly throughput since our IPO during 2019.

Our operational performance, together with disciplined cost and capital management, enabled us to grow full year adjusted EBITDA attributable to the partnership by around 31% and cash available for distribution by around 25% compared with 2018. We finished the year with cash available for distribution of $180 million. This was higher than the revised guidance we gave with our third quarter results, when we expected to be at the top end of the range of $165 million to $175 million, largely due to higher-than-expected dividends from equity method investments.

We maintained a robust distribution coverage ratio at 1.41x during the fourth quarter and 1.28x on a full year basis. Cash increased by around $40 million during the year, holding a year-end balance of around $100 million, even after a mid-teens distribution growth rate. This positions us well to self-fund some attractive organic growth projects in the future. I'll come back to this later in the presentation.

So in summary, it was another year in which we continued to build on our track record of strong operational and financial performance.

Let me now hand over to Craig to take you through our fourth quarter and full year operational and financial 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. We finished 2019 with strong operational and financial performance. Our fourth quarter total pipeline gross throughput was more than 1.7 million barrels of oil equivalent per day, higher than the third quarter of 2019, reflecting the recovery of offshore volumes from weather impacts in the Gulf of Mexico in the third quarter, increased throughput on Proteus and Endymion due to the ramp-up of the Shell-operated Appomattox offshore facility and stronger volumes on the River Rouge pipeline than planned. This was partially offset by lower volumes on BP2 due to slightly higher levels of apportionment on the Enbridge mainline during the quarter, offshore producer maintenance in the Gulf of Mexico and scheduled slippage on new well development by offshore producers from the fourth quarter of 2019 to early 2020.

On a full year basis, throughput increased around 6% compared with 2018, driven by higher throughput on BP2 with BP's Whiting Refinery continuing to perform well notwithstanding apportionment on the Enbridge mainline and higher throughput on Mars and Ursa, reflecting continued new well development at several fields connected to the offshore facilities tied into these 2 pipelines.

As Rip mentioned earlier, BP2 achieved record quarterly throughput in the third quarter and River Rouge achieved record quarterly throughput in the fourth quarter, both are noteworthy achievements since our IPO.

Net income attributable to the partnership for the fourth quarter was $47.6 million, higher than the third quarter of 2019, reflecting increased revenue from the recognition of full year deficiency revenue under the throughput and deficiency agreement related to BP2 pipeline and increased net income from equity method investments, primarily due to increased throughput on our offshore pipelines, as previously mentioned.

Adjusted EBITDA attributable to the partnership was $54.2 million for the quarter, around 4% higher compared with the third quarter of 2019. Cash available for distribution for the fourth quarter was $52.8 million, around 17% higher compared with the third quarter of 2019. This increase in cash available for distribution reflected the favorable impact of releasing cash associated with the throughput on the River Rouge pipeline being above the minimum volume commitment for the full year.

On a full year basis, adjusted EBITDA attributable to the partnership and cash available for distribution increased by 31% and 25%, respectively, compared with 2018.

I think it's worth spending a moment highlighting how exceptional our financial performance was in 2019. When we started the year, our cash available for distribution guidance was $160 million to $170 million. As we progressed throughout the year, volumes on River Rouge and Diamondback were higher than planned. Mid-year tariff increases across all our onshore pipelines were higher than expected and inspection costs related to Diamondback were lower than planned.

The headroom we created in terms of cash delivery from a great year in 2019, now provides us with flexibility in 2020 to target a distribution level that is higher than the forecast growth and cash available for distribution. So with the cash we expect to generate this year, we will have the ability to self-fund some attractive growth CapEx opportunities. Rip will talk more about this in a moment.

In January, the Board of Directors of the general partner declared an increased quarterly cash distribution of $0.3475 per unit for the fourth quarter. This represented an increase of 3.6% over third quarter 2019 distribution per unit. After factoring in the increased distribution, our distribution coverage ratio for the fourth quarter was 1.41x, and our full year coverage ratio was 1.28x, both higher than our target range of 1.1 to 1.2x, further evidence of our strong financial performance.

With that, I'll now 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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Thank you, Craig. Let me now spend a few minutes talking about 2020, starting with distribution growth. We are aware that BP Midstream Partners is one of the few remaining MLPs based on a traditional sponsored dropdown model. We acknowledge that the focus of the capital markets has transitioned, placing greater value on attributes such as moderating distribution growth to self-fund organic growth CapEx opportunities from within the existing portfolio. And we have heard the views of our unitholders regarding incentive distribution rights.

While we believe that we could achieve mid-teens distribution growth through 2020 with the dropdown, given equity market conditions, we cannot consistently rely on the growth from dropdowns financed by that market. Fortunately, we have a portfolio of assets with strong organic growth potential. Going forward, any dropdown transaction, if it happens, represent upside to our guidance.

