Q3 2020 Genesis Energy LP Earnings Call
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Welcome to the 2023rd quarter Conference calls for Genesis Energy Genesis has four business segments. The offshore pipeline transportation segment is engaged in providing the critical infrastructure to move oil produced from the long lived world class reservoirs from the deepwater Gulf of Mexico to onshore refining centers.
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 of sour gas streams to remove sulfur at refining operations, the onshore facilities and segment and transportation segment.
He is engaged in the transportation handling blending storage and supply of energy products, including crude oil and refined products.
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 and the Gulf of Mexico.
During this conference call management may be making forward looking statements within the meaning of the Securities Act of 933, and the Securities Exchange Act of 934. The law provides safe Harbor protection to encourage companies to provide forward looking information Genesis intends to avail itself of those safe Harbor provision.
Conns and direct you to its most recently filed and future filings with the Securities Exchange Commission.
We also encourage you to visit our website at Genesis energy Dot Com, 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 at this time I would like to introduce grant Sims CEO of Genesis energy.
LP Mr. sends will be joined by Bob Deere, Chief Financial Officer, and Ryan Sims, Senior Vice President Finance and corporate development.
Good morning, everyone and thanks for joining.
As we mentioned in our earnings release during the third quarter, we were successful in paying down approximately $70 million in debt in spite of continuing but improving macro challenges from worldwide cold with 19 pandemic as well as the most disruptive hurricane season since 2005.
We are continuing to realize the benefits of the actions. We took earlier this year to maintain and improve our financial flexibility and are encouraged about what these actions will bear for the remainder of 2020 and in the years ahead.
We have a clear and to find opportunities to realize improving financial results of future periods as the upstream community gets back to a normalized operations in the Gulf of Mexico, and the demand for some of our goods and services continue it's returned to pre pandemic levels, and which will more than likely grow from there.
Now turning to our individual business segments.
Our offshore pipeline transportation segment was negatively impacted from Hurricanes, Arco and Laura combining for basically two weeks a complete temporary cessation of production in the central Gulf of Mexico during the quarter.
As we have previously discussed a platform that our trups pipeline goes up and over incurred some limited structural issues, which was required investigation and analyses.
We continue to discuss with the Bureau safety and environmental enforcement to determine how best to return to normal safe and responsible operations on chops as soon as practicable.
Today, we have been successful in routing all affected volumes through our Poseidon pipeline system and are close to revenue neutral, although the financial impact from Poseidon is on a one month lag.
Due to it being effectively a joint venture.
So far in the fourth quarter, we experienced almost 15 days of disruptions in the production flowing through our pipes from Hurricanes Delta and Zetta.
To put this in perspective.
Aggregate financial impact to us in this remarkable year, resulting from the disruptions to producer activity and incurrence of extraordinary operating expenses, including several million in cost. It will show up in this quarter will likely be in the $40 million to $50 million range as opposed to the approximately eight to 10 million that we would reasonably expect.
In a quote unquote normal year.
On top of this or some major maintenance happening this quarter, while the negative now we believe that there is an acceleration of work that was needed to occur in any event, allowing for more sustainable production throughput in future quarters, beginning in 2021.
Despite these challenges nothing and I want to emphasize absolutely nothing has occurred to lose any future production or existing reserves from dedicated fields were to alter the normalized earnings profile of our offshore segment.
I would point everyone to the first quarter of this year's financial results of approximately $85 million as the current normalized quarterly earning capability of our industry critical infrastructure assets in the Gulf of Mexico.
In fact, we would reasonably expect overall increase in volumes is Atlanta us phase three and cap continued to ramp.
We always anticipate scheduled and unscheduled maintenance downtime as well as weather related downtime, but under any kind of historical normalized scenario, an average of $80 million to $85 million of quarters are expected average quarterly run rate as we currently see it.
Plus we're now just 12 or 18 months from initial flows from Argos in King's key which required minimal capital from us and in the case of Kings key come with take or pay agreements covering a significant portion of expected production.
These two fields are scheduled for first production in late 2021 or early 2022 in early to mid 2022, respectively.
When fully ramped up they will likely generate in excess of 25 million a quarter or over $100 million, a year and incremental segment margin EBITDA and importantly cash flow to us in the very near future.
