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Edited Transcript of GEL earnings conference call or presentation 8-Aug-18 2:00pm GMT

Q2 2018 Genesis Energy LP Earnings Call

Houston Sep 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy LP earnings conference call or presentation Wednesday, August 8, 2018 at 2:00:00pm 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

* Robert V. Deere

Genesis Energy, L.P. - CFO of Genesis Energy LLC

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Conference Call Participants

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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Cheng Wang

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

* Dong Wang

Citigroup Inc, Research Division - Senior Associate

* Shneur Z. Gershuni

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

* Theresa Chen

Barclays Bank PLC, Research Division - Research 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 2018 second quarter conference call for Genesis Energy. Genesis has 4 business segments, the Offshore Pipeline Transportation Division 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 division 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 division is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation division is engaged in the maritime transportation of primarily refined petroleum products.

Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming 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 and 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 Karen Pape, Chief Accounting Officer.

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

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Good morning. As mentioned in this morning's earnings release, we have entered into an option agreement to sell certain noncore assets. In return for the option, we will receive a $30 million upfront option payment, which would be ultimately be applied to the final purchase price subject to certain terms and conditions. We are in a position at this point to announce the option is for our Powder River Basin assets and the option holder is Silver Creek Midstream, in conjunction with Tailwater Capital and The Energy & Minerals Group, 2 large sophisticated and respected energy-focused investment shops. While there can be no guarantees that we ultimately consummate and close the transaction, we currently expect to sign and close in the third quarter. Proceeds from this sale would be used to pay down outstandings under our revolving credit facility and for general corporate purposes. On a pro forma basis, we would expect this to reduce our bank compliance leverage by more than 0.3 of a turn and meaningfully contribute to your ultimate long-term goal of around 4x or less on our leverage calculation.

Turning to our quarterly results, our businesses in the quarter continue to perform well and delivered financial results that provided 1.55x coverage of our sequentially increased quarterly distribution. Something that we're focused on is performance below our expectations in our offshore business. Three particular major fields have underperformed our expectations over the last 2 to 3 quarters. One field, we believe is underperforming as a result of reservoir quality degradation and not due to mechanical factors. Offsetting this in future years are 2 subsea tiebacks of the same dedicated in-field production facility scheduled to come online. One in early 2019 and one later in 2019. Between now and then, however, our segment margin will be around $5 million, 1/4 less than what we'd previously anticipated.

The other 2 large underperforming fields, we think are predominantly timing related. To maximize reserve recoveries, the operator appears to be producing at a slower rate than communicated to us just last year. This lower current level and yet consistent, longer-term production nonetheless has negatively affected our reasonably anticipated segment margin by approximately $5 million a quarter.

Longer term, we are quite bullish on and pleased with the activity in and around our substantial footprint of assets in the Gulf of Mexico. Additionally, we are currently seeing increasing demand for our assets from production that is currently dedicated to third-party pipelines but is unable to get to shore due to such competitive pipelines being, in our estimation, oversubscribed. Given our excess capacity and connectivity on certain of our systems, we expect to benefit from this takeaway capacity constraint in future periods. There are certain scenarios where we could benefit from this market dynamic by as much as $7 million a quarter, for at least the next couple of years.

Stay tuned as things unfold until the end of the year. Our recently acquired soda ash operations have continued to exceed expectations. We believe we're on track to produce $165 million to $175 million in margin for 2018, up from the previously discussed range of $155 million to $165 million. This is primarily driven by higher-than-expected ANSAC export pricing, pushed by higher-than-expected Chinese domestic pricing influenced by continued environmental inspections, resulted in tightened export supply. Increased supply from Turkey in the Kazan, continues to ramp slower than expected and, therefore, has been unable to backfill the reduced and higher-priced exports out of China. Worldwide demand for soda ash continues to be strong.

It's these market factors that have led to our increase in expected margin of some $10 million for the full year even with a longwall move, negatively affecting the third quarter by $3 million to $4 million.

Our Historical Refinery Services business continues to perform well and benefits from many of the macro factors and worldwide economic activities that also positively affects soda ash.

