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Edited Transcript of GEL earnings conference call or presentation 6-Aug-19 1:30pm GMT

Q2 2019 Genesis Energy LP Earnings Call

Houston Sep 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy LP earnings conference call or presentation Tuesday, August 6, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Grant E. Sims

Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC

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Conference Call Participants

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* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the 2019 Second Quarter Conference Call for Genesis Energy. Genesis has 4 business segments. The Offshore Pipeline Transportation segment is engaged in providing the critical infrastructure to move oil produced from the long-lived world-class reservoirs from the Deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services segment includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities as well as the processing of sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation segment is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products.

The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products. Genesis operations are primarily located in Wyoming, the Gulf Coast states and the Gulf of Mexico.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with the Securities Exchange Commission.

We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P.

Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Ryan Sims, Senior Vice President Finance and Corporate Development.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [2]

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Good morning, and welcome to all. As mentioned in this morning's release, we are pleased to announce total segment margin of $184.1 million and a calculated bank leverage ratio of 4.96x for the second quarter. Leverage is down from 5.63x just one year ago. In fact, this is the first time in close to 3 years where Genesis has achieved a leverage ratio of below 5. Despite several unexpected challenges over the previous 12 months, our diverse and market-leading businesses continue to perform, allowing us to naturally de-lever our balance sheet, a process we believe continues in the coming years. By achieving a bank leverage ratio below 5, we will now benefit from a 25 basis point reduction in the pricing grid associated with the outstanding amounts under our senior secured credit facility. This, when combined with the Federal Reserve's recent 25 bps reduction of the Fed funds rate and potential further easing, will translate into meaningful reductions in our borrowing costs on our floating rate debt, which stood at $967 million at quarter end.

In fact, this outstanding debt is down some $340 million from the year ago quarter. We received approximately $290 million for the sale of our Wyoming assets. So over the last 12 months we've managed to reduce total borrowings under our revolver by an additional $50 million. During the quarter, our Offshore Pipeline Transportation segment saw consistent volumes across our asset footprint and continues to benefit from increasing activity in the Deepwater, including both in-field drilling and new standalone development opportunities.

The quarter was highlighted by first oil flow in late June from the LLOG operated Buckskin development. Buckskin is a subsea tieback to the existing Lucius production platform and is 100% dedicated for the life of its lease to our SEKCO system, our longest lateral in the Gulf of Mexico and to our Poseidon system for ultimate transportation to shore.

The development has an anticipated peak production rate of 30 kbd, and we expect to see a meaningful financial impact as production ramps throughout the second half of 2019.

Importantly, the Buckskin development required 0 capital expenditures from us and highlights a significant operating leverage of our offshore footprint. It is also representative of the types of developments and opportunities we are seeing across our market-leading asset footprint in the central Gulf of Mexico.

In early July, we experienced temporary throughput disruptions on our offshore systems as the producing community shut in production associated with Hurricane Barry. We experienced no permanent damage to our assets, but do expect some negative financial impact to our third quarter results. Barry was an anomalous storm in terms of our operations in the Gulf. Rather than a typical storm, which approaches from the South and disrupts normally only half or so of our throughput, Barry actually formed in Alabama, moved South and then West before turning North, temporarily shutting in almost all production in the central Gulf of Mexico. Given its path and speed, most production would have been expected to be offline for 3 or -- to 4 days. However, residual non-Barry-related weather delayed the site remaining of production and transportation facilities by 1 day.

Once our and other folks were redeployed to offshore locations, a third-party provider of the largest communication systems in the gulf experienced issues restoring service.

As a result, what we would've expected to be a 3 or 4 day -- 3- to 4-day event turned into an 8- to 9-day event, affecting some 90% of the throughput on our offshore systems. While we hope we do not experience any additional downtime in the third quarter, any additional disruptions could further negatively affect the third quarter's results.

We remain on track to exit 2019 with an incremental 40 to 50 kbd of long-term dedicated volume across our footprint relative to the fourth quarter of 2018. Our team continues to work diligently to finalize agreements to add to significant incremental volumes we have previously disclosed.

The fundamentals in activity levels in the Gulf of Mexico remain very strong, and we continue to be excited about our ability to add incremental dedicated volumes to our market-leading position with little-to-no capital required. During the quarter, our Onshore Facilities and Transportation segment performed as expected.

Rail volumes delivered from Canada to our Baton Rouge complex resumed in April with increased volumes in May, June and July that exceeded the minimum take-or-pay volumes, which allowed our main customer to utilize all of the prepaid credits they accrued in the first quarter. However, we expect August and September volumes to ramp down as the current near-term differential does not support movements, but in the aggregate, we should see similar volumes in the third quarter as we experienced in the second quarter.

We continue to monitor the easing of production curtailments by the Government of Alberta. And if they continue to reduce the self-imposed production curtailments through the remainder of 2019, we believe market conditions should exist to return to fourth quarter 2018 volumes by the end of 2019 and into 2020 at our Baton Rouge complex.

