Q1 2021 USD Partners LP Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP first quarter 2021 results conference call.
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It is now my pleasure to hand, the call over to Jennifer Waller director of financial reporting and Investor Relations for opening remarks. Please go ahead.
Good morning, and thank you for joining US welcome for our first quarter 2021 earnings call.
With me today are Dan Borgen, our Chief Executive Officer, I'm out for our Chief Financial Officer.
Brad 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 ended March 31 2021.
If you would like a copy of the press release, you can find one on our website at USD partners Dotcom.
Before we proceed please note that the safe Harbor disclosure statement regarding forward looking statements in last Night's press release applies to the statements of management on this call.
Also please note that information presented on today's call speaks only as of today may six 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 see last night's press release for reconciliations to the most comparable GAAP financial measures and with that I'll turn the call over to Dan Borgen.
Thank you Jennifer and good morning, everyone and thank you for joining us on the call. This morning.
We are pleased to report a star.
<unk> start to the year at the partnership and are excited to update our distribution guidance with our intent to resume growing the partnership's quarterly distribution.
Our strategically located terminals continue to perform well and our recommendation to the board to increase our quarterly distribution by approximately two 3% relative to the fourth quarter of 2020 was reinforced by the improved outlook for our business along with our enhanced liquidity position.
Which Adam will discuss in more details in just a few minutes.
Our long term take or pay contracts with our strong investment grade customer base continues to produce strong financial results for the partnership and continue to provide the foundation for our business.
As Adam will discuss our efforts to strengthen our liquidity position over the last 12 months have resulted in a net leverage ratio of three two times and trending lower.
And even with the updated distribution guidance for the quarter and 2021.
Management expects to continue to see the partnership generate a significant amount of free cash flow for the remainder of the year.
We also continue to make progress on and are very excited about our sponsors previously announced diluent recovery unit or Dr. Yu project in destination terminal in Port Arthur Texas.
We expect construction of the D R U and Port Arthur terminals will reach substantial completion in July ramping to full capacity in August and we look forward to that announcement.
As a reminder, while the <unk> project is at the sponsor the longer term contracts at the D. R. U benefit the partnership because those contracts will be matched up with the Terminalling services agreements at the Partnership's Hardesty terminal.
Converting 50000 barrels a day of capacity at the partnership to a 10 year take or pay contract with Conocophillips. Additionally.
Additionally, USD and our partner Gibson.
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 extend the associated contracted cash flows at the partnership's Hardisty rail terminal.
Asset.
There continue to be references made about the D are you on other public company earnings calls as well as social media platforms. We look forward to our <unk> solution, becoming an industry standard as more customers start to adopt the strategy and we are pleased to see the industry began to get behind the program.
Josh will also give an update later on this call detailing where we are with our sponsors development activities.
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 continued to deliver.
Innovative solutions for our customers.
So drew bid that our customers intend to transport into future is considered a nonregulated commodity and is not considered hazardous and it does not fall under the U S. D O T hazardous materials regulation and candidates transport of dangerous goods regulations.
Also as we mentioned on our previous earnings call I do want to mention some of the other growth we are seeing at the sponsor level.
As a 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 weed.
We believe our Terminalling assets are strategically located to address some of the expansion needs and the clean fuels transition.
And we believe our relationships in the industry, including with the railroads.
Uniquely position USD to be a strong player in this sector going forward.
We look forward to keeping the market updated on these developments.
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 industry by working with the railroads and our customers to develop strategic logistic assets and infrastructure.
As some of these assets are potentially dropdown candidates for the partnership we look forward to keeping the market updated on our progress.
Adam is going to start us off from an update on the partnership's latest financial results and our liquidity position then we will jump back into the recent market and commercial developments Adam. Please go ahead.
Thank you Dan and thank you for joining us on the call. This morning yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter of 2021.
And to issue our first quarter 10-Q with additional details after close of market today.
Our take or pay contracts and primarily investment grade customers. The partnership had another strong quarter.
For the quarter, we reported net income of $7 $3 million net cash provided by operating activities of $12 6 million adjusted EBITDA of $14 6 million and distributable cash flow of $12 5 million.
Our efforts to strengthen our balance sheet over the last 12 months continue to produce results and we have paid down almost $40 million on our revolving credit facility since the first quarter of 2020, which significantly higher than our previously stated guidance.
