Q4 2020 USD Partners LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the U S. B partners L. P. Fourth quarter 2020 was that conference call. At this time all participant lines have been placed in a listen only mode before will be opened for your questions. Following the prepared remarks, if he would like to ask a question.
At that time, Please press star one if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key when asking a question. We ask that you. Please pickup your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn the call over to Jim.
For a while our director of financial reporting and Investor Relations for opening remarks. Please go ahead Jennifer.
Thank you Holly good.
Morning, and thank you for joining US welcome to our fourth quarter 2020 earnings call with me today are Dan Borgen, Our Chief Executive Officer, Adam out for our Chief Financial Officer for.
Sanders, our chief commercial officer, Josh Ruple, our Chief operating officer as well as several other members of our senior management team.
Yesterday evening, we issued a press release announcing results for the three months and year ended December 31st 2020, if.
If you would like a copy of the really you can find one on our website at USD partners Dot com.
Before we proceed please note that the safe Harbor disclosure statement regarding forward looking statements in last Night's press release applies for the statements of management on this call.
Also please note that information presented on today's call speaks only as of today March for 2021.
Any time sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript.
Finally, today's call will include discussion of non-GAAP financial measures. Please.
Please see last night's press release for reconciliation for the most comparable GAAP financial measure.
And with that I'm happy to turn the call over to Dan Borgen.
Thank you Jennifer and good morning, and thanks, everyone for joining us on the call today.
We appreciate your ongoing support and we hope everyone is staying healthy and safe during these challenging times.
The partnership had another strong quarter as our terminals continued to perform well under our long term take or pay contracts. In addition, we had a very constructive year 2020.
Our terminals performed safely and reliably throughout the year.
Our financial performance continued to be strong and steady.
Generating a significant amount of free cash flow.
We were successful on the optimizing our operations and have seen benefits from that in our recent quarterly earnings.
And we followed through with our previously stated guidance to Delever by approximately $20 million to $25 million on an annualized basis. In fact, we exceeded that and have paid down more than $30 million on our revolving credit facility since the first quarter of 2020.
As we have referenced in previous calls our strong contract structure and our customers' investment grade credit profile continue to provide the foundation for our business.
We also continue to make progress on our sponsors previously announced Dale you want recovery unit or the <unk> project, which we expect will be placed into service late in the second quarter or early in the third quarter of this year.
The partnership sponsor has secured debt.
Sorry financing obtained all material permits and entered into fixed price EPC contract regarding the construction of the project.
There have been references made to the D. R. U on other public company earnings calls and we are pleased to see the industry began to get behind the program.
We look forward to becoming an industry standard as more customers start to adopt the strategy.
Jos will also give us an update later on this call detailing where we are with our sponsors development activities.
As a reminder, while the <unk> project is at the sponsor.
Longer term contracts with the D argue benefit the partnership.
Those contracts will be matched up with the Terminalling services agreements at the Partnership's Hardisty terminal.
Upon the successful construction and completion of the Dr. Yu approximately approximately 32%.
The partnership's Hardisty terminal capacity will be automatically extended on a long term committed agreement through mid 'twenty 31.
Additionally, USD and our partner Gibson arent meaningful commercial discussions with other potential producer and refiner customers to secure additional long term take or pay agreements to support future expansions of capacity at the D. R U and <unk>.
Stan the associated contracted cash flows at the partnerships Hardesty rail terminal assets.
The day are you is also a critical part of our sustainability and ESG initiatives.
Which remain a key focus of our business as we continue to deliver innovative solutions for our customers.
The dru bits that our customers intend to transport in the future is considered a nonregulated commodity and is not considered hazardous added as it does not fall under the USD hazardous materials regulation, and Canada transport of dangerous goods regulations.
We look forward to updating the market about the progress of our <unk> project over the next several months.
As we expected day are used to have a material impact on the long term sustainability of our business and specifically on our operating cash flow.
Also before handing the call over to Adam I do want to mention the growth we're seeing at the sponsor level.
As the role of Biofuels continues to expand in the clean energy transition, we are committed to offering new capabilities and services.
