Q1 2021 Genesis Energy LP Earnings Call
[music].
Greetings and welcome to the Genesis Energy Q1, 2021 earnings Conference call. At this time all participants are in a listen only mode of question. It's the session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the call.
That's over chose Mr. Duane Morgan. Thank you you may begin.
Welcome to the 2020, one first quarter conference call for Genesis Energy Genesis Energy 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.
The selling activities.
As well as the processing of sour gas streams to remove sulfur at refining operations the.
On to our facilities and transportation segment is engaged in the transportation handling blending storage and supply of energy products, including crude oil and refined products.
The Marine Transportation segment is engaged in the maritime transportation of primarily of refined petroleum products Genesis operations are primarily located in Wyoming, The Gulf Coast States and the Gulf of Mexico.
During this call management may be making forward looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1930 for the <unk>.
<unk> provides safe harbor protection to encourage companies to provide forward looking information Genesis intends to avail itself of the safe Harbor provisions and directs you to its most recently filed in the future future filings with the Securities and Exchange Commission. We also encourage you to visit our website of Genesis energy Dot Com, where a copy.
Of the press release, we issued today is located on.
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 L. P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer, and Ryan Sims, Senior Vice President Finance and corporate development.
Thanks, Brian and good morning to everyone.
As we mentioned on this morning's earnings release, the first quarter of 2021, demonstrating our market leading businesses are in fact resilience of our financial results were consistent with if not slightly ahead of our internal expectations.
As we look forward, we remain increasingly confident that improving macroeconomic conditions provide the significant operating leverage to the upside.
In combination with our de Minimis capital requirements outside of our Granger soda Ash expansion project.
Believe we are poised to deliver significant value in future periods to all of our stakeholders.
Our actions taken in early April to extend our senior secured credit facility, coupled with the tack on offering to our senior unsecured notes due 2027.
Position Genesis with no maturities of long term debt until 2024.
While providing ample liquidity and flexibility to deal with the trailing impacts of COVID-19, and the 2020 of hurricane season.
While we continue to expect 2021 to be a year of transition. The partnership is well positioned for long term success with the recovery of our soda ash business significant additional free cash flow coming from our two contracted projects on the Gulf of Mexico.
And first production from our fully expanded Granger soda ash facility on the back half of 2023.
Now turning to our individual business segments.
Our offshore pipeline transportation segment performed in line with our expectations and achieved a more normalized earnings run rate during the first quarter.
As we look forward in the second quarter is typically a heavy maintenance quarter for our producer customers in the Gulf of Mexico, and we would expect a certain level of the planned downtime associated with these activities even with this expected downtime, we still anticipate to achieve quarterly segment margin in.
In the second quarter of around $80 million.
Our two large contracted offshore projects Argos and King's key continued to remain on track for first oil in the first half of 2022.
VP of Murphy of both publicly.
Reaffirm their prospective projects scheduled for the first and second quarters of 'twenty 'twenty two respectively. We continue to anticipate that these two fields when fully ramped will generate in excess of $25 million per quarter or over $100 million a year in additional segment margin and free cash flow net to Genesis.
Yes.
We remain in discussions with three separate new Standalone deepwater production hubs in various stages of sanctioning with anticipated first oil starting in the late 2020 for 2025 timeframe.
Assuming the sanction by the end of this year early next year.
We understand from our discussions with the producer community the drilling and development activity on existing and valid leases in the Gulf of Mexico is continuing pretty much the same as it always has.
The recent announcement of beat these Puma West prospect is yet. Another example of producers building around and leveraging their existing footprints and expertise in the Gulf of Mexico.
Along with echelon of ours monument discovery and beacons Winterfell discovery, the opportunity set of future new developments, all of which more likely than not we'll need to access our existing infrastructure over the debt over the decades to come continues to grow.
We continue to believe that a large percentage of the economic acreage in the Gulf of Mexico, which can be developed under the current drilling technology has already been leased this inventory of existing invalid leases should provide a decade's worth of drilling development and production opportunities.
Regardless of when the statutorily mandated leasing programs in the Gulf resume.