It is important to note that while volumes from onshore shale plays are seeing accelerating declines production and throughput in the central Gulf of Mexico continues to increase even in this current environment.
For example, we are pleased to announce today that we have recently entered into agreements with ALOG and other working interest owners to provide downstream transportation services for all of the crude oil associated with our recently announced splits discovery.
True answer is located in Union banks blocks, a 77 and 921 and it was initially discovered by log in as partners in mid 2019.
Wires from Sprint's.
With first oil expected in early 2022, or 100% dedicated to Poseidon for the life of lease contains certain take or pay features and required exactly $0 from us to capture this incremental cash flow.
This is just one example of an active and steady backlog of additional development wells in subsea Tiebacks that will keep base production flat to slightly increasing while lumpy projects such as Argos in King's key as well as anchor which happens to be dedicated to a competitor's pipeline at by the way it happens to be currently over so.
Subscriber will all be coming online over the next few years.
Additionally, there remains a number of other projects it could reach their five D final investment decision in the next 12 to 24 months that would otherwise represent additional incremental production to come online in 2023 or 2024 and beyond.
All of these projects will support continued steady to potentially significantly increased production and throughput from the central Gulf of Mexico.
We remain resolute in our belief that the Gulf of Mexico will be an important producing province for the us and the world as a whole for decades and decades to come.
Switching gears to our second largest segment, our sodium minerals and sulfur service segment continues to improve from the depths of the second quarter we.
Recent data suggests the soda ash market is rebalancing and improving and early indications would suggest we will be sold out this quarter from our west Veeco facility and that that will continue into and throughout 2021.
Not only do we expect to pick up additional sales, but this is very important to our cost given the loss of fixed cost absorption and other inefficiencies weve experienced by not running Westlake full design capacity over the last six months or so.
In terms of soda ash market dynamics, we are seeing a steady near term improvement in worldwide supply and demand balances for soda ash as the world's economies begin to reopen along with certain supply responses like the temporary mothballing of our Granger facility and more permanent reductions in capacity in China.
As well as short term supply disruptions from flooding in central China.
In other words, the market is working through inventories and existing bulges in the soda ash supply chain. The developed at the end of last year became materially worse as a result of the economic reactions that posted 19.
Well, one would expect to see prices rise under these developing market conditions, we are taking a conservative view and expect prices to be reasonably muted.
Entering 2021.
Let's see prices, increasing perhaps meaningfully as we move through the next year provided we do not see a second shutdown of economic activity in response to the virus.
It is very important to recognize that are naturally produce soda ash doesnt compete with a substitute product. It competes with synthetically produced soda ash, which basically cost twice as much as our natural production, an enviable position to be in any market.
Regardless regarding the decision to mothball, our Granger facility until the expansion is complete I would point out that this was by far our highest cost facility that is then annual production rate of 500 to 600000 tons.
Even at 2019 prices operating Granger was marginally profitable is such an inefficient level of operations.
It's important to point out that if our Wesbanco facility was sold out of its roughly three and a half million tons per year production and that there is a return to something akin to 2019 prices.
Our soda ash business is quite capable of generating a $160 million plus per year segment margin and EBITDA, even with no volumes from Granger.
Having said that we remain excited and on track with our Granger expansion project.
We believe when it comes online in late 2023, and an expanded 1.2 million tons per year, our Granger plant will be one of the most economic soda ash production facilities in the world similar to our World class, if not leading west Veeco production facility.
This will allow all of our production from Granger to compete more favorably for both growing the incremental global demand as well as displacing significantly more expensive synthetic production.
Longer term it would be hard to conceive of a brighter future than what we envision for this segment.
Whether it is general fiscal stimulus general infrastructure expenditures are spending target at energy conservation and a lengthy process of transitioning from hydrocarbons as the primary transportation fuel.
These businesses will materially benefit.
Soda ash among other applications is an essential component using glass manufacturing and the production of lithium ion phosphate batteries.
Construction of new homes, and new automobiles as well as the retrofitting of older buildings with new L.E.D. certified glass Windows will continue to drive increasing soda ash demand.
The demand from the production of new batteries to facilitate the storage and usage of developing renewable resources of energy is likely to be a major contributor to increase in demand for soda ash in the years ahead.
