Q1 2020 Earnings Call
Good morning, My name is Shalane and I'll be your conference operator today.
At this time I would like to welcome everyone to that today's webcast for shell Midstream partners.
I would now like to turn the call over to Jamie Parker Investor Relations Officer, you now, but you may begin your conference.
Thank you.
During today's webcast for shell midstream partners with me today or Kevin Nichols CEO.
Sean Carsten, CFO, and Steve, let better BP commercial and business development.
Slide two contains our safe Harbor statement.
We will be making forward looking statements related to future events and expectations during the presentation and Q and a session.
Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as all of them todays press release and under risk factors in our filings with the SEC.
Today's call also contain certain non-GAAP financial measures. Please refer to the earnings press release, an appendix one of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation with that I'll turn the call over to Kevin Nichols.
Thanks, Jamie and good morning, everyone and welcome to our first quarter webcast.
These are extraordinary times, both within our industry as well as worldwide.
So before we begin let me acknowledge the dynamic circumstances that we're all facing and tell you how shell midstream is responding.
Wrapping care of our people and our assets top of mind.
Our operational teams are all taking recommended precautions, while keeping our facilities fully operational and running safely to ensure we keep Americas energy moving.
And I'm very proud of my team who continues to give their best under these difficult circumstances.
Shell has a long history of caring listening responding to our customers our colleagues and communities and we will do what is necessary to manage and recover from this unique time in our history.
So with the current landscape serving as the backdrop for today's call I'll focus my comments in three areas. The impacts were seeing across our business. The actions that we are taking in the short term and ultimately how we're positioned for long term resilience something we have always demonstrated.
So let me start with the impacts that we're seeing across our business.
Unprecedented supply demand volatility.
The assets currently experiencing the most impact are those transporting refined products.
The industry is seeing demand reduction across the country of approximately 50% for gasoline, 80% for jet fuel and around 10% for diesel and these reductions are impacting pipeline throughputs as well as causing refineries in the us to lower run rates and in some cases shutdown.
So with refineries consuming less crude crude is finding its way to storage, which is quickly filling up.
And this is causing producers in some basins to reduce production.
The situation remains dynamic and our systems will be impacted by varying degrees should the demand imbalance continue.
Ill leave it to Sean to talk more about the second quarter later in his section.
So how are we taken action in the near term to navigate through the uncertainty.
There are three distinct leavers, we're pulling real time.
First we're maximizing opportunities to grow revenue, particularly with storage.
As an example, we've secured additional storage in the Mars caverns to meet customers' needs for crude storage on our systems, given the contango market environment.
Second we are actively reducing our costs focusing on must have activities not only to reduce exposure in the near term, but ultimately to achieve sustainable cost reduction.
Something I will discuss more in future quarters.
And third we're selectively reducing discretionary projects spent without sacrificing long term growth aspirations.
It's important to note that despite the difficult environment, we continue to progress discussions with producers for the Mars expansion project.
We expect is the signed definitive agreements by the end of the year and have the project online in 2021.
So now let me talk about how we're positioned for long term resilience.
In the offshore and in generally as in general as it relates to crude there's been much talk about lower price environment, and which areas of crude production will be affected.
We believe that the production basins, we serve fared better than others.
Taking a more about this.
It's been reported that certain onshore and shallow water producers have started to shut in production.
However, it's important to note that the majority of the customers we serve in the Gulf of Mexico, Our large investment grade companies with the ability to whether the current environment.
On top of that volumes that we transport are predominantly medium sour crude grade.
Which is the refining centers in the Gulf coast need to maximize diesel production.
And diesel is the refined product in the highest demand in today's environment.
This advantage is supplemented by our quarter systems Optionality with access to multiple refining centers.
And access to storage hubs like loop same James and the strategic Petroleum reserve.
Also with access to water.
To date, the crudes being impacted the most both in terms of production as well as price are those that are landlocked with less access to water.
With the unique optionality and crude great advantage, along with a lower marginal cost of production, we feel strongly that the goal for retain its long term strength and as always we believe we are well positioned with one of the premier quarter networks to capture these benefits for the partnership.
Lastly, in our onshore portfolio, our assets span the commodity supply chain and possess unique advantages long term.
Examples include colonial and explore which are the most cost efficient options to their respective demand centers and markets from the Gulf Coast Zydeco still one of the best connected systems onshore for crude in the Gulf Coast.
