Q1 2021 Shell Midstream Partners LP Earnings Call
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Good morning, My name is Peter and I will be your conference operator for today at this time I would like to welcome everyone for today's webcast for shell Midstream partners.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session and you won't get depressed for one on your telephone if you require any further assistance. Please press star zero.
I would now like to welcome gave me Parker Investor Relations Officer, you may begin.
Thank you welcome.
Welcome to today's webcast for shell midstream partners.
With me today, Steve Ledbetter, CEO, Shawn Carsten, CFO, and Sean Guillory, VP of 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 and Q&A session.
For our results may differ materially from such statements and factors that could cause actual results to be different are included here.
And as old and today's press release and under risk factors and 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.
And we'll take questions at the end of the presentation with that I will turn the call over to Steve Ledbetter.
Thanks, Jamie Good morning, everyone and welcome to our first quarter earnings webcast.
And this is my first call as CEO of shell Midstream partners and I look forward to talking to you about our business and the discussion following the prepared remarks.
Today, I will discuss our asset performance during the quarter as well as a few medium term opportunities. We are focused on to ensure shell midstream partners is set for continued sustainability and and evolving market.
Starting offshore across our footprint, we continue to see increased volumes as our throughput grew some 11% during the quarter.
These increases were a continuation of activity returning to normal levels as the 2020 Hurricane season ended and producers came back online from planned turnarounds that were completed and the fourth quarter.
Also during the quarter, we benefited from increased volumes on our auger system as we were able to leverage our connectivity and provide evacuation routes for producers as a competitor pipeline completed repairs from hurricane damage.
And as we've said many times, we remain positive on the outlook for the Gulf of Mexico and are encouraged by the level of activity in and around our core doors as we work to grow our funnel of projects to meet customer needs.
And one project to highlight and as the margin expansion, which we expect will increase our capacity in the corridor by approximately 65000 barrels per day to help our customers reached the markets that matter most and <unk>.
Currently we are working to finalize the definitive agreements and have begun procuring the materials needed for the modifications on the system.
This investment will be funded by S plc, and the margin JV will benefit from the expected throughput all with no capital from the partnership.
We expect the expansion to be fully operational and advance of incremental volumes from power Nap and Vito arriving into the system in 2022.
Moving to the onshore we continue to experience lower than normal throughput on our refined product systems, resulting from impacts of the ongoing pandemic.
But.
And we remain optimistic and expect that when demand improves across the U S. Our system throughput recover as well.
Looking a bit further out on our growth opportunities, we maintain our core belief that assets in the ground connecting the key supply areas to refineries trading hubs and export demand centers are extremely valuable.
In addition, we book.
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Jamie I, just swap slides too.
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Ladies and gentlemen, this is the operator, we have experienced a technical problem. The conference will resume momentarily. Please continue to standby. Thank you for your patience.
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Jamie Parker.
Oh, yes, we apologize for the technical difficulties there.
Steve will resume a.
A few sentences back and will move forward.
Hey, apologize everyone that technical difficulties, but I'm going to start on the onshore comments and we'll go from there sorry for a couple of these might be repeat.
And so as we move to the onshore we continue to experience lower than normal throughput on our refined product systems, resulting from the impacts from the ongoing pandemic.
But we remain optimistic and expect that when demand improves across the U S. Our system throughput will recover as well and then looking a bit further out on our growth opportunities, we maintain our core belief that assets and the ground connecting the key supply areas to refineries trading hubs and export demand centers are extremely valuable and and.
Vision, we believe that one of our competitive advantages is our diversified footprint that provides connectivity to key market centers and the Gulf coast and northeast and the Midwest.
And it is from this position of strength that we see opportunities as crude flow patterns and North America change due to various factors such as certain pipeline cancelations.
With these changing dynamics, we continue to preserve pursue development opportunities that provide efficient and competitive optionality for our customers a few examples to highlight.
And I'm pleased to announce that our zydeco team was able to contract 75000 barrels per day of capacity starting may 1st for 12 month term.
With this new contract, we will have roughly two thirds of capacity contracted for at least April 2022.
As for the remaining space that is able to be contracted and we are optimistic that we will be able to contract those volumes and the near future based on interest shown by potential shippers.
