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Edited Transcript of GEL earnings conference call or presentation 2-May-19 1:30pm GMT

Q1 2019 Genesis Energy LP Earnings Call

Houston Jun 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy LP earnings conference call or presentation Thursday, May 2, 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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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Michelle Kenel

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the 2019 First 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 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 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.

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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 release we announced total segment margin of $173.6 million in the quarter. Everything else the same, total segment margin, adjusted EBITDA and available cash before reserves in the quarter were negatively impacted by approximately $11.5 million due to a couple of discrete items.

First, we experienced an unexpected electrical transformer failure at one of our soda ash production facilities resulting in reduced realized margin of approximately $5 million from lost sales volumes. Second, as previously disclosed, we saw a negative impact from the Alberta production curtailment, which cost us approximately $6.5 million on a sequential quarterly basis under the assumption that the volumes would have remained consistent with the fourth quarter, 2018.

Notwithstanding these events which I'll comment on later, our businesses performed as expected, highlighted by increased contribution from our offshore segment and we remain on track with our previously announced guidance for full year 2019. Excuse me, I have a cold. Before we get into our customary remarks on our individual businesses, I wanted to briefly touch on the current crude by rail dynamics out of Canada. We generally view the recent election results in Alberta as a positive, but we'll tell -- the time will tell how quickly the pricing spread between Western Canadian Select and the Gulf Coast values reflects the market driven supply and demand fundamentals for takeaway capacity out of Alberta.

The futures market indicates a widening spread between WCS and Gulf Coast thus making rail movements out of Alberta to our Scenic Station rail facility, Baton Rouge export terminal economic. Physical volumes resumed moving to our Baton Rouge facility in April, albeit slightly below the minimum take-or-pay volumes, but we now expect volumes in May and June to be at or above our minimum take-or-pay volume. We expect our main customer will utilize prepaid transportation credits from the first quarter for any over performance in the second quarter, with any continued over performance not being reflected in our non-GAAP financial results until the second half of 2019. Assuming no material change in government policy or supply takeaway capacity, we expect to continue to see volumes ramp up throughout the second half of the year ultimately return to or exceed the fourth quarter 2018 volumes delivered into our Baton Rouge facilities.

Turning to offshore, I would mention again that in my 30 plus years of focusing on infrastructure in the Gulf of Mexico, I have rarely seen such an active backlog of known and sanctioned developments by the producing community, especially as it relates to our current footprint of strategically located assets with capacity all the way to shore. During the quarter we saw increased volumes across our asset footprint and we began receiving volumes on Poseidon and CHOPS from production delivered to us by a third-party pipeline that has insufficient capacity to directly deliver all of its committed volumes to shore. To avoid any confusion, I thought, I should expand a little bit on this situation. There is a third-party pipeline system that has a 24-inch diameter pipeline that goes all the way to shore with notional capacity of 280,000 barrels per day or kbd.

Additionally, it has an affiliated 16-inch pipeline that can notionally move 50 kbd to 80 kbd to the Eugene Island pipeline system for further transportation to shore, which for a variety of reasons is not an overly attractive option for most producers. Finally, it has a 20-inch pipeline that comes aboard our platform in Ship Shoal Block 332 where the third-party pipeline can deliver into our 100% owned and operated CHOPS pipeline and/or into our 64% owned and operated Poseidon pipeline for further transportation to shore.

We have to date entered into take-or-pay agreements with at least 4 shippers dedicated to said third-party pipeline for downstream delivery services of their produced volumes on CHOPS and/or Poseidon with the most recent agreements having a term ranging from 12 months to 5 years. We are in active discussions to possibly expand and extend these existing agreements as well as enter into new arrangements with additional producers. Therefore we would reasonably expect to benefit from the transportation all the way to shore of what likely will be growing volumes for certainly the next several years.