Across growing demand for clean fuels to include ethanol renewable diesel and biodiesel.
We believe our terminalling assets for our strategically located to address some of the expansion and the clean fuels transition.
And we believe our relationships in the industry, including the railroads uniquely positioned USD to be a strong player in this sector going forward.
In addition, we continue to develop our refined products program out of Texas, deepwater and servicing the demand pool from Mexico.
Lastly, as we have always done we continue to grow our presence in the storage and transit.
By working with the railroads and our customers to develop strategic logistic assets and infrastructure.
As some of these assets for potential dropdown candidates for the partnership we look forward to keeping the market updated on our progress.
Adam is going to start us off with an update on the partnership's latest financial results and our liquidity position and we'll jump back into the recent market and commercial.
Adam Please go ahead.
Thank you Dan and thank you for joining us on the call. This morning.
Sturdy afternoon, we issued our fourth quarter earnings release, which included the details of our operating and financial results for the fourth quarter and full year 2020, and we plan to issue. Our 2020 10-K with additional details after close of market today.
With our take or pay contracts and primarily investment grade customers. The partnership had another strong quarter and a relatively steady and resilient year in 2020, given all the challenges the country has faced over the last 12 months.
For the quarter, we reported net income of $6 5 million net cash provided by operating activities of $12 1 million adjusted EBITDA of $14 9 million and distributable cash flow of $12 9 million.
In addition, our efforts to strengthen our balance sheet continue to produce results as we pay down more than $30 million of revolver debt since the first quarter of 2020, which is above our previously stated guidance of approximately $20 million to $25 million on an annualized basis.
This has created additional liquidity for the partnership and has helped position us for a potential refinancing of our revolving credit facility in November.
Notably our credit facility leverage ratio is currently three five times and trending lower and our distributable cash flow yield over the last 12 months continues to be strong at greater than 30% based on our current price.
As Dan mentioned, the partnership's terminals continued to perform well and we continue to generate a significant amount of free cash flow as evidenced by our strong DCF coverage of over four times during the quarter.
And now I will go into the details for the quarter.
Partnerships operating results for the fourth quarter of 2020 relative to the same quarter in 2019 for primarily influenced by higher revenue with the Stroud terminal due to higher rates that are based on crude oil index pricing differentials.
The partnership experienced lower operating costs during the fourth quarter of 2020 as compared to the fourth quarter of 2019, due primarily to lower subcontracted rail services costs associated with lower throughput.
Net income for the quarter increased as compared to the fourth quarter of 2019, primarily as a result for the operating factors discussed already coupled with lower interest expense incurred resulting from a lower weighted average balance of debt outstanding and lower interest rates during the quarter as well as foreign currency transaction gains.
Net cash provided by operating activities for the quarter.
<unk> relative to the fourth quarter of 2019, primarily due to the operating factors already discussed and the general timing of receipts and payments of accounts receivable.
Payable and for.
<unk> revenue balances.
Adjusted EBITDA and distributable cash flow increased by 16% and 36% respectively for the quarter relative to the fourth quarter of 2019.
The increase in adjusted EBITDA was primarily a result of the operating factors already discussed and DCF was also positively impacted by a decrease in cash paid for interest and income taxes during the quarter.
As of December 31, 2020, the partnership had approximately $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $188 million on a $385 million senior secured credit facility.
Subject to the partnership's continued compliance with financial covenants.
As of December 31, the partnership had amounts outstanding of $197 million under the revolving credit facility for.
Pursuant to the terms of the partnership's credit agreement the partnership's borrowing capacity is currently limited to four five times its trailing 12 months consolidated EBITDA as defined in our credit agreement.
As such the partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $56 million at the end of the fourth quarter.
The partnership was in compliance with its financial covenants as of December 31, 2020.
On January 28.
The partnership declared a quarterly cash distribution of 11, one cents per unit or <unk> $44.04 per unit on an annualized basis.
AME amount is distributed in private in the prior quarter.
The distribution was paid on February 19th to unitholders of record at the close of business for February 10th.