Turning to our Sodium Minerals and Sulfur Services segment. During the quarter, we experienced lower production volumes due to a longer-than-anticipated planned move of our longwall mining machine. During the move, we proactively completed several additional de-bottlenecking projects and maintenance-related items. The longwall move along with the additional work we perform has successfully been completed, and we expect to run at or near slightly expanded full capacity for the foreseeable future.

We remain on track for our full year estimate in our soda ash business for 2019 as we continue to expect higher volumes along with stronger export pricing in the second half of the year.

Our view of the international market supply/demand balance for the remainder of the year remains unchanged, and we believe prices are likely to strengthen in the coming years. Our refinery services business also performed as expected despite some unexpected challenges, including unplanned turnarounds and production issues in a number of our host refineries. So far in the third quarter, our refinery services business is experiencing some supply chain disruptions beyond our control to some of our South American customers. If not restored in short order, third quarter margin could be negatively affected by $1 million or $2 million. Our Marine Transportation segment continues to perform as expected and segment margin increased slightly for the sixth quarter in a row. As previously discussed, we continue to remain optimistic that we have seen the bottom for the quarterly segment contribution from our entire fleet of assets and recent strength in near-term day rates and utilization rates is reflective of an improving market.

In summary, our businesses generated financial results that provided 1.39x coverage of our common unit -- to our common unitholders, inclusive of a full quarter of cash distributions paid to our preferred unitholders, and a sequentially decreasing leverage from 5.08x (sic) [5.00x] to 4.96x.

Our target coverage ratio, including all preferred cash distributions, remains 1.4 to 1.6x, and we expect our quarterly distribution rate will remain at $0.55 per common unit for the foreseeable future.

As we look towards the second half of the year, it is likely we will end up towards the lower end of our previously adjusted EBITDA guidance for 2019 of $685 million to $715 million. Notwithstanding generally nonrecurring challenges which can arise in any quarter and with the noise from the first half of the year being largely in the past other than a couple other things mentioned earlier, the long-term fundamentals across our businesses are strong and appear to us to be getting stronger. We continue to believe that fourth quarter of 2019 remains more indicative of our businesses going into 2020, and we are confident that the growth anticipated from our existing footprint will keep us on track to naturally de-lever our balance sheet and achieve our long-term leverage target of 4x in the coming years. We intend to be prudent, diligent and intelligent in achieving and maintaining the financial flexibility to allow the partnership to opportunistically build long-term value for all our stakeholders without ever losing our commitment to safe, reliable and responsible operations.

As always, we would like to recognize the efforts and commitment of all those with whom we are fortunate enough to work. With that, I'll turn it back to the moderator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of J. Schultz.

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

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It's TJ. I think just first, as you think about offshore, when would you expect to finalize adding some of those dedicated volumes in the 2020, 2022 time frame? I think you've talked in the past about some specific dedicated volumes in 2020 in the 80,000 barrels per day range. So I'm just trying to understand when the next potential Buckskin-type 0 CapEx tie-in could occur.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [3]

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I think that -- again, we gave the estimate, I think, in the last quarterly call. I think that that's -- we're basically dotting the i's and crossing the t's on a number of those as a practical matter. I mean due to logistical reasons of proximity to our existing systems and the capacity that we have where some of our competitor top lines don't have incremental capacity, I think it's -- the probability of us not getting to the finish line on a contracted basis is basically 0 on most of the things that we mentioned last time. So I do think that we have incremental volumes coming in '20 and then even larger ones in 2021, especially with -- towards the end of '21 or early '22 with the Mad Dog 2 coming on. So our ramp that we intimated and gave some guidance on in previous quarterly calls I think is still very much intact.

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

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Okay. Understood. And then the leverage plan, you talk about getting to 4x in the coming years. As you think about your ability to pursue some potential growth projects, whether that's expansion of soda ash or additional offshore pipes, just your thoughts on the ability to finance some of this more meaningful growth, should it arise just in the context of your leverage goals, would be helpful.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [5]

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I think that certainly in the offshore, when combined with the downstream economics that -- to the extent that -- and these are discretionary, but -- expenditures, but the aggregate return profiles have -- what we would view is -- as incremental capital to be spent in the Gulf of Mexico, again, taking into account the downstream economics, that they're less than 5x still. So -- including longer-term take or pay to guarantee that, if you will, and not take timing or reserve risk in most cases. So we view those as in essence financeable under almost any kind of scenario with the flexibility that we have under our revolver, where we would get material project EBITDA credit from the strength of the take-or-pay agreements that we have with people. The -- on other opportunities in the soda ash business, I think that we have discussed the Granger Optimization Project, which we do believe that at the end of the day, on a run rate basis, it's less than the 5x still. The difficulty there is a little bit that there's a 3-year construction period. So we would look at other ways to potentially finance that without recognizing that we have a 3-year capital spend that would kind of bridge us, if you will, to where we're closer to the incremental EBITDA contribution that we would expect from it, 3 years once we FID it.