Notably the partnerships net leverage ratio is currently 3.2 times and trending lower.
Managements improved outlook for our business along with the partnerships enhance liquidity position supported our recommendation to the board to increase our quarterly distribution by two 3% relative to the fourth quarter of 2020.
We are excited to resume growing the distribution I have also announced our intention to recommend to the board to increase our quarterly distribution by an additional quarter of a cent per quarter for the second third and fourth quarters from 2021.
This is obviously subject to the board's approval and we will continue to keep the market updated on these increases.
Even with the distribution increase this quarter as Dan mentioned, the partnership is projected to generate a significant amount of free cash flow as evidenced by our strong DCF coverage of approximately four times during the quarter.
Management expects to continue to have strong distribution coverage for the remainder of the year.
And now I'll go into the details from the quarter.
The partnership's operating results from the first quarter of 2021 relative to the same quarter. In 2020 were primarily influenced by higher revenue on at Stroud terminal due to higher rates that are based on crude oil index pricing differentials, which was partially offset by revenue that was deferred in the first quarter of 2021 and connection with makeup right options that the partnership.
To its customers.
Additionally, revenue was the hardest hit terminal was slightly lower in the first quarter relative to the first quarter of 2020, resulting from the recognition in the first quarter of 'twenty of revenue that was deferred in 2019.
This decrease in Hardesty revenues was partially offset by a favorable variance, resulting from the change in the Canadian exchange rate associated with the partnerships Canadian dollar denominated contracts as well as increased rates on certain of the partnership's hardisty agreements when compared to the first quarter of 2020.
The partnership experience lower operating costs during the first quarter 2021, as compared to the first quarter of 2020.
This decrease was primarily due to a noncash impairment of goodwill associated with the Casper terminal that was recognized in the first quarter of 2020 with no similar charge recognized in the first quarter of 2021.
Net income increased in the first quarter as compared to the net loss recognized in the first quarter of 2020, primarily because of the operating factors already discussed.
Coupled with lower interest expense incurred during 2021.
Resulting from lower interest rates and a lower weighted average balance of debt outstanding.
Additionally, the partnership recognized a noncash gain associated with its interest rate derivative during the first quarter of 2021.
Net cash provided by operating activities for the quarter increased 8% relative to the first quarter of 2020.
Primarily due to the operating factors already discussed and the general timing of receipts and payments of accounts receivable accounts payable and deferred revenue balances.
Adjusted EBITDA and distributable cash flow increased by 18% and 27% respectively for the quarter relative to the first quarter of 2020. The increase in adjusted EBITDA was primarily a result of the operating factors already discussed D.
DCF was positively impacted by a decrease in cash paid for interest and income taxes during the quarter.
Partially offset by slightly higher maintenance capital expenditures incurred during the current quarter, which included technology upgrades and safety maintenance at the partnership's Hardisty and Stroud terminals.
As of March 31 of this year.
The partnership partnership had approximately $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $196 million on a $385 million senior secured credit facility.
Subject to the partnership's continued compliance with financial covenants.
As of the end of the first quarter. The partnership had borrowings of 189 million outstanding under the revolving credit facility.
Pursuant to the terms of the partnership's credit agreement the partnership's borrowing capacity is currently limited to four five times trailing 12 months consolidated EBITDA as defined in the credit agreement.
As such the partnership's available borrowings under the senior secured credit facility, including unrestricted cash cash equivalents.
$75 million at the end of the first quarter.
The partnership was in compliance with its financial covenants as at March 31.
On April 20, <unk>, the partnership declared a quarterly cash distribution of <unk> 11 of 11 three five.
Per unit or <unk> $45.04 per unit on an annualized basis, representing an increase of two 3% over the distribution declared for the fourth quarter of 2020 distribution. This distribution is payable on may 14th to unit holders of record at the close of business on may 5th.
Given our improved liquidity position and our sponsor's growth projects at the day are you on Port Arthur we are scheduled to come on come online in the third quarter. We continue to be excited about our future and we continue to be focused on enhancing the long term value for our unit holders.
With that I would now like to turn the call back over to Dan.
Thank you Adam a great quarter.
I appreciate your leadership on that John.
Josh we'll turn to Josh now and give a and have him give us a project update Josh.
Thanks, Dan Let me start first with our joint D argue project in Hardesty with our partner Gibson.
Basis, a lot of work by our joint project team.
