Q2 2023 NuStar Energy LP Earnings Call

Participants

Bradley C. Barron; President, CEO & Chairman of NuStar GP LLC; NuStar Energy L.P.

Daniel S. Oliver; EVP of Business Development & Engineering at NuStar GP Holdings, LLC; NuStar Energy L.P.

Pam Schmidt; VP of IR; NuStar Energy L.P.

Thomas R. Shoaf; Executive VP & CFO of NuStar GP LLC; NuStar Energy L.P.

Christopher Francis Jeffrey; Associate; Mizuho Securities USA LLC, Research Division

Michael Jacob Blum; MD and Senior Analyst; Wells Fargo Securities, LLC, Research Division

Selman Akyol; MD of Equity Research; Stifel, Nicolaus & Company, Incorporated, Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to the NuStar Energy L.P. Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Please go ahead.

Pam Schmidt

Good morning, and welcome to today's call. On the call today are NuStar Energy L.P.'s Chairman and CEO, Brad Barron; and our Executive Vice President and CFO, Tom Shoaf as well as our Executive Vice President of Business Development and Engineering, Danny Oliver, 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 alternative to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release and if applicable, additional reconciliations may be 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.

Bradley C. Barron

Good morning. Thank you all for joining us today to hear about our solid quarterly results, our progress on our strategic initiatives and our positive outlook for the rest of 2023.
Let's get started with a few highlights of our second quarter results. We generated $169 million of total EBITDA in the second quarter, comparable to second quarter '22 adjusted EBITDA of $174 million. Our Pipeline segment EBITDA was up around 5% in the second quarter over the same period in 2022. Refined product systems and our ammonia system continued to deliver solid, dependable revenue contributions in the second quarter, with throughputs up around 3% compared to the same period in 2022, reflecting the strength of these assets and our position in the markets we serve in the mid-Continent and throughout Texas. Our McKee System continued to perform well with higher revenues and throughputs versus the same period last year due to increased demand across the system as well as a customer's maintenance issues in 2Q '22.
Moving on to our Permian Crude System. Our Permian Crude System's volumes averaged 508,000 barrels per day, down slightly compared to the same quarter last year. Our 2Q Permian volumes reflected some producer-specific operational issues and delays as we've seen in the first half of the year that we expect to be resolved as we move into the back half of 2023. As those issues are resolved and those producers ramp up activity, we expect volumes to pick up. In fact, we've already seen an uptick in July with volumes averaging near 530,000 barrels per day, and yesterday's volumes were close to 540,000 barrels per day. We continue to expect to exit 2023 in the range of 570,000 to just under 600,000 barrels per day. Since our systems' CapEx scales up and down with our producers' needs, if our exit rate comes in at the lower end of that range, we would expect reduced CapEx to mitigate the impact of lower volumes.
Turning to our Fuels Marketing segment. After near record-breaking 2022, our Fuels Marketing segment has reported another strong quarter in 2023, generating $7 million EBITDA comparable to the segment's strong quarter -- second quarter '22 results. With that, a few observations about 2023 before I turn it over to Tom.
Looking to the full year for our business as a whole, even though macroeconomic uncertainty has persisted so far this year, NuStar continues to expect to generate total adjusted EBITDA of $700 million to $760 million. As we've mentioned in prior calls, we proactively mitigated some of the impact of inflation in '23 through the $100 million expense optimization initiative we kicked off in early 2022. And NuStar's results will again benefit from provisions of our Pipeline tariffs and contracts that provide for annual rate escalations linked to the preceding year's PPI or the FERC's index.
Through optimization and careful planning, we've been able to continue to meaningfully reduce our leverage and we are ahead of schedule with our plan to simplify our capital structure. In June and July, we repurchased another 1/3 of the remaining Series D preferred units, leaving only about 1/3 of the original issuance still outstanding. In last quarter, we mentioned we were planning to redeem all remaining Series D by the end of 2024, which was already about 2 years ahead of our original schedule. By accelerating the repayment of the Series D preferred units over the course of this past year, while at the same time, taking necessary steps to protect our healthy debt-to-EBITDA metric, we have demonstrated our commitment to continuing to improve our balance sheet. You can expect us to remain focused on that improvement in the second half of '23 and '24 and beyond.
Once again, in 2023, we expect to self-fund all of our spending, including all of our OpEx, all of our growth capital and our distributions. And we also continue to expect to finish the year with a healthy debt-to-EBITDA ratio or metric below 4x.
And with that, I'll turn the call over to Tom.