Some accounts the demand for soda ash to produce new batteries alone maybe an additional six to 7 million tons a year by 23.
This alone represents more than a 15% increase in demand for soda ash outside of China relative to today.
All of these growth drivers are in addition to the intrinsic growth of 2% to 3% per year, we would expect as the developing countries resume their in extra volt path of growth towards the per capita consumption in the more mature OE CD economies.
Our legacy the legacy refinery services business performed in line with our expectations.
We saw demand for Nash, the sodium and sulfur based product we produce increased during the quarter as our copper mining customers, which is our primary market resumed operations that were otherwise halted or cut back in the second quarter from government or self imposed shutdowns associated with the pandemic.
Copper is used in everything from phones to automobiles to bridges and will undoubtedly benefit from the continued economic recovery and future global economic expansion, which in turn will drive the demand for Nash for decades to come.
Furthermore, our process helps our host refineries limit their air pollution by close to chemical reaction as opposed to their alternative method of the conventional combustion process to remove sulfur from their finished products.
Our Marine Transportation segment performed in line with our expectations for the quarter.
We're starting to see the negative impacts of lower refinery runs in the Midwest and Gulf Coast, which is putting pressure on both day rates and utilization, especially in the inland world.
We do expect to see an acceleration and asset retirements, beginning this year into and throughout 2021, which will help balance supply with the current reduced demand for marine tonnage.
At the end of the quarter, we successfully re contracted the American Phoenix with credit worthy new customer, albeit at a lower rate.
We only re contracted her inclusive of our customers options through next year as we believe the market will tighten given expected asset retirements and a recovery of demand as we move through 2021.
The less given the pressure on utilization rates in this new contract starting for the Phoenix, the fourth quarter is going to be challenging for Murray.
Our onshore facilities and transportation segment performed in line with our expectations.
We started to see certain rail volumes returning to our scenic station in the fourth quarter, but we will not see any significant financial impact from these movements as our main customer will be utilized in prepaid credits.
Assuming a return to refinery demand and upstream production along with the government of Alberta is recent announcement to eliminate their self imposed two years' worth of production curtailments on December Onest, we can see this trend to continue into 2021. Additionally.
Additionally, if something happened to the operations of Dapple, we would expect to benefit as more volumes would have to move by rail as such a conduit were shut off by regulatory fee.
As previously disclosed we received approximately $41 million in cash from Denbury, which was included in segment margin adjusted consolidated EBITDA in the quarter.
As we further disclosed yesterday, we've finalized an agreement with Denbury, which allows us to totally exit the Seo to pipeline business, a non core business for us.
We will receive an additional $22.5 million in cash in this fourth quarter and an additional 70 million in cash to be paid in equal installments of $17.5 million in each quarter of calendar year 2021.
Combined we will receive approximately $134 million in cash from Denbury, which we used to pay down debt.
Additionally, we will recognize all of that $134 million as adjusted consolidated EBITDA under our bank revolving credit facility for purposes of Klein compliant with our covenants there.
The run rate on these two pipeline assets had fallen to around $24 million to $25 million of margin and EBITDA year by their explicit terms. They were essentially going to go to zero and five or six years anyway.
We felt it was better to work with Denbury, who had exclusive use of these assets to accelerate the money's do us so let us pay down debt more quickly and importantly recognize significantly incremental EBITDA, while our two main businesses significantly improve and ramp over the next four or five quarters.
As we look forward for the remainder of 2021, we now expect adjusted consolidated EBITDA as defined by our banks and used to calculate compliance with our covenants, how we have always representative.
For the full year to come in a range of $590 million to $610 million. We will continue to evaluate additional sales of non core assets and examine our general administrative and operating expenses in the context of the economic operating environment.
Accordingly, we see no scenarios, where we have the risk of not comfortably complying with all of our financial covenants and look forward to the improving financial performance of our core businesses as previously described.
In the third quarter, we added back approximately 19.7 million to our LTM last 12 months adjusted consolidated EBITDA, which included 13 and a half million dollars from onetime charges associated with our cost savings initiatives, which we are permitted to add back through the first quarter of 2021.
The remaining $6.2 million from the material project completion credit for approximately $12 million of additional infrastructure. We are installing the Gulf of Mexico that is supported by certain take or pay contracts.
