Q3 2020 USD Partners LP Earnings Call
Sure has gasoline demand down year-on-year approximately 12% distillates down approximately 9% in jet materially down approximately 40%
Starting an early three Q producers in Canada and the US has started to bring back temporary shut in production from the first quarter of 2028 and these current price levels and future price levels. I just shared with you specific to Canada based on public announcements and discussions with our current and potential customers and more importantly or equally important given the recent announcement from the Alberta Government to lift the production curtailments beginning December of two thousand and five. It is our expectation that production in Canada is returning at a rate that total production is likely to reach pre COVID-19 by the end of the year.
and or
Early next year as a quick reminder. It was during q1 of 2020 that incentives the export crude Biro were dead in the money which is to say because to move oil from Hardisty to a destination destination Market was less than the wage red or the incentive to do so and at that time our hardest the terminal was approaching throughput levels of $180,000 off of that size. We moved back to these levels the need for crude-by-rail export capacity from our terminals is expected to also increase our discussions with our customers.
Continue to indicate and confirm the growing need for CBR that started in late three q and is expected to continue into the fourth quarter time frame and then Thursday or early 2021 now I'd like to provide a couple of key highlights on on our commercial activity starting with Hardesty. But first of foremost given the the macro transition that I just outlined as activity picks up our key Focus will be on servicing our existing customers.
We also believe commercially we will be able to identify opportunities to execute on spot activity and commercializing the remaining off the remaining seven real slots available at our Hardesty South which is the sponsors expansion of the Partnerships Hardesty terminal.
Finally and most importantly we will work with existing and new customers to transition to a d r u solution with that. I'd like to give a quick update on with the D. Are you in coordination with our customer the railroads and our partner Gibson RD are you project is tracking per plan as we have mentioned before we are fully permitted and we have commenced construction at both the d r u and Hardesty and at our terminal in Port Arthur Arthur with civil activities underway off. Both projects are on budget and progressing for our plan schedule with substantial completion plans second quarter of 2021 currently name is Dan mentioned. We are in active and detailed discussions with current and new customers to commercialize the d r u b on the current 50,000 barrels a day off.
Announced with our current customer as a reminder benefits of the d r u r material and provide a competitive and potentially Advantage solution to egress Alternatives and I'd like to list what those are quickly first and foremost is Dan provided a d r u provide me to say for egress solution. You're exporting a material that is non-hazardous non-flammable. In addition you reduce the role and more importantly the cost of deal you involved in the value chain.
thirdly your
Reduce the cost of freight on the bitumen related basis in the value chain and fourthly improve the value of the product that you deliver to your customers and the the case of pure bitumen which gives the market the opportunity to custom blend and not be burdened with Adele song a deal that blend and then finally and and possibly most importantly it provides scalability advantages during these periods of of high uncertainty for customers to have the opportunity to create egress solutions that are size to their needs and timed when they needed most is a real advantage and provides less balance sheet burdens. So we're we're excited about as we roll into to Thursday.
I'm Twenty-One and the the macro-environment. I just described we think the the opportunity to grow our customer base at Dr. You and ultimately money for doctors is real material. Finally. I like to give some high-level updates on our Texas Deepwater asset which is the sponsors asset wage. And on the Houston Ship Channel first and foremost. We remain very purpose about growing are too critical what we call run a business office is that drive material cash flow and opportunities for growth at Texas Deepwater. The first one is what we call our sit plus business, which is our stores in transit type business, which targets real storage staging switching services trans loading and Railcar Royal car Support Services wage.
Given our current infrastructure at Texas Deepwater. This is a material and growing business and we're excited about the opportunities not only a Texas water but elsewhere and then secondly, we have our dredge business which is our ability to handle dredge spoils at Texas deep bar wage, which is accessible to most of the Houston Ship Channel and services primarily maintenance and new construction that also is a business that we feel is dead is got a lot of growth potential and certainly business that's ongoing.
Finally from a development perspective. We continue to leverage our existing connectivity rail infrastructure and access to the Houston Ship Channel to drive meaningful and ongoing detailed discussions with Houston area producers consumers of crude oil light products petrochemicals and ngos to uniquely solve their distribution office and Export needs and closing and in a period of time where there's High uncertainty. We are really excited about the quality of these discussions the depth and breadth of these discussions and look forward to to announcing real opportunity here soon in the future with that. I'll hand it over to Dan.