In 2020, our target distribution growth is around 10%, assuming no dropdowns. We believe this growth will be driven by increased throughput from our existing offshore pipelines, such as the ramp-up of volumes from Shell's Appomattox facility as well as growth in the minimum throughput volume commitment on our BP2 onshore pipeline from 310,000 barrels per day to 320,000 barrels per day and, as Craig previously mentioned, the cash headroom we created from our outperformance in 2019.

Our consistent strong operational and financial performance since IPO, together with the cash we expect to generate this year in excess of our distribution, now allows us to self-fund a number of attractive growth CapEx projects.

Our focus on growth CapEx projects is strategically coherent with our sponsors' near-term priorities. For example, enhancements to BP Whiting Refinery utilization, which presents opportunities for BPMP to invest in repurposing pipelines to source additional advantaged crude into Whiting as well as expanding existing pipeline for Whiting's refined products to move efficiently to markets.

Downstream of Whiting, these include opportunities in terminaling businesses in support of marketing growth. In the deep waters of the Gulf of Mexico, our sponsor remains one of the most active upstream investors, along with other integrated majors who are tying in new production. In most cases, these developments require no BPMP CapEx and at least one case, an opportunity to expand capacity on existing lines with minimal capital investment.

Currently, we have a portfolio of several organic CapEx projects we would like to progress. These projects are expected to generate stable fee-based revenues and generate mid-teens returns. Collectively, these projects may require a total capital investment of around $30 million to $40 million. We are targeting to reach final investment decision on 2 of the larger projects this year. Several other smaller projects are already progressing within our joint venture, KM-Phoenix.

The financial benefits of these projects are to be realized in late 2021 through 2022. We have earmarked $15 million to $20 million to progress the execution of these 2 growth CapEx projects this year, subject to reaching final investment decision.

Before I hand over to Craig, let me comment briefly on incentive distribution rights. We've listened to a wide spectrum of views and thoughts from you, our unitholders, on ways forward regarding IDRs. Unlike some of our peers, the issue is less material for us at the moment.

In 2019, our IDR payments were just over 1% of our full year cash available for distribution, about $2.5 million against the full year cash available for distribution of $180 million. Based on a 10% distribution growth rate for 2020, IDR payments are expected to be around 4% of cash available for distribution. As the distribution grows, albeit at a moderated pace, that runway of time shortens, and we will continue to evaluate our IDR options. We won't be elaborating any further on this today.

With that, I'll now hand over to Craig.

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Craig W. Coburn, BP Midstream Partners LP - CFO & Director of BP Midstream Partners GP LLC [6]

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Thanks, Rip. In addition to the annual distribution growth of around 10% per unit for 2020, other guidance points for the full year are: pipeline gross throughput is expected to increase to approximately 1.8 million barrels of oil equivalent per day; average revenue per barrel is expected to be broadly flat with 2019 on a portfolio basis; total maintenance spend is expected to be around $22 million; around $12 million relates to our wholly-owned assets, of which around $6 million will be expensed and around $6 million will be spent as maintenance CapEx. The maintenance expense largely reflects onshore pipeline inspection and repair costs, while the maintenance CapEx includes around $4 million related to the Griffith Station repair. We expect to receive insurance proceeds of the same amount in 2020 related to this repair, offsetting the cash impact of this CapEx. Around $10 million relates to our equity method investments. From a cash perspective, these maintenance costs are already deducted prior to receiving cash distributions.

Our debt metrics have been and continue to be consistent with investment grade. We have recently further strengthened our balance sheet by extending our existing revolver credit facility by another 5 years at an attractive interest rate. As a result, our financing costs are expected to reduce around $3 million per annum to around $12 million for the full year 2020. We expect our gross debt to adjusted EBITDA ratio not to exceed 3.5x, and our full year distribution coverage ratio to be in the range of 1.1 to 1.2x.

We expect adjusted EBITDA attributable to the partnership to be in the range of $200 million to $210 million. And finally, we expect our full year cash available for distribution to be in the range of $185 million to $195 million, excluding growth CapEx, representing 3% to 8% growth year-on-year and around 13% to 16% compounded annual growth over the 3-year period of 2018 to 2020.

Looking to the first quarter, we expect pipeline gross throughput to be slightly higher than the fourth quarter of 2019, reflecting the continued ramp-up of production from Shell's Appomattox facility and the absence of producer maintenance, which occurred in the fourth quarter and increased throughput on our onshore pipelines. We expect cash available for distribution to be lower than the fourth quarter of 2019, primarily due to the absence of favorable cash impacts from the River Rouge that occurred in the fourth quarter.

I'll now hand back to Rip.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [7]

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Thanks, Craig. In summary, we achieved strong operational and financial results in the second full year of operation since our IPO. Our asset portfolio continues to perform very well. We delivered our target of mid-teens distribution growth for unitholders without a dropdown. We have built cash on the balance sheet, allowing us to self-fund some attractive organic growth opportunities in 2020. And we are confident in our ability to grow the distribution by around 10% in 2020, without a dropdown.

