Q2 2020 Genesis Energy LP Earnings Call
The sodium minerals and sulfur services segment.
Includes trona and trona based exploring mining processing, producing marketing and selling activities as well as the processing a sour gas streams to remove sulfur at refining operations.
The onshore facilities and transportation segment is engaged in the transportation handling blending storage and supply of energy products, including crude oil and refine products. The marine transportation segment is engaged in the maritime transportation of primarily refined petroleum products.
Genesis operations are primarily located in Wyoming, the Gulf Coast States in 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 1930 for the long provide safe Harbor protection to encourage companies to provide forward looking information Genesis intends to avail itself of those safe Harbor.
Visions and direct you to its most recently filed in future filings with the Securities Exchange Commission.
We also encourage you to visit our website at Genesis energy Dotcom, 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.
This time I would like to introduce.
Grandson, CEO of Genesis Energy LP, Mr. Sims will be joined by Bob Deer, Chief Financial Officer, and Ryan sense, Senior Vice President Finance and corporate development.
Good morning, everyone. Thanks.
As we make any of our earnings release over the portion of the last few months, we've taken the proactive steps necessary to improve our financial flexibility and be a net higher debt you win so through difficult operating bar.
Let me repeat that respectively.
You have in those generationally challenging bar.
We reduced our quarterly distribution.
We say with approximately 200 million Belgian Hamburger agreements with GE, So capital partners to allow us to delay the capital expenditures associated with our Granger optimization project by up to 12 months.
We recently implemented cost savings initiatives that are expected to generate approximately $38 million an annual savings beginning this quarter.
We embedded with the unanimous support of our might be bites are senior secured credit facility to be able to add back.
Good evening onetime charges associated with our cost savings initiatives as well as increasing our covenants through first quarter 2021.
Earlier in the second quarter. We were also successfully purchasing approximately $96 million worth of our unsecured notes on the open market at a weighted average price of just under 79 cents on the dollar resulting in a gain as well as a reduction of total debt of approximately $20 million.
Now turning to our individual business segments.
Offshore pipeline transportation segment continued to perform and allowed our expectations.
The exceptional non perspective downtime associated with tropical storm Crystal ball.
During the quarter, we saw producer shut in volumes in May with some continuing into June representing maybe 2% to 3% of total volumes for the quarter.
As a response to the dramatic falling commodity prices during late April and May.
Virtually all of these volumes with exception of around maybe 5000 barrels of oil equivalent a day or back online as of July onest.
As we mentioned in our second quarter call. The third quarter is typically a very every quarter for scheduled maintenance and belt.
Some of which does ultimately result in higher output in future periods.
In addition, we are currently in the midst of hurricane season, and still have roughly two months left with no guarantee we will not have additional shutdowns as a result, overlays storm or more than what they've sold them in the Gulf of Mexico.
Additionally, we didn't reconfirmed during the quarter the anticipated timing of several major offshore projects, which are already contracted sure expensive infrastructure in the central Gulf of Mexico.
Argos for formerly Mad Dog, two and the kids key collagen production system, which has the fields policing more abundant samra tied to it or still scheduled for first production late 21 or 2022 early 40 42 in early to mid 2022, respectively.
These two below which required almost zero capital from us are expected to generate well in excess of $100 million annual segment margin to us when ramped up to anticipated full full production.
I thought it might be useful to touch briefly on the current political environment. Some of the flip policy rhetoric that is out there.
While I'm not going to speculate on the election or future policy.
I would say that we continue to believe the future of the Gulf of Mexico remains strong.
Especially in the near to medium curve with the existing contracted volumes dedicated persist.
Additionally, a significant portion but by no means all of the highly prospective acreage in the deepwater Gulf.
Has already been leased under primary terms of 10 years.
And the upstream community. This already paid the federal government billions in lease bonuses and assessments tens of billions more on exploration activities and production facilities to date.
Under previously accrued plans of exploration or claims will development, there literally hundreds and hundreds of wells already permitted we'd be drilled on leases under primary term leases that have already have an approved plan of development or suspension of production.
And order leases, which are held in perpetuity by having established.
Already production mirror.
The upstream community continues to spend significant amounts of money. Despite the proceed political risk and we continue have to have discussions with producers about providing critical infrastructure for their future developments.
