Q3 2020 Shell Midstream Partners LP Earnings Call

October 30, 2020

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At this time I would like to welcome everyone to today's webcast for shell Midstream partners also.

All participants are in a listen only mode. After the speaker presentation that will be a question and answer session to ask a question. During the session you would need to press star one on your telephone.

If you require any further assistance please press star zero.

I will now turn the call over to Jayme Parker Investor Relations Officer, you May begin your conference.

Thank you welcome.

Welcome to today's webcast for shell Midstream partners with me today are Kevin Nichols, CEO, Shawn Carsten, CFO, and Steve led better DP 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 in 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 well as in today's press release and under risk factors in our filings with the SEC.

Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and 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.

Thanks, Jamie and good morning, everyone and welcome to our third quarter earnings webcast.

Before I begin today I want to recognize that we continue to live through an unprecedented time with the pandemic as well as one of the most active hurricane seasons that I can remember and certainly since 2005.

These combined events have impacted our communities our staff customers and our investors.

And our focus is on a safe operations the safety of our employees and we certainly hope that you're staying safe during this difficult time.

As I look back on the third quarter, we continued to see effects from the pandemic and these storms as well as some planned turnaround activity from our customers.

Against this backdrop, our diversified asset base continued to show strength, despite a difficult macro environment.

In the offshore the partnership saw a temporary reduction in volumes as customers shut in production several times throughout the quarter related to the storms in the Gulf.

These shut ins also impacted zydeco as we saw slightly lower volumes coming in from the offshore.

And our refined products systems continue to see the impact related to the pandemic as demand destruction caused lower throughput in both the second and third quarters.

With the significant supply and demand imbalance in the second quarter, we were able to offset some of these impacts through storage opportunities.

However, as supply and demand has come more balance in the third quarter were seeing reduction in these opportunities for storage as inventory levels are worked off.

To help offset the impacts to our earnings our operations and commercial teams work to minimize business interruption in order to maximize business value from our assets during this challenging quarter.

And despite an impact of approximately $12 million from the storms were able to deliver $163 million in overall cash available for distribution.

And I also think it's really important to note that we did not experience any material damage to any of our assets as a result of the storms.

And volumes have ramped back up to pre storm levels once producers have restarted production.

Our ability to continue delivering value to unit holders in this challenging quarter and year speaks to our operational capabilities and the resilience of our assets.

Offshore we have one of the Premier corridor networks, which provides transportation for an advantaged medium crude grade and provides our customers unique optionality.

Longer term, we continue to remain bullish on the development and growth in the Gulf of Mexico.

Where we see continued activity by our sponsor and other customers and we have the ability to capture these volumes for little to no capital required by the partnership.

Our onshore assets they span the commodity supply chain from crude crude the clean products and we're well positioned longer term to ramp up with the us and global recovery.

As is true with the entire industry, we expect to see continued volatility and uncertainty in the near term.

Given these uncertainties that still remain in the marketplace around the pandemic as well as the softening of overall demand. We will continue to monitor the business environment and make decisions regarding future distributions on a quarter by quarter basis.

So with that I'll now hand, the show the call over to Sean Sean Thanks, Kevin.

As I reflect on the third quarter, our assets have performed well in this difficult economic environment.

So first let me cover a few of our key financial metrics for the quarter.

Our total revenue was $110 million a decrease of about $10 million. Now. This decrease was primarily related to the impacts of the multiple storms that Kevin spoke about earlier, along with some planned turnaround activity.

The decrease was partially offset by about $3 million in higher product revenue.

When compared to the prior quarter now this is due to the sales of allowance oil.

Our operating expenses were $75 million down about 4 million from the prior quarter, mostly related to lower severance expense in the current quarter. Now this was partially offset by an increased cost of allowance oil and assessment or property taxes.

Our income from equity investments was 109 million. This is flat with the second quarter.

And with all this adjusted EBITDA attributable to the partnership was $191 million and after interest expense maintenance capital and other adjustments total cash available for distribution was $163 million.

The partnership declared a distribution of 46 cents per LP unit now this resulted in a coverage ratio for the quarter of one times.

And finally, we incurred about $11 million of maintenance Capex in the third quarter, primarily related to zydeco.

So now for the partnerships balance sheet and liquidity.

As of September Thirtyth, the partnership has a total debt outstanding of $2.7 billion.

Which equates to a debt to EBITDA ratio of three and a half times based on an annualized Q3 adjusted EBITDA.

We're comfortable with our balance sheet and believes that if.

We believe it allows us the desired flexibility to continue to effectively navigate these turbulent times.

So now let me move to a few updates for the rest of this year.

In the offshore we expect to have an impact of approximately $15 million to both net income and cash available for distribution in the fourth quarter.

This impact is related to hurricanes delta into data, which affected the Gulf in October as well as some planned turnaround activity that was delayed from the third quarter as a result of the storms.

As part of our cash preservation and operating cost initiatives Weve already committed to $10 million in sustainable savings in 2020.

Now in addition to this we also expect savings in 2021 in the range of $30 million to $40 million.

This would be inclusive of inclusive of the 10 million already captured in 2020.

I'm really pleased to report that we are well underway to achieve these targets.

So as I close let me say again that we have a strong suite of high quality midstream assets and coupled with our resilient balance sheet. We believe the partnership is well positioned for the long term.

And with all that and I will take your questions operator.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the county roster.

Sure. Our first question comes from the line of Shneur Gershuni from GBM. Please go ahead.

Hi, good morning, everyone not to everyone as well.

Maybe to start off with literally your your concluding remarks with respect to cost savings and so forth I was wondering if you can expand on it a little bit how sustainable the or.

And you know our we just scratching the surface of it now or can there be materially more incremental cost savings throughout 21, you can sort of talk about your process.

How you're going about it.

So thanks Shneur. So when you think about our savings we believe theyre all sustainable savings. We've made a few one off cost movements, but we're focused right now on fundamental structural savings roughly half of this cost is related to salaries and wages and the other half is what was that related to a number of cost reductions in terms of the way.