Volumes to our onshore terminals and in our pipelines have increased from the year earlier period and sequentially, although to date, not at the levels we have previously anticipated. However, based upon July and no nominations for the rest of the quarter, we would expect to see meaningful growth in future quarters, especially at our Scenic Station facility servicing the ExxonMobil Baton Rouge Refinery in Louisiana. Railroad capacity, out of Canada, has been expanded, and we are now seeing the benefits in volumes landed at Scenic Station, which we expect to continue to ramp through the end of 2018 and into 2019 and beyond.

We would anticipate volumes to increase later this year and into 2019 in Texas as integrity work is completed on a downstream pipeline, which currently has constrained physical flows to under the minimum volume commitment of our customer.

Turning to Marine. Margin actually increased slightly on a sequential quarterly basis for the second quarter in a row. While we are reasonably hopeful, we put in a bottom for the quarterly segment margin from our entire fleet of assets, we have no expectation of the fundamentals for Marine Transportation saw in any significant improvement over at least the next several years. We certainly have significant operational leverage if things improve sooner. In summary, the net effect of the financial performance is slightly lower quarterly and cumulative EBITDA than we had expected when we announced our capital reallocation plan last fall. While the coverage of our distribution is strong, the pace of our natural delevering is slower. We will continue to target and ultimately move to around 4x or less on our leverage calculation, but it could take a little longer than we had originally anticipated. The transaction assuming at close will meaningfully help us achieve that goal. We intend to be prudent and diligent in maintaining financial flexibility to allow the partnership to opportunistically build long-term value for all our stakeholders.

As always, we would like to recognize the efforts and commitment of all those with whom we are fortunate 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 Shneur Gershuni from UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

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Maybe we can just start off with the challenges that you highlighted in the offshore segment. Given the fact that there was an actual -- you haven't shared with us what your expectations were before versus now, but you've given us the Delta on it. At the same time, you've said that this field has been underperforming for the last several quarters. Are we to understand that the $10 million a quarter effectively that was called out or at least $5 million on the ongoing basis, would suggests that this quarter would have been $5 million higher? Or are we saying that it's going to degrade further by $5 million on a go-forward basis from where you are today? I'm trying to understand what's been baked in and continuing versus degrading further?

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

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No. The $5 million is already baked in, but we don't see that coming back, although it's not a inconsequential portion of that will be made up, if not exceeded, when the 2 subsea tiebacks to the same field are consummated by the end of 2019.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

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So is the way to look at it, you look at today's results, it would have been $5 million higher effectively. So while you've exceeded expectations, but you would have been $5 million higher than that?

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

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Exactly. Exactly.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

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Okay. Just wanted to clarify that. And secondly, with the asset sale just wanted to understand some of the mechanics with respect to it. You've already received a $30 million nonrefundable payment that you get to keep no matter what happens with this outcome, and in sort of trying to triangulate and, obviously, we're missing some components here, but you talked about a 0.3x leverage improvement with the asset sale. Are we talking something in the $400 million to $500 million range in terms of evaluation number?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [7]

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I'm not in a position at this point to divulge that, but we would anticipate -- as we said, we anticipate the option being exercised in fairly short order, and so more information around the overall transaction will be forthcoming shortly.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [8]

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Okay. And 2 more quick follow-ups. Your goal of in terms of the leverage goals that you had laid out, there was actually a range but like, for example, you said you'd be approaching 4.75x, but the less than 5x. Are those targets still valid at this point right now, it's just your towards the middle or higher end of that range? Or do those targets get revised?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [9]

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I think that we -- earlier whether or not it was the fourth quarter or the first quarter, we had said that getting all the way to 5x at the end of 2018 was going to be probably difficult, primarily because of we were continuing to spend in Wyoming. But -- so not only we still think that that's going to be a little difficult to do on TTM basis, or an LTM basis at 12 31. Although with an annualized fourth quarter, we think that we will be on top of it if -- but we do think -- we continue to believe that the 2019 and 2020 targets are still reasonably achievable although they may be pushed out a little bit as we kind of guided just because we're missing a little bit of the anticipated EBITDA that we just talked about.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [10]

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And one final question. Onshore segment did well. Looks like the long-awaited ramp of Baton Rouge is finally, happening. When we think about the maximum capacity of what that can do, the volumes during the quarter. What percentage utilization does that sort of represent at this stage right now? Because you sort of suggest by a meaningful upside that we're not quite near or full yet.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [11]

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Yes, I mean, I think that we realistically, we can do 2 trains a day from a capacity point of view. But that's not where we're -- we haven't seen that yet, but we do see some ramping coming up, and I think that we anticipate that, that based upon what we've seen and the capacity expansions on the CP and the CN coming out of Canada that the market dynamics are certainly there to see meaningful volume ramps in the third quarter. We're seeing those and continuing on into the fourth.

