Q2 2021 Shell Midstream Partners LP Earnings Call

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Yeah.

Good morning, My name is Kevin and I'll be your conference operator today at this time I'd like to welcome everyone Studies Webcasts for shell Midstream partners. All participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session on need to press star 1 on your telephone if you require any further assistance. Please press.

<unk> zero.

I will now turn the call over J D. Parker Investor Relations Officer, you May begin your conference.

Thank you.

Welcome to date to today's webcast for shell Midstream partners with me today are Steve Ledbetter, CEO, Shawn Carsten, CFO, and Sean Guillory, VP commercial and business development.

Slide 2 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.

Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as all are in today's press release and under risk factors.

As in our filings with the SEC.

Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release and appendix 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.

We will take questions at the end of the presentation with that I'll.

I'll turn the call over to Steve Ledbetter.

Thanks, Jamie.

And welcome to our second quarter earnings webcast overall, our assets performed well for the quarter.

I am proud that our people and assets continued to show strength in the face of ongoing volatility.

Some key operational highlights for the quarter.

<unk> include continued resilience in the Gulf of Mexico as a whole.

With new tie backs into our Delta system coming online.

In the onshore zydeco volumes are up approximately 8% since last quarter and.

And I am pleased to report the system is now almost fully contracted through May 2022.

Continues to demonstrate the strategic value of that asset to our business.

Additionally, we saw a significant uptick in explore primarily due to refinery turnarounds in the Midwest.

You've heard me speak to our own business improvement efforts that we've taken over the past several months.

Which to increase competitiveness and ensure longer term sustainability.

We are on track to deliver against our $30 million to $40 million commitment by year end.

In summary, our portfolio has proven resilient throughout a pandemic that has affected markets globally and we've taken.

A number of measures internally to stay.

Cost efficient.

But as I look ahead to the medium term the partnership faces significant headwinds.

As you know the distribution waiver from our general partner ended with the first quarter distributions and.

And the partnerships preferred units are eligible for conversion in 2022.

Also our business has yet to see a full return to normal in the market.

As we've seen in recent days COVID-19 infection rates, driven by new variance continue to gain momentum.

And we cannot predict how that will impact the macro environment as we still continue to see softness in regional regional.

On demand at a refined product line Sir.

Further there is additional uncertainty around colonial.

As previously announced Colonial's board decided to not pay a dividend this quarter.

And it is our view that some of the challenges colonial is facing in particular, the ongoing FERC rate case.

Regionally could have a negative impact on its future dividends.

And with all of this.

We made the difficult decision to Rebase, our quarterly distribution to <unk> 30 per common unit.

Now we believe this measure helps ensure the partnership's financial health and will allow us to navigate the headwinds.

We see for our business in the near to mid term.

In addition, we believe the Rebase of the distribution provides a sustainable financial framework and affords us the optionality to pursue projects that will build upon our diverse portfolio.

All of which we believe will enhance unitholder value as we move forward.

Sean will provide.

<unk> some insights into what this distribution reset means to our refreshed financial framework, but before turning it over I want to revisit some of the fundamentals of shell midstream partners.

First and foremost we believe in our diversified asset base, which connects key supply areas strategic market.

Across the country.

The long term resilience of the Gulf and our advantageous position there will continue to serve us well.

And when combined with our onshore Gulf Coast logistics assets, we believe our partnership remains well positioned to receive relatively stable long term cash flows.

As.

Centers of our Gulf of Mexico Corridor strategy in action, we continue to see capital dollars being put to work and there are a number of tie backs, which are bringing volume into our systems in the near and mid term.

For example, Bp's Manwell prospect and other producers are expected to bring an estimated incremental.

Rather than <unk> to 20000 barrels a day into our delta in the <unk> systems in the second half of 2021 with more on horizon.

This will provide incremental cash to the partnership with no capital outlay.

Further I am pleased to share that the margin expansion project reached a major.

On a fifth stone just last month when the pump module was set in place on the West Delta 143 platform.

As discussed previously this project will increase our capacity and the corridor by approximately 65000 barrels per day and remains an integral component of our growth in the Gulf.

We expect definitive agreement.

Myles with producers to be finalized in the near term.

And the project is on schedule to be completed in advance of additional volumes in 2022 from shell power Nap and Vito developments.

Now moving to the onshore we continue to explore opportunities taking advantage of our existing asset base with the unfolding.

Dynamics.