Thomas R. Shoaf

Thanks, Brad, and good morning, everyone. As Brad mentioned, our second quarter EBITDA was comparable to our second quarter '22 adjusted EBITDA. Our second quarter adjusted DCF was $73 million, and our adjusted distribution coverage ratio was 1.64x.
Turning now to our segments. In the second quarter, our Pipeline segment generated $152 million of EBITDA, up $7 million, around 5% over second quarter '22 EBITDA of $145 million, thanks in large part to our McKee System Pipelines and our Ammonia Pipeline as well as annual rate escalations.
Turning next to our Storage segment. Our EBITDA for second quarter '23 was $40 million, which is about $9 million lower than the second quarter '22 EBITDA. That decrease was mostly due to an amendment and extension of a customer contract at our Corpus Christi North Beach terminal and customer transitions and required tank maintenance at our St. James terminal as we've talked about. But that was offset by a solid performance of our West Coast region where due to our West Coast renewable fuel strategy, we handle a large portion of the region's renewable fuels in our Renewable Fuels Logistics Network, including almost 3/4 of California sustainable aviation fuel and nearly 1/3 of its renewable diesel. In the second quarter, thanks to our renewable fuels market leadership that we are -- we have built. Our second -- our West Coast region generated about 30% higher revenue in the second quarter than the second quarter '22.
Our Fuels Marketing segment, which had a near record breaking year in '22, continued to deliver great results in the second quarter. Fuels Marketing generated $7 million of EBITDA, which is comparable to the segment's strong showing in second quarter '22 and driven by strong butane blending and bunkering margins. I'm also pleased to report on our continued progress in building our financial strength and flexibility. As Brad mentioned, in June and July, we repurchased another 8.1 million of our Series D preferred units. We ended second quarter with a debt-to-EBITDA ratio of 3.73x and with $750 million available on our $1 billion unsecured revolving credit facility.
As you may have seen, we announced that on June 30, we renewed our unsecured revolving credit facility, maintaining the facility's $1 billion capacity and extending the maturity of the facility to January 2027.
Moving now to our outlook for '23. As Brad mentioned, for the full year, we continue to expect to generate adjusted EBITDA in the range of $700 million to $760 million. We now plan to spend $125 million to $145 million on strategic capital this year. While we continue to expect to exit the year with our Permian volumes between 570,000 and 600,000 barrels per day, we are now forecasting lower spending for our Permian System in the range of $35 million to $45 million. And we continue to expect to spend around $25 million to expand our West Coast Renewable Fuels Network.
Turning to reliability capital. We still expect to spend between $25 million and $35 million on reliability in '23. And even with the acceleration of our Series D redemption in '23, we still -- we're still on track to finish the year with a healthy debt-to-EBITDA ratio below 4x.
Now I'll turn the call back over to Brad.

Bradley C. Barron

As you've heard, we had a solid second quarter, and we're on track to deliver another solid year. Last quarter, we announced a project to connect our ammonia system to OCI state-of-the-art ammonia products facility in Iowa, supported by a long-term revenue commitment. That project is on track to be in service next year when we expect this healthy return, low capital project to begin meaningfully increasing utilization of our system.
We hope to be announcing other projects this year as we continue actively working with several potential customers interested in connections to our ammonia system across our footprint for a variety of opportunities. As we've mentioned in past calls, we're seeing burgeoning interest in lower carbon ammonia. Interest from the company's developing blue and green ammonia production facilities that need market access as well as from the company's interest in supply of lower carbon ammonia to make fertilizer, DEF and other important products. We're also talking to a number of potential customers who are looking at new uses for lower carbon ammonia, including as a low-cost, safe way to transport hydrogen for fuel.
In addition to the greening of ammonia in the domestic ammonia market, international ammonia demand is also driving interest in building or converting logistics to export ammonia produced here in the United States. Our Ammonia Pipeline System currently supplies the nation's breadbasket, primarily with domestically produced ammonia, but growing interest in export capabilities could drive additional utilization of not only our Ammonia Pipeline System, but also potentially our St. James facility, which have dock capacity and a footprint to support ammonia storage and export.
We're excited about this growing interest in ammonia and actionable opportunities that, that interest is generating for our Ammonia Pipeline System and beyond in the near term and over the next several years. Rest assured, in the meantime, as we work with potential ammonia customers, we are continuing to work to build unitholder value through advancing our core strategic objectives: increasing our cash flows through organic projects and optimization of our business; fortifying our financial strength by improving our capital structure, while maintaining a healthy debt metric; and providing the safest, most reliable transportation and storage of the essential energy that fuels our lives. We look forward to talking with you next quarter about our progress.
With that, I'll open up the call for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Blum with Wells Fargo.

