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Edited Transcript of GEL earnings conference call or presentation 1-Nov-18 1:00pm GMT

Q3 2018 Genesis Energy LP Earnings Call

Houston Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy LP earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm 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

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Conference Call Participants

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* Cheng Wang

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

* Dong Wang

Citigroup Inc, Research Division - Senior Associate

* Kyle May

Capital One Securities, Inc., Research Division - Associate

* 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 Third 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.

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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. During the quarter, we completed the sale of our Powder River Basin midstream assets for net proceeds of approximately $300 million inclusive of the $30 million option payment we received in August. We used the proceeds to reduce the balance outstanding under our revolving credit facility. As the terms of our facilities allows pro forma credit for this transaction, we were pleased to report our credit agreement leverage ratio at 5.24x adjusted EBITDA at the end of the quarter. The closing of this transaction coupled with the improving financial performance of our businesses makes us feel increasingly confident that approaching our leverage target of 4.5x by the end of 2019 is reasonably achievable.

Turning to our financial results. Our businesses continued to perform well in the quarter. We generated recurring financial results that provided for 1.65x coverage of our sequentially increased distribution. We believe the third quarter financial results represent the baseline performance of our businesses from which we expect to grow in this operating environment and future periods.

We find it interesting that if you simply multiply, let's say, 173 times 4 and divide it into our outstanding debt net of the proceeds we received from the sale of our Wyoming assets, our leverage ratio calculated generally consistent with the terms of our bank facility would be less than 5x currently.

In the quarter, we were pleased to see the increase in the contribution of our Onshore Facilities and Transportation businesses, primarily driven by increasing volumes flowing through our infrastructure in the Baton Rouge corridor in Louisiana. These increased volumes are the realization of the expected growth in this business that we have discussed over the last several quarters. We believe the market fundamentals are intact to see increasing volumes and margin contributions both in Louisiana as well as in Texas over the next several quarters to levels sustainable for certainly the next several years. While the ramp in contribution from our organic growth projects has taken longer than originally anticipated, we are beginning to see the expected results that underpin these investments.

Even after reflecting the sale of our Powder River Basin midstream assets, we would expect margin contribution from our Onshore Facilities and Transportation segment to increase sequentially in the fourth quarter of 2018. This increase comes from physically handling increased volumes of crude oil rather than marketing or merchant fees, which, for context, contributed less than $1 million for the third quarter.

In our offshore business, we have continued to experience an inordinate amount of scheduled and unscheduled downtime at several of the production facilities connected to our offshore infrastructure. Notwithstanding these short-term negatives, 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.

Our soda ash operations have continued to exceed expectations. We believe we are 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 high input prices as well as continued environmental inspections resulted in tightened export supply.

Turkish supply from Kazan continues to ramp slower than expected, and therefore has been unable to backfill the reduced and higher price exports out of China. Worldwide demand for soda ash continues to be strong, and we expect the market to be reasonably tight in 2019 and even tighter in 2020.

Our Refinery Services business continues to perform at or above expectations with increased volumes in the quarter. Margin in our Marine segment actually increased slightly on a sequential quarterly basis for the third quarter in a row. We are reasonably hopeful we've put in a bottom for the quarterly segment margin from our entire fleet of assets, but we continue to have no expectation of the fundamentals for Marine Transportation showing any significant improvement through at least the next several years. We certainly have significant operational leverage and financial leverage if things improve sooner.

We continue to enjoy a strong coverage ratio and remain on our path to naturally delever our balance sheet. With the sale of our Powder River Basin midstream assets, we have minimal planned growth capital on the horizon and currently would plan to use any excess cash to reduce outstandings under our revolving credit facility. We intend to be prudent and diligent in maintaining our financial flexibility to allow the partnership to opportunistically build long-term value for all 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) And your first question comes from TJ Schultz.

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

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Just on the physical volumes into South Louisiana, any context you can provide on the ramp there? Maybe what capacity you have to unload rail versus what is coming in right now? And how this may be trending?

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

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We have the capacity to unload minimally to probably 2 trains a day, which would translate into about 140,000 barrels a day. We think that if the railroads can schedule it properly, that we could actually unload 3 trains a day. But currently, we're approaching -- subsequent to the end of the quarter, we're approaching the equivalent of about to the average of almost 2 trains a day.

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

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Okay. And South Louisiana, there has obviously been some focus on LOOP exports and the proposed Swordfish Pipeline from Raceland. Can you just provide any color on the competitive dynamic for you all? And how that may be evolving, if at all, in the area amid some of these projects?

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

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Not inconsequential amount of the volumes that we are currently receiving by rail are currently being exported. We don't know if it's going internationally or exported to other domestic refineries, but we are loading it on marine vessels at our port of Baton Rouge. So we think that, that continues under the current market dynamics. Several of the proposed new pipelines that are being talked about coming from St. James down to Clovelly may or may not ultimately end up having some interconnectivity with our facilities at Raceland, which is capable of taking substantial volumes of crude by rail both Canadian as well as domestic volumes there.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. And then just moving to Texas, are you filling volumes north of Webster? And what are expectations to supply into Baytown?

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

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We're currently flowing above the minimum volume commitment that we have from the Baytown refinery there. That's for the first time in a number of months or close to almost a year, because of ILI issues that we talked about on the downstream of Webster. So it's -- we would anticipate that everything else the same that as we referenced, I think for 2019 that we would anticipate to see increasing volumes flowing north from HOOPS and CHOPS to get the viscosity, the heavier barrel that the complex refineries need from going north towards Webster.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Got it. Understood. Just last one, kind of a detailed question on the release in the select items. There's like a $12 million dispute cost during the quarter, just can you give some detail on that?