We continue to be excited about the future and we are happy to see our efforts to strengthen our liquidity position producing results and we continue to believe our efforts will enhance long term value for all stakeholders.
And with that I would now like to turn the call back over to Dan.
Thank you Adam now I'll ask for out of cost to give us a quick commercial update regarding the western Canada select market and the impact of recent market events.
Right.
Dan. Thank you so as a reminder, in the early Covid days demand for crude oil decreased late in the first and into the second quarter of 2020, lower demand led to lower prices and the eventual shut in production approximately 2 million barrels a day in U S and a million barrels a day in Canada.
Today due to the efforts to reopen the economy and the accelerated rollout of vaccinations.
We have seen almost a full recovery in demand in the stabilized stabilization of oil prices as an example, EIA energy information administration of the U S.
<unk> recently projected demand in 2021 versus.
Our 2019 as follows gasoline down 7%.
Distillate effectively unchanged and jet down 20%. So as you can see the trend back to 2019 levels is as fully in 2021 projected to be a strong demand here. All of this has led to a current price levels for W. P.
$62 a barrel.
Now this is relative to our last earnings call, we actually shared with with our listeners.
Price for Adobe Tiara is $38 a barrel. So we have 20 for dollar plus or minus increase in prices just.
Since since 90 days ago, so a significant change.
All led by this supplier rationalization event and then ultimately a return.
Trend and return to normal or on demand.
So starting in early third.
Third quarter producers in Canada.
In the U S started to bring back production that was temporarily shut in.
Additionally in January of 2021.
Cap, which is the acronym for the Canadian Association for.
Petroleum producers announced that they are for <unk>.
Forecasting more than a $3 billion increase in planned upstream oil and gas spending as compared to 2020 levels.
The outcome of all that is particular to Canada, Canada is returned to pre COVID-19.
Production levels and with this new announcement of spending our expectations are that in 2021, we will actually be producing at higher levels than we did pre COVID-19 levels. So returned to normal in Canada is actually.
Returning at a pace faster than the U S.
Outcome of all that is that in.
And the key indicators that we watch that first and foremost substantiate that this is in fact happening.
Is that we observe the apportionment levels for all the egress pipes.
Debt to.
I'm sure that our this production can.
Can exit.
Canada on a ratable.
And efficient basis and in fact, what has happened is the three main pipe.
Pipelines have all experienced apportionment levels T M X expressed an enbridge and enbridge in particular.
Reported proportionate levels at 53% as recently as.
February which is a historical high level.
This naturally then leads barrels stranded potentially in Canada, which then drives inventory levels higher and as we observe inventories we've seen them trending higher starting late last year and continuing here in the first quarter of 2021, and our expectations as they will.
Two to trend higher all of this will lead to the falling prices will reflect the need to Incent continued.
Continued growth in.
Crude by rail egress and that is evident by the fact that debt.
Utilization at our hardest set in particular.
Is beginning to to increase and growing on a monthly basis.
So what does this all me.
Based on forecasted increase in spending by producers in Canada.
And the forecast that WCS to <unk> forward curve spread levels, then we expect throughput levels at Hardisty Casper and at Austro terminals will continue to trend upwards through 2021.
Before I leave.
Leave this market update section I'd like to say something quickly about Cushing as I mentioned earlier.
Supply hasn't.
Returned in the U S. At the same rate as it has in Canada. So subsequently the production and supply available at the Cushing hub, which is the largest hub in the U S.
As has.
It has been at a reduced level and therefore cushing.
Inventories had been on a steady trawl beginning.
Late last year and is forecasted to continue to draw.
Through the balance of 2021 should that happen that leads to two things one is a very supportive price for WTO, which is important.
To our customers and yeah.
Just the business in general and then secondly that the values at Cushing relative to other domestic locations.
We'll carry a premium and that will be important as I move into our update on commercial activities.
So as we think about.
We are now moving into where crude by rail matters.
And as I, just stated where values at Cushing are important than that is very supportive.
Our activities at our Hardisty, Casper and our Stroud asset, which supports the Cushing terminal.