Longer term, we're exploring the possible expansion of our Lockport facility, providing further staging and segregation.
And crude blending services for the local Midwest market or to allow shippers to move south on the previously announced cap line reversal and providing access to the St James market.
Additionally, we're pursuing multiple opportunities to connect St. James to Clovelly, which will provide access to the coveted VLCC export capabilities at loop.
And we continue to leverage our existing assets like zydeco by pursuing joint tariffs to extend our reach further to supply centers to create connectivity to multiple destinations that customers desire.
And these are just a few areas and I'm excited about that our team continues to work and we continue to create value for shell midstream, both now and into the future.
And with that I'll now hand, the call over to Sean John Thanks, Steve and good morning, everybody.
As I reflect on the quarter, our assets have continued to perform well even in this difficult economic environment. So.
So first let me cover a few of our key financial metrics for the quarter.
Our total revenue was $139 million and increase of $9 million from the fourth quarter.
Now this increase was primarily related to improved offshore throughput has been that had been impacted by storms and turnaround activity in the prior quarter as.
And as well as shippers utilization of deficiency credits.
Now this increase was partially offset by the exploration of certain zydeco contracts and the closure of the convent refinery at the end of 2020.
Our operating expenses were $75 million down about $7 million from the prior quarter.
Primarily related to lower project spending and zydeco and norco and.
Along with an improved cost profile, resulting from our cost initiatives.
Our income from equity investments was $102 million up about $15 million from the prior quarter, mostly due to increased offshore throughput volume returned to normal levels following storms and turnaround activity.
And with all of this adjusted EBITDA attributable to the partnership was $201 million.
And after interest expense maintenance capital and other adjustments total cash available for distribution was $173 million.
Our partnership declared a distribution of 46 cents per LP unit now this resulted in a coverage ratio for the quarter of one one times.
So now let me turn to the partnership's balance sheet and liquidity.
As of March 31, the partnership had total debt outstanding of $2 7 billion now this equates to a debt to EBITDA ratio of three three times based on an annualized Q1 adjusted EBITDA.
We believe and the strength of our balance sheet as it provides us flexibility to continue to effectively navigate these turbulent times.
So now turning to a few updates starting with our portfolio. We have entered into an asset swap with our sponsor to exchange our anacortes truck rack for the remaining seven 5% interest and the zydeco pipeline.
Now all of this was an opportunity for the partnership to acquire the remaining interest and zydeco and where we have scale and opportunities for future growth as we continue to look for ways to create additional value by creating efficient pathways from Houston to the southeast Louisiana corridor, all the way to the loop facility.
Additionally, on the balance sheet by working with our sponsor and we were able to take advantage of the low interest rate environment and proactively entered into a new 10 year facility.
And this was a $600 million fixed rate debt facility.
This facility was issued a competitive rates and carries a few covenants and was used to retire the existing five year facility, which was due to expire next year.
And as indicated last quarter, we expect to have several producer turnarounds during the year now based on the current schedule and we can reaffirm and and expected impact of both net income and cash available for distribution of roughly $10 million, primarily and the second quarter.
And where can we continue to actively work to reduce our operating cost run rate across all of our consolidated assets and our operated equity method investments.
Currently we continue to be on pace to exit 2021 with roughly $30 million to $40 million of savings to net income.
And.
Finally, as I close we're pleased with the performance of our overall diversified asset base as we continue to navigate the current macro environment. So with all that we'll now take your questions operator.
Thank you as a reminder to ask a question you will need depressed, Taiwan and your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
And your first question comes from the line of senior Gersh any with UBS. Your line is open.
Hi, good morning, everyone.
And just wondering if we can start off by focusing kind of on your last comments there specifically you've got the asset swap for zydeco and the credit facility renewal and so forth can you give us a sense of what the annualized run rate positive impact would be for shell acts.
Correctly, it was $10 million and I just wanted make sure I understood everything correctly.
Shneur this is John.
For the question. So look the general the transaction does not alter our expected earnings or cash flow profile, so they're roughly equivalent but due to the structure of the transaction. We expect the partnership to have a one time increase to C. A F D of roughly $10 million for the second quarter.