With that, let's open the phone lines and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Gabe Moreen with Mizuho.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [2]

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Quick questions for you. Can you just talk a little bit about some of those projects you're evaluating on the growth capital side? I think, you mentioned there were a couple of larger projects. Are those all around Whiting and terminaling projects? Or are you looking at some other projects in that roster?

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

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I'll be relatively succinct on this, Gabe. Probably comes in 3 buckets. One, we have customers asking us for service. So we're pre-FID on that. They need the connection in our pipes to get to market. So we're quite comfortable. An arrangement will be landed there with mid-teens kind of returns. Two, when we look at the terminaling business, our affiliate did Thortons acquisition, picked up a very nice retail footprint in the Midwest and basically pivoting from what had been multisourced petrol as the Brits would say to sole source from lighting. So there's expansion projects for terminals, et cetera, et cetera. And then the other business is actually competitive. So I'd rather not talk about it, okay? There's other folks in the market. So we'll deliver that outcome when it's time to deliver that outcome.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [4]

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Got it. And then can you talk also about what expectations should be around minimum volume commitments in terms of those that expire around some of your onshore pipelines? When there'll be an update around those?

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

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We've been in discussions. I actually reviewed the state of discussions with the BPMP Board earlier this week. We will announce that once we consummate. There's 3 different MVCs that need to be reviewed, more or less 2 of them are in okay shape. One is still a bit up in the air related to kind of the influence of Canadian heavy and forecast this, that and the other. That will be forthcoming.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [6]

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Okay. And then just last one for me. Rip, you had, I think, on previous calls, referenced trying to source -- I mean, just for lack of a better term, alternative sources of capital to potentially help on the dropdown strategy. Is that still an ongoing effort? Or did you find those sources of capital either not available or too expensive? Just looking for color on that.

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [7]

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Well, needless to say, given the current market headwinds, wow, right? I'm sure you're all sitting at your desk watching the screens, while listening to me as well. I have bankers calling me all the time. There's probably a market window for what felt like relatively expensive common in early January. We didn't find that attractive and the sizing wasn't really there. There's kind of always a convertible market available, but that feels really expensive. And then with the current stock price, it's just kind of nonsensical to think about that at the moment. There is a lot of private capital out there, but that tends to transact in a very different space, okay? So we're -- it's fair to say, we monitor the market. That's why we pitch this as -- we're pivoting to organic growth. Any kind of drops would have to be upside. And currently, it's just a tough, tough market.

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Craig W. Coburn, BP Midstream Partners LP - CFO & Director of BP Midstream Partners GP LLC [8]

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Yes. I'd like -- it's Craig, Gabe. Just like to emphasize that we're fortunate that we do have the ability to have the organic growth coming through, especially in 2020. And with these new projects we're looking at, I mean, again, we can't get into specificity on some of them because of competition reasons, but it will add to the pie, I would say, going forward, 2021, 2022, in addition to the growth that we'll see forthcoming -- should see forthcoming from the offshore. So I think we've moderated our distribution growth consistent with what we're seeing in the marketplace. It makes sense for us. We'd have strong pull-through from our sponsor around wanting these CapEx projects to be done. They're part of their overall strategy to grow the downstream businesses. And so we expect good stable returns from the support from our sponsor so that it makes sense to do these projects as well.

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Operator [9]

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And the next question comes from Derek Walker with Bank of America.

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Unidentified Analyst, [10]

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This is Alex on for Derek. Just a quick one for me regarding the distribution growth with it to 10%. I mean, if there were dropdowns during the year, would you guys reevaluate the distribution growth? Or would that just -- that excess be just used to self-fund?

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Robert P. Zinsmeister, BP Midstream Partners LP - CEO & Director of BP Midstream Partners GP LLC [11]

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We'd revisit the distribution growth, definitely. The -- we're growing the organic hopper, but it wouldn't be a near-term call on what you get out of a dropdown.

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Craig W. Coburn, BP Midstream Partners LP - CFO & Director of BP Midstream Partners GP LLC [12]

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I guess -- Alex, I would also -- this is Craig. I'd put it -- add to that by saying, we've always guided to mid-teens distribution growth, including a dropdown. The dropdown is tough in this particular market. That would put us at sort of the 5% -- 6% organic growth we've talked about. We believe we actually have the space to do 10% -- closer to 10% this year. But we still see our guidance longer term being mid-teens. So if we came back to the possibility of more drops, we would revisit that and come back and talk about that more deeply.

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Operator [13]

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This concludes our question-and-answer session. I would like to turn the conference back over to Brian Sullivan for any closing comments.

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Brian Sullivan, BP Midstream Partners LP - VP, IR [14]

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I'd just like to thank everybody for their participation in today's call, especially, as Rip mentioned, what's happening in the financial markets this morning. If you'd like to follow up, the IR team will be available this afternoon to answer any of your residual questions. You can find our contact information on our website. This concludes our call today. Thank you.

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Operator [15]

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Yes, thank you. Ladies and gentlemen, the call has now concluded. Thank you for attending today's presentation, you may now disconnect your lines.