During the quarter, our onshore facilities and transportation segment performed as expected and we did see some short term benefit from contango during the quarter, but do not expect that to repeat in future periods.
We continue to see zero crude by rail volumes from Canada, those scenic station and continued to build at a minimum volume commitment levels.
It's a recent news about a potential dapple shutdown comes to fruition, we could potentially see certain crude by rail volumes for North Dakota, some through our rail unloading facility.
Specifically, our race comfortable given their direct routing for virtually every loading facility in North Dakota by the via this road.
Marine fundamentals during the quarter were relatively consistent with our expectations. We continue to monitor refinery utilization as lower refinery runs in PADD II and past three we're starting to have the financial impact on us specifically on the groundwater fleet given there is less intermediate refined product volumes needed.
To be boot between refinery and terminal locations.
Our offshore coastal barges have fared remarkably well and utilization rates have held in this quarter at least so far consistent with the first half of the year.
The American Phoenix existing contract is up in late September.
In early March we were in active discussion on new terms in the neighborhood or current contract.
Unfortunately, the dislocations, resulting from phobic 19 is caused by near term supply demand imbalance in Jones Act tonnage and we would otherwise expect with a re contracted a day rate south of return.
The second quarter was challenging for sodium minerals and sulfur services segment, even more challenging than we reasonably expected at the time of our first quarter Paul.
Our legacy refinery services business experienced some volume loss during the quarter in domestic pulp and paper sales, but especially in South America as mining activities were ordered curtailed or shuttered by local governments in response to those countries attempting to address the spread of cobot my team.
In July Freeport Mcmoran indicated they were allowed to restore the copper mining operations and Peru. During the second quarter, followed into cobot monkey restrictions or were imposed by the Peruvian government in March 2020.
The company indicated they exited the second quarter, roughly 80% of their 2019 operate past.
Copper prices are at or near their highs for all of night, even 2019 preclinical reflecting the effects of the production loss in the second quarter, and hopefully increasing demand as more and more economies attempt to reopen.
Our pulp and paper customers attempted to avoid turnarounds in the quarter in order to limit the number of Nonemployee is on location due to protocols on combating folks at night team and during which they would normally use larger about suit sodium hydrosulfide or match.
So far this quarter, we are starting to see normal more normal volumes as those facilities no longer can avoid that turnarounds or ignored or need to replenish the sodium and sulfur molecules critical to their processes.
As a result, we're increasingly confident that are matched cells are likely to fully recover as we approach the ended the year.
In soda ash, we are facing a generationally difficult operating above.
Beginning in May and accelerated into June our domestic and international customers for soda ash begin canceling orders for the remainder of the year.
As they adjusted to the demand destruction.
Associated with co. Good night team for their final products in which soda ash and use.
In fact since our last earnings call, we receive cancellation of orders for slightly more than 300000 tons through the rest of this year alone.
This physical demand disruption to worsen Downdraft tour showed operations experienced during the financial crisis of 2008 2000.
To respond to such imbalance, we made the decision to cold stack.
Meaning we could return to normal operations improved to six months our existing.
Operations at Granger, which currently our highest cost facility, resulting in a reduction of our supplies to be sold by some 550000 tons on an annual basis.
We know who other domestic producers have also with the supplies and we are aware of a major synthetic producer in China shutting down on this a worldwide markets were soda ash adjust to the current demand environment.
Additionally, we delayed our Granger expansion project by a year and currently expect to bring on a fully expanded granger facility in late 2023 that it fully expanded capacity of 1.2 to 1.3 million tons, a year and optimize such it will join our West Bay Coke facility is one.
The most economic soda ash production facilities in the world.
The market for soda ash could tighten very quickly as demand recovers along with increases in that economic activity, especially given the supply response as we've already seen.
There is no doubt in our minds, if the demand for soda ash will ultimately rebound.
And that we will benefit from being one of the world's largest.
And lowest cost suppliers is such a critical industrial component.
There are few size that maybe we put in a bottom from a volume for it.
Export orders have stabilized over the last four to six weeks.
In July domestic sales were up relative to June which were marginally up for Matt.
We have also seen that reported Chinese soda ash inventories have decreased almost 18% over the last several weeks.