Okay.
Okay got it.
And then secondly, I was I was wondering if we can talk about the waiver ex.
We're or lack of expansion and I guess at this point right. Now I was wondering if you can give us a little a little color here are there any discussions internally about a waiver extension or do you kind of share recovery at this point right now.
Materializing and therefore, there may not need one you know are there or is it more benefits to come on the cost optimization side. I was wondering if you can give us a holistic view or discussion on how we should think about will there be a waiver or extension or are there other factors that you're thinking about.
As I said the cost reductions for growth recovery or even a dropdown usually this is the time and you'll use from time to do Dropdowns and just wanted to.
And give us some color on that.
Hey, Shneur. This is a this is and this is Steve ledbetter. Thanks for the question a lot packed in there. So let me try and unpack that a little bit by.
We all know that the waiver and does roll off and in Q1.
As far as how we look at the business I wanted to kind of start and just quickly by reflecting on how proud I am of our business in.
And the resiliency of our assets and our team as we and we.
Performed well over the map past many quarters facing unprecedented situation with the pandemic as well as a record number of hurricanes and.
And 2020.
And what we're focused on you heard.
And in the prepared remarks, the kind of run rate associated with our cost competitiveness measures and we we feel good about us being able to deliver that and we're still focused on those things and we expect kind of a $30 million to $40 million run rate exiting 2021, and then we're also looking to take advantage of our footprint and some selective growth.
Options, both in the offshore and the onshore and offshore we have our and our expansion coming along well and Mars and producers continue to deploy capital and the Gulf of Mexico. So we feel good and addition.
We feel good about our position and assets and the ground are always going to win the day and we are taking advantage of those those use case scenarios and what that looks like we'll have to wait and see as the market unfolds, but we're pursuing many of those.
Many of those those options and then or just general position and the market from a diversified level of assets and our position and the offshore and onshore.
And we feel really good about that and as Sean mentioned.
And our balance sheet is in good shape and we have a we have plenty of room on there to help us through whatever may come and turbulent times, and so I'm pretty confident and the underlying aspects of the business and that's what we're focused on.
Yeah.
Okay. So.
To sum up basically wait and see on the wafer for next quarter.
Yes, we're not we're not providing any guidance on on the waivers.
Moving forward.
Okay perfect.
And that was all for me. Thank you very much appreciate it and have a great weekend.
Thanks, John.
And your next question comes from the line of terrorism Channel with Barclays. Your line is open.
Morning, Thank you for taking my questions and first on Zydeco and related to the re contracting that was done and.
Alright.
And to be a may 1st two thirds of the pipe we contracted through April and can and April 2020. Two can you give us a sense of what kind of rate and you were able to get and.
Net.
Hey, Hey, Theresa and I'm going to and I haven't done this for many for millennia former for.
For moly introduce the new Vice President of commercial who is and Sean Guillory, who are who replaces me as I took this role so he's going to answer any questions. You may have on and some of the commercial aspect.
Yeah, Thanks, Steve and thanks to reserve for the question, what I will say about Zydeco is and continues to be a core strategic system for our portfolio and meets the demand of shippers to move crude to a refinery.
And the fiery demand centers and to the desired export location, it's more specific around and you heard what Steve talked about earlier around the new T&D of 75.
<unk> thousand barrels a day that will begin on the first of May and the.
<unk> you asked specifically about are their belt and the same range at the rates that came came out in November but as we continue with the asset itself will continue to optimize the asset and continue to work through additional T&D and combined those with joint tariff that we feel will be competitive and bring value to the partnership.
Great that is very helpful and turning to and you're a refined product.
Assets, so curious to hear how you're seeing demand trend.
And your footprint, there and we you know.
And whether it be the EIA data or.
And our anecdotal commentary from other industry participants it seems that things are moving and the right direction and so I'd like to hear a little bit more color on debt quarter over quarter decline in.
Colonial and Bengal, specifically and was this really just and you know a.
Result of demand not being there and they have other volatility perhaps related to refiners and the Gulf coast being down due to the storms and and that's a lack of supply or was it on colonial was it due to the are not being economic and sit there with a local debt for products, which had three and we did see a lot of them.