We operate more efficiently summer direct so we were reducing our direct contractors.

And so in services, so that directly benefits the partnership and summer our indirect in the sense that our parent shell pipeline, which is our service company has made some other reductions in both processes and salaries and wages as they make those reductions those those costs those cost savings get passed on to the MLP hope that helps.

It certainly does so just to paraphrase. So some of it is directly at the MLP level and some of it is the the allocation from Royal Dutch at the little guys.

But maybe to follow up on that is there is there kind of like everybody seems to have like a different name project. This project out or something to take down is.

Is there is there kind of an ongoing process right now within Royal Dutch shell that.

We could see another layer of costs come down as well to work. This is kind of the the bulk of the review on the cost structure.

Yes, Hi, this Kevin yes.

Yeah, and I think you may be referring to some things you hear about Royal Dutch shell reshape and some other things that they're doing but but actually Sean and I.

And the management team and started this.

Last year already in looking at how we could sustain and bring our competitor our cost down to be more competitive and so we've been on this journey may be a little bit ahead of some of the things that shell is doing and we're now putting those in place which is why we're comfortable that we'll see them here in 2020 and as we go into 2021, it's also about creating a continuous.

Improvement culture, and a culture that we'll continue to look for cost not willing to really give you an idea or guidance above the $30 million to $40 million for the MLP at this time, but it is something that we as a management team are installing.

As far as continued.

Exploration around how we just do things better we're looking at things leveraging our new ERP system that we've talked about in the past.

As for on the on the S&P platform and how we can digitize things takeout manual manual work processes make things more efficient and prioritize things so.

We'll always continue to look for additional cost but.

What what Sean referred to is the the output of a program that we've had in place now.

For some time.

That makes sense, so, but so the journey not over.

Okay and then.

Okay perfect.

And then I was just wondering if we can talk about the distribution outlook for second year.

Last quarter the language in the press release sort of outlined.

You basically pre declared the following quarter you didn't do that this time and so forth trying to understand if that's signaling change or is it just that last quarter. There was so much uncertainty.

Leading into your when you reported earnings that you felt you needed to do this and now we're back more on a typical.

For you release, the quarterly distribution, just trying to understand the change in language there.

Yes fair enough I mean, let me start out with I understand.

You as well as our other investors nobody else are looking for longer term guidance and the strategy of the company going forward and we're not talking just about one corner of events I think we've got the feedback and we certainly understand that looking to say well how does this play out over the next 12 18 24 months and we are certainly working to put that in place and we're not ready to give that today with.

Regardless of the change from quarter, two signaling quarter, three keeping it flat in quarter four.

If you take a look at some of the changes back then the trends we are headed in the direction of fewer cases in the pandemic.

Marketplaces, we're opening things were looking pretty good from a general trend perspective, if we sit here and look at it in the fourth quarter.

Yesterday, we set an all time high for cases in the United States Hospitalizations are on the rise you look at it globally countries are actually looking back down again other cities are reimposing restrictions. There is a lot of volatility in the oil and gas sector. So there's just a lot more movement right now as we sit in quarter four than there was last quarter and we think it's just.

Right to probably give you the results of the quarter and not try to fix that right now and continue to work towards getting you that long term guidance as we can see some of the settle down.

Okay and maybe one final question, then Youve talked about kind of the science work that you're you're looking at and I think you just sort of touched on some of them in the last answer.

In the current run rate right now, yes, we as you sort of intimated, we're having startups in going backwards Pago forward and so forth. If we were sort of two main tool the level of congestion and activity that we are at right now so we don't improve from here.

Because everything sort of averages out here and there and that stays that way for the next few quarters is that something that you are comfortable with from a payout perspective like you'd feel comfortable you're generating enough cash.

Cover the expenses and everything else trying to.

Wondering how to think about the hypothetical there.

Im not sure Shneur I am going to.

Right to comment on on a scenario that plays out or how that would play out certainly we're looking for more stability.

And as that stability comes and you can beat we've we've always committed to our investors that when we give guidance we shoot to deliver on that guidance and so the things that we're looking at are the same things that we've been looking at before it's the what's happening with the pandemic, what's happening in the oil and gas sector, what's happening with demand what could happen with the restrictions running tight coverage.

Right now and.

And so of course, we're trying to see what what the the near term looks like longer term, we're still confident in our growth the projects that we have coming on with power nap and veto, but those are a little bit further out.

All right perfect. Thank you for taking the time to as my questions today and have a great weekend.

Thanks, nor be safe.

You too thanks.

Thank you. Our next question comes from the line of where we said Chen from Barclays. Please go ahead.

Good morning, I wanted to ask you about the zydeco re contracting for at the 18 month contract that I believe are going to expire at the end of this year. So just in a couple of months and had the shippers on selected for their six month extension or are they will be contracting completely different rate.

At this point any color you could provide great.

Hi, Theresa this is Steve led better yes, so I think given the current volatility that Kevin mentioned, it's created an environment that that shippers are waiting to see longer term impact prior to locking in and in light of that the two contracts that we have with the 18 months that expire at the end of November the shippers have elected not to renew the.

Those contracts.

But I would say that we are we're in conversations and we still are looking at various options and currently we will run.

Those options outside of a typical open season process.

And I'll just follow up I think was an important note that we've been pretty purposeful and diversifying our asset away from any one geography or asset when you think about the things that we've done in the offshore in the onshore refined products gas gathering and so we feel good about the overall mix of the position and the capability to deliver to the power.

Turning to ship longer term.

Understood and if I remember correctly I think one of your longer dated contracts.

On Vidacare, what does source a bakken barrel on and I was just wondering if you have any exposure to DAPL as that continues to evolve.

Yes, so so we're not going to comment on exposure around what may or may not trends transpire as a result of dapple, we stand ready to provide efficient and competitive solutions and our and are ready to move the barrels not only from Houston, but also needle in the Bakken barrels to the various destination.