And in the case of our refinery gas pipelines in Norcal logistics assets, we transport and store the primary feedstocks to keep our affiliates running backed by long term take or pay contracts.
Like the offshore we believe our onshore assets are well positioned and should ramp up once demand recovers.
So before I turn the call over to Sean Let me leave you with a few thoughts.
While the entire country in our industry are dealing with difficult times, our portfolio is well positioned and is resilient.
We are taking actions to manage the business in a short term all the while progressing value added long term projects for the partnership.
And shell midstream and our customers are well positioned to whether the current macro environment.
Clearly there is uncertainty in the markets at this time.
However, our forward outlook is more about us demand recovery and less about commodity price.
And I'm confident in our ability to rebound with strength as demand in the us moves towards recovery, so with that I'll turn it over to Sean.
Thanks, Kevin.
Now let me go over the fourth quarter results, where we saw continued strength across our portfolio through the first quarter.
For the quarter. The partnership partnership performed in line with our expectations, earning 138 million to net income generating 196 million, an adjusted EBITDA and delivering 170 million in cash available for distribution.
Now when we look quarter over quarter. The primary drivers on an EBITDA and cash level basis or higher distributions from quality and explore and increased throughput on the eastern corridor, partially offset by not having the Mars reimbursement payment, which was which was received last quarter.
So now let me move quickly to our forward guidance as Kevin discussed earlier, our quite a few moving pieces that could affect the partnership's earnings for the second quarter of 2020.
On April one we closed on the acquisition of the Medix pipeline and the Norco logistics assets from shell.
And as previously discussed the assets are backed by long term fixed commitments and are expected to provide an estimated 125 to 135 million of cash flow from operations. All this during the 12 month following the closing of the acquisition.
Now on the Capex space, we now plan to spend about 38 million for the year of which around six nine will be growth capital. Now. This is a reduction from prior guidance of 46 million of Capex spend in 2020.
This reductions primarily related to maintenance capital as we have deferred projects to outer years and have slowed our Permian growth.
And in the near term, we faced headwinds related to reduce refined products demand across our finished product systems, along with the subsequent impacts on crude storage and ultimately as producers.
Now these challenges our primary primarily related to demand destruction, which packs of the value chain all the way to crude.
We anticipate our second quarter coverage ratio to be less less than one times, but given the current levels of uncertainty we're unable to provide a reliable range of outcomes at this time.
The level of impact will be dependent on how long refined products demand remains low and if crude throughput on our systems is further curtailed.
So let me remind everyone of our strong financial framework and a conservative balance sheet. We entered the current macro environment from a position of strength.
We have over 1.2 billion of liquidity available to us and with very few facility covenants with our lender shale.
And as highlighted earlier, we continue to hold a very positive long term view on our onshore assets, which provide console games transport to key demand centers, along with access to export over the water.
We're also positive on our Gulf of Mexico, or producers have already made their investment.
And we believe the majority will continue to produce as long as Lincoln place or barrels.
But let there be no mistake. These are volatile times, so we'll update investors in future quarters as the market dynamics play out.
Now we currently intend to maintain our distribution rate of 46 cents per limited partner unit for the second quarter of 2020.
And we'll utilize our balance sheet to cover any operational cash flow shortfalls were needed.
Our board will monitor the current business apartment and make and make decisions regarding future distributions on a quarter by quarter basis.
So with all that well now take your questions operator.
As a reminder question. Please press star one of your telephone keypad. Once again this top line, we'll pause for a moment ago policy on a roster.
And your first question comes from the line of generic Gary Sony.
Hi. This is an sherlon question here just a quick question on the distribution policy. It seems a language in today's press release is change on the distribution and given the context that shall cut its dividend has the commitment changed and shall acts might follow the path Michelle or is it more cynthia scenario that show up.
Closely following its own volume drivers funded virus and challenge drivers are different than Chow.
Yes. Thanks for that question no I wouldn't read anything through to that from.
Rather that shell and what's happening there.
Covered 19 has introduced just a tremendous amount of uncertainty and as Sean and I have said on the call where more driven by demand and what happens with demand recovery. We've seen some early signs of recovery just within this last week, but it's very early days and very difficult for us too.
Predict what's going to happen further out so we think it's a responsible thing to do to review the business on the quarter by quarter basis with aboard we feel confident.
In quarter, two we're halfway through quarter too and Thats why we gave the guidance for positive.
And the shallow Sean just to add an agile as Kevin said.