This project was approximately 18% complete as of the third quarter.
We have added a footnote I want to point that out to everybody. We've added a footnote in our earnings release, which describes these pro forma adjustments in greater detail, so investors and analysts alike can more closely approximate how we and our banks evaluate our financial results.
With this accelerating the ability to pay down debt and with relatively de minimus capital requirements to realize the financial benefits of these improving business conditions, we foresee no issues and extending our senior secured credit facility and refinancing our near term unsecured maturity, which by the way is still some too.
And a half years out.
I would like to once again recognize our entire workforce and especially our miners Mariners and offshore personnel, who live and work in close quarters. During this time of social distance.
I am extremely proud to say, we have safely operated our assets under our own COVID-19 safety protocols procedures and protocols with no impact to our business partners and customers with limited confirmed cases amongst our some 2000 employees.
It is an honor to have the ability to work alongside such quality folks.
With that I will turn it back to the moderator for any questions.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, maybe necessary to pick up your handset.
Before pressing star one one moment, please while we pull for questions. Our first question today is coming from three to Chen from Barclays. Your line is now live.
Good morning. Thank you for that thorough review grants on I wanted to follow up on the soda ash side to begin with and ask how much rationalization.
Permanent versus temporary.
Currently versus peak capacity, including Granger.
No we.
In total we have seen worldwide, including about 650000 tons of annual capacity in China.
Shutdown permanently.
As of our understanding and approximately 4000.
Before 400000 tons shutdown permanently in.
In Europe.
So a million tons of permanent reduction and worldwide 55 million tons a year.
Business and then obviously the temporary cessation of another half million or so.
From our shutting down Granger in addition to several large facilities were.
Temporarily affected in the third quarter in China due to the flooding in central China. So our belief that they are back up and running on rate at this point.
Got it.
And in terms of the incremental demand from batteries alone.
Loan.
7 million ton, what underlies that estimate and how visible to you. Thank you.
That concludes me based on electrification fleet or other factors are there at purchase or infrastructure infrastructure investments that need to be met before that number I can have more lives and drive demand for soda ash directly.
Steve I mean, it's pulled from.
Public pronouncements and projections that are provided by other public companies, including <unk>.
Kind of on the end use side.
Companies such as Tesla.
As well as those that are under production side of the companies such as Albermarle, So which is the largest the world's largest producer of.
Lithium phosphate so in any event.
When we started this in carbonate so in any event those it's kind of those are.
Of the data points that we used to have to backup to the forecast that we gave today.
Okay.
And then in terms of.
The offshore segment can you remind us as far as returning chops to normal operations, what exactly needs to be done at this point either on your end or on Betsy.
We're currently in.
Discussions with Betsy.
About what to do and how to do it the relative to the other.
A limited.
Structural issues should develop to GBP 72 platform. So.
As those discussions progress.
We're prepared to move very quickly to.
Be able to restore normal service so.
This point, we don't have a resolution with the.
Bessie, although we hope to have one and a clear path forward.
Shortly.
Understood.
And lastly, I really appreciate all the color you provided on the offshore.
Offshore.
Relating to that inventory opportunity on the production side.
If we do see federal lease band put in place and potentially a permitting slowdown do you think this FX and the inventory pathway much.
And not on that not not on that identified at this point because I think it's by and large it's already permitted and other things and concerning a lease span.
At least are I'm, not a lawyer and I'll, probably get in trouble for practicing law, but I'm not sure that.
The leasing program the Gulf of Mexico is covered under the outer continental shelves lanzatech or Oxley as we call it and that requires a department of interior by law by legislation to maintain an active leasing program of.
Federal waters.
They are so im not sure that.
By executive.
That to.
That can happen.
So.
I think that there are other people in the upstream community, which has significantly more dollars at risk.
And we're spending significant dollars.
You can see whether or not its a.
Hesser Murphy years, many of the other what you might call Super majors that have recently reported that the specialty BP that the Gulf of Mexico is going to continue to be.
A significant part of their hydrocarbon footprint.
For decades to come so they're the ones that have.
More of the the five to 10.
To develop the resources, which are known and have been discovered to date.
Thank you very much.