Joints, and a competitive and efficient manner, Hey, Theresa that and just one more thing to add there that the customer that has that contract has a number of different connect points to source and to move on our system. So.

The contract and their obligations to us are sound and we've got multiple options for them.

Great.

And switching to offshore so.

We get a lot of questions on the political landscape and I'm curious to pick your brain on that what you think.

Can happen offshore as far as the on.

Failure to end the third party customer project. So if we do get absolute wave. So can you talk about maybe the resiliency of yours.

Sponsors portfolio as well as third party customers and if there is a ban on new leases how long do you think that volumes on your pipeline can remain intact.

Yes, thanks for.

First and foremost we've operated a very successful business throughout a number of multiple administrations right and we found ways to deliver across that so those come and go certainly they'll have their challenges.

As far as the Gulf of Mexico, and my comments earlier about being really bullish on the Gulf of Mexico, If you listen to Shell's webcast and their earnings webcast. A couple of things to note Ben highlighted the need for hydrocarbons for the next decades, and there will be a role for hydrocarbon in the next decades against the backdrop of energy transition and we can certainly talk more.

About that but there will be continued investment by shell and the hydrocarbon chain. They are going to take a very focused approach to that and one of those areas. Specifically is the development of Gulf of Mexico, and so we're confident in our sponsors progression of the projects that they have in the funnel that we already have plan like power nap and Vito and other tie back.

Next but also whale blacktip other large discoveries that they've had those commercial leases are those leases that are commercializing.

I feel very confident shelf feel very confident in their ability to progress those and bring them to market.

Even against the backdrop of an administration change I think longer term than when leases coming out, but thats, usually 10 years plus out so very confident in our in our Gulf of Mexico profiles.

For the next five to seven years.

Understood and if there is.

In addition to ban on new leases and various and permitting slowdown how does that impact your sponsor portfolio projects and as well as a third party customer it's related to the actual volumes that are going to physically flow into your Pat do you see any risk.

Permitting process.

Declining the volumes per se.

Well, so I think theres a couple of things going on there what you normally hear about as far as infrastructure and permit issues is is new build construction on infrastructure and getting the necessary permits to put the new build in place offshore one of the benefits to what we have is that an existing extensive wide footprint of infrastructure that's in place with the capabilities.

Move new volumes without actually having to build anything I mean and things like our Mars expansion and de bottleneck project is just about adding pumps, which already permitted for the platform.

To an existing platform. So from an infrastructure perspective don't see a lot of permit risk there from a developers perspective in the Gulf of Mexico, Betsy and offshore guidance and regulation that when you do a lease you put into place a very defined milestone development plan with.

Government and you agree that on the front end and you have to drill and then you have to bring the oil to market under certain timeframe. So I think those those things permitting isn't like onshore and putting new infrastructure in offshore.

We think it's much better.

Thank you.

Thank you I show. Our next question comes from the line of Gabe Moreen from Mizuho. Please go ahead.

Hi, everyone I just wanted to ask about look you've built rather reduce net debt.

Over the last two quarters I'm, just curious about kind of the 21 capex outlook clearly.

Clearly the market has been spent so far.

Youre building cash on your balance sheet or at least over the last couple quarters is there anything.

I guess planned in the Hopper and Alex with some of those dollars that are coming and hopefully over both the distribution.

That's okay. This is Sean thanks for the question. So we haven't provided guidance for 21 for Capex.

As you highlight cash is building up on our balance sheet that will allow us to do.

Whether whether small projects or just reduce debt and so but we'll we'll see as we as we get there so.

Okay, and then I also just foreign to us because I don't know if was asked previously but just with some of the pad one refineries changes just wondering kind of how colonial's warning.

Whether there is an opportunity there to push more barrels on to warn hopefully as demand recovers.

Yes.

Hey, this is Steve I'll take that one I mean, so yes as.

As we talked about earlier there are things that continue to change with the with pandemic in demand patterns, what we've seen over this quarter and the past couple of quarters is that colonial continues to be resilient still has a very cost advantaged access to supply and various things. They can do to compete no matter what is happening.

In terms of the refinery production in that pad.

Obviously has some exposure to the New York Harbor, but but we see colonial be able to compete with whatever may unfold up there.

Yes.

Thank you.

Your next question comes from the line of Derek Walker from Bank of America. Please go ahead.

Hey, guys. Thanks for time.

No just the just want to get a quick update as we make sure.

The outlook around the margin expansion.

Just given the current environment has there been any change around how you're thinking about the timing of that project. It though about the ramp on it I know you kind of talked about in the past I just want to see the financial year on that.

Hey, Derek this is Steve Thanks for the question, Yes, we're still very excited about the margin expansion.

Yes, we have otherwise in place we expect definitive agreements by the end of the year with project being brought online.

2021, and advance Vito and power coming through the quarter and 2022.

And as we've talked about in the past, we've built and constructed the project for additional flows of roughly 65000 barrels a day.

And just to remind everybody that.

As of the last call, we won't have capex expenditure from a partnership perspective for that expansion that we will do that with customers for the customers.

Got it thanks, and then maybe just maybe just an operational question.

Any lessons learned so far I know, there's a lot of stuff.

Lot of variability going on as you.

As you alluded to with the weather shut ins et cetera.

We've also been.

Than diligent on the cost front, just any lessons learned on that front as far as.

Operations offshore.

Volumes coming back onto the system.

In the city and personal use I think you've talked about just efficiencies around.

Personalities with COVID-19 independent there so just want to see kind of how you are.

I think the progress for you guys last couple of quarters.

Yes, just for.

Are you seeing any more efficiency there on that front. Thanks, Yeah. I mean, we're continuing to learn as we all are through the pandemic and virtual and using technology and tools and we'll continue to deploy those course, we talked about last quarter that we changed our shifts to 14 on 14 off to have more efficiency fewer travel costs with helicopters that type thing also to match.