1 example, in our first quarter earnings webcast, we highlighted the possible expansion of Lockport facility to take advantage of efforts to move barrels south on the announced cap line reversal.

And we continue to evaluate options that provide solutions to customers moving barrels to St James and.

And the refinery complex in Louisiana and on to the water via loop.

As we progress these projects through various stage gates, we are seeing increased interest from a wide base of potential partners and customers.

We have several opportunities we are evaluating to take advantage of our positions in both the Gulf of Mexico and onshore.

Onshore and as these opportunities move to a higher degree of certainty, we will come to the market with them at that time.

In closing I am excited about shell midstream future as we leverage our diversified portfolio of assets and the capabilities of our team to deliver long term value to unit holders.

So with that I will now hand, the call over to Sean.

Great. Thanks, Steve.

<unk> on the quarter, our assets have continued to perform in this challenging pandemic environment.

So first let me cover a few of our key financial metrics for the quarter.

Our total revenue was $148 million an increase of.

<unk> volume from the first quarter now.

This was primarily related to increased throughput on zydeco as newly committed contracts started in the second quarter, bringing our mainline contracted capacity to 350000 barrels per day.

We also recognized increased product revenue related to allowance oil sales during the quarter.

Now all of this increase was partially.

9 the by lower offshore throughput when compared to the first quarter.

Our operating expense was $83 million up about $8 million from the prior quarter. Now. This is primarily related to timing of project spend on our zydeco in norco acids, along with an increase in the cost of allowance oil sales.

Our income from equity investments was $105 million.

Up $3 million from the prior quarter, mostly due to increased volumes on explorer as it benefited from longer than expected refinery turnarounds in the Midwest during this quarter.

All of these increases were partially offset by decreased earnings from Colombia.

With all of this adjusted EBITDA attributable to the partnership was 200.

Third 7 million.

And after interest expense maintenance capital and other adjustments total cash available for distribution was $186 million.

It is important to note that in the second quarter. The partnership recognized a onetime cash helped but $10 million from the previously announced anacortes asset swap as well as $2 million related to the August 12.

So now without these onetime cash receipts.

Our cash available for distribution would have been about $174 million and our coverage would have been less than 1 times under our prior distribution levels.

Our partnership declared a distribution of <unk> 30 per LP unit now this resulted in a coverage ratio for the quarter of 1.6 times.

So now let me turn to the partnership's balance sheet and liquidity.

As of June 30, the partnership had total debt outstanding of $2.7 billion, which equates to a debt to EBITDA ratio of 3.3 times based on annualized Q2 adjusted EBITDA.

We believe in the strength of our balance sheet as it provides us flexibility.

To navigate these turbulent times.

So now let me quickly provide a few updates for the rest of the year in the Gulf, We expect to see an impact from planned turnaround activity activity of approximately $6 million.

Now part of this as was previously disclosed 10 million we expected in 2021.

Bill and we anticipate the explorer throughput to come down as the Midwest refiners refiners are now back up and running at normal rates I will note that while refined products demand has improved we are still not at pre COVID-19 levels.

And as I close let me move to our refreshed financial framework, because I think through all the opportunities Steve walked through.

I am excited about the future prospects for our partnership.

With the renewed financial framework and strong balance sheet, we have both the strength to weather the current headwinds and the added flexibility to drive increased long term value to our unit holders.

Now with this flexibility comes a responsibility to effectively manage and deploy potential excess cash.

In ways that add value to our unit holders. So we will take into account. The following guidelines when considering uses for any of the excess cash.

First of all expect our distribution coverage to average 1.1 times or greater.

We look to maintain an investment grade balance sheet targeting targeting between 3 to 3.5 times debt to adjusted EBITDA.

Now this is consistent with prior guidance from the past.

We expect to pursue smaller highly accretive projects that deliver relatively quick paybacks.

And we're going to look for opportunities to return capital to our unit holders, which could include opportunistic on buybacks.

And lastly, if markets allow and it's in our.

EBITDA.

Our unit holders best interest, we have the ability to acquire assets from shell runway.

As I close we're energized about the future of the partnership and we believe in our ability to drive long term value as we employ our diversified asset base to move Americas energy. So with all that we will now take your questions operator.

Yes.

Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the 1 key on your Touchtone telephone. If your question has been answered or you were seeing with yourself from the queue. Please press the balance sheet.

Our first question comes from Shneur <unk> with UBS.

Hi, good morning, everyone.

Just to start off really just a quick.