We remain on track to exit 2019 with an additional 40 kbd to 50 kbd relative to fourth quarter of 2018 from infield development drilling and sub-sea tie backs, including the LLOG operated Buckskin prospect. Our team continues to finalize agreements adding incremental dedicated volumes approaching 80 kbd in 2020, which includes Atlantis Phase 3, 70 kbd in 2021 and 150 kbd in 2022 which includes Mad Dog 2, none of which requires any capital expenditures whatsoever by us. We are in early, but active discussions regarding incremental volumes that could possibly come in the 2022 to 2025 time-frame.

We believe we are well-positioned to capture incremental volumes as we are the only major pipeline operator in the central Gulf that does not have affiliated equity production to be concerned with, has current significant excess capacity and has attractive expansion opportunities to shore. However, unless and until the parties enter into definitive agreements, there is no guarantee that we well be successful in capturing some or any of these volumes.

Our onshore facilities and transportation segment experienced a negative impact from the government imposed mandatory production curtailments, which was reflected in our first quarter with approximately zero volumes moved through our Scenic Station facility in February and March. Our other legacy businesses in our onshore facilities and transportation segment performed as expected. We continue to evaluate opportunities to integrate our onshore assets with some of our offshore assets in the Houston area as well as the lower Mississippi corridor that might ultimately complement the growth boom of international exports.

Despite the unexpected operational interruption in the quarter, our soda ash operations continue to exceed our expectations. We have replaced the damaged transformer and we are back to running at full capacity. We expect to offset this first quarter negative with higher volumes and stronger pricing in both the domestic and export markets and remain on track for our full year guidance for 2019. The international market supply and demand balance continues to remain tight, and we believe prices are likely to strengthen in the coming years. We continue to evaluate our Granger expansion opportunity, which at today's metrics, we believe to be a sub 5x investment.

Our refinery services business continues to perform at expectations and we believe it will continue to do so for the foreseeable future. Our marine transportation segment continues to perform as expected and segment margin increased slightly for the fifth quarter in a row. We remain optimistic that we have put in a 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 ever-so-slightly tightening market. We continue to see strengthening in Jones Act tanker rates, possibly indicating that more and more shale volumes delivered to the Gulf Coast are needing to be delivered to the PADD 1 and PADD 5 refineries on Jones Act vessels, in addition to international exports. We believe this trend will continue as more pipeline capacity comes on line out of the Permian bringing more light sweet crude to the Gulf coast that ultimately needs to be cleared. Regarding IMO 2020, we expect to see increased demand for our type of inland barge that can get the right intermediate refined barrel to the right refinery location under the more stringent requirements for finished products.

In summary, our businesses generated financial results that provided 1.42x coverage to our common unitholders, inclusive of one month of the preferred cash distribution, and a leverage ratio that slightly decreased on a sequential basis. We expect our coverage ratio to be slightly lower in future periods, everything else the same, as we move totally out of the paid-in-kind period on our preferred units. We will use any excess cash flow to repay amounts outstanding under our revolving credit facility or to internally fund potential attractive, low multiple, organic growth opportunities. This coupled with our expected growth from our existing asset footprint, which requires little or no capital, keeps us on track to naturally de-lever our balance sheet. We currently expect for our quarterly distribution rate to remain at $0.55 per common unit for the foreseeable future.

Our outlook for the remainder of 2019 remains unchanged from our previously stated guidance. We remain encouraged by our view of the current operating environment for our businesses, especially in the Gulf of Mexico with a number of exciting tie-backs and infield developments being completed in the second half of the year ramping crude by rail volumes from Alberta and normalization of production in our Wyoming soda ash facilities.

We intend to be prudent and diligent in maintaining our 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 commitments 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 Theresa Chen.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [2]

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Good morning. Thank you for taking my questions. In terms of the onshore business, just for the purposes of distilling all the moving parts related to Phoenix station. So if the future curves and spreads remain where they're implied, what do you think the EBITDA or DCF contribution would be for this facility for the year taking into account the below NBC volumes in Q1 and April as well as the shippers ability to utilize credits as volumes ramp back up in Q2 and beyond?