Thank you Brad. Appreciate the update market update another we appreciate everyone listening to call today. And with that will open it up for any questions at this time. I would like to remind them that if you would like to ask a question to press star one on your telephone keypad. Now again, ladies and gentleman that star one for any questions over the phone line will pause for just a moment to compile the queue and a roster.
And again, that's star one for any questions.
Okay, we do have a question from Greg, please. Go ahead. Hey quick question the as far as the VRU when he comes online, will you be getting a premium on any of the existing contracts with that service being available?
That's a great question Greg. And I appreciate that certainly. We will as we have calculated our commercial agreements with that. We will get some premium over our our our current present value related value of the Hardesty real asset obviously as you look at what all is considered in that pricing. We're certainly trying to take full advantage of the opportunities that we exist. But we also share those with our our customers and our partners on that as a reminder obviously railroad tank customer partner. I could give us an energy and then certainly synergistic benefits back to the the customer. But but certainly it delivers a a positive additional you to the underlying partnership assets and and certainly sustainability over at ten plus year period of time which with investment-grade counterparties, which I don't need to tell you but obviously
And these markets that's that's what sustains you through challenging times. Like like one who we've been going through that help you out. Greg. Yes, and then currently off hard to see that 33% Is that correct? That's the 33 of is is the capacity that's being used at currently. So there's
the 67% available
Yeah, the as you think about that understand that we have current utilization of the of the asset the underlying partnership assets. Now as we then along those in you know are pursued to the to the commercial d r u agreements and you'll see those extend beyond that. So for instance the next customer that we bring on unless you say it's a it's a 50,000 barrel-a-day customer then we will have we will then be up to approximately two-thirds of the underlying asset walk outside and extending that Beyond in in those 50,000 Barrel increments just using that as an example. It could be more than that and certainly as we've set for sometime the extension of those contracts with the d r u brings, you know brings about those long-term committed, you know values, you know in in capsules into into the underlying partnership assets wage.
because you can't do one without the other so they're they're linked and that's that's the
Important thing that was our design in our plan to do that. All along was to convert what we felt like was an inefficient dealing with model or dilbit model and move it into a more sustainable long-term prove it and model which brings both producer will find our railroads communities and certainly the environment more advantages and their phone number why customers are willing to commit long-term? Hey Greg, it's Adam to address that last question. So we we actually don't publish the utilization at our terminals, but the 30% that we referenced was once the d r u is in place 32% of the hardistys capacity will be extended for from basically took a five year contract to ten year contract to 2031. So that's not the current utilization. That's what we were projecting. Once we once we get the d r u in place and operational
No, one of our existing customers contracts will flip to a ten year contract and that'll be about a third of the hardest capacity. I figured that it was proprietary Just One Last quick question and thank you for the answers. Do you know percentage-wise what the what the difference in what the refiners are paying for the the um for the oil as far as d r u vs non d r u oil
Has that been calculated? Yes Gibson?
This is browse. Excuse me. Sorry, this is Brad. So the droop it material will be I'd answer your question specifically. I don't know but uniquely depending on the input of the material into the D. Are you will determine the quality and price of the output at that point in time. The benefit is not necessarily in the price of the bitumen. The benefit is in the ability to take bitumen and uniquely blend to the needs of the consumer likely the refine her in which case couple of things happened one is is your throughput rates improved significantly and then secondly you get off yields that meet the needs specifically for your refinery in in the customers that you use service. So it's mostly a value type dead.
Value proposition the bitumen price is is is less important than the value that it creates for either the blender or the consumer understood and then just a second that so the so basically the fact that the the the VRU will create a non-hostile material. Obviously. I'm assuming that that that creates savings which the partner with any of the which any of the partners are obviously going to take advantage of do you have any idea of what the difference in the cost or the same things are there on a percentage or any sort of dollar term basis that they would save by not having to deal with whatever environmental and or Transportation regulations apply to housing how to do some hazardous materials wage.
Yes, so, so let me try real quick to answer.