Let me remind you that you already as portfolio the costs as a global portfolio across a number of businesses now our business is less about price and more about demand has Kevin highlighted and so we have very little commodity exposure and we believe strongly in the basins that we work in the assets that we have but we're very small portion of the audio so you shouldn't read.
Through.
From what Rds might have done to our assets or to our distribution policy.
Great that's helpful.
Your next question comes on line of Theresa Chen.
Hi.
Hey, Theresa good morning, Hi, Thank you for taking my questions on in addition to the Norco and Maddox.
Assets can you just remind us how much of your business as a whole is supported by volume commitments.
Yes, So let me we haven't given the the exact break down to that but let me we have three kind of areas that that I'd break it down into you have the take or pay contracts and it's like the norcal logistics. The the terminal assets that we have refinery gas assets that we have.
Zydeco has a take or pay then we have traditionally talked about our fee based but ratable cash flow with the life of lease or dedication of lease offshore and there's a high switching cost are almost an insurmountable barrier to switching offshore. So once people connect to our core systems is a very ratable, but it's about production.
And production flows I think Sean in that bucket kind of in.
Gave you information about once the producers make thats sizable investment in those offshore production hubs have a very low marginal cost of production from wells and this basin has the Gulf of Mexico has held up comparatively speaking to onshore shale and such so those are ratable flows as well and then the feed Expo.
Roger that we have is on the kind of a refined products systems, but remember colonial and explore serve some of them more key market demand areas for the United States and they are the premier assets.
As far as the most efficient cost effective way to serve those demand centers. So.
We feel like they're very strong and as demand recovers.
Well they'll have a position of strength.
Got it on and on the topic.
On potential uptick in demand on tier earlier comments so.
Across the board there has been data and other anecdotal evidence from market participants.
Good luck video either.
Stats that while the year over year change is still negative sorry gasoline demand goes the pace of declines seems to have.
Is that where you were referring to or can you just speak generally to what you're seeing in terms of demand in your assets Microchip refinery utilization as well as the interest and explore and colonial.
Right.
So I'll, probably let Steve talk to you is closer to what we're seeing on demand and plugged into the marketplace with regards to gasoline diesel.
Hey, Theresa. This is this is Steve as Kevin mentioned earlier, you know this is a pretty volatile dynamic situation, but we have regular active conversations with all parts of our business as well as.
Inside of midstream as well as our affiliates and we're monitoring storage constraints as well as.
Reduction in demand patterns or increase in demand patterns on gasoline, but those all informed play into the levers that we pool and how we how we position the business to maneuver over the next several quarters, yes. So so trace a one thing we are seeing momentarily now is in a move slightly back in the refining centers the gasoline.
Some early signs of gasoline picking up.
But again, it's only been in the recent days and it's too early to draw conclusions from that.
Understood and and as you plan for the next call. It 12 to 18 lines and beyond what underlies your fundamental assumptions is that you shape recovery you shaved are you baking in contingency plans should we see a second wave of the virus later this year.
Can you share any color on your thinking around that.
Yes, so thats kind of that cobot, 19 uncertainty and the high degree and range of uncertainty that exists out in the marketplace you shape L shaped V shape W.
We do run scenarios to.
To manage and predict our business and what we would do under those circumstances, but.
Again, we're focused on making sure that our assets our position that when the recovery comes we actually benefit from that strength and.
I guess I would highlight.
So far in the Gulf of Mexico, When you look at what's happened with production and the production cuts we have not seen a material cuts to production offshore like do you have seen onshore the couple of maybe points that I'll throw it over to Steve to talk about the Gulf of Mexico strength, which drives our thinking yes, yes, thanks, Kevin we like our.
Position in the Gulf for a few reasons one we believe.
Were favorable from a geographic exposure perspective with concentration of assets to the Gulf coast in PADD, three which offers efficiency and cost effective access to refinery system storage and export across the water second I'd say is really favorable crude exposure versus some of the basins and we predominantly transport medium sour grade bear.
Those with match the demand patterns currently needed for refineries as well as into the future.
We also have traver favorable producer exposure as Kevin mentioned these are large cost effective lower breakeven costs than some of the other basins and what you're seeing in the marketplace and then again, we have limited exposure from a credit worthiness perspective again most of our shippers producers are large investment grade producers and we think this helps us not only weather.
This storm, but we also believe these are key points.
That continue to make us believe in the strength longer term and our position in the Gulf of Mexico.
Great. Thank you very much hope you all stay safe and well.
You as well hope everyone. So interesting.