To further elaborate on my comments from last quarter crude oil from the deepwater Gulf of Mexico remains some of the lowest carbon intensity barrels produced and refined in North America, if not the world.
Several large producers, including the supermajors, such as BP and Chevron have recently indicated the Gulf of Mexico is core to their future carbon neutral initiatives then the cash flow from these low carbon barrels will help fund and fueled our growing renewables of initiatives to help them meet their emissions targets of net zero goals.
The recently BPC overnight, <unk> said and I quote hydrocarbons projects like Mad dog to recruit really important and on our new strategy the.
The cash flow of these developments provide will drive our company's transformation.
These types of comments on the continued activity in and around our footprint further drive of our confidence that the Gulf of Mexico will remain one of the leading north American basins for years and years to come.
Now turning to sodium minerals on sulfur services, our soda ash business continues to recover as demand for soda ash is steadily increase and as of the worlds economies reopen and trending towards pre COVID-19 levels.
The global supply and demand dynamic for soda ash continues to tighten.
And we believe all natural producers are sold out globally for 2021.
Remember, we don't compete with an alternative product, we compete with synthetically produced soda ash, which cost nearly twice as much to produce and it has a carbon and other environmental footprint far in excess of naturally produced soda ash.
The markets work.
Low cost of environmentally conscious natural soda ash production will be base loaded to meet the worlds of demand in the market will swing on synthetic production, which given its cost basis, we will provide the backdrop for significantly improving prices pricing as the world's economies recover from the effects of the pandemic.
Within China against whom we primarily compete in Asia certain synthetic production has come offline due to environmental restrictions, while domestic demand for soda ash continues to increase ultimately reducing the number of tons available to be exported outside of China.
Lower export volumes from China, and recent increases in container shipping rates are also driving up costs associated with some Chinese synthetic production on a delivered basis to markets of southeast Asia.
In response to this dynamic and Sac announced a price increase for soda ash in early March for the second quarter on all of their non contract sales of soda ash and on contracted sales on contracts allow.
We believe this increasingly tight supply and demand dynamics will continue to support prices rising through the remainder of the year, especially towards the end of the year. When we would otherwise re determined most of our contract prices for the majority of ourselves for 2022.
In addition to rapidly recovering demand from a resumption of economic activity and longer term demand growth from existing applications. We remain encouraged with increasing demand for soda ash from a variety of the green initiatives around the world lifts.
Lithium producers utilize soda ash in a two to one ratio to support their production of lithium carbonate.
Which is also used to make lithium hydroxide, both of which are building blocks to new generation lithium ion phosphate batteries that are placed in the exponentially growing the electric vehicle and battery storage markets.
Lithium batteries are the primary energy source for battery operated vehicles independent part of your assumption of EV penetration rates on the overall automobile market, we could see a meaningful impact of the demand for soda ash over the coming years.
Soda Ash is also a critical component on the glass manufacturing process and subsequently in the manufacturing process of silver panels.
And factor of recent reports of up to five new glass flow furnaces coming online in China to build more solar panels.
All of which the importantly will consume higher cost Chinese synthetic soda ash, thus further reducing the Chinese synthetic ash volumes available for export.
The increase in demand to manufacturer of additional solar panels in both China and the United States when combined with the increase in demand from the lithium producers and battery manufacturers should provide our soda ash business with increasing levels of participation.
Financial benefit from the various green initiatives around the world.
Looking out of couple of years. We also have reason to believe that certain competitors are of shelving or otherwise the delay in their respective production expansions due to the company specific reasons.
This dynamic could suggest our granger expansion project remains the only material natural production expansion project in the world that will come on line by late 2023.
Once expanded and optimized grainger has significantly reduced cost structure will allow us to production to compete favorably on the global market to capture just normal demand growth, resulting from GDP growth as well as renewables driven demand or at a minimum displace higher cost synthetic soda ash production.
Our legacy refinery services business performed in line with our expectations.
During the quarter, we saw steady production levels combined with the strong demand from our copper mining customers and improving volumes from our pulp and paper customers.
Copper prices remain at near decade high levels, driven by the tremendous demand for copper from the reopening of the world's economies and the insatiable appetite for renewable and green initiatives around the world.