So that at a high level cuz cuz it's not it's not certain specifics will help you here. We had one objective and that our objective was to compete with Piper. No Alternatives favorably from a cost standpoint and to create incremental value in part of that values what I just described. So if you see you broadly consider that that rail on on the bill bit related basis is 5625 to 50% higher than than pipeline economics effectively, the d r u closes that Gap entirely
So we we're that's the whole beauty of of the d r u the Simplicity of it is Dan mentioned eliminating the the dead it costly need to to acquire and blend.
There you went early in the process. We're just we're eliminating all those those costs and we're creating incremental value for our our customers the producers in the case of non Hammer slam or railroads. That's that's obviously one of the most important things for them is is safety of our communities that they service and and I have business through and then finally our our end user and customer.
Yes, just that. Yeah further that brief lazy. Obviously the benefits across let's just say our our railroad Partners is that as they handle a wage a non-hazardous material then they can take more efficient routing systems through through areas on and and taking the most efficient route system down to Market wage time crew time fuel a variety of different cost centers out of that which you know, they have been investing into the rate structure. So they're poor crack a better net back. So when I said earlier that it's a benefit to all the players it certainly is, I mean from a railroad perspective, it gives them a long-term sustainable business that they can build a an operating case around there for creating more efficiency not having any start stops, like sometimes a little bit business can have so it it really the the attention
Of course was was to give the market a industry solution that creates the best met back for the producer that creates the most efficient environmentally safe product of the railroads to move and then gives our our refining customers at destination the best, you know base blend component that they have to be able to then add and create the you know, the the most preferred blend that create the the best Netflix for them on that end. So and we've been able to achieve that and and we're we're thankful for doing that and we appreciate all all the partners that it takes to make this happen.
Great. Thank you.
Sure. The next question will come from Paul Burke house with Cornerstone acid, please go ahead. Yes. I'm really encouraged by today's quarterly report that you announced and I'm assuming that you are too and going forward. Would there be any chance that the board would consider increasing the distribution quarterly distribution rate, especially with a four and half percent cash flow coverage and you're moving it to the high end of debt reduction in that 25 million dollar range. And if not within the next 6 months, what would be the parameters that you would be looking for in order to begin increasing your quarterly distribution rate as you walk in the past?
Hey Paul, this is Adam. Thanks for the question. Yeah, it's a good question. And we had a great quarter. We have you know, we we do evaluate our mission every quarter with the board and we did give public guidance that we intended to pay down debt with any free cash flow that we we generate and I think right now I think our view is continue to to stick to our guidance. Um pay down debt with free cash flow. Um, basically we've given the guidance said it was 20 to 25 million on a basis for trending a bit a bit higher than that. So I think once we hit that and once we get a little bit more clarity in the market and obviously with you know, the election and things that going on today with COVID-19.
As far as metrics, I would say we're we're constantly looking to push our leverage ratio down. I think we've we've in the past we've said we were kind of targeting 3 and 1/2 x leverage today. We're a little bit higher than that, but trending towards that and so I think that would always be something that for would consider as far as distribution coverage. Obviously. We're pretty high right now.
Okay. Thank you very much. That's it for me.
And once again ladies and gentlemen, if you would like to ask a question, please press * 1.
The next question is from Greg vanney. Who's a private investor, please go ahead. Good morning. Thanks for the great result question for you. I'm from DC. So I understand how the somewhat of is how the government works. What are the chances of you guys building this thing out and then having some group come out and say, you know, it's flammable or dangerous or in America does tar or asphalt. Goodbye railroad. Is that the equivalent of the product? Are you certain that some government agencies not going to come out and say I can't do this.
Yeah, it's great. Great question Greg and thanks for thanks for being on the call. And we appreciate you being an investor the and I don't know whether to apologize that you live in the DC area right now or not, but I understand that could you could become your own State up there so maybe congrats on that. But anyway the it's great question. I think you know certainly uh with the election and and um wage whether you're a trump supporter are biding supporter depending upon on that. They both have different views certainly chance your first question around asphalt and that's a that's a reasonable comparison here, uh asphalt has moved just about every day across the railroad and it's done very safely and sustainably we don't think that this product would be challenged by any chance, you know adverse reaction from the market again, it's not hazardous not flammable. It's uh, it's not even a class three product so it doesn't fall on you need a charge. So it's uh, we dead.