Thank you. Our next question today is coming from Shneur Gershuni from you'd be asked your line is now live.
Hi, Good morning, everyone, maybe just to follow up on that last question. If I recall there was an attempt to put an executive board for exactly Theresa's question Zack under the Obama administration.
If I recall correctly, what's in that push that Congress would actually have to change the law rather than using executive order is that kind of the summary of what how you just responded to the question.
That is correct then post.
April 2010, the very unfortunate condo incident the.
Obama administration attempted to us.
Emmis activities going on in the Gulf of Mexico in the upstream community took it to court and immediately had headed.
And to determine that that is a congressional action is required to do what they were trying to do so.
I think that Thats still our view in terms of.
A permanent band or or whatever on leasing activity and other extraction activities for the resources underline the federal waters of the Gulf of Mexico.
Okay that was my understanding also okay perfect.
And just to pivot to a few questions here.
Yes, a couple of new projects in the Gulf I also mentioned that the contract with log.
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If I recall typically you don't really need much capital for these types of new additions. It is that the case here as well to that it's just incremental EBITDA without.
Any or minimal Capex spend yes. This is this is nine it's maybe it's out in the public domain, but its going into the it's a subsea tieback developments back to intervention is the operator of the lobster platform, which has one export crude oil pipeline off of it which is the sites.
Okay.
And maybe to pivot to your commentary on the call with respect to soda Ash you had sort of indicated that you expect to be conservative around setting expectations and.
I respect that.
Just trying to understand like we see the strength in the soda ash market right now I would have thought that would bode well for the upcoming negotiation season, but at the same time I get it that it represents I think two thirds of your sort of soda ash production.
So is that why you're conservative that some of the strength might come after the contracting cycle or flow through just trying to understand where the puts and takes are in terms of the conservatism.
Why that why what we're seeing in the spot market won't necessarily materialize in the upcoming negotiations.
I think that again a lot of it has to do our conservatism a lot of it has to do with the the nature of the contracting processes, where most domestic prices are subject to caps and collars.
And so theres not a lot of volatility from one year to the next flute.
There is a.
Yes that market share grabs from time to time, given the limited member of the.
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Play players on the supply side domestically and then annual contracts and.
Latin America predominantly than shorter term contracts quarterly or so.
In Asia outside of China, So lot of market dynamics and to borrow.
In terms of placing volumes and to.
Borrow aligned from a.
Warren Buffett, and it's hard to be a lot smarter than your dumbest competitor.
And so we're just.
We're being conservative of how we think that the 21 is setting up the fundamentals for sure Shneur are driving.
The you know where supply and demand is balancing people are working through the.
The inventories and I think pertains very well for us as we move through 21, and certainly into 2002 and beyond.
Okay I appreciate that maybe one last question if I may.
You sort of talk about being able to hit full capacity.
In turn and I assume that obviously present operating leverage from a margin perspective on a constant pricing basis, how much would your margins expand in soda ash business, just by being able to one flat out right.
Rather than partially running.
For this year.
I don't.
I don't have a specific number off the top of our head. We can we will do a little bit of investigation and.
Try to work that in in.
For our for future discussions, but I don't have it off the top of my head.
Not a problem totally appreciate it. Thank you for the color today and have yourself a safe Doug. Thank.
Thank you you too.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from TV TJ Schultz from RBC capital markets. Your line is now live.
Great. Thanks.
The rail volumes into scenic station and the Mbcs when would you add.
Expect to get through the credits where the increased activity would impact cash flow.
And then you talked about dapple, if you could just quantify the benefit to all our capacity to handle more trains.
There is the potential to do some other stuff but.
And to accelerate the deleveraging, but we'll take advantage of that if the market conditions are at and we think that that's.
Fair value for anything that we have.
Okay, great. Thanks.
Thanks to you.
Thank you we reach end of our question and answer session like to turn the floor back over for any further are closing comments.
Well again I appreciate everybody I know that's.
Pretty.
Hectic schedule. This morning with all the other they're reporting that's going on so we appreciate everybody carving out so 30 minutes.
Said with us and we will talk to you we'll talk to you soon thank you.
Thank you I guess computer today teleconference. You may disconnect you lie to this time and have a wonderful day, we thank you for your participation today.
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