Michael Jacob Blum

First question I just wanted to ask about the CapEx and the Permian volumes for the year. The fact that you've lowered CapEx slightly, does that suggest that you think you're going to come towards the lower end of that Permian range of 570,000 to 600,000?

Daniel S. Oliver

Yes. I think we're probably no better than the midpoint is what we see now, but we can be -- I'm surprised sometimes to the upside as well as the downside. So we'll probably tighten that up next quarter, but I think anything is possible within that range.

Michael Jacob Blum

Okay. Great. And then I just wanted to ask about the ammonia opportunity. You seem extremely excited about the possibilities there. I'm just wondering if you could just kind of bracket the size of this, the potential invested capital you could spend here and what returns could look like over whatever time frame you want to frame that.

Daniel S. Oliver

Right. Well, I think for a relatively small amount of capital, we can certainly build the line. We're currently running about 65%, I think, with the OCI deal that we announced and the other deal Brad mentioned that we expect to announce a little later this year. We'd probably fill up the line. And then there's some -- actually some pretty low-cost projects that we could do to expand the line and get above our current capacities. And then it just -- there's -- as Brad mentioned, there's multiple conversations going on and if we did them all, it could be more significant. And if we move into St. James and start building new refrigerated storage to export some of these products, then it could get bigger. But it's -- we're not going to have a problem and it's not going to take a lot of CapEx to fill the line and even increase current capacities, and then we'll just see how much bigger it gets in that.

Operator

(Operator Instructions) Our next question comes from Gabriel Moreen with Mizuho.

Christopher Francis Jeffrey

This is Chris on for Gabe. Just maybe following up on the Permian conversation, maybe your early days, but as you look at '24, do you kind of expect to have that similar flexibility or kind of how you're gauging it with your expectations for volume pick up and carry through to that year?

Daniel S. Oliver

Yes. We are expecting volumes to pick up. And of course, as it relates to CapEx, Brad said this before, our CapEx is scalable based on the activity that's going on. So -- but I think we'll do a little better next year than we did this year.
We've been plagued also a bunch of -- I'm sorry, we've been plagued also this year by -- really since the spring by a bunch of unusual operational issues, not on our side, but operational issues either on our producer side or in some gas plants. We've had several unanticipated gas plant outages and that's hampered our volumes in the first half as well.

Christopher Francis Jeffrey

Got it. And then maybe just kind of an update on like any inflationary impacts that you're seeing in that system as well. I know that was kind of more of a theme a few years ago, but are you still kind of seeing elevated prices for equipment and maybe that coming into the CapEx picture as well?

Daniel S. Oliver

Yes. Generally speaking, it's really starting to calm down. We still have some supply chain issues, not that we can't get something we've learned how to deal with those, but there's longer leads on certain types of equipment, mostly on the electrical side. But we've certainly seen pipe costs come off significantly since the beginning of the year. Labor costs have started to level off. And so it's not gone away, but I think it's really flattened out.

Christopher Francis Jeffrey

Great. And then just last one, maybe on the renewable fuels business. With the update from the RFS from the PPA as far as quotas renewable diesel, just curious if you're hearing any changes from producers as far as supply and demand impact in California?

Daniel S. Oliver

Generally speaking, they want more storage.

Operator

Our next question comes from Selman Akyol with Stifel.

Selman Akyol

Danny, just following up on your last comment there, you talked about more demand for storage. You're seeing additional opportunities to invest in renewables in California in '24?

Daniel S. Oliver

Yes, we are. We've got several comps. Some are repurposing existing assets. I think there's a couple of locations we could potentially even build more storage. That being said, the West Coast, kind of regardless of which state you're in, is challenging to say the least in terms of the permitting environment to build new assets. But I think we'll continue to see EBITDA growth in that segment for years to come, just as we transition into these higher-margin products.

Selman Akyol

Understood. And then you guys also talked about continuing to pursue or realize benefits from your optimization -- your expense optimization program. And I'm wondering if there's more to do there. Are you guys finding more opportunities?

Bradley C. Barron

That's something that we're continually looking at, and we'll be looking at that hard as we go into the 2024 budgeting cycle. So I do expect there's more that can be done there, though.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Pam.

Pam Schmidt

Thank you, Kevin. We would again like to thank everyone for joining us on the call today. If anyone has additional questions, please feel free to contact NuStar Energy -- I'm sorry, NuStar Investor Relations. Thanks again, and have a great day.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.