U.S. Markets closed

Edited Transcript of NS earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 NuStar Energy LP Earnings Call

SAN ANTONIO Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of NuStar Energy LP earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bradley C. Barron

NuStar Energy L.P. - President, CEO & Director of NuStar GP LLC

* Daniel S. Oliver

NuStar Energy L.P. - SVP of Marketing & Business Development - NuStar GP LLC

* Thomas R. Shoaf

NuStar Energy L.P. - Executive VP & CFO of NuStar GP LLC

* Tim Delagarza

NuStar Energy L.P. - Manager, Investor Relations

* Jorge del Alamo

NuStar Energy L.P. - SVP & Controller

================================================================================

Conference Call Participants

================================================================================

* Joseph A. Martoglio

JP Morgan, Research Division - Research Analyst

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the NuStar Energy L.P. Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to Tim Delagarza, Manager of Investor Relations. Sir, you may begin.

--------------------------------------------------------------------------------

Tim Delagarza, NuStar Energy L.P. - Manager, Investor Relations [2]

--------------------------------------------------------------------------------

Good morning, and welcome to today's call. On the call today are Brad Barron, NuStar Energy L.P.'s President and CEO; and Tom Shoaf, Executive Vice President and CFO, along with other members of our management team.

Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliation of certain of these non-GAAP measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the Financials page of the Investors section of our website at nustarenergy.com.

With that, I will turn the call over to Brad Barron.

--------------------------------------------------------------------------------

Bradley C. Barron, NuStar Energy L.P. - President, CEO & Director of NuStar GP LLC [3]

--------------------------------------------------------------------------------

Good morning. Thank you for joining us today. Before I turn the call over to Tom for more details, I want to take a few minutes to walk you through some highlights on NuStar's performance in the second quarter, our progress on our 2019 capital projects as well as what we expect for NuStar in the second half of 2019 and beyond.

First, for the highlights on the strong results we generated in the second quarter. In word, we were up over second quarter 2018 on all of our key indicators.

Total pipeline and storage revenue, up 7%.; adjusted EBITDA, up 8%.; adjusted net income, up 85%; adjusted EPU was up 20%, even with the impact of our merger to simplify our structure and eliminate our IDRs; DCF available to common limited partners, up nearly 10%.

There was one key metric, however, that was down in the second quarter compared to Q2 2018. I think we all agree that in this case, down is better than up. Our second quarter debt-to-EBITDA ratio was 3.95x, significantly lower than the 4.72x we reported at the end of Q2 2018.

In addition to the EBITDA increases I mentioned, another key factor in lowering our debt-to-EBITDA ratio this year is our sale of the St. Eustatius' operations. I'm very pleased that we're able to close on our sale of St. Eustatius at a healthy double-digit multiple in July. And that sales, along with the EBITDA improvements for the quarter I reported earlier, has allowed us to lower our year-end 2019 debt-to-EBITDA projection to 4.1x, improved from our prior guidance of 4.3x, well under our revolver debt covenant of 5x.

Bit more, the sale of St. Eustatius operations not only lowered our leverage, it also simplified our business, reduced our risk profile, lowers our 2019 reliability capital and allows us to focus 100% on our core business here in North America.

Speaking of our core business, we've made great progress on our 2019 capital projects this summer. And I want to congratulate and thank our project teams for what they've accomplished.

As you know, we have capital projects in 2019, totaling between $500 million and $550 million, marking a high point in NuStar's historical capital spending. The majority of our 2019 spending is earmarked for 3 things, the continued build-out of our Permian crude system, our project to deploy underutilized assets to supply refined products in Northern Mexico and our Corpus Christi export project.

Starting with the Permian, we've continued to expand our system to keep pace with our customers' needs. So far this year, we've expanded our capacity by 100,000 barrels per day from 460,000 barrels per day to 560,000 barrels per day.

We've also added 25 additional well connections and completed connections to third-party pipelines and facilities to ensure we have the flexibilities our shippers need. And our volumes continue to grow and reflect our Permian team's hard work, the quality of our dedicated acreage and the skill and experience of our producers.