While copper remains a foundational building block for many of mainstream items on our lives. It is a critical component for the energy transition in particular wind and solar technology energy storage and electric vehicles.
To provide some additional color if you looked at the amount of copper in a traditional internal combustion engine vehicle. It would require of roughly 48 pounds of copper.
One of the electric vehicle requires approximately three eight times the amount of copper are up to 180 pounds per vehicle.
We believe the demand for copper from the various green initiatives will only continue to increase as we move forward, which should help us provide was steady and possibly increase in demand for of sodium hydrosulfide product in future years, if and when copper mining expansions come on line.
As you can surmise, our sodium minerals and sulfur services segment is well positioned to benefit from various energy transition initiatives.
Not only to directly and indirectly to contribute to lowering carbon emissions, but in fact to profit from the energy transition.
We provide the picks and shovels are the mission critical building blocks to both lithium producers and copper miners today as they continue to produce the raw materials needed to help drive the energy transition and future of green initiatives around the world.
As mentioned above in early April we successfully refinanced our senior secured credit facility.
The receiving $950 million in total commitments, consisting of a new $650 million revolver and of $300 million term loan all held with a syndication of the 13 bikes.
We proactively reduced the size of extended the tenor to March of 2024.
And obtained certain additional flexibility to address any uncertainty of covenant compliance as we deal with the trailing the impacts of COVID-19, and the 2020 of hurricane season, even as our businesses are rapidly recovery.
In mid April we successfully price a tack on offering of additional 8% senior notes due 2027 at a premium of 103 spot 75%.
And received net proceeds of approximately $256 million.
The proceeds from this offering were used for general partnership purposes, including repaying a portion of the borrowings under our recently extended revolver to further improve our liquidity position.
As of March 31 per.
Pro forma for these transactions, we would of had approximately $150 million outstanding on our 650 million of senior secured revolving facility.
While our total adjusted debt was sequentially flat from last quarter.
We did liquidate crude oil inventory that had been the hedged on the contango market.
We sold such barrels for approximately $22 million in March but did not receive the cash proceeds until April or after quarter end we've.
How do we receive the proceeds in the first quarter, we would have sequentially reduced our total adjusted debt by $22 million during the quarter.
Sure.
I'll switch gears now and touch on our view for the remainder of 2021.
We remain on track with our previously announced guidance for full year adjusted consolidated EBITDA as defined on our senior secured credit agreement coming in a range of between 630 of the $660 million, which includes approximately $30 million to $40 million of pro forma adjustments.
In addition, we continue to expect to generate free cash flow after all cash obligations in the range of $80 million to $110 million in 2021.
That being said given the anticipated cadence of the future spend on our Granger expansion project, we might choose to spend some of this or future periods free cash flow to fund portions over and above the 250 million minimum obligation for us to draw under our asset level of preferred funding arrangement.
This option does not take away from the fact, we will continue to generate increasing amounts of free cash flow and our ability to accelerate our deleveraging plan remains on track and we are steadfast on our commitment to achieving our long term target leverage ratio of four <unk> times.
I would like to once again recognize our entire workforce of especially our miners Mariners and offshore personnel.
Live and work in close quarters. During this time of social distancing.
I'm extremely proud to say we of safely operating our assets under our own COVID-19 safety protocols and procedures with no impact to our business partners and customers with limited confirmed cases, amongst our sub 2000 employees and no known workplace transmission.
It is on honored to have the opportunity to work alongside sides such quality folks.
With that I'll turn it back to the moderator for any questions.
At this time, we will be conducting a question and answer session.
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On the poll for questions.
Our first question comes from the line of colony with capital One Securities. Please proceed with your question.
Hi, good morning, everyone.
Grant you mentioned some of the synthetic soda ash production in China was offline can you talk more about what's going on I guess for the environmental restrictions, perhaps how much global supply that represents and any indication of how long it can be offline.
Okay.
It's a little bit of a.
Dark space from our perspective, but that's the indications that we.
We hear from consultants on other boots on the ground, but thats basically due to the discharges.