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Operator [12]

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Your next question is from the line of TJ Schultz from RBC Capital Markets.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [13]

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I guess just first, a quick follow-up on that last point. On the Canadian rail capacity expansions, is there -- have those opened up enough, or do you have line of sight to get to 2 trains per day at Scenic Station?

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

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Again, that's a capacity situation. I would say that we've seen nominations that would indicate on average at least 1.5 trains a day on average.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay. And then back on the offshore volumes. Those volumes that you are expecting to get from dedications away that will or may need to use your pipes, what's the trigger or the hurdles for you to get those volumes? I think you said that could have an impact of $7 million per quarter for you all.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [16]

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The trigger for it is basically -- is the competing pipeline ramps up to its capacity and, therefore, it has no other way to go except be dropped off. There's some other -- I mean, there's some interesting plumbing with some interconnectivity elsewhere. But we have seen nominations starting in August, which we -- for prospective periods and producers interested in entering into 12- to 24-month contracts to provide the capacity that is going to be required to move their production because it can't move on the pipelines that they're dedicated to.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Okay. And the asset sale, are you able to give the current run rate EBITDA associated with the PRB assets you're looking to sell?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [18]

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No, we're not in a position to do that, but our calculation of the overall effect on our calculated ratio was basically in round terms it included the net proceeds from the overall, assuming that the transaction closes as well as backing out the LTM EBITDA so.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Yes. Okay. Understood. Just lastly on leverage and distribution. I certainly understand you have plenty of coverage on the distribution. I just want to confirm or get your view if there's any plan on reevaluating distribution policy, again, just to get debt leverage down sooner. Or is this just something that you think you have time to kind of wait it out?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [20]

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I think that we -- as we discussed almost a year ago when we had the capital reallocation that we will evaluate on a run go-forward basis what the highest value use of our capital is. But at this point, we see nothing that would deviate from what we laid out back in October.

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Operator [21]

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Your next question is from the line of Theresa Chen from Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [22]

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On the soda ash business, is that $10 million bump in guidance sustainable for 2019 as well? Or does it mostly have to do with competitor facilities abroad facing issues today?

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

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We feel our -- we feel that the market fundamentals and the dynamics are such that it's sustainable into 2019.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [24]

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Got it. On offshore, can you just give us a bit of history on how you came to adjust your estimates for the reservoir quality for the field and degradation? And how like comfortable do you feel about the rest of the estimates in the near term for the other fields?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [25]

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Well, we saw a continued precipitous decline and while we don't have the insight and direct knowledge of any kind of reservoir engineering data that we came to the conclusion that this was not something that was going to snap back. So we did an evaluation of kind of the 12 months ending 6/30/2017 versus a 12 months ending 2018 on that and that was the genesis, no pun intended, of the $5 million, a quarter of underperformance that we did not expect. But -- so we are making the assumption that, that is not coming back. And on the other fields, basically, again, as we said, we rely upon the good faith -- the estimates of the production coming from the fields to put into our forecast both for financial purposes as well as capacity and then physical operation purposes. What they have certainly not met to what they told us to expect even last year. So we've kind of recalibrated our expectations, so that's not coming as rapidly as what we had anticipated or not peaking at where we thought it would.

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Operator [26]

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Your next question is from the line of George Wang from Citigroup.

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Dong Wang, Citigroup Inc, Research Division - Senior Associate [27]

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Just a couple of quick questions. Firstly, just in terms of unit buyback versus debt payment, any thoughts on kind of when the board may or may not eventually approve the unit buyback, just considering that the Genesis is still trading at a substantial discount versus peers?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [28]

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Yes, I think that once we get comfortably under $5 million that is certainly something that we could evaluate as a board in terms of if we still think that at that point the units are undervalued. But getting our financial flex -- maintaining our financial flexibility, we think that we have a number of opportunities that we -- have good places to deploy our capital. But if we -- again, if we think that that's the best use of the capital buying back units will certainly be on the radar screen.