First and foremost our focus will be on servicing our existing customers, we recognize that that our customers will be their demand for utilizing our assets will be trending higher as we move into the second quarter and our focus will be.
First and foremost on being able to service our customers customers' needs.
Additionally, then we'll we'll identify what incremental capacity that might be available at any of these facilities and work with existing and new customers to either.
Use it spot activity to generate incremental revenues and door continue to work to renew and extend.
Existing and incremental capacity at either of these terminals as we move into a high demand period in 2021.
And naturally because where we are in a crude by rail environment will continue to.
To work two to us.
Dan said identify.
Commercialize and grow or or D are you in Port Arthur network.
We are currently in active and detailed discussions.
With existing and new customers to commercialize the D R U and the current.
50000 barrels a day that we've announced with with Conoco Phillips.
USD also believes that the D. Our view is is extremely well positioned to be competitive.
Long term egress solution as Canada, and the U S continue to experience <unk>.
Environmental regulatory and political challenges as it relates to Canadian heavy.
Chris options macros alternatives.
And as Dan mentioned in addition to to the day.
Environmental and safety benefits to the D. R U Wii.
Believe that D. R U.
He is is when you consider cost.
And and values that are created and it's it's a process that is competitive to alternatives.
And again equally important provide scalability advantages. So once again, what we mean by that is during these periods of high uncertainty.
The D. R. U solution egress solution is one that debt you can rightsize can right.
From a timing standpoint.
And you can solve with with less of a balance sheet burden for our customers. So we think all of that is positive so do our customers and we feel really good about the opportunity to.
To find our second and third customer.
Are you in Port Arthur for.
Finally, I like to talk briefly about our clean transport fuels initiatives that Dan mentioned and should we know transportation fuels in the United States is in a state of transition.
Transition.
As a result of societal norms and corresponding policy.
The outcome of which will determine the vehicles driven the fuel that is consumed in the quality there.
<unk>.
USD believes this transition will result in increased demand for octane, while requiring a lower carbon footprint.
Of the fuel itself a combination that is challenging to achieve.
USD also believes Biofuels will play a continued and critical role in achieving these requirements facilitating expansion into new products, such as renewable diesel and further.
And attrition into the market.
Existing solutions like ethanol.
As a result, a potential higher blends.
So what are we focused on as a reminder, at west Colton, we currently.
Are these solutions for our customers.
In California.
Who are in need of low carbon blend stocks.
Low carbon intensity plan stocks in our facility and what's called provides that solution.
Via rail.
In connectivity to ethanol producers in the U S, who specifically are focused on producing ethanol with low carbon intensity. So we currently provide.
A clean solution to our customers.
Southern California, our plan is to grow that business in addition debt debt footprint.
Whats Colton will allow us to grow into a renewable diesel solution for existing and new customers and.
And we will continue to work with with producers the renewable space is much like the ethanol space. The producers are fragmented and depend heavily on rail solutions.
Get to where the market will will provide the best solution industry solution is what we call it and west Colton is uniquely positioned for that and our relationships with existing customers with the railroads. We're uniquely positioned given our experience we are uniquely positioned to work with.
These.
These new producers of renewable diesel to create origin and destination solutions on their behalf. So we're very focused on this.
Let me quickly give a a an update then on what's happening at.
Our.
Houston Terminal, our Texas deepwater facility update just set a very high level.
From a development perspective, we continued 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 and consumers of crude light products, petrochemicals and Ngls to uniquely solve their distribution and export needs.
And.
We're.
Pleased that were actually in detailed discussions in every one of those commodities.
And we look for too to sharing more on <unk>.
Progress and opportunities in each one of those in future discussions so.
Still very excited about what's going on at Texas deepwater.
At this time I'd like to two.
Pass the discussion over to Josh Ruple or C O O and ask him to provide.
Updates on our construction activity, it's D R U and at Port Arthur In addition to updates on our commercial rail development initiatives. He is leading Josh.
Thanks, Brad.
As Dan mentioned previously in our coordination efforts with our customers the railroads and our <unk> origin partner Gibson.