The environmental discharge is associated with the synthetic production. So we don't know really the.
Whole quantity.
Or the duration of it.
It appears on the first part of the.
The first quarter of 2021. This is on somewhat of a lagging basis. The total exports out of China, which we can track, but again on the lagging basis, we're down about 10% year over year.
Okay.
Okay got it that's helpful.
And then I guess as we think about the the <unk> price increase in the <unk>.
Backdrop of soda ash pricing. This year can you remind us if genesis has much exposure to the better pricing or are you pretty much entirely contracted for the year.
And Ah.
In round terms.
About half of ourselves or domestically.
Or pretty much fixed for the remainder of 2021.
About half of our export sales or 25% of our total sales are to Latin America through and Sac on those are typically also fixed for the for.
For the period so the.
The other half of exports of 25% of our total sales, which are the sales from the <unk> two.
Asian economies outside of China.
Are typically shorter duration in the majority of them re price on a quarterly basis. So during 2021 the.
The only real uplift the.
Youre going to see from a moving pricing is.
On the 25% of the sales, but the mix within either of those portfolios.
Can affect some of the pricing but the.
Suffice it to say that it.
Certainly as I've tried to make clear on our comments.
It certainly feels that the market is the rebalancing in the supply overhang and the continued demand running below a year earlier levels.
At the <unk>, which occurred at the end of 2020 kind of gave.
The backdrop for lower prices in 2021, but we see that reversing in the.
And the dynamic changing that.
The prices to recover in 2022.
Okay. That's very helpful. Thanks for taking the questions.
Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Hi, Grant Thanks for taking my questions. One quick kind of follow up on the pricing question. Just when you boil all of that down on in relation to the mix of your portfolio that's part of.
What is contracted.
When it's on.
Rebating and price quarterly and the magnitude of the answer on price increases and also the mix of the portfolio of your 25% exports to Asia ex China.
The kind of quarter to quarter op net should we expect on near term and also looking into 2022 as you renegotiate contracts at the.
The end of 2021 that what kind of uplift should we expect just from the price movement there.
Well the.
<unk>.
We're the Crystal ball is not as crystal is sometimes it would appear to be I mean I think in.
Let's go back in terms of with a little bit of historical perspective, we had in late 19 pre pandemic and so when we were setting prices for 2020, we had kind of the.
Beginning of the slowdown in the worldwide economic activity as well as an overhang of the potential trade war between the U S and China going on so there was a little bit of an overhang. So 2020 prices actually started the year lower than they were in 2019.
And then the pandemic hit and so we had as we went through.
The 2020, the the domestic prices in Latam prices.
Held up because they were in negotiation.
And then the Chinese expect.
Asian prices ex China.
The fall as we went through.
2020, and we have the dynamic going on in 2021 so.
The long weighted answer is that.
We're not exactly sure how rapidly things are going to recover although theyre going to recover if we could get back to.
I would say it this way if we can get back to 2019 prices, which again I'm not claiming that we're going to get there in 'twenty, two but certainly 23 feels potentially.
Potentially that.
The the business would recover order of magnitude.
The back into the 160 to 180 run rate and Thats before Grainger comes on and with those 2019 prices the.
The mid 2019 prices when Grainger comes on we would expect incremental segment margin contribution from <unk>.
<unk> grainger to be of the $60 million range, So again getting back to $2 20 to $2 40.
The kind of in the $23 24 type time frame certainly seems.
It seems reasonable to us.
Understood. Thank you and then just turning to the marine.
A lot of moving parts of the segment as well.
Can you just the scale for us what the.
The run rate should be.
Assuming a more normalized quarter four of Drydocks in the session as refining utilization continues to increase on the alpha on the heels of the New American Phoenix contract, yes. The.
The.
The AP contract in the first quarter was the low watermark, it's gone under contract.
At the.
Probably in round terms, six or $7000 of day more.
GAAP.
On the first quarter. So that's under that so it will be a 12 month contract.
On a prospective basis so.
And also on the first quarter due to various dry docks and the other things, we more or less had one net.
The Bluewater unit out of service during the entire quarter.