Very confident of that. Are we to Sayers can we know the future? Obviously we can't but it has not been impacted historically through different administrations. And so we would feel confident that it would continue to run and and and certainly if you viewed the administration going left and seeing perhaps Palm West Pipeline egress coming out of Canada that there would be more and more demand for this type of product as it as it goes through obviously we've been able to do this whole program in this project for you know, under a a more conservative Administration and so our customers and refiners and railroad Partners believe that the viability of that certainly in a conservative government works works, uh, well and have made commitments and leaned in on that. I think that you know as we see additional Clarity around dead.
This is the type of product that that I think we can all be proud of because it's it's environmentally sound it's it gives the best netbacks to the parties and and that was our intent back in and it creates the efficiencies that we all want historically we've been always been able to build these types of what we call industry solutions that really meet the the true challenge or the problem that the market faces and they continue to be sustainable as we look back over the last twenty-five years. So we see no different here, you know, no difference here. We see it being able to to meet those needs and be well, you know supported by either side either Administration. We've we're constantly constantly we're off is looking at ways that we can become, you know, more efficient more environmentally safe, uh of that kind of thing, but I think this is a as one of the the railroad c e
Said this is a true game-changer in terms of the way.
I just Products Transport.
Okay. Yeah, I mean anyway, it's it's predictable. We'll see what happens with the new. Well, I think a new Administration on them to see in the call. You mentioned Hardesty was the General partner was expanding slots by I think six or seven something like that and that's a general partner level is that and that'd be ready next year. Is that correct?
You broke up there a little bit maybe Adam. Did you hear that question? I did and and and yeah, so Greg basically that those are extra slots that we have it harder to sell birth parent. So it's not an expansion. It's uh, it's existing capacity that exists today and I think Brad was making a reference that we're looking to commercialize those and fully utilize those as well. We are stuck with is is is similarly positioned with we take your pay contracts and and primarily investment-grade customers. And it's it's as far as Revenue. It's almost a full capacity, but we do have some additional capacity that we're looking to commercialize as well. So, this is Brad, I'm sorry, go ahead.
Yeah, I guess my question was I mean I like the delivering idea but let's say you're you're twenty-five million.
Is that a potential drop into the limited partnership and is I have no idea about the size of that or what the cost of that out that would be but is that the most likely to be dropped down for growth? But the limited partners in the next year. So we've got expansion at at Hardesty south or we have the hearts of south terminal basically and then we also have the suspension it's Stroud. So those are two you know, potential drop downs in the future. I think with regard to drop downs right now. We we do talk about that on a quarterly basis with our board will continue to evaluate the Mark. I think it kind of falls in the same category where we're going to always evaluate those things. Um, make sure that it makes sense with regard to you know, that is kind of pro forma cap structure going forward. Um, but as of right now those are operating and cash flowing and they're basically kind of adjacent to our existing assets. So I think the answer your question they would be the most wage
To be dropped down. I think the only caveat to that would just be you know, given that we'd have to evaluate market conditions.
Yeah, there's always been Craig, you know, it's a great question. Our attempt always has been to to take as much risk out of of any of the business before we would drop it into the partnership and so long, you know as we would look to expand and and grow the business and elongate those revenues and certainly that's been our plan. We've talked about that for some time obviously market conditions page Adam said, you know need to help dictate that but we're we're um, we would look forward to the day when we could get a market condition where we could do that and it truly give the partnership even though some may have been, you know, maybe missed the mark on that but continue to drop down high-quality assets that give investment-grade long-term committed fee-based Revenue off that uh can stand the test of time and and delivered to our investors the kinds of things that that that you guys want. Remember we own approximately the sponsor owns approximately 50% of the Partnerships so dead.
We're truly partnered. Uh
In this together and so we would we would never do something to mistreat you ourselves. And we want to do that in the in the most efficient way and make it as a creative as we possibly can because we all took it from that.
Yeah, I understand. I'm in the equity markets not rewarding you. So you can't offer Equity. I guess maybe my question is whatever the value that.