I'm happy to report that the development activities at Hardesty are progressing extremely well.
Most of the major construction efforts are nearing completion and we're in process right now per plan and handing off those construction activities to our operational teams for commissioning.
The day of your project as a whole in hardesty is on time and on budget now.
Now regarding USD is port Arthur rail destination hub or what we often refer to as P. A T. Again, we have a similar positive story regarding execution at phe.
Our terminal development activities are progressing per plan.
And we're making extremely good progress as a whole on the project towards our execution goals, our rail facilities Marine infrastructure terminal tankage and local pipeline connectivity are all on schedule and on budget.
Overall, given the scale of this project, both at Hardesty and Port Arthur the why.
Weather challenges, we faced the specific pandemic related hurdles, we've had to overcome I'm very proud of our collective team.
And happy to Echo Dan's earlier comments regarding our expectations that the construction of the day are you project as a whole again hardesty and port Arthur will reach substantial completion in July of this year and ramp to full capacity. Shortly thereafter in August aligned with our commercial expectations and without Dan I'll hand, it back to you.
Thank you Josh another great report I appreciate.
All the effort there to keep us on track.
On the projects. So I appreciate that I will now turn to Brad and get a market and.
Commercial update right.
Thanks, Dan let's start with some good news.
Given our efforts to reopen.
<unk>, the accelerated rollout effects of nations and the resumption of <unk>.
Economic activity.
Manned for transportation fuels continue to trend higher and this of course is supporting the strengthening of crude prices.
As of this week U S crude prices as represented by the West, Texas Intermediate price index or W. T I R.
Are at or near $66 a barrel at these price levels specific to Canada. The industry has aggressively responded to bring back shut in production.
We're focused on new spending to increase production in 2021.
All of this has led to Canadian production returning to levels greater than those in pre COVID-19 days.
So we have very strong and supportive supply story for Western Canadian crudes.
As discussed in previous calls this higher supply has led to higher competition for export pipe egress capacity, which ultimately drives apportionment levels higher.
Current apportionment levels are at the higher end of history and have big recording levels of 43% to 53% over the recent past.
These apportionment levels naturally leave stranded barrels at origin and drive inventory levels higher.
In fact is happening and inventory levels are trending to historical levels as well.
Finally, the higher inventory levels will ultimately drive prices to correct to a level that insurers barrels can eat growth by rail profitably.
We're in early stages of this happening and wants to to upgrade of turnarounds and in late <unk> early <unk>.
Our expectations are that pricing in Canada will trend towards levels that will incent your gross by rail and drive utilization through rail terminals higher at USD <unk> <unk>.
Origin terminals, both hardesty and CCR, we are experiencing this increase in demand today.
Finally, we mentioned in our last earnings call a little bit of the macro story at Cushing and the potential impact to USD business bottom line.
Fishing is in need of incremental supply and is pricing at a premium and an attempt to attract barrels to fill egress pipes been refining demand in the mid continent.
As evident by the rate of reductions in inventory currently occurring and it is our point of view that this will continue.
Cushing will need to price to attract incremental supply in the future future excuse me naturally this is supportive of our Stroud asset and supporters of our efforts to renew and extend contracts though.
So at a high level, we have Canadian production returning to levels greater than pre COVID-19 levels.
Environmental and regulatory headwinds and therefore risks remain high for alternatives egress options.
Cushing strength continues.
Struggles to find incremental supply.
Given these market conditions.
Our priorities going forward are first and foremost.
Commercially servers are contracted customers in anticipation of our demand growing from here.
Second of all identifying opportunities to fully commercialized incremental capacity both on a spot indoor term basis at hardisty.
Kasper, Stroud and port Arthur or given the changing market conditions.
I just described.
And then finally to commercialize D are you import arps or phases, two and three.
Given not only the market conditions, we just discussed.
But more importantly, as an eat gristle alternatives for us and egress solution.
It provides a competitive safety and and ESG.
Alternatives.
It is cost competitive and actually on the bitumen related basis.
It's cheaper than alternative egress solutions and disadvantages growing given current risks and growing costs relative to alternatives egress solutions. It has in addition value drivers that benefit producers ROE roads and refiners.
And as we've talked about previously on calls it has scaled.
Scalability advantages where you.
Can time appropriately.
Your your volume and N and egress needs.
And provide a day.