It's the pandemic or the COVID-19 exposure I think from an operations perspective on our front as well as our customers on producers plan platforms, starting to learn to how the deal with Covance.

Both trying to prevent that from happening or an exposure on the platform through quarantine for week prior to deployment.

Going offshore then once were on the platforms our customers have people on the platform. If there is a case thats not a health issue how do you quarantine on the platform continued to operate the platform without having to shut down and then finally in the event that you do have a need to take the people off the platforms.

And bring them in I think the producers and we've gotten really good at that and as far as the minimizing the downtime of taking the crude that has the exposure off having the other crew ready cleaning the platform and bringing it back up so we don't have any material impact from Cove. It from from any one particular incident offshore with having numbers of platforms.

Connected to our assets.

Got it thank you I appreciate it.

Thank you.

Our next question comes from the line of Spiro Dounis from Credit Suisse. Please go ahead.

Hi, good morning, guys.

Two questions for you both related to some recent announcements on the sponsor side of things and the first one relates to going back to the lack of clarity here.

Very understandable in this environment and I guess, what I'm struggling with is your sponsors ability to come out.

By the new distribution policy and a capital framework with presumably the same level of uncertainty. So I guess I'm just wondering why don't we see a more coordinated effort to come out and announce these plans together and maybe the right way to think about is that your sponsors plan needs to be finalized and implemented before you walking or make your decisions for shell X.

Well no I wouldn't say that certainly it certainly isn't the case I mean, when when the sponsor announced their distribution cut and we did not have a distribution cut we got the question about should there be a read through from that and and our answer sort of the same there, which as they manage and operate a very different business from ours, it's global in nature. It has.

Different classes of business different exposures than ours, so there isn't necessarily a one for one correlation.

Between what the sponsor does with their portfolio of what we do with our portfolio.

We continue to have strong sponsor support for the vehicle they look at this.

MLP and this company has a long term.

Investments.

They've had very favorable credit terms that they've extended us thats not changed we have the waiver in place through first quarter of next year.

We continue to we have high quality assets in there that underpin a much wider value chain and as you as you heard Ben talk about a focus on the Gulf of Mexico, We have the premier footprint in the Gulf of Mexico, and underpin a lot of that.

Evacuation of their crude so.

So as they grow we grow so theres a good relationship there as well.

Fair enough and maybe picking up on that last point around growth I think Rds also talked about maybe four growth areas outside of Gulf of Mexico, I think marketing power hydrogen and Biofuels I believe are the four mentioned can you talk about how shall I can participate I guess within those four buckets, some probably more than others I assume.

Yes. The first one to start with is the obvious one right, which is the Gulf of Mexico in hydrocarbons and anything in the United States, where there is an infrastructure need for the hydrocarbon value chain.

And we will be there and we have the opportunity to play through our existing assets or potentially new assets, but I also think and we've got the question from time to time in the energy transition in alternative energy space would you consider and would there be an opportunity longer term to participate in that and the answer is yes with no definitive guidance for you at this time with specific projects, but renewable gas.

Asked projects hydrogen solar those kinds of things I think thats the benefit of being associated with a sponsor like shell and and Ben talked about it and said about a third of the capital's going into.

The traditional hydrocarbons and third and marketing in the third and this energy transition alternative energy.

Fair, let's just see how the road ahead looks like I mean, right now we have as we've grown we have them.

Better a better position from a qualified income as an MLP.

So we are able to take on some non qualified assets as we grow but the other thing courses with if there is if there is a new blue blue wave if they rewrite the rules around MLP that may open up some new opportunities that we can't currently enjoy given our tax structure.

Yes.

It's a good point okay. That's it for me thanks for the color guys. Thanks. Thanks.

Thank you.

Our next question comes from the line of Michael Blum from Wells Fargo. Please go ahead.

Thanks, Thanks for all the answers very helpful.

Just really one question at this point.

Just wanted to can you just refresh our memories in terms of how.

The contracts are structured in the Gulf of Mexico, When you get these hurricanes that come through.

Do you have any protection with the insurance or is there anything contractually that protects you or do we just think of these as.

It's more fourth quarter question I guess, but is this just lost revenue.

Yes, it's a mixed bag off shore, we negotiated different contracts for different circumstances. There are a number of contracts that have minimums like the maddox pipelines that was recently contributed so regardless of the volumes flow. We get paid there are others, where we have life of lease or dedication from the field, but so long as the volumes.

Flowing so we while we have a customer that's kind of captive to the to our particular system to bring their volume to shore. If they shut in production were exposed to that.

Maybe Sean you can talk about the insurance component, yes. Thanks, Kevin Thanks, Michael So we do have be insurance on our assets and so you know and as much as we would have damage from the storm to our assets and limiting our ability to deliver barrels then we would be covered by that insurance, but of course, we can't provide insurance for our producers.

They have damage that's that's a different story so.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Joe.

From JP Morgan. Please go ahead.

Morning, guys. Thanks, Good morning, Thanks for taking my question.

Wanted to first ask on you mentioned a storage opportunity in the prepared remarks wondering if you can discuss at all at this point I guess, how significant that wise.

And kind of how we should think about bad stepping down in the fourth quarter.

Yes, that's the first time.

Yeah, Joe So actually what I was trying to highlight there maybe I didnt do it as clearly as I could was.

It was really an opportunity for us that helped offset some of the gap in quarter. Two when we were at the height of the pandemic and demand destruction. There was a really significant dislocation between supply which had not ratcheted down.

At the same level as demand had been destroyed and so producers were looking for opportunities to store barrels anywhere they could find it and we took advantage of that and it helped offset some of that gap in Q2 in Q3 supply and demand has now come closer into balance where the refineries and the production has now kind of equally weighted.

A little bit more so theres not as much of that storage opportunity. So I wouldn't really count on anything.

Anything from a modeling perspective around storage opportunities, we'll continue to take it when we have it in the marketplace, but.

That has kind of changed from a profile perspective from Q2 to Q3.

Okay that makes sense.