Quick question I don't want to really be labor and so forth, but just kind of wanted to understand the decision around the distribution right sizing and I don't want to come across as being opposed to it I think it does make sense.

I was just curious about specifically the timing.

A lot of the driving force that you mentioned on the conference call were known.

Some quarters ago, and so forth.

Was it really just about the timing around the waiver exploration that that drove the decision.

Or were there some other factors.

Hey, Shneur.

Good morning. This is Steve I'll take the debt question.

As it relates to the timing I mean first of all what I would like to say.

I'm proud of the performance of the business and the team despite what's going on with the continued volatility and uncertainty as the pandemic continues to.

To range and actually increase in some areas.

As far as the timing goes I think there was a couple of notable items debt.

1 time.

But we don't expect to see moving forward debt as Sean articulated without.

Would have without the Rebase would have put our coverage below 1 the first 1 was associated with explore and the increase in terms of value. We saw there associated with the refiner.

<unk> been defined or as being in turnaround in the Midwest and we.

Back on line now and we don't expect that to continue as as we mentioned the demand has continued to be soft and not back to pre COVID-19 levels. The second 1 I would say is that uplift from the balancing payment for the recent asset swap between.

Okay.

And in a quarter. So that is really around the timing, but in general the components that went into it I think on.

Altogether made sense for us to do that this quarter.

But as we mentioned.

Softness continues there is a high degree of uncertainty in terms of demand.

On the pandemic impacts continue to linger and in particular colonial recently elected not to declare the second quarter dividend.

Primarily given the headwinds around the uncertainty of the pending rate case, as well as that cyber attack and.

And the hundreds of El repair.

Sure.

Our internal view of the rate case from the analysis. We've done is that we believe there is potential for a negative outcome and the reduced dividend may extend longer than 1 quarter.

In addition to that we are entering now we're in the midst of hurricane season, and while it's been light thus far we've got a long way to go.

And then.

As you mentioned the distribution waiver rolling off.

After Q1 and on their preferred units, becoming eligible for conversion next year.

Those headwinds kind of drove us to the decision.

To take the Rebase now again wanted to wanted to reiterate that will allow us to average.

Average of 1.1 times or greater for the foreseeable future.

Okay.

Got it.

Maybe if we can pivot to slide number 7 where you can.

Kind of lay out the.

The framework.

It's kind of interesting to me that you would put return on capital second.

And then Dropdowns third.

Was that on purpose from a signaling perspective is dropdowns still something that youre going to consider I would imagine that.

Post distribution cut you can actually equity funded internally acquisition from shell. So just kind of wondering how we should think about.

In terms of priorities here you get to 3 times Levered argue buying back units or are you buying assets from shell just kind of curious.

How we should think about the rank order of priorities after a small bolt on.

And quick payback.

Projects, Yes, Shneur. This is Shawn I hope youre doing well.

So you shouldn't read into the order on the slide. These are just a menu of options that will use with our excess cash as we as we have any.

As Steve highlighted earlier, we expect some headwinds.

On the foreseeable future, so we will get through that but.

At some point, we will have we will have and we expect to have excess cash.

And we will deploy it.

The appropriate time, when it makes sense and where it makes most sense for unit holders and so I don't think I wouldn't read into the day order on this slide in terms of priorities just the menu of options that we have.

Okay. So so the takeaway is you have access cash flow now.

Cash.

If you get to 3 times leverage for some leverage level like we should either expect to see a return of capital where we should see growing the business.

We're not guiding on on how we should necessarily interpret that so so.

More guidance as we move along over the next 2 quarters.

Cool.

Alright. Thank you very much really appreciate it and have a great weekend.

Thank you.

Our next question comes from Theresa Chen with Barclays.

Yes.

Hi, there. Thank you for taking my question on so maybe first starting on the <unk>.

Sure of colonial and it seems like you've already done some work around it.

Perfect.

Can you say that.

On the outcome of the rate case, it could be negative can you just remind us what are the shippers asking for at this point I'd like the magnitude of decrease since I think it was several dockets now consolidated into 1 and then where do you think it could shake out as far as.

As a percentage decrease to the weighted average rate.

Yes.

Again, that's hard to thanks, Teresa Steve that's hard to determine at this point, we do believe and in our view given all the analysis and modeling that we've seen is that there could be a negative outcome, which again would challenge.

Steve the potential further cash distributions more than just just 1 quarter.

For specifics around the rate case, I'd point, you back to colonial.

More detail.

Okay, and then just on <unk>.