Your next question is on the line of Derek Walker from Bank of America.
Good morning, Derek How're you.
Good morning, guys.
Good afternoon question.
Just a couple from me later at Starwood customers short term action.
Kevin you mentioned.
Less than revenue opportunities with the Lamar's cavern is give us a little bit more background on sort of how that came about what are some the rates that you're targeting customers there and as at more of a stable revenue for the remainder of the year or how does that this contract. So.
Yeah.
Yes, so thanks, Eric I'll turn it over to Steve I don't know that we're going to give specifics on individual contracts, but he can talk to you more about the different storage opportunities that we've actually pulled pulled the trigger on yes. Thanks, Derek I think what you're looking for is how we leveraging our current assets and maximizing we have we have various opportunities where we have storage assets across.
Our systems and we have several.
Contracts, we've been in into leveraging some of the storage at home and some water access across adopt and then the second cavern and Mars Purveyor provides available storage is whereas ratability for the flows that has continued to produce offshore.
But in general will continue to look for opportunities across our system and put those into our into our business and we are rates are competitive market rates with anybody thats out there looking to offer storage defaults.
Yes, I guess.
Do you have a sense sort of like in the aggregate the uplift is associated with it.
While we're not going to give guidance now around around the the additional revenue that's coming.
Other than just know that wherever we have a barrel storage, we're pulling that because there's a storage is a hot commodity right now.
Okay. Thanks for fit and then maybe on the margin expansion.
I think is starting to messes up by the ended the year, how should we think about the the cadence area expansion in 21 and the in service is that more of a year end 2021 mid mid year.
Everything, but the timing on that project.
So the timing on when it will will be executed to come online and believes that the question.
Yes.
Yes, so were.
We're still in the midst.
Defining the commercial construct which will inform the final detailed design. The good thing is lots of conversations still progressing the demand is still there we anticipate final definitive agreements by the end of the year and will be online mid year timeframe in 2021.
It's really an advance Derrick.
Head of Vito and power Nap, which are still on the original schedule.
Okay, Perfect and then maybe Theres less one for me I mean, which would you characterize since we have April under our belt would you characterize that month is sort of.
And in particular, given that you're seeing some uptick as sort of the.
Yeah kind of the tougher month for to Q and.
If you were to kind of make April sort of the May June timeframe as well give a sense of what the coverage ratio would be April results were for B.
Yeah.
The full quoted as us so again, I think you're asking for us to be a little bit more definitive in that less than one coverage ratio.
And we are only halfway through the quarter.
June is still out there there's a lot of moving parts and that's still have to unfold. We've seen some positive recovery in gasoline in some demand that is headed in the right direction, but what happens.
As states lift there restriction and whether or not they actually continue with that are they shut back down. There's just a lot of volatility for us to get to get exact with a range there.
Okay, great. Thanks, Thats it from me appreciate it.
Thank you stay safely.
Likewise.
Your next question comes on line of Robert Moskow.
Hi, good morning, everyone.
Hey, Rob how are you.
So in regard to your sub onetime covered anticipation for the second quarter, just given the distribution waiver beginning next quarter in.
Contributions from dropdown assets is that coverage, great being calculated a little differently to reflect what coverage would be without the waiver. Just seems like you guys might have some breathing room before going sub one with some of those items coming up next quarter.
Yes, so the guidance that we provided is really around you what we're seeing with the market. So we were pretty.
Pretty pretty optimistic if you recall from the early part of the year, when we announced the deal being completed.
But with the covered 19 hitting us.
Kind of late March is just too difficult for us to see would from vaulted given the volatility in our in our earnings for the assets that to provide any kind of more guidance. So normally little yes, we would than we've been well well above 1.1, 0.0 coverage, but but we'll see where Q2 lantus.
I understood.
And then if I could add an operational question, particularly on what Youre seeing offshore and I know you already answered. The first part of my question speaking to the demand for Gulf of Mexico barrels in the call for refinery system, but can you, perhaps opine on the eastern court or volume reductions and then just anything you're seeing as far as the timeline for longer term.
Our exploration project offshore.
Yes, so I'll start and then I'll turn it over to Steve.
Yes.
We've been talking about the Gulf of Mexico for very long time, and it's gone through various different cycles around different crude price and that kind of thing and with the funnel offshore that once people take their investment decision. Both projects are pretty much committed so the near term and the medium term is less likely to be affected with new projects coming on as an example, Vito.