And then also wanted to ask on on maintenance Capex and you guys have.

Consistently done a good job of reducing that.

This year noted to kind of step down again for what is expected in 2020.

How should we think about that as as kind of a run rate going forward was there anything where some maintenance got pushed out or is it just.

Cost savings.

Yes, so thanks, Joe Sean I think yes, we haven't provided guidance for going forward, but but yes.

With regards to we haven't had too many projects that we pushed out so we try to do it was absolutely necessary for our assets. We our first priority is always about safety.

And so in as much as you know the run rate how you model that I guess you'd work with Jamie on on how you my desk model that going forward, but we haven't providing for guidance on that.

Okay got it thanks for taking my questions.

Thank you.

Thank you we have no further questions I will now turn the call back over to Jayme Parker.

And thank you for your interest in shell Midstream partners. If you have any additional follow up questions. Following today's presentation. Please feel free to call me directly my contact information can be found on the presentation materials as well as on our website shell midstream partners dotcom. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Good morning, My name is Bill am and I'll be your conference operator today.

At this time I would like to welcome everyone to today's webcast for shell Midstream partners. All participants are in a listen only mode. After the speakers presentation that will be a question and answer session.

Good question during the session you would need to press star one on your telephone if you require any further assistance. Please press star zero.

I'll now turn the call over to Jayme Parker Investor Relations Officer, you May begin your conference.

Thank you well.

Welcome to today's webcast for shell Midstream partners with me today are Kevin Nichols, CEO, Shawn Carsten, CFO, and Steve led better DP commercial and business development.

Slide two contains our safe Harbor statement.

As well as in today's press release and under risk factors in our filings with the SEC.

We will take questions at the end of the presentation with that I'll turn the call over to Kevin.

Thanks, Jamie Good morning, everyone and welcome to our third quarter earnings webcast.

These combined events have impacted our communities our staff customers and our investors.

And our focus is on a safe operations the safety of our employees and we certainly hope that youre staying safe during this difficult time.

As I look back on the third quarter, we continued to see effects from the pandemic and these storms as well as some planned turnaround activity from our customers.

Against this backdrop, our diversified asset base continued to show strength, despite a difficult macro environment.

In the offshore the partnership saw a temporary reduction in volumes as customers shut in production several times throughout the quarter related to the storms in the Gulf.

These shut ins also impacted zydeco as we saw slightly lower volumes coming in from the offshore.

And our refined products systems continue to see the impacts related to the pandemic as demand destruction caused lower throughput in both the second and third quarters with.

With the significant supply and demand imbalance in the second quarter, we were able to offset some of these impacts through storage opportunities.

However, as supply and demand has come more balanced in the third quarter were seeing reduction in these opportunities for storage as inventory levels are worked off.

To help offset the impact to our earnings our operations and commercial teams work to minimize business interruption in order to maximize business value from our assets during this challenging quarter.

And despite an impact of approximately $12 million from the storms were able to deliver $163 million in overall cash available for distribution.

And I also think it's really important to note that we did not experience any material damage to any of our assets as a result of the storms.

And volumes have ramped back up to pre storm levels once producers have restarted production.

Our ability to continue delivering value to unit holders in this challenging quarter and year speaks to our operational capabilities and the resilience of our assets.

Offshore we have one of the Premier corridor networks, which provides transportation for an advantage medium crude grade and provides our customers unique optionality.

Longer term, we continue to remain bullish on the development and growth in the Gulf of Mexico.

Where we see continued activity by our sponsor and other customers and we have the ability to capture these volumes for little to no capital required by the partnership.

Our onshore assets they span the commodity supply chain from crude crude the clean products and we're well positioned longer term to ramp up with the U.S. and global recovery.

As is true with the entire industry, we expect to see continued volatility and uncertainty in the near term.

So with that I'll now hand, the show the call over to Sean Sean.

Thanks, Kevin.

I reflect on the third quarter, our assets have performed well in this difficult economic environment.

So first let me cover a few of our key financial metrics for the quarter.

Our total revenue was $110 million a decrease of about $10 million.

This decrease was primarily related to the impacts of the multiple storms that Kevin spoke about earlier, along with some planned turnaround activity.

The decrease was partially offset by about $3 million in higher product revenue.

When compared to the prior quarter now this is due to the sales of allowance oil.

Our operating expenses were 75 million down about 4 million from the prior quarter, mostly related to lower severance expenses in the current quarter. Now this was partially offset by an increased cost of allowance oil and assessment or property taxes.

Our income from equity investments was 109 million. This is flat with the second quarter.

The partnership declared a distribution of 46 cents per LP unit now this resulted in a coverage ratio for the quarter of one times.

And finally, we incurred about $11 million of maintenance Capex in the third quarter, primarily related to zydeco.

So now for the partnerships balance sheet and liquidity.

As of September Thirtyth. The partnership has a total debt outstanding of 2.7 billion.

Which equates to a debt to EBITDA ratio of 3.5 times based on an annualized Q3 adjusted EBITDA.

We're comfortable with our balance sheet and believes that we.

We believe it allows us the desired flexibility to continue to effectively navigate these turbulent times.

So now let me move to a few updates for the rest of this year.

In the offshore we expect to have an impact of approximately $15 million to both net income and cash available for distribution in the fourth quarter.

This impact is related to hurricanes deltas data, which affected the Gulf in October as well as some planned turnaround activity that was delayed from the third quarter as a result of the storms.

As part of our cash preservation and operating cost initiatives Weve already committed to $10 million in sustainable savings in 2020.

Now in addition to this we also expect savings in 2021 in the range of $30 million to $40 million.

This would be inclusive.

Inclusive of the 10 million already captured in 2020.

I'm really pleased to report that we are well underway to achieve these targets.

So as I close let me say again, we have a strong suite of high quality midstream assets and coupled with our resilient balance sheet. We believe the partnership is well positioned for the long term.

With all that and I will take your questions operator.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the county roster.