While encouraging we know that economic activity has to continue to recover worldwide or we see a return to 20 nice teen type levels.
Longer term, we are encouraged about certain emerging macro screens beyond just a recovery in economic activity to pre pandemic levels.
It appears people are increasingly interested in living horizontally, rather than vertically, which would be more soda ash intense.
Similarly.
We believe auto sales are likely to increase as fewer commuters water out congested public transportation at the same time to the average age of the automobile fleet in the U.S. is at an all time high.
There are also a couple of green initiatives, starting to underpin soda ash the me.
Demand for soda ash from the lithium carbonate producers in South America and elsewhere is growing rapidly.
There are slightly more than two parts are soda ash required for each part of lithium to make lithium carbonate the major constituent of new generation lithium batteries.
Additionally, accelerated endeavors to retrofit older buildings to meet the standards for L. E. D certification should lead to significant new demand for glass it gets soda ash.
As we look forward to the second half the Twentytwenty.
We would expect adjusted consolidated EBITDA as defined by our banks and used to calculate compliance with our covenants to come in a range of 570 to 610 million.
Are generally in line with current street expectations.
While challenges certainly remain given the steps we have already taken and given our lack of future capital requirements. We believe we have positioned the partnership to comfortably live within its means and navigate the current macroeconomic environment.
The pace and scope of the recover in the world economy is not abundantly clear and could will extend into 2021.
In any event, we believe we're well positioned to weather the store regardless of duration and we will still be cash flow positive and be a net higher debt this year and in subsequent years.
A more important focus from our perspective this for everyone to recognize the significant operating leverage we have to produce increasing financial results in future periods with no capital.
As the world economies recover and contracted offshore volumes come online.
I would like to once again recognize our entire workforce and especially our miners Mariners and offshore personnel, who live and work and close quarters. During this time the social distance.
Hi, I'm extremely proud to say, we have safely operating our assets under our own cobot 19 safety protocols and procedures with no impact to our business partners and customers with limited confirmed cases of ups are some 2000 employees.
It is an honor to have the opportunity work alongside such quality people.
With that I'll turn it back to the off moderator for any questions.
[noise] since.
[noise] to ask a question do you have a telephone. Please press star one if you will like to look I got a question. Please press the pound key again does star and the number one.
Yes.
And your first question comes from the line of call May.
Hey, good morning.
I wanted to start off with need to sodium in sulfur segment.
Obviously, you talked about the effects of Kogan 19 on the business, but wondering if you can provide any additional thoughts around the pace of recovery at this point you kind of the cadence is how you see volumes trending through the second half of the year.
As I gave in the prepared remarks, I mean, I think that domestically, we are seeing sequential increases or.
July over June June over May, but we're at this point, we're still obviously.
We are you still below 29 teen level.
Our visibility wireless improving and our customers seem to be.
Improving and is on the export markets, where the margin we compete with Chinese exports in the Asian economies outside of China. It's a good sign that the Chinese.
Inventories of.
Declined over the last couple of weeks, which everything else is same means that we're starting to see a little bit more balanced between the demand and supply so.
At this point, we anticipate that volumes will continue to a.
To recover but by no means do we think that we're going to at this point to exit the.
20.
With the anything close to what we were doing in 2019, I think that it's probably going to take realistically.
[music].
Through 20 and into 2021 until we are depending upon the places, but reopening the economies worldwide to to get back to 2019 levels.
Okay got it and I believe last quarter, you discussed, placing the existing granger facility and hot hold mode.
Now that's going to cold stack can can you walk us through the decision here and then how this will change your operations and expenses.
Basically it will.
Yeah. What we did was initially we were very quick to react when we saw the demand destruction starting to come through the.
Through the supply chain with our customers.
We furloughed and.
If you will initially for what was anticipated to be a 90 to 120 days period.
The Granger facility.
So in other words, we still pretty much have the.
Had most of the expenses.
Except for certain labor expenses, resulting from furloughs.
Associated with maintain it isn't ready mode.
We both made the decision during the quarters.
May unfold at an accelerated into gene that the in order to rebound facilitate a rebalanced not only of our portfolio.
Supply and demand, but ER to help accelerate the world balancing we made the decision to.
Cold stack it with basically.
[laughter] required a reduction in force more permanent reduction in force.
As we go forward as well is the.