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Dong Wang, Citigroup Inc, Research Division - Senior Associate [29]

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Got you. And then secondly, just in terms of deal flow and besides this upcoming PRB asset sale, are there any more sort of noncore assets on the chopping blocks, you guys are looking at?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [30]

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I don't know that I'd say the blocks or anything, but there's other -- we have other pockets of assets, which I would say are noncore. But we have nothing pending or any kind of processes or anything else, but we are continuing to sharpen our focus on where we have dominant and quality market positions. And we think that's a good place to focus

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Dong Wang, Citigroup Inc, Research Division - Senior Associate [31]

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Got you. And then lastly, just in terms of the Marine segment, kind of, you guys guided for the next few years, it's going to stay depressed. So just -- is there any kind of catalyst like you guys can see sort of for a stronger recovery beyond expectation? I just wonder what can sort of cause the segment to perform much better. What's the expectation going forward?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [32]

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I mean, I think that the best thing that could happen would be domestic differentials blowing out to the point that it would absorb some of the Marine capacity to move crude oil from point A to point B. And by that I primarily mean that Gulf Coast destinations to East and West Coast, which would soak up a lot of Marine Transportation assets. With all of the march of moving the bottleneck from the Permian to the Corpus Christi or Houston area that's a potential likely outcome. And so from an overall industry point of view, if Houston or Corpus starts trading at a significant discount, which it might once you just kind of debottleneck and get the stuff down, then those differentials would support Marine Transportation to pad 1, pad 5. But when that occurs, I'm not exactly sure. But that's an illustrative of what could more near term kind of probably provide some overall relief for the Marine Transportation sector.

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Operator [33]

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Your next question is from the line of Barrett Blaschke of MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [34]

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Just a lot of mine have been asked but just to kind of housekeeping here. On the $5 million from basically slower production, is that the same $5 million from degradation of the other field? Or is that $5 million and $5 million?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [35]

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$5 million and $5 million.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [36]

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$5 million and $5 million. Okay. So $5 million sort of expected to come back and $5 million sort of staying off-line. Okay. That helps. And then I just noticed the free state volume seemed to be sort of slowly on the uptick. Is that just a function of commodity price today? Or what's driving that?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [37]

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Well, as you're probably aware, Denbury is the primary shipper and to the extent that higher prices support additional tertiary [drilling] , we would expect -- and if that's what is occurring, then we would expect volumes on for each state to inch their way up.

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Operator [38]

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Your next question is from the line of Patrick Wang of Baird.

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Cheng Wang, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [39]

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Looking at the soda ash business, results there continue to impress, but can you comment on the current spot market with the recent softening in Chinese prices? And what if any implications you have at this point on contract renewals heading into year-end?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [40]

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It's reasonably sensitive at this point but, again, I think that everything else the same, as we said, that export prices in the first half of the year have exceeded our expectations as we entered the year. And we believe those market fundamentals are in place to continue exceeding our expectations for the remainder of the year. And then as I answered an earlier question, we don't see a lot of changes in fundamentals that would back off in 2019.

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Cheng Wang, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [41]

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Okay. And then my last question. On your $750 million in preferred equity, could you remind us if you have the option to continue to pay in kind those units beyond the first on 18-month period? Or will those become fully cash pay in 2019?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [42]

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Pursuant to the original terms and conditions, the pick period was for 18 months.

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Operator [43]

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(Operator Instructions) Again your next question is from the line of Shneur Gershuni from UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [44]

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Just one last follow-up question. Do you happen to have the CapEx for the quarter? And is it still $122 million for the year as an expectation?

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Robert V. Deere, Genesis Energy, L.P. - CFO of Genesis Energy LLC [45]

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I believe that, that expectation is somewhat [contingent here] upon what happens in Wyoming and if we close the transaction, then it will relieve us of some of the estimated capital expenditures.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [46]

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Order of magnitude, assuming that the transaction closed perspective CapEx for the year, would be down $15 million or $20 million.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [47]

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$20 million. And do you happen to have what was spent during Q2?

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Robert V. Deere, Genesis Energy, L.P. - CFO of Genesis Energy LLC [48]

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I'm sorry. $20.5 million in Q2.

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Operator [49]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [50]

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Okay. Well, that concludes the quarterly call. And we appreciate everyone's attendance. Thanks.

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Operator [51]

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Thank you. This concludes today's conference call. You may now disconnect.