Sure. Our first question comes from the line of Shneur Gershuni from please go ahead.

Hi, good morning, everyone not to your everyone is well maybe.

Maybe to start off with literally your your concluding remarks with respect to cost savings and so forth I was wondering if you can expand on it a little bit how sustainable they or.

And you know our we just scratching the surface of it now or can there be materially more incremental cost savings throughout 21, you can sort of talk about your process.

How you're going about it.

Oh, Thanks, Shneur. So when you think about our savings we believe theyre all sustainable savings. We've made a few one off cost movements, but we're focused right now on fundamental structural savings roughly half of this cost is related to salaries and wages and the other half is related to a number of cost reductions in terms of the way.

We operate more efficiently some are direct so we were reducing our direct contractors.

It certainly does so just to paraphrase so some of it directly at the MLP level and some of it is the the allocation from Royal Dutch at the end of the day.

But maybe to follow up on that is there is there kind of like everybody seems to have like a different name project. This project out or something so take it down is.

Is there is there kind of an ongoing process right now within Royal Dutch shell that.

We could see another layer of cost come down as well to work. This is kind of the bulk of the review on the cost structure.

Yes, Hi, this Kevin yes.

Yeah, and I think you may be referring to some things you hear about Royal Dutch shell reshape and some other things that they're doing but but actually Sean and I.

And the management team had started this.

Last year already in looking at how we could sustain and bring our competitive our cost down to be more competitive and so we've been on this journey, maybe a little bit ahead of some of the things that shell is doing and we're now putting those in place which is why we're comfortable that we'll see them here in 2020 and as we go into 2021, it's also about creating a continuous.

As far as continued.

Exploration around how we just do things better we're looking at things leveraging our new ERP system that we've talked about in the past.

As for on the on the S&P platform and how we can digitize things takeout manual manual work processes make things more efficient and prioritize things so.

We'll always continue to look for additional cost but.

What what Sean referred to is the.

The output of a program that we've had in place now.

For some time.

That makes sense, so, but so the journey not over.

Okay and then.

Okay perfect.

And then I was just wondering if we can talk about the distribution outlook for second year.

Last quarter the language in the press release sort of outlined.

Leading into your when you reported earnings that you felt you needed to do this and now we're back more on a typical.

We don't for you release, the quarterly distribution just trying to understand the change in language there.

Yes fair enough.

Let me start out with I understand you as well as our other investor if nobody else are looking for longer term guidance and the strategy of the company going forward and we're not talking just about one corner of events I think we've got the feedback and we certainly understand that looking to say well how does this play out over the next 12 18 24 months and we are certainly working to put that in place and.

We're not ready to give that today with regards to the change from quarter, two signaling quarter three keeping it flat in quarter four.

If you take a look at some of the changes back then the trends we are headed in the direction of fewer cases in the pandemic.

Marketplaces, we're opening things were looking pretty good from a general trend perspective, if we sit here and look at it in the fourth quarter.

Yesterday, we set an all time high for cases in United States Hospitalizations are on the rise you look at it globally countries are actually locking back down again other cities are reimposing restrictions. There is a lot of volatility in the oil and gas sector. So there's just a lot more movement right now as we sit in quarter four than there was last quarter and we think it's just.

Right to probably give you the results of the quarter and not try to protect that right now and continue to work towards getting you that long term guidance as we can see some of the settle down.

Okay and maybe one final question, then youve talked about kind of the cycles that you're you're looking at and I think you just sort of touched on some of them in the last answer.

Yes.

The current run rate right now, yes, we as you sort of intimated, we're having startups in going backwards Pago forward and so forth. If we were sort of two main tool the level of congestion and activity that we are at right now so we don't improve from here.

Because everything sort of averages out here and there and that stays that way for the next few quarters is that something that youre comfortable with from a payout perspective like you feel comfortable you're generating enough cash.

Cover the expenses and everything else trying to.

Wondering how to think about the hypothetical there.

Yes, Im not sure Shneur I am going to.

Right to comment on a scenario that plays out or how that would play out certainly we're looking for more stability.

And as that stability comes in you can beat we've we've always committed to our investors that when we give guidance we shoot to deliver on that guidance and so the things that we're looking at are the same things that we've been looking at before it's the what's happening with the pandemic, what's happening in the oil and gas sector, what's happening with demand.

Could have happened with the restrictions.

Tight coverage right now.

So of course, we're trying to see what what the the near term looks like longer term, we're still confident in our growth projects that we have coming on with power nap and veto, but those are a little bit further out.

All right perfect. Thank you for taking the time to answer my questions today and have a great weekend. Thanks.

Thanks, nor be safe.

You too thanks.

Thank you. Our next question comes from the line of three we said Chen from Barclays. Please go ahead.

Good morning, I wanted to ask you about the zydeco be contracting for at the 18 month contract that I believe are going to expire at the end of this year. So just in a couple of months and had the shippers, let's say before their six month extension or are they will be contracting completely different rate.

At this point any color you could provide great.

Hi, Theresa this is Steve led better yes, so I think given the current volatility that Kevin mentioned.

Created an environment that shippers are waiting to see longer term impact prior to locking in and in light of that the two contracts that we have with the 18 months that expire at the end of November the shippers have elected not to renew those contracts.

But I would say that we are we are in conversations and we still are looking at various options and currently we will run.

Those options outside of a typical open season process.

And I'll just follow up I think was an important note that we've been pretty purposeful and diversifying our asset away from any one geography or asset when you think about the things that we've done in the offshore and the onshore refine products gas gathering and so we feel good about the overall mix of the position and the capability to deliver to the.

Partnership longer term.

Understood and if I remember correctly I think one of your longer dated contracts.

On Zydeco does source a bakken barrel.

And I was just wondering if you have any exposure to DAPL as that continues to evolve.

Yes, so so we're not going to comment on exposure around what may or may not trends transpire as as a result of dapple, we stand ready to provide efficient and competitive solutions and our and are ready to move the barrels not only from Houston, but also needle in the Bakken barrels to the various destination.