Save us money, but [noise].
Maintaining that in warm stacked vote. So.
It was the best way most efficient way too.
For us to do it to address the reality of the what we perceive to be the.
The market over the next couple of years as we said we can we can bring it back in three to six months if market conditions dictate but right now our plan is to keep it in cold stack.
And bring it back on all together as we make in the expanded during the project reality and bring it all back up in 2023.
We do not believe that the delay.
In the Granger optimization project, where the expansion than Granger.
Has been significantly impacted from a dollar point of view by delayed a couple of years. So.
Back there some economies.
Especially during tie ends with the existing operations of other interface point of between existing Granger, an expanded grain do that.
We can do more efficiently and cheaper with.
Existing granger is down to cold stack mode.
[noise] God, Okay. Thanks, Grant I'll turn it back.
Thank you.
Again, and I was just to ask a question press Star then the number one on your telephone keypad that's star one.
Your next question comes from the line of Shira screening.
Hi, good morning, everyone good to hear everyone's well I.
I guess to start off a little bit here I'm kind of wanted to talk about your options here I mean it the other day here your free cash flow positive I'm, giving you actually that that you've actually taken.
At the same time, when I look at where your public debt is trading there actually treating really well and not providing much of the discount at this point right. Now so what are the options that you're going to do with the excess cash do you still buy bonds that are in that 90 East do you look to maybe go after other parts of the capital structure, even possibly.
Buyback some units just kind of wondering what what your options and that youre thinking about in orders a priority.
[noise] very good questions or as usual.
Yeah, I don't think that we will actively participate in trying to buy in Boston.
In the knives earn the Ninetys if you will.
We will continue to we'll use the cash to pay down revolver debt.
We have the ability under the existing agreement.
Once so once we go below five times on are calculated the.
Total funded debt covenant with our bikes that we can actually we can go into the equity to the extent that that makes sense at that point in time. We're obviously, we're not there at this point, but we will be.
Hopefully in the.
Fairly short order, so that that will give us another opportunity to.
And manage the capital structure and return.
Turn money to the investors.
Okay and that that make sense, and then just and I don't want to beat the whole soda ash things too much I think it's been kind of straight color, but I was just wondering or you sitting on a lot of inventory at this point right now.
I understand that and they granger typically been cold stacked at this point right now, but you know is the market for soda ash pricing actually improving based on the trends that you just highlighted and do you add inventory, where we can see a working capital conversion to cash.
As you as you sell out and how deep is that inventory and so Nash.
Yeah, we don't we don't have a we're kind of.
Within reason you would call this kind of adjust some time suppliers. So we don't have large amounts of the inventory in our supply chain, that's not the our business were.
We made good and push it through the as the first step in the supply chain. So.
We don't anticipate the any kind of gain you will is prices.
Improve from selling inventory made in the low price and selling it at a high price at this point.
That makes sense and maybe one final question.
As we sort of think about any guidance range or your updated guide range that you put out today.
You know what are the scenarios they get us to the high end of what are the scenarios. They get it took a low and I imagine shelter in place we get us to the low end, but what are specific trends.
Within reason I'm trying to predict.
That gets a tier high end and low end.
Yeah, I think it's really it's really driven by could it be room the.
The pace of the their recovery and worldwide.
Markets and whether or not weaken.
Primarily in or they're not has and then that would translate into the.
Pricing if you will for.
So that as well as volume WRECO. So.
That's really going to be the big driver as well as you know can we.
Yeah, Kevin you manage through a re contracting with the Phoenix, which again is small around them.
Just the overall aggregate the segment margin, but to just a.
A few negatives relative to a few positives is really.
The driven primarily by the volume recovery and soda ash and.
In the second half of the years really going to that's going to determine where we come in but in that range.
So in the biggest driver is going to ultimately be soda ash pricing and effectively that that kind of the biggest swing one way or another.
That's correct.
Perfect.
Really appreciate the color today once again glad to hear your own Kaiser all well adversity.
Thanks.
Again in order to ask a question press Star one Oh, your telephone keypad that star and the number one.
And there are no further questions.
Okay, well, thanks, everyone for participating.
This morning.
I think the second half is gonna be better the first half of hopefully, but so we will talk in 90 days if not sooner. So thanks, everyone.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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