Which again, we think that thats kind of behind us. So we should get a little bump on that and then.
Importantly.
Once.
In reality, the winter storm, which I think some people called urea I never knew what that meant but the.
Once it caused some.
Dislocations in the refining along the Gulf coast or specific types of barges black oil barges or internal heater barges actually started to see a dramatic increase.
And the utilization.
And then as refi as you pointed out per user refinery runs.
Continuing to to its share way higher.
The world can figure out what to do with the jet cut on the on the crude barrels in the.
We would expect it to Stephen recover more so as we sit here today of our brown water utilization.
As in the high 80% range. So we've seen the.
A fairly steady cadence of the improvement on that as the as the refinery utilization has continued so on.
On a go forward basis.
Of the.
I don't know what the good run rate is because we're kind of stuck for 12 months on the fairly.
Fairly low pricing environment for the American Phoenix, which really moves the needle but.
Things are improving from a fundamental point of view rather rapidly for us.
Thank you grant.
Thanks, Jason.
And once again as a reminder, if you would like to ask the question for Star one on your telephone keypad. Once again, if you would like to ask the question. Please press star one on your telephone keypad.
Our next question comes from the line of Shneur <unk> with UBS. Please proceed with your question.
Hi, good morning, everyone.
Figured since soda ash is popular I'll just continue with the the questions there.
Yes.
Given the growing renewable initiatives.
Just kind of curious if it's possible for you to accelerate the timeline on Grainger and just also wondering if you were customer base has expanded to include these green buyers.
So can you give us some examples.
Hi.
Yes, I think there are certain circumstances, where we can accelerate.
The Granger expansion were but.
We could always at some point within probably a four to six months.
<unk> frame of the.
If prices supported it so there was a dramatic recovery in the primarily export prices because it doesn't make any sense to kind of bring it up and try to fight for market share of something thats already contracted domestically, but if export price has got to the point, where it made sense, even on an efficient basis to.
To resume the 550000 ton annual production, we could get out of Grainger, we could probably put that back in the service in the call it 4% to six months.
Kind of at the outside if conditions warranted.
Not all of that much we can do to accelerate the overall of the expansion to the one two to one 3 million ton.
The range so.
Not a lot that we can do now relative to the second of your second question embedded in that I mean, obviously.
Okay.
Companies like Albemarle, which was the world's largest lithium producer of others were seeing.
Increased demand from those types of applications and certainly has pointed out.
Both in the.
The U S but.
Especially in China, which again is our major competitor at the margin for export sales out of out of Wyoming.
Is really dramatically increasing their demand of soda ash of worldwide for the.
Solar panel the panel manufacturing so.
I'm not going to go into the individual discussions with the individual customers and stuff, but suffice it to say that we are participating in those discussions and looking to.
To be of supply chain partner with the.
Some of the leaders on or the things that are per.
The building blocks for the green initiatives.
Alright perfect.
Just a follow up question you'd mentioned in your prepared remarks about a liquidation of some crew debt.
Generates a $22 million of leverage benefit.
Just wanted to understand is that just a leverage benefit or is that something that we should be thinking about.
For the second quarter from an earnings perspective, as well to you and and how does this impact.
The securities buyback basket that you have currently outstanding.
Sure.
The no whatever margin if you will that we earned associated with the contango marketing play was reflected in the first quarter.
So that is strictly kind of a balance sheet item that the cash is coming in.
Post the end of the quarter. So all of it does is on.
Otherwise reduce our total outstanding debt.
So we have within our revolving facility we have a sub.
Hedged inventory facility. So it doesn't fill up any of the baskets or relieve any pressure leave anything taken anything out of using any of the other basket. So it's not a net earnings of <unk>.
Factitious of net cash and a reduction in total outstanding debt.
Simply because we received the cash proceeds post the end of the quarter.
Alright, perfect I have a few more questions, but ill jump back in the queue. Thank you.
Thank you.
Our next question comes from the line of T. J Schultz with RBC capital markets. Please proceed with your question.
Hey, good morning.
So in the Gulf just one question or on your prepared commentary on the discussions with <unk>.