Points in a competitive and efficient manner, Hey, Theresa that and just one more thing to add there that the customer that has that contract has a number of different connect points to source and to move on our system. So the.

The contract and their obligations to us are sound and we've got multiple options for them.

Great and switching to offshore so.

We get a lot of questions on the political landscape and I'm curious to pick your brain on that what you think.

Can happen offshore as far as the.

A failure to end the third party customer projects. So if we do get a wave. So can you talk about maybe the resiliency of your sponsors portfolio as well as third party customers and if there is a ban on new leases how long do you think that volumes on your pipeline can remain intact.

Yes, Thanks, first and foremost we've operated a very successful business throughout a number of multiple administrations right and we found ways to deliver across that so those come and go certainly they'll have their challenges.

As far as the Gulf of Mexico, and my comments earlier about being really bullish on the Gulf of Mexico, If you listen to Shell's webcast and their earnings webcast. A couple of things to note Ben highlighted the need for hydrocarbons for the next decades and there'll be a role for hydrocarbon in the next decades against the backdrop of energy transition, we can certainly talk more about.

That but there will be continued investment by shell in hydrocarbon chain, they're going to take a very focused approach to that and one of those areas. Specifically is the development of Gulf of Mexico, and so we're confident in our sponsors progression of the projects that they have in the funnel that we already have plan like power nap and Vito and other tie backs.

But also whale black tip other large discoveries that they've had those commercial leases are those leases at the commercializing ice.

I feel very confident shell feels very confident in our ability to progress those and bring them to market.

Even against the backdrop of an administration change I think longer term and leases coming out, but thats, usually 10 years plus out so very confident in our in our Gulf of Mexico profiles.

For the next five to seven years.

Understood and if there is.

In addition to ban on new leases and various and permitting slowdown how does that impact on your sponsored permanently a project and as well as a third party customer it's related to the actual volumes that are going to physically flow into your pipe do you see any risk.

Permitting process.

Declining volumes per se.

Well, so I think theres a couple of things going on there what you normally hear about as far as infrastructure and permit issues. It is new build construction on infrastructure and getting the necessary permits to put the new build in place offshore one of the benefits to what we have is that an existing extensive wide footprint of infrastructure that's in place with the capabilities.

Move new volumes without actually having to build anything I mean and things like our our Mars expansion and de bottleneck project is just about adding pumps, which already permitted for the platform.

We think it's much better.

Thank you.

Thank you I show. Our next question comes from the line of Gabe Moreen from Mizuho. Please go ahead.

Hi, everyone I just wanted to ask about look you've built.

Other reduce net debt.

Over the last two quarters I'm, just curious about kind of the 21 capex outlook crude.

Clearly the market has been spent so far.

Youre building cash on your balance sheet or at least over the last couple of quarters is there anything.

I guess planned in the Hopper and Alex will some of those dollars that are coming and hopefully over both the distribution.

Okay. This is Sean thanks for the question. So we haven't provided guidance for 21 for Capex.

No as you highlight cash is building up on our balance sheet that will allow us to do.

Whether whether small projects or just reduce debt and so but we'll we'll see as we as we get there so.

Okay, and then I also just wanted to ask or enough was asked previously, but just with some of the had one refinery changes just wondering kind of how colonial's wondering.

Whether there's an opportunity there to push more barrels into into stock warrant hopefully as demand recovers.

Yes, Gary this is Steve I'll take that one I mean so.

As we talked about earlier there are things that continue to change with the with pandemic in demand patterns, what we've seen over this quarter and in the past couple of quarters is that colonial continues to be resilient still has a very cost advantaged access to supply and various things. They can do to compete no matter what is happening.

In terms of the refinery production in that pad.

Obviously has some exposure to the New York Harbor, but but we see colonial be able to compete with whatever may unfold up there.

Yes.

Thank you.

Sure. Our next question comes from the line of Derek Walker from Bank of America. Please go ahead.

Hey, guys. Thanks for time.

No just the just wanted a quick update as we make sure.

The outlook around the margin expansion.

Given the current environment has there been any any change around how you're thinking about the timing that project.

How about the ramp on it I know you've kind of talked about in the past I just want to see this in Asia and Europe.

Hey, Derek this is Steve Thanks for the question, Yes, we're still very excited about the margin expansion.

We have otherwise in place we expect definitive agreements by the end of the year with project being brought online.

Late 2021, and advance Vito and power nap coming through the quarter and 2022.

And as we've talked about in the past, we've built and constructed the project for additional flows of roughly 65000 barrels a day.

And just to remind everybody that.

As of the last call.

We won't have capex expenditure from a partnership perspective for that expansion that we will do that with customers for the customers.

Got it thanks, and then maybe just maybe just an operational question.

Any lessons learned so far I know, there's a lot of.

A lot of variability going on as.

As you alluded to with the weather shut it et cetera.

We've also been.

Than diligent on the cost front, just any lessons learned on that front as far as.

Operations offshore.

Volumes coming back onto the system.

It just personnel use I think you talked about just efficiencies around.

Personnel. It is with COVID-19 independent there. So just wanted to see kind of how you are.

I think the progress for you guys last couple of quarters.

Yes, just.

Are you seeing any more efficiency there on that front. Thanks, Yeah. I mean, we're continuing to learn as we all are through the pandemic and virtual and using technology and tools and we'll continue to deploy those course, we talked about it last quarter that we changed our shifts to 14 on 14 off to have more efficiency fewer travel costs with helicopters that.

Type thing also to manage the pandemic or the COVID-19 exposure I think from an operations perspective on our front as well as our customers on producers plan platforms, starting to learn to how the deal with Covance.

Both trying to prevent that from happening or an exposure on the platform through quarantine for week prior to deployment.

Going offshore then once were on the platforms our customers have people on the platform. If there is a case thats not a health issue how do you quarantine on the platform continue to operate the platform without having to shut down and then finally in the event that you do have a need to take the people off the platforms.