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

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We actually had a negative arbitration award. It's not significant, it's not material, it's not recurring, and it's specifically ignored by our banks for purposes of calculating bank EBITDA for covenant compliance.

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Operator [10]

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Your next question comes from Kyle May.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [11]

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I was just wondering if you could give us an update regarding the potential timing and uplift that you're seeing or could see from capacity constraints on third-party offshore pipelines?

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

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We are starting to see it in this quarter. So subsequent to the end of the quarter for which we're reporting, we have been approached by a number of other shippers that have not yet contracted to move the incremental volumes on us, but we would anticipate that accelerating into the end of the year and certainly into 2019 as the capacity constraints on the competitive pipelines are exacerbated by ramping volumes that are dedicated to them.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [13]

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And can you talk anymore about which of your pipelines could see that benefit?

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

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It's primarily Poseidon and Cameron Highway.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [15]

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Okay. Great. And one question on the soda ash or Alkali business. Over the last couple of months, you've announced price increases for soda ash and other products in the Alkali business segment. Can you talk more about the timing or cadence these prices will roll through? And how should we think about the magnitude of uplift to revenue?

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

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Typically, domestic contract prices are kind of 1- to 3- to 5-year type contracts. And prices for 2019 are generally set to start in the late third quarter or early fourth quarter. So I think that the announcements that you've seen coming from us on some of the specialty products especially and others reflects our view of what I said in our prepared remarks that 2019 looks to be reasonably tight and getting even tighter going into 2020 and 2021. So I do think that we are anticipating that there's upward pressure on prices given the overall fundamental supply-demand balances across the suite of products. And that's what we -- I think will show in the 2019 results the effect of that.

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Operator [17]

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Your next question comes from Patrick Wang.

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Cheng Wang, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [18]

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In Offshore, could you comment on whether customer communication regarding planned downtime has improved at all in recent months? I recall, we've talked about the past instances where actually lags on those communicated expectations. Has that improved at all? Are you seeing any more consistency there?

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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, no. In a simple nutshell, we continue to see bouts of unscheduled downtime in addition to pretty remarkable amounts of and drawn out unscheduled downtime. I think that in some cases, it's actually in preparation to expand facilities. So ultimately, I think we'll see the fruits of the short-term speed bumps that we've had. But as a general proposition and then, I will point out that it was not necessarily reflected in the third quarter, but there was a small hurricane and there was some downtime associated with it from the Offshore and it will show up in the fourth quarter, which is really unusual to have any kind of weather-related downtime. In the order of magnitude, it could be $1 million or so, so it's not significant, not material. But just kind of -- again, it's a little bit of a speed bump that wasn't otherwise anticipated.

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Cheng Wang, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [20]

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Okay. That's helpful. And then bigger picture, can you discuss your appetite for additional divestitures in general? Are any further divestitures baked into that 4.5x year-end 2019 leverage target?

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

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We have not and kind of affirming that we believe that 4.5x at the end of '19 is quite achievable. We have not assumed any other divestitures in arriving at that and reaffirming that kind of target.

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Operator [22]

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(Operator Instructions) And your next question comes from George Wang.

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Dong Wang, Citigroup Inc, Research Division - Senior Associate [23]

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Just on the Marine transport segment, obviously, you said that we might be near the bottom, so can you give more color just on the trend that kind of you are seeing on this segment? And did you expect the segment to improve going forward? Or do you think it will be a more sort of -- that growth will slow down?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [24]

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I think that what we're certainly seeing on the inland side and the dirty barge or the black oil side of the inland market, we're seeing high utilization rates and a little bit of increase in spot pricing, which is indicative that things are kind of coming off of the bottom. I think that our coastwise or blue water, especially the -- we have 9 total offshore barges -- offshore ocean-going barges, the 5 that were in dirty service, which again is primarily black oil, which is primarily what our focus is. We have fairly high utilization rates and reasonable pricing on that. The 4 that are in clean service, because it's not really kind of core or it's a smaller part of our business that struggles a little bit. So I mean, I think all in all, George, as we said, it feels like -- I mean, I know it's minimal, but at least we have kind of sequentially gone up for 3 quarters in a row off of the bottom that we hit. And so to us that's indicative that we're putting the bottom in and -- but as we also said, we don't expect any kind of significant or dramatic improvement near term.

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Dong Wang, Citigroup Inc, Research Division - Senior Associate [25]

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Got you. And last question, just high level on the distribution policy. Obviously, you guys have ample coverage, but near term the priority is to pay down debt. You thus far still tried to grow distribution kind of $0.01 sequential increase per quarter and just try to use excess cash to pay down debt. Is the thinking unchanged?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [26]

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I think it's something that we discuss at the board level on at least a quarterly basis. We -- I think -- I'm sure this doesn't come as a shock, but we're not overly pleased with where we -- the underlying value of the units and that -- or the yield, if you will, the calculated yield especially in the context of continuing to grow the distribution. But we evaluated on a 90-day -- every 90 days if not more often than that. And I think the board will try to make a reason business decision on what the highest value use of incremental capital is. And -- but at this point, I would say that certainly through the end of this year that we're committed to stay on the $0.01 per quarter increase.

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

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Got you. One last follow-up, if you will. Just in terms of potential unit buyback, is there any update on that? Or do you think that's still going to be an ongoing discussion with the board?

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

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I think, it's -- again, it's -- that's one of the choices that we would have with the highest value use of excess cash. And it's certainly something that we would consider and we believe that, that's the highest -- again, that's the highest value use of incremental dollars that we have.

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Operator [29]

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At this time, there are no questions.

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

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Okay. So I guess that's the end of this quarterly call. And so we appreciate everybody's participation, and we'll talk to you in another 90 days if not sooner. Thank you.