A solution to your balance sheet that has that advantage relative to alternatives.
So we stay focused on them.
Our commercialization efforts at D. R. You import port Arthur and we're excited about the potential of being successful at both.
Finally, I like to talk briefly about our clean trends right.
<unk> fuels initiatives that Dan mentioned, as we know transportation fuels in the United States is in a state of transition and as a result of societal norms and core spelt corresponding policy.
Given these greenhouse gas concerns and focus our priorities for clean fuels include first and foremost grow our current business and the ethanol space.
As we've talked about in previous calls, we believe that the colon octane and ultimately ethanol.
Could grow and there is a potential for for the blend.
Well two weeks.
Spans from Eaton to even 15.
As Dan mentioned, we're focused on building a renewable diesel.
Network, working with fragmented producers and blenders to ensure that the new supply gets to where the.
Demand is.
Currently in and California for sure given there.
Status as a leader in the CSS.
Regulatory requirements, but also in the growing El CFS demand.
That we're seeing not only in the number of new states, but also in Canada.
Other locations.
And then finally.
We're working hard to identify other value propositions that work toward clean fuel solutions supporting our communities things like fuel blending in LNG fueling. So these are.
Our key focus areas for us.
In closing I'd like to talk briefly about our Texas deepwater properties.
Yeah.
In support of this discussion we just went through on greenhouse.
Clean fuels.
We are specifically working on fuel blending opportunities in LNG fueling opportunities that support our Houston community.
<unk> business model. Additionally.
Additionally, we're working continue to work with existing businesses and businesses that are in need.
Change to ensure that they can compete with the.
The fragmented.
Current conditions and the need to consolidate and create solutions that meet global requirements things.
That fall into the specialty chemical space or an example of this so we're working hard on identifying what those opportunities are and working with those existing customers two to provide competitive solutions, then as Dan mentioned, where we're leveraging our advantage real capability.
To create advantage networks meeting supply by by rail and an example is that of course is life products that Dan mentioned in Mexico.
And the potential for things like propane in Mexico. So we stay pretty focused on that so we're excited about the.
Where we are at Texas deepwater and the things that we're working on.
And certainly the potential that it could provide.
So at this time I'd like to pass the discussion over to Josh fruitful.
Ask him to provide updates on our commercial real development initiatives he's leading.
Supporting first mile last mile solutions for our potential customers Josh.
Thanks, Brad regarding our commercial well development efforts.
<unk> just mentioned, we often also call it first and last mile or storage and transit initiatives, we're starting to see some really good progress jointly with our railroad partners.
As the railroads collectively implement a more focused or precise operational service plan.
Precision scheduled railroading or <unk> as we've all been reading in the headlines for almost a couple of years now.
And as the global logistics change evolve.
The need for new and improved rail infrastructure is growing.
Specifically tied to rail transported commodities things like storage staging trans loading and warehousing all again tied to rail service are growing and shifting in demand regionally.
U S. D is currently working directly with several class ones, both east West and in Canada.
And our joint and new customers collectively to develop a network of assets to service. These exact needs. Our focus is to provide the railroads with a more efficient and cost effective option to directly service.
These customer.
And for the customer specifically, a tailor made solution that provides them the service flexibility that they need by rail to maximize their businesses as a whole.
We're making good progress as I mentioned earlier and looking forward to share a bit more detail as we continue to work collectively with the railroads and have specifics to share publicly.
And with that Dan I'll hand, it back to you.
Thank you, Josh and the rest of the team great reports.
With that we'll open up the call for any additional questions.
At this time, if you'd like to ask an audio question you may do so by pressing star and the number one on your telephone keypad, then that is star one well pause for just a moment.
I'm going to ask an audio question My Star one.
With that we are showing no audio question from now hand, the call back to Dan Borgen for closing remarks.
Thank you very much and as always we appreciate your support and are really excited about our future as we enter into the next phase of the partnership for growth story around the diluent recovery unit.
Feel like the steps, we've taken to bolster our growth prospects and enhanced our liquidity position have positioned us well.
To support the projected increase in activity as the market returns to pre COVID-19 levels later this year.
I want to thank you again for dialing into the call. This morning, we will continue to keep you updated and look forward to additional announcements regarding our progress on the D. R U and port Arthur and potentially other initiatives, we have in the future. Thanks, again and have a great day.
This does conclude today's conference call, we can just growth.
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