And you walked delivered. I'm going to guess by $25 million sometime in the next six months. Maybe even more is it affordable is the value of money down. If you just write a check or back or you borrow $25 million to have that drop-down that is that possible. I mean cash is just far when it is dead. Well, I was just going to address your question. I think we we have availability on the the revolver now and we do get credit for for pro form of cash money when we do Acquisitions. So I think the answer the questions. Yes. It's definitely possible. I think we were always going to monitor what the the capital structure looks like and we've you know, we've always given guidance around leverage and three and half times. So we'd be looking for a an attractive deal that would be lever the partnership or they would have reducing leverage in its
You know in in the in the projections in the future and I think the last thing I'd say is that the the you know, our sponsor has a lot of experience Dan mentioned as a lot of experience building these girls and so we can we can build these things at relatively low build multiples. So, uh, we would always look for a sweet spot that would work for the partnership but also work for the sponsor as well.
the partner willing to to transfer that over for basically what their cost is or
You know, I think the flexibility we have our our experience and having a little build multiples is always helpful. But obviously those are things that are subject to the board and we always have to evaluate that on a quarterly basis and and and with our conflicts, Well, okay, he final question on the on the contract your concerts are take-or-pay but then you mentioned about Market if if if one of your home if one of your customers does not use the capacity and somebody else wants to use it. That's a net gain for Revenue that in that. Is that correct?
This year I only see this. Okay. Go ahead then no clue. No.
Well, I was saying Ms. Raju.
I was just going to clarify the fact that the spot activity I was describing would be to pursue spot activity and utilize the seven slides that are currently off not commercialized. So that's what I was referencing.
Okay, great day as you Greg as you think about, uh spot related business and and you heard out and talk a bit about that. We have floors in our take-or-pay agreement which allows them to participate in the outside of the market under certain conditions. And so as as as the market supported that obviously we participated in that but we have base for service agreements in that in some conditions where where we have something and the nominations are available to us. Then we would always look to optimize the assets, you know with the customer support to do that month. And so we're always looking at at how we can optimize that but we're never you know, so we're never opposed to that but we certainly want to make sure that our customers are taking care of and off they have and a lot of times it's existing customers who need additional volume that which we try to offer to first to be able to meet their needs.
Okay. Thank you very much. Great job guys.
All right. Thank you. Greg really appreciate the positive comments and and I'll think that's the last question as well. Go ahead and transition to just just to a few kind of closing thoughts and comments and off obviously appreciate the questions great questions appreciate the positive comments. This has been a great quarter. You know, I'm really proud of our team and and I think every investor should be as wage this pain is probably is one of the most challenging times in my career. Our team has remained very focused. We have we've always been able to fight too challenging times and we've always not only managed through them but we've always grown to them just like we're doing now we've accomplished, you know, tremendous financing refinancing project financing on a large scale and we've been able to keep on track on budget on the expanse of these things that really create both long-term castles and and Thursday.
Same value to the investors. And so we really we really are thankful for that and that that really and I again be remiss if I didn't applaud our team for all the hard work and dedication that they've been doing Monday through through all of this, you know, as we as we continue to grow with our great partner at Gibson energy and and grow these these opportunities, you know, that's will continue to talk about those and announce those we hope to be able to spread said we're in deep discussions with uh, the second customer coming into that into the d r u m. We look forward to being able to talk more about that as soon as we can and excited to be able to announce that then and again depending upon Which Way elections go there could be more demand for our product even more so when we could be we look forward to be able to grow even the underlying rail access to be able to support the wage.
except with the d r u as we continue to do that, you know, I think that
You know, we hope that we can get some some quick relatively quick solution or resolution to the election so we can kind of get on and get focused on on remain focused and and growth with our customers on on the next phase of our business and and then get some clarity in the markets and I think everybody's looking for that month and we are as well. But but know that we are working everyday to try to you know, create the value that you've seen in this in this quarter and then we we trust will be there on an ongoing basis, but we'll continue to do that and it's really because the quality of our projects and the quality of our customers when you in our opinion when you truly create solutions to a market you get sustainability you get long-term value you get long-term investment grade customers, which is what we're all striving to do. So, we appreciate everybody give thanks for all the great questions and we trust everyone will ma'am.
Safe and healthy through all of this and um, and um, we thank you all again for joining the call. Thank you.
Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.
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