Our system throughput has now grown by an amazing 200% since we acquired it in May 2017, far outpacing overall Permian Basin throughput, which has grown about 80%.

We are currently moving nearly 400,000 barrels per day. And based on what we know from our producers forecast, we still expect to exit the year around 450,000 barrels per day.

As I've mentioned before, we work closely with our producers to understand their drilling plans and meet their needs. In contrary to some commentary we've heard about the Permian's overall production growth slowdown, our producers are proceeding full speed ahead on our dedicated acreage.

Turning to our projects to supply refined products in Northern Mexico, our early service for Valero on Nuevo Laredo project is scheduled to go in service this quarter. Our Valley pipeline expansion is also on schedule to be in service this quarter, and we're pleased that our open season for the valley line was fully subscribed.

Finally, turning to our Corpus Christi export project. We're happy to announce that the first stage of the project, which utilized their 16-inch pipeline in South Texas to receive and transport WTI from a connection to Cactus II to our Corpus Christi export facility, is now complete and ready for service. We're excited to report that starting to see as early next week, our Corpus Christi dock facility will be the first in the port of Corpus Christi to export barrels transported to South Texas via one of the 3 large Permian long-haul pipeline projects.

The second stage of our export project, a new 8-mile, 30-inch pipeline to transport WTI from a connection to Cactus II in Taft to our Corpus Christi terminal is on schedule to be in service this quarter.

I would like to add, even in advance of completion of significant project, we are seeing volumes on our South Texas crude system up to around 180,000 barrels per day, significantly above our minimum buying commitments of 106,000 barrels per day for the system and near the record volumes we transported on that system back in 2015.

And that increased pipeline volumes also increased utilization of our Corpus Christi terminal storage.

In addition, we now expect to connect our South Texas crude system to Gray Oak at Highway 97, which should bring additional volumes to our system as early as the beginning of the fourth quarter. We expect our strategic capital spending to peak in the third quarter as we begin completing these projects.

Moving to our expectations for the full year. We continue to expect 2019 adjusted EBITDA in the range of $665 million to $715 million. And we now expect to finish 2019 with our DCF coverage in the range of 1.3x to 1.4x, also improved from our prior guidance of 1.2x to 1.3x.

Beyond 2019, while we won't be able to provide the specifics on 2020 until later in the year, I can tell you that next year, as the cash flows from those completed projects ramp up fully, we are also planning to spend significantly less strategic capital, which we expect will lead to another solid year.

In 2020, we plan to execute on a smaller-scale capital program on low-cost, low-multiple projects to enhance our existing assets, while providing world-class service across our footprint. So we can continue to build financial flexibility, improve our debt metrics and strengthen our balance sheet. For the remainder of this year, we're focused on completing our projects and operating efficiently and safely, so we can continue to generate the solid, consistent growth demonstrated by our second quarter results.

Now I'll turn it over to Tom for more details on those results.

--------------------------------------------------------------------------------

Thomas R. Shoaf, NuStar Energy L.P. - Executive VP & CFO of NuStar GP LLC [4]

--------------------------------------------------------------------------------

Thanks, Brad, and good morning, everyone. Before I get started, I just wanted to have a few housekeeping items related to our sale of the St. Eustatius operations.

First, because of that sale, the St. Eustatius operation results for all periods presented in our earnings tables are now reported as discontinued operations. Further, discontinued operations for the prior year periods includes the results of our European operations, which were sold in late 2018.

Our reported second quarter results, which include adjusted net income, adjusted EPU, adjusted EBITDA, DCF and related metrics, include results for both continuing and discontinuing operations. Excluding these measures is a noncash impairment charge totaling $8.4 million related to our St. Eustatius divestiture. For the second quarter of 2019, we generated adjusted EBITDA of $169 million, up $12 million over the second quarter 2018 adjusted EBITDA of $157 million.