<unk> Standalone deepwater HUD debt that would hit maybe on the 24 25 timeframe.
Are those.
Hubs, where you have the natural tend to get the volumes what type of magnitude either volumes or to your segment margin are.
Some of the discussions around the hubs.
Low capital projects that just utilize the mega hub in capacity or do you invest in and the new infrastructure.
We're probably not in a position under NDA and other things to go into a lot more detail out.
I can give you I am comfortable that on.
On a from a volumetric point of view that the.
The sum of it would be.
Yes.
Yeah.
Some of our arguably on peak production.
200, 220000 barrels a day of incremental per.
Production.
Everything else the same it certainly feels and looks like we.
Are the logical.
The transporter to shore of given the capacity configurations.
We have on our systems and the capacity situations on competing system. So.
That's about as far as I can go at this point, but again indicative of the.
If you put it in context, the Argos in the King's key together because of Argos is quite a large system from us.
Or <unk>.
Floating production unit, those two or 210 sort of wrap behind here kind of three additional ones that.
Add up to about the same.
The same amount.
Okay, great. Thank you that's all I got thanks Peter.
And once again as the final reminder, if you would like to ask the question. Please press star one on your telephone keypad. Once again, if you'd like to ask the question. Please press star one on your telephone keypad.
We drove the follow up question from the line of Shneur <unk> with UBS. Please proceed with your question.
Hi, Grant as promised I did say that in some more questions.
Okay.
Out of curiosity, when I sort of think about the soda ash business.
I imagine that there's a lot of fixed cost absorption within that business I was wondering if the constant pricing environment.
At this stage right now.
What is the marginal tonne due to your margin like from the you adding.
Adding incremental ton at this point right now production does that expand your margin even when the constant price environment.
Yes.
In part.
Some of the financial results that we saw in 2020 was that we werent, even even after we made the decision to.
Temporarily mothball Grainger.
Even at our Westvaco facility, which notionally.
Produced $3 5 million tons of so.
Of that it doesn't because some of it goes on to either cost.
To make caustic or specialty products it doesn't exactly match up to some of the the.
On the volumes that we report but.
We werent, even operating of 100% on when you're not operating the such a massive industrial complex at 100% here you lose the fixed cost absorption.
The benefits so in the fourth quarter, we got back to.
Running a 100%.
We anticipate.
The Westwood icon, we anticipate running at a 100% throughout and our our team.
Led by Fred von Aaron's on the ground in AD.
The leading there our soda ash business.
We're always looking for ways to squeeze out of incremental ton out because the variable operating expense is quite low relative to the average fixed cost.
Getting that the getting that incremental ton of of ash on the belt as we like to say is very valuable to us.
Yes.
And then kind of the analogy shneur as kind of Grainger and that is that.
Grainger has the infrastructure and in essence, the fixed cost almost of a.
One 2% of $1 3 million ton of year facility, but because it has it had inadequate evaporative capacity for lack of of better description. It was only capable of producing 550000 tonnes. So it would fit.
It was kind of inefficient bye.
By expanding that we make at the same economics as Westvaco, which we believe is the.
The cheapest or among the cheapest producing facilities of the world.
Grainger will join that right when it comes on on an expanded basis.
That makes perfect sense and one follow up on you.
All of the schedule.
Well move this year or next year, just wondering if that's something that we just need to think about in terms of modeling.
We have.
We've just completed a longwall move.
So.
It will.
To the to the extent there is any effect will show up in the second quarter, but.
We built up as much inventory in the in the ore piles, we could prior to doing that and continue to have.
More of mining operations, while we were doing the <unk>.
Longwall move so we don't anticipate.
The significant.
The fact, but it is behind US at this point and the team did a great job of getting it done.
Safely and within schedule.
Perfect. Thank you very much of that does it from me.
Thank you.
And with that ladies and gentlemen, we've reached the end of our question and answer session and I would now like to turn the call back over to management for any closing remarks.
Well I think we appreciate everybody's attendance.
<unk>.
Hope to talk to you in 90 days, if not a little bit sooner. So thanks, everyone.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation on of a wonderful day.
Okay.
Okay.
Yes.
Okay.