Our phase <unk> initiative is tracking slightly ahead of plan, which is good news again, we're fully permitted and are deep into both the design and construction processes with our EPC vendors.
Our COVID-19, Hs <unk> protocols, and our procurement strategies have proven to be effective.
And currently we are progressing on schedule and on budget at both ends of the <unk> network at Hardesty and PHP.
Port Arthur respectively.
With substantial completion planned late Q2 and formal commissioning in early Q3 of this year.
We are right on track.
With our project execution goals and our teams are focused and poised to deliver phase one successfully in the coming months.
And I just note with our patented <unk> process. We are currently permitted for growth at both D. R U.
At Hardesty and at Port Arthur.
Enabling us to immediately engage with our customers and quickly provide an improved takeaway option for their Canadian heavy barrels as a phase II to our current <unk> initiative.
Finally with regards to day are you just to echo both Dan and Brad's previous comments, we are very well positioned to provide a competitive long term solution to candidates market access needs the benefit of the day argue.
Our material.
And provide a safer non hazardous egress solution that optimizes the cost of diluent reduces the cost of freight and improves the value of bitumen in the value chain not to mention as Brad previously mentioned day.
Scalability advantages associated with D argue so again, we're super excited about our efforts, where we're at and where we plan to go with D. R U.
And Brad to your point, if I may I'd like to just mention quickly.
Some updates in regards to our rail development efforts around storage and transit and first and last mile services to include Trans loading.
As both you and Dan have mentioned on the call. Today. This is a space we participated for quite some time and currently have operating assets that Texas deepwater and pay for it to provide services to both the railroads and our collective customers. We continue to work with our class One railroad partners on a regional basis.
And as an update regarding this initiative, we're very close on a few new asset development.
In Canada the Midwest.
The southwest and on the East Coast.
As we continue to support the railroads and Rps our transition efforts with focus on growth, we look forward to sharing a bit more detail on these developments in the very near future.
And with those comments I'll hand, it back for you Dan.
Thank you, Brad and Josh in for an exciting update of our current business and future growth. So with that we'll open up the call for any additional questions.
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Yeah.
Okay, and we have a question in the queue and that will come from the line of John French private investor.
John Please go ahead with your question.
Thanks, So much I appreciate the information that you all share it sounded like a successful.
2020, and some good projections for 2021.
Curious if you all have any insight as to any update or change to the distribution plan for 2021 do you envision.
Similar emphasis on possibly paying down the revolver or perhaps consideration on returning the distribution to slightly higher level.
Understanding.
None of us can predict the future, but just wasn't sure. If you have any thoughts at this time on that.
That's another question. Thanks.
Hey, John This is Adam I'll start thanks for the question.
That's a great question. We are we feel good about what we've done in the last 12 months.
By meeting and exceeding the guidance with regard to paying down debt.
Obviously the distribution question is subject to the board's discretion on a quarterly basis, but but I think I can say that the fact that we're at 335 times and trending lower.
Generating a significant amount of DCF coverage and DCF yield.
Certainly those things.
Health to help help the discussion with regard to distribution policy going forward.
So it's nice to see those things trending in the right direction and again, what we'll address that on a quarterly basis, but I feel much better about our position with regard to that discussion going forward.
Okay.
Thank you.
At this time I see no further questions in the queue, Dan I'll turn it over to you for closing comments.
And first let me say thank you for your continued support and confidence in USD partners business.
We appreciate it very much has been a challenging year for.
For all of us and but I do feel good about where we came out in 'twenty and.
The actions, we took in 'twenty to strengthen the balance sheet to increase our strategic position in the market.
And prepare for the increase in activity as the market continues to return to pre COVID-19 levels hopefully mid to later this year.
You will continue to keep you updated and look forward to additional announcements regarding our progress on the day are you in port Arthur.
And other growth initiatives, we have in the future.
Again, thanks again, we appreciate the support.
And thanks for joining the call today.
Once again, we'd like to thank you for participating in today's USD Partners LP fourth quarter 2020 results Conference call you may now disconnect.
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