Adjusted net income for the second quarter of 2019 was $54 million, up $25 million or 85% over the adjusted net income of $29 million in the second quarter of 2018. Second quarter 2019 adjusted earnings per unit was $0.18 compared to adjusted EPU of $0.15 for the second quarter 2018.

Second quarter 2019 DCF available to common limited partners was $90 million, up $8 million compared to DCF available to common limited partners of $82 million for the second quarter of 2018, and our distribution coverage ratio for this common limited partners was a strong 1.39x.

Second quarter 2019 EBITDA in our pipeline segment was $120 million, up $18 million or 18% from the second quarter of 2018 due to continued throughput volume ramp in our Permian crude system, increased crude volumes on our Ardmore system, resulting from our recent connection to the Sunrise pipeline at Wichita Falls.

For segment reporting, we exclude the divested St. Eustatius and European operations from all prior periods for an apples-to-apples comparison of our results between periods.

Our second quarter 2019 EBITDA in our storage segment was $62 million, comparable to second quarter 2018 EBITDA.

While we have seen increased storage and dock fee revenues at our -- I'm sorry, our Corpus Christi North Beach Terminal from increased quarterly volume receipts on our South Texas crude oil system as well as the start-up of revenue from some recently completed West Coast biofuel storage projects, those increases were offset by a onetime accounting entry related to contract termination in the second quarter of 2018.

Second quarter 2019 EBITDA in our Fuels Marketing segment was $3 million, essentially flat compared to the second quarter of 2018.

On May 16, we raised $500 million by issuing 6%, 7-year senior notes. This bond offering was significantly oversubscribed. And we used a portion of these proceeds to refinance $350 million of notes that matured in 2018 and for general corporate purposes, including funding our capital spending program and repayment of our outstanding borrowings on our revolving credit facility.

Our June 30 debt balance was $3.5 billion. And our debt-to-EBITDA ratio was 3.95x, significantly below our credit agreement covenant threshold of 5x.

Turning to our projections for full year 2019, which now include our recent sale of the St. Eustatius operations. We continue to expect NuStar's 2019 adjusted EBITDA to be in the range of $665 million to $715 million. With regard to 2019 capital spending, Brad mentioned that we continue to expect $500 million to $550 million of spending for strategic and other capital in 2019, which is primarily made up of approximately $175 million on the Permian crude system, $150 million for the Northern Mexico refined products supply projects and about $105 million for our Corpus Christi, North Beach Terminal export projects.

Regarding our reliability spending for 2019, we now expect to spend $60 million to $80 million, which is lower than our prior estimate range.

Based on these projections, as Brad noted in his remarks, we now expect our common unit distribution coverage ratio for 2019 to be in the range of 1.3x to 1.4x, and our year-end debt-to-EBITDA ratio to be around 4.1x.

And with that, I'll turn the call back over to Brad for his closing remarks.

--------------------------------------------------------------------------------

Bradley C. Barron, NuStar Energy L.P. - President, CEO & Director of NuStar GP LLC [5]

--------------------------------------------------------------------------------

Thanks, Tom. And thank you, all, for listening today, giving me the opportunity to talk to you about what our employees have accomplished so far in 2019.

Look forward to reporting more good news as the year progresses, more positive results, more projects completed and more information about the growth and improvement we've planned for 2020.

And with that, I'll open it up for Q&A. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Jeremy Tonet with JP Morgan.

--------------------------------------------------------------------------------

Joseph A. Martoglio, JP Morgan, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

This is Joe for Jeremy. I wanted to ask, first, just kind of accounting-wise, the $62 million, I think, you mentioned for storage EBITDA, is that before or after the $8 million impairment for St. Eustatius?

--------------------------------------------------------------------------------

Thomas R. Shoaf, NuStar Energy L.P. - Executive VP & CFO of NuStar GP LLC [3]

--------------------------------------------------------------------------------

It doesn't include that. That's not there. No. The $62 million does not include the $8 million.

--------------------------------------------------------------------------------

Joseph A. Martoglio, JP Morgan, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Okay. So then including that, it would be $8 million lower? Is that correct?