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Operator [6]

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And your next question comes from the line of Shneur Gershuni.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [7]

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It's actually Shneur Gershuni. Just a couple of quick questions here. Maybe partially to follow up on TJ's question. So when you're thinking about FID-ing the project and so forth, are you sort of thinking about like a sale-and-leaseback type of arrangement? Or some of those JB structures that we saw with Targa and some of the others. Is that sort of the structure that you're thinking about? Or are we thinking about it incorrectly?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [8]

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I'm not sure that we're precluding any structures at this point, but what we are trying to do is come up with a structure that we feel allows us to start the project, get it under construction, recognizing that there is a 3 year lag before incremental lease but that does not conflict with our otherwise deleveraging goals. So I'm not prepared at this point to discuss the various structures that are under consideration, but that's what we're trying to achieve, Shneur.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [9]

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Okay. No, that makes perfect sense. And I think the last time we had met, you had doted that you were updating the original expansion plans that, I think, were done in 2013 and 2014 or somewhere in that time zone. Has that happened, is the cost materially higher and so forth? Just kind of curious if your sort of lease made it through that, the reevaluation process.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [10]

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Yes. I think that we're well into that. And that we believe that we're in the, call it, plus or minus $325 million range in today's dollars to fully affect the 700,000 ton plus expansion in Granger.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [11]

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Okay. And then just switching gears a little bit here, nice to see the debt balance has come down and so forth. You sort of talked about the low -- you triggered the lower rate by getting under 5x. Just given where the tenure is at today, does it make sense at this point right now to possibly term out a portion of what's on your facility, just sort of to take advantage of where rates are today, broadly speaking?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [12]

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I mean I think on any kind of historic basis that there's clearly been a fairly dramatic recovery in energy unsecured paper. On the other hand, it's still a couple of hundred bps wide of where we could price currently. And we do have a fairly clear -- in our mind, a fairly clear path forward of paying down or continuing to pay down over the coming years outstanding revolver. So other than some existing maturities that we think that we could roll and extend by doing an early call on reasonably flat to where we -- the current coupon on them, I don't see that we're in a big -- there's a lot of impetus for us to term out outstandings under the revolver.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [13]

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So what you're effectively saying, you're comfortable with the amount that's drawn on the revolver today, that -- it just -- given where commodity prices have exhibited a lot of volatility and so have drilling plans and so forth, you don't think it's prudent to take it down a little bit further?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [14]

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We don't have any concerns about the current outstandings. No.

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Operator [15]

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(Operator Instructions) Your next question comes from the line of Ethan Bellamy.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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You seem pretty confident about soda ash pricing in the medium and long term. Could you peel the onion for us there a little bit? And will that hold if we see worsening global economic conditions?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [17]

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Yes. I mean I don't know that we, under a significant worldwide recession, but I think that there could be some reduction in at least the demand growth. But again, we see demand growing, not with -- not necessarily in the EU, the U.S. or China proper, but certainly in Southeast Asia in flat/float glass demand as well as lithium demand in South America. So as long as we have increasing demand with no increasing -- whether or not it's 100,000 tons a year or 900,000 tons a year, without incremental natural supply coming on, we still see that the market's very balanced. We're currently aware of at least 2 not inconsequential supply disruptions, so -- which are going to be ultimately solved, and hopefully, for their sake, sooner rather than later. But we certainly see the demand/supply balance in the cost advantage of natural production vis-à-vis with only the synthetic production, which is currently -- is a practical matter of serving the incremental demand is that fundamental -- is fundamentally isn't changing in our view at this point.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay. That's helpful. And then in the Marine business, it looks like your utilization is held up and looks to be pretty good there. Should we expect that going forward? And what does the rate environment look like right now?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [19]

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I would say that yes, we expect the utilization to hold up based upon fundamentals. I think that we've talked in previous calls relative to IMO 2020, that actually for our style and barge -- inland barge certainly -- internal heaters could add incremental demand because of getting the right barrel or right intermediate refined barrel to the right refinery location of EPI IMO standard. So we think utilization remains high, and we are seeing, at the margin, incrementally increasing spot rates, which -- and I think the litmus test is that we've actually had some customers talk -- start talking to us about terming up, which means -- how we view that is, in their mind they believe that rates are going to go up, so they're trying to lock in. So I think fundamentally, we feel reasonably comfortable that, as we've said, we've put in a bottom, it's just baby steps. But for the sixth consecutive quarter in a row, we've had marginally improved performance out of the overall segment. So -- but we've also stated that we don't expect it to be running back to 2014, 2015 levels anytime soon.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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And one last question. Very big picture. There are a lot of assets for sale, there's an IPO logjam, do you guys -- are you actively looking at the M&A or consolidation opportunities that are out there?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [21]

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We're not active in -- I mean, I don't make a lot of comments on that, but I would say that we're -- we don't look at things like that. We believe that we are focused on continuing to deliver on our promises and taking advantage of the opportunities that we have of our existing footprint, which we think the return profiles and the long-term value creation are far superior to participating in frothy M&A activities.

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Operator [22]

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(Operator Instructions) And there are no more questions at this time. Presenters.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [23]

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Okay. Well, thanks, everyone, and we'll talk to you in 90 days or so. Thank you.

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Operator [24]

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Thank you. That concludes today's presentation. We may now ask that you disconnect your lines.