Power Nap coming on next next year and there's a couple of beyond that where they are well into construction and so what we if there was to be an impact it would come in delays to new things coming into the funnel which have.
Really more of that five seven year out time horizons, and we'll have to wait and see what happens and that'll have not will depend on volatility and how long were in this kind of demand situation.
With regards to eastern quarter, all I'll, let Steve answer that yes, I think so I think the exposure on the east really is around concentration for smaller producers are higher cost to produce fields as well as some of the crude grades.
Being more of an HLS type exposed barrel that may not match up as well with the current demand pattern.
We've seen very little impact to the to our business and impact too.
To the eastern corridor to this point, but something we continue to monitor again.
The majority of our.
Crude that we transport through the central corridor, and others is a medium sour what matches up very very well and our exposure to points. We mentioned earlier our relevant for this situation as well as the long term.
Okay. Thank you Thats really helpful.
Thanks be safe.
Your next question comes from TJ Schultz RBC capital.
Hey, Jay.
Hey, good morning.
Just one follow up on the distribution. So my understanding was.
That coverage would be tight this year in kind of a transition period, and then grow over time and you have the flexibility to withstand tighter coverage is given your asset mix and the balance sheet.
So if anything changed relative to your outlook on coverage.
Proving beyond 2020, and if you're looking at the distribution on kind of a quarter by quarter basis, now where you're keeping it flat.
In the second quarter in what might be a trough demand quarter just.
Just how you're thinking longer term for for coverage and improvement.
I think our story is still there with regards to the business that we see coming on board the margin expansion project. Some additional offshore production and some of the other projects that we see across our portfolio that hasn't changed what really is changed right. Now is just the level of uncertainty with from covert 19, and the demand destruction.
And what really is going to happen with demand over the the rest of the year.
And so we'll have to watch and see what happens with demand I think it's more of that refined product storage.
We think the basin in the Gulf of Mexico on crude holds up well.
But we're going to have to wait and see what happens with demand.
So I think thats really the big change.
Okay I appreciate it thank you.
Your next question comes on line of Joe.
JP Morgan.
Good morning, Joe.
Mine.
I just wanted to ask maybe dive in a little more on I guess why you're seeing offshore.
And the shines there I think.
Murphy's divest morning, their dialing back production a bit I'm wondering if that flowed onto your systems and then also.
Got it the production from the managers I guess how it.
If they are dialing back as much or what you're seeing Mac.
Yes, and maybe I'll, let Steve given more detail, but overall, we have not seen a material impact to our systems offshore and the other thing would be that I know people were focused on storage and it becoming physical there where you couldn't put your crude anywhere because there were lot more freedom as needed to be refined and that would curtail we have.
Not seeing that materialized there are some players in shallow water and some of the smaller players for financial reasons are either pulling their turnarounds forward to do it in this timeframe or for financial reasons are choosing to do something but it hasn't been material and it doesn't impact our large offshore production.
Customers Steven anyone as no I think you covered it well together.
Okay that makes sense. Thanks for that and then also.
Another one.
To date the color you gave about kind of overall refined product trends.
But wanted to see I guess on your system can you say I guess, what youre seeing on kind of colonial and explore quarter today.
And is that consistent with the country's trends.
Maybe I'll sign accrued side, I guess, why you're seeing on site ago clear today.
Yes, I'll take the first part in the last season's desire to copper, we don't talk on behalf of colonial which is an independently run company that were one owner of.
But obviously colonial is one of the large flagship finished product systems.
And so it correlates to what you see demand happening.
Across the country, especially in the northeast.
It is the most cost efficient most effective way to transport to meet demand in key markets centers in New York hardware and all those states in the eastern Seaboard. So as demand returns it would be the pipeline system that would recover with strength.
On Zydeco, we maybe you can comment so and so on zydeco, what we see is we still see strength in volumes currently on the system and we believe that again Testament to that ACA remaining a strategic asset in the Gulf coast that that can compete context connects multiple trading hubs refining centers.
Storage as well as export access across the water. So we're pleased with our position.
Then zydeco continued.
Okay, great. Thank you I appreciate the color Thats all for me.
Yes, thank you would be safe.
All right.
Question ill now turn the call back over to Jamie Parker.
All right.
We thank everyone for their interest in shell Midstream partners and do you happen to any additional follow up questions. Following today's presentation. Please feel free to give me a call directly my contact information can be found on the presentation materials is on our website shell midstream partners dotcom.
This concludes today's conference you may now disconnect.
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