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

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There are a few moving parts, but based upon what we believe May and June we have clear line of sight on those nominations that we believe that we'll see no incremental contribution -- segment contribution that in other words in the second quarter as the customer uses its prepaid credits if you will from paying the take or pay volumes in the first quarter. However, if they continue to ramp and exceed those levels, we would anticipate actually exiting in the fourth quarter, and consistent with what we saw in the fourth quarter of 2018.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [4]

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Got it. And then for offshore, so what exactly are the final steps or hurdles you need to get through to finalize the dedications for 2020 through 2022?

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

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It's basically in many cases, I would characterize it as -- as I say, dotting I's and crossing t's. We are in very good shape on most of them, otherwise we wouldn't have kind of mentioned them. So I think that we feel very comfortable that as we go through '19 and into '20, we'll announce numerous additional long-term dedications.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [6]

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Understood. And then on the soda ash front, can you just provide us and then more a detailed update on what you're seeing in terms of the macro outlook for volumes and pricing on both the domestic and international front?

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

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Yeah, I think that basically we -- based upon our analysis of export statistics out of Turkey, we believe that all of the Turkish volumes are now fully absorbed in the market, in the worldwide market that we were -- that we're starting to ramp up in 2017. So -- and we're still seeing additional pricing pressures in export markets especially which is again driven by demand is growing outside of China, probably in the order of magnitude 900,000 tons to 1 million tons a year. And we continue to see primarily due to environmental and safety audits less Chinese production hitting the worldwide market. So, those dynamics are indicative of continuing to tightness in the worldwide market with the obvious result of prices likely to go up.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [8]

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Okay. And in the same line of thought, your potential Granger expansion, I understand that it's in the sub 5x EBITDA. But in terms of timing of making that decision for FID or funding, any thoughts around, especially in light of your overall deleveraging plan?

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

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We're working on a number of -- on a number of fronts to figure that out. We would hope that sometime this year if not over the next couple of quarters we have figured that out. I would say that, we need to keep in mind that that's a 3-year capital spend, so it's not really lumpy in terms of it's not a tremendous amount of -- it's spread out over 3 years. We're looking at a number of ways to finance it that doesn't otherwise conflict with our stated desire to delever the balance sheet.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [10]

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Thank you very much.

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Operator [11]

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Your next question comes from the line of Barrett Blaschke.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [12]

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Hey, Grant. Any -- anything we need to know kind of going through 2019 as far any additional like long-wall moves anything on the soda ash business and should we expect volumes to fully kind of recover in the second quarter?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [13]

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We will probably have a long-wall move in the second quarter which was -- we just did one in the third quarter last year. So it's a little bit off of cycle, but we would anticipate that's all in our plans. And so, we think that, as I said earlier, we believe that we'll be in the 175 and 185 range for the whole year, a little bit back loaded towards the third and fourth quarters because of that long-wall move. Another positive data point I think on the soda ash operations is that, we're successful in entering into a 5-year extension of our collective bargaining agreement with our unionized workforce there in at what I think were mutually agreeable and beneficial terms and conditions, so we have that. We have clear saving from labor cost knowledge point of view as we go forward from here.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [14]

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Okay. Thank you.

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Operator [15]

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

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Michelle Kenel, [16]

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Hi, this is Michelle on for Shneur. Just a quick question, what was the total CapEx spend for the quarter?

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

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From say growth capital standpoint the spend was $15 million. From maintenance capital the expenditures were $18 million for the quarter.

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Michelle Kenel, [18]

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Okay. Perfect. That's it from me.

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Operator [19]

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And there are no other questions at this time.

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

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Okay. Hearing no other questions. Thanks everybody for your participation. And we'll talk soon. Thank you.

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Operator [21]

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