--------------------------------------------------------------------------------

Thomas R. Shoaf, NuStar Energy L.P. - Executive VP & CFO of NuStar GP LLC [5]

--------------------------------------------------------------------------------

Well, that's been moved. That's down in...

--------------------------------------------------------------------------------

Jorge del Alamo, NuStar Energy L.P. - SVP & Controller [6]

--------------------------------------------------------------------------------

All the results -- that $8 million related to St. Eustatius and all the results for St. Eustatius are included in a line call discontinued operations. So none of the St. Eustatius results are included in the storage segment results, storage segment earnings for either period.

--------------------------------------------------------------------------------

Joseph A. Martoglio, JP Morgan, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

Okay. That makes sense. That's helpful. And then also, I wanted to ask with Capline reversal proceeding, could you just kind of talk about the opportunities you're seeing at your same St. James terminal and the possible size and timing of any expansion you may see there?

--------------------------------------------------------------------------------

Daniel S. Oliver, NuStar Energy L.P. - SVP of Marketing & Business Development - NuStar GP LLC [8]

--------------------------------------------------------------------------------

Yes, Joe, this is Danny Oliver. We're working on a project right now to get our portion -- our connection there reversed. We plan on being in service at the time that they've said, Capline will be reversed. We've got many customers in the facility that are interested in that connection, and we expect that it will increase throughputs at the terminal, probably very significantly. And we'll just continue to monitor that interest and look for opportunities, possibly even to build more storage if the volumes come.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Ryan Levine from Citi.

--------------------------------------------------------------------------------

Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [10]

--------------------------------------------------------------------------------

Can you just -- what are the volumes that you're expecting to come off of Gray Oak -- I think in your prepared remarks, you mentioned some connectivity that you're building there?

--------------------------------------------------------------------------------

Daniel S. Oliver, NuStar Energy L.P. - SVP of Marketing & Business Development - NuStar GP LLC [11]

--------------------------------------------------------------------------------

Yes, we've got connectivity. Some of our customers want that connection. We're expecting, at least initially, the bulk of the volume coming in from the Permian to come in on the Cactus line with one of our customers. We don't have a specific volume that we're anticipating coming over there, but they will supplement their exports with volumes off of Gray Oak.

--------------------------------------------------------------------------------

Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [12]

--------------------------------------------------------------------------------

What's the capacity that you're able to take off at Gray Oak?

--------------------------------------------------------------------------------

Daniel S. Oliver, NuStar Energy L.P. - SVP of Marketing & Business Development - NuStar GP LLC [13]

--------------------------------------------------------------------------------

Through this connection, because it flows through our Eagle Ford system, we could probably run 50,000 to 75,000 barrels a day through that system or from that system, from that point.

--------------------------------------------------------------------------------

Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

Okay. And then in terms of the reliability CapEx, what's driving the lower numbers that you're guiding to?

--------------------------------------------------------------------------------

Thomas R. Shoaf, NuStar Energy L.P. - Executive VP & CFO of NuStar GP LLC [15]

--------------------------------------------------------------------------------

Pulling St. Eustatius out.

--------------------------------------------------------------------------------

Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

Okay. And then to your point about your leverage is coming down and you're expecting more consolidated free cash flow for next year, are you more open to strategic acquisitions? And is there certain types of assets that you're more focused on today?

--------------------------------------------------------------------------------

Bradley C. Barron, NuStar Energy L.P. - President, CEO & Director of NuStar GP LLC [17]

--------------------------------------------------------------------------------

I'd say, right now, we're really focused on completing our projects, lowering our leverage. We've got a great business. And so we want to continue to just grow our business. And our organic opportunities at this point look better than anything we see out in the market.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Tim Delagarza for closing remarks.

--------------------------------------------------------------------------------

Tim Delagarza, NuStar Energy L.P. - Manager, Investor Relations [19]

--------------------------------------------------------------------------------

Thank you, Sidney. We would, once again, like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks, again, and have a great day.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.