Cargoes and.
Life and pad one from Europe and.
Nor medium term for that you know are you concerned that there will be a higher and.
And then normal amount of shipments of products from Europe. This summer and beyond given that many areas. There are currently.
Currently facing lockdowns and longer term, just lack of profitability locally and the European refiners will be looking for outlets for their products.
And he says Hey, this is Steve. It was there was a lot and that question I appreciate it and I think you've thought through a lot of that very well yeah. We continue to see that as being a demand picture tissue right and as demand the picture changes both locally and abroad as you mentioned.
The arb piece does impact movement into colonial with the New York Harbor and import possibilities as different parts of the book shutdown for the pandemic and and Theres no place for that product. So those are natural competitive elements I think more on a macro level in our geography, the United States is still balancing out the remaining.
Refineries and the production associated with that so it's both of and impact largely demand oriented and and also there's probably a bit of late and the fact that some of the storm elements are impacted early on and so yes, I think you're reading it right. We believe that the demand settles out. These are still very strategic declines that are.
Volume will will come back as demand picks up and they will have a place longer term from a from a strategic asset and the United States.
Got it and lastly, just as it relates to the winter storms and I imagine this is not significantly impact your offshore footprint and if at all but on the onshore side that was there and any impact one way or another and specifically where you're able to sell back and power to the grid and from any of your systems.
No. So yeah. There you are correct and wasn't there wasn't a significant impact offshore there was some impact onshore where we had to take down due to loss of power, obviously, the big grid issue and Texas and in ERCOT was is very well known for that obviously impacted some of our our assets onshore we didn't have any material damage.
But there was a few days, where we had to slowdown given bottlenecks in either a receipt or actual energy to to run the assets, but not a material impact to our business.
Thank you.
Yeah.
And your next question comes from the line of Derek Walker with Bank of America. Your line is open.
Good morning, everyone and congrats Steve on your first conference call here.
I wanted to touch base on the and the opportunities around locked for your bedroom there's.
Potential for expansion there.
And what size of opportunities are you, referring to and I guess when do you expect those to kind of firm up and can you also talk about some of the connectivity.
I think from St James to for Lulu.
VLCC and wanted to see how you expect that to unfold and I wouldn't expect us opportunities from them.
Hey day, there does show and gallery Aldo and.
And take that one thanks, Thanks for question and it's a good one.
And we see crude flows continue to be dynamic and you see some of the recent news with cancelled projects and the reversal of cap line and we.
We feel that we have a competitive advantage with our diversified footprint of assets and as Steve mentioned earlier, having assets and ground has its own competitive advantage also and as they provide connectivity to the key market centers, especially in the Midwest.
With that and mine, we're exploring the possibility of and expansion of our la Porte system that will provide shippers tanking and storage not just for the Midwest market, but also for the potential staging a movement to the St James and export markets themselves.
What I would tell you about since you asked about timing.
It's still early days.
But when we have something more definitive we will come back to the market debt at that time.
Got it thanks, John and maybe I could ask a follow up on the auger.
Think volumes were down here for Q, but the revenue per barrel was up pretty meaningfully.
Can you talk to from the dynamics, there and how you expect that.
And to play out over the course of the year.
Yes, Derek Thanks for the follow up question on <unk>.
And there continues to be a.
A very strategic asset for us and the Gulf of Mexico, as we continue to see developments and investment and the Gulf of Mexico, We still expect volumes to make its way and flow through there AGA has presents a great connectivity from the offshore onto the onshore.
And to the onshore market to then move into the refining centers or even making its way to onshore pipelines that connect and two to export facility. So I would expect that.
Going forward, we will continue to see a similar type of volume that we've seen in the past for the older system.
So just to be cleared and as is the $1 59 and is that a fair run rate on the revenue per barrel.
And because it feels like a dollar for 14 last quarter. So I'm just trying to.
They get a feel for whats the appropriate run rate yet.
Dark as Sean just also just maybe just call Jamie and.
He'll help you work through the model and that one.
Okay perfect. Thank you.
That's it for me.