And bring them in I think the producers and we've gotten really good at that as far as the minimizing the downtime of taking the crew that has the exposure off having the other crew ready cleaning the platform and bringing it back up so we don't have any material impact from Cove. It from from any one particular incident offshore with having numbers of platforms.

Connected to our assets.

Got it thank you I appreciate it.

Thank you.

Our next question comes from the line of Spiro Dounis from Credit Suisse. Please go ahead.

Hi, good morning, guys.

Two questions for you both related to some recent announcements on the sponsor side of things and the first one relates to going back to the lack of clarity here very understandable in this environment and I guess, what I'm struggling with is your sponsor the ability to come out and provide a new distribution policy and a capital framework with.

Presumably the same level of uncertainty so I guess I'm just wondering why don't we see a more coordinated effort to come out and announce these plans together and maybe the right way to think about is their sponsors plan needs to be finalized and implemented before you walking or make your decisions for salix.

Well no I wouldn't say that certainly certainly isn't the case I mean, when when the sponsor announced their distribution cut and we did not have a distribution cut we got the question about should there be a read through from that then and our answer sort of the same there, which as they manage and operate a very different business from ours, it's global in nature. It has.

Different classes of business different exposures than ours, so there isn't necessarily a one for one correlation.

Between what the sponsor does with their portfolio, what we do with our portfolio.

We continue to have strong sponsor support for the vehicle they look at this.

MLP and this company has a long term.

Investment they've they've had very favorable credit terms that they've extended us that's not changed we have the waiver in place through first quarter of next year.

Continued we have high quality assets in there that underpin a much wider value chain and as you as you heard Ben talk about a focus on the Gulf of Mexico, We have the premier footprint in the Gulf of Mexico, and underpin a lot of that.

Evacuation of their crude so.

So as they grow we grow so theres a good relationship there as well.

Fair enough and maybe picking up on that last point around growth I think Rds also talked about me before growth areas outside of Gulf of Mexico, I think marketing, our hydrogen and Biofuels I believe are the aforementioned keep talking about how shall I cant participate I guess within those four buckets, some probably more than others I assume.

The traditional hydrocarbons and third and marketing in the third and this energy transition alternative energy.

Fair, let's just see how the road ahead looks like I mean, right now we have as we've grown we have some better a better position from a qualified income as an MLP.

So we are able to take on some nonqualified assets as we grow but the other thing courses with if there is if there is a new blue blue wave. They rewrite the rules around MLP that may open up some new opportunities that we can't currently enjoy given our tax structure.

Yes.

It's a good point okay. That's it from me thanks for the color guys. Thanks. Thanks.

Thank you.

Our next question comes from the line of Michael Blum from Wells Fargo. Please go ahead.

Thanks, and thanks for all the answers today very helpful.

Just really one question at this point.

Just wanted to can you just refresh our memories in terms of how the contracts are structured in the Gulf of Mexico, and you get these hurricanes that come through.

Do you have any protection with the insurance or is there anything contractually that protects you or should we just think of these as.

It's more fourth quarter question I guess, but is this just lost revenue.

Yes, it's a mixed bag off shore and Weve negotiated different contracts for different circumstances. There are a number of contracts that have minimums like the maddox pipelines that was recently contributed so regardless of the volumes of flow. We get paid there are others, where we have life of lease or dedication from the field, but so long as the volumes.

Flowing so we while we have a customer thats kind of captive to the to our particular system to bring their volume to shore. If they shut in production were exposed to that.

Maybe Sean you can talk about the insurance component, yes. Thanks, Ken Thanks, Michael So we do have be insurance on our assets and so you know and as much as we would have damage from the storm to our assets and limiting our ability to deliver barrels then we would be covered by that insurance, but of course, we can't provide insurance for our producers.

They have damage that's that's a different story so.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Joe.

From JP Morgan. Please go ahead.

Morning, guys. Thanks, Good morning, Thanks for taking my question.

Wanted to first ask on you mentioned a storage opportunity in the prepared remarks wondering if you can discuss at all at this point I guess, how significant that wise.

And kind of how we should think about bad stepping down in the fourth quarter.

Yes, that's the first time.

Yeah, Joe So actually what I was trying to highlight there maybe I didnt do it as clearly as I could was.

It was really an opportunity for us it helped offset some of the gap in quarter. Two when we were at the height of the pandemic and demand destruction. There was a really significant dislocation between supply which had not ratcheted down.

At the same level as demand has been destroyed and so producers were looking for opportunities to store barrels anywhere. They can find and we took advantage of that and that helped offset some of that gap in Q2 in Q3 supply and demand has now come closer into balance where the refineries and the production has now kind of equilibrium.

A little bit more so theres not as much of that storage opportunities I wouldn't really count on.

Anything from a modeling perspective around storage opportunities, we'll continue to take it when we have it in the marketplace, but.

That has kind of changed from a profile perspective from Q2 to Q3.

Okay.

Make sense.

And then also wanted to ask Scott on maintenance Capex and you guys have concern.

Consistently done a good job of reducing that.

This year noted to kind of step down again for what is expected in 2020.

How should we think about that as as kind of a run rate going forward was there anything where some maintenance got pushed out or is it just.

Cost savings.

Yes, so thanks, Joe Sean I think yes, we haven't provided guidance for going forward, but but.

With regards to we haven't had too many projects that we pushed out so we try to do it was absolutely necessary for our assets. We our first priority is always about safety.

And so in as much as you know the run rate how you model that I guess, you can work with Jamie on on how you my desk model that going forward, but we haven't provided for guidance on that.

Okay got it thanks for taking my question.

Thank you.

Thank you we have no further questions I will now turn the call back over to Jayme Parker.

Thank you for your interest in shell Midstream partners. If you have any additional follow up questions. Following today's presentation. Please feel free to call me directly my contact information can be found on the presentation materials as well as on our website shell midstream partners dotcom. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2020 Shell Midstream Partners LP Earnings Call

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