And your next question comes from the line of Joe Martha Paleo with J P. Morgan Your line is open.
Hi, Thanks for taking my question.
Wanted to ask kind of a clarification question on the asset swap.
And you mentioned it was kind of I think accretive and a coffee by 10 million and and the second quarter.
Is that just I guess, a payment from the sponsor or what does that and then.
And since it's I guess, I think Jonathan mentioned and kind of long term cash flow and earnings profile. It doesn't change and then also with ought to talk and you kind of just walked or the reasoning there and EM and why was now the right time to kind of do that swap.
Alright, Thanks, John as Sean.
So couple of couple of things one per your question and again, it's kind of on a long term basis.
And kind of like for like you know about roughly the same cash flow. So it doesn't really change the model.
The transaction itself was the swap.
And plus $2 million was what the MLP gained and so again, it's a one time cash flow increase.
Just two for that balancing payment between the two assets when we swapped.
For the rack for for Zydeco Dear.
For your bigger question, Yeah look for suggests and opportunity for us to take a non core asset which is the truck rack, which is near.
And they're not near any of our assets and the northwest and swap it for the remaining seven 5% of Zydeco and this is a core asset to our heartland and MLP already owns most of it so now we own 100% of it.
Zydeco as one of our core corridors, we think that debt by increasing this ownership, it's gonna provides upside.
Our teams continue to develop that Houston corridor, all the way to the water via loop.
And that's kind of a big picture on the debt.
And we just took the opportunity because the sponsor may be offered.
Okay and Mccann.
And then I'll try and wanted to ask on the margin expansion and it.
Is it kind of fair to assume the incremental barrels that all.
Comments that are at a similar rate to you know.
And what are the barrels being moved our and our or kind of hot water negotiation for that life.
This is Sean deal are you. Thanks for the question on the margin expansion and what I would say with the margin expansion is well maybe I'll give you a little bit of color on the on the progression of the project itself is we just continue to progress as planned and we procured and long lead items and.
As Steven mentioned earlier, we expect a definitive agreement to be completed by the end of the second quarter of in terms of the way that the rate will be similar to <unk>.
What has been found on Mars before but what I would also say is just a reminder, this is no cap debt has no capital outlay to the partnership itself and it also is provides further evidence for us around the continued investment and strategic nature of the Gulf of Mexico.
So for.
For offshore producers and offshore producers continually wanted shell midstream partners provide and export solution for for short.
Okay. Thank you that's all for me.
Again, if you would like to ask a question for Star then the number one on your telephone keypad that ex Taiwan on your telephone keypad.
And your next question comes from the line of Michael Blum with Wells Fargo. Your line is open.
Thank you good morning, everyone.
And I just wanted to go back and and just make sure I understand I'm glad accounts.
And all of the puts and takes here. So I guess the first if you could just explain that.
Decrease quarter over quarter, and and revenue per barrel was that really just a function of the higher.
Throughput you saw and then as it relates to when the new contract comes a kitchen.
Just wanted to clarify that you're saying that will effectively and not impact this revenue per dollar rate holding everything else equal from.
Hey, Michael Schall and gallery.
And what I would say about right and told us.
And what we what it is.
Said before is with the new T&D will fill up or.
About two thirds of the of the volume on the on the on.
And the asset itself and with the rates the rates will be similar to the rates debt that you saw come off and at the end of November and with the volume.
Tuition with Zydeco will continue to progress and optimize the asset and fill the asset with volume through future T&D contracts and we anticipate continuing with joint tariffs to total volume on the asset also.
Okay, Great and then just in terms of the.
Uh huh.
The change and the revenue per barrel quarter over quarter.
Talked about.
Yeah.
And Michael this is Sean.
Just maybe to have a chat with Jamie and he can help you walk through your models on it.
Great. Thank you.
Thanks.
Uh huh.
Thank you we have no further questions I will now turn the call back over to Jamie Parker.
Thanks Peter.
And I apologize for the technical delay today and thank you for your patience as we work through this and for your continued interest and shell Midstream partners.
Do you have any additional follow up questions. Following today's presentation. Please feel free to call me directly my information can be found and the presentation materials and on our website shell midstream partners Dot com. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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