Your affiliates.

Well.

Is there any way shell X can participate in that from an infrastructure perspective.

So what kind of economics can that generate for you.

<unk>, Sean Givler I'll go ahead, and take that 1 and thanks for the question what I would tell you is that.

We're extremely excited to see.

With continued activity in the Gulf of Mexico, and the oil project itself is just another proof point of the continued investment in resilience that you see in the basin.

The oilfield itself within the Western zone.

Area on the Gulf of Mexico, and that's if you look at our maps from area that shell eggs doesn't currently.

Have any corridor pipeline.

What I will tell you that we're still evaluating how we can expand our presence in the west.

And combining that with the multiple opportunities we have in the central and eastern goal to grow both volume and balance value for shell on shareholders as we move forward.

Thank you.

Our next question comes from Doug <unk> with credit Suisse.

Hey, everyone. Thanks for the question.

Maybe a follow up on Dropdowns.

It sounds like.

Still kind of wait and see.

I know you've talked about the south in ethane system as a potential dropdown candidates at 1 point I think.

Pet Chem facility is still under construction.

I'm just curious what the rest of the backlog looks like if you could provide any sort of color on what other type of assets might be available for dropdown.

Maybe if there's.

Even anything tied to some of the sponsors energy transition efforts that might make sense for shell eggs.

Yeah I think thanks this is Steve the.

The Falcon pipeline is as you mentioned mechanically complete waiting for startup of the plant yourself on several other midstream assets and there.

Wider array of assets.

That could be accessed should the market suggest and makes sense for the partnership.

Given what we see right now that might net makes sense, but as we've talked about with our financial framework. It is it is a menu options that we can access it at the right time.

Okay got it. Thank you and then I guess, you mentioned I guess on organic projects with the.

Central walk for projects around the cap line reversal, just curious kind of on a broader level. If you can talk about maybe some of the changing dynamics around St. James with net reversal coming online.

Maybe what kind of opportunities.

Are there for shell eggs.

What projects could look like in terms of thinking from a leverage export markets would that be kind of more greenfield type projects is there potential to maybe reverse the pipes that are that are already on the system.

Just curious what opportunities are out there as well.

Okay I'll try to impact on there was a lot there.

Blood on that 1 so maybe I'll give a bit of a high level view of the types of things and kind of our screening criteria and then I'll I'll.

Ill have Shawn talk a little bit more about the specifics of Lockport and a couple of others.

As we look forward to deploy capital again, we're going to do the thing that makes the most sense for the unit.

On an older but we do see opportunities.

On to defend and grow our Heartlands, it's both Gulf of Mexico, as well as onshore.

The way we are looking at projects to take advantage of the market.

Our assets in the ground, we see now command a bit of a strategic premium at this point and the way, we evaluate the projects and screening criteria.

As relatively quick paybacks with kind of a mid teens type returns.

And.

Pending on the type of solution for those projects, we'd look at capital in the area from $10 million to $50 million, but that depends on on how we how we play those cards and unfold the solutions from the customers.

We continue to evaluate several of them so with that I'll turn it to Shawn to give you a bit of color on on that.

On the on the 2 projects that we've talked about.

Yeah. Thanks, Steve.

I appreciate the question and thank you for that what I would tell you is that right now we believe that 1 of our competitive advantages is our diversified footprint with assets.

On the ground and as you've mentioned the ability to provide connectivity to the key market centers.

Gulf Coast in the Midwest right now there are a number of opportunities that we're developing but still haven't been.

But to have a range.

Potential capital outlays, Steve.

Steve talked a bit about.

That's a lot for potential onboard project.

With the non capital we could spend on that and would be available for tanks and available connection, but I would also draw you to another part of our Heartland, which is.

Developing projects in the Gulf of Mexico, particularly in.

Western part of the Gulf of Mexico that will provide.

Or by 1 of our key corridor assets the ability to capture future development in the near future and similar to what Steve mentioned before in terms of the capital outlay and range of capital we could spend on it could possibly be 30% to $50 million, but when we have something a bit more defensive on.

On all of those opportunities will come back to the market at that time.

Okay got it I appreciate the extra detail on our oil weighted there.

Our next question comes from Gabe Moree with Mizuho.

Hey, good morning, everyone I just had a quick question on the.

Perfect.

Adjusted your parent owns at this point is it fair to say that your assumption is that those products will will actually convert at this point or do you think there is still some uncertainty around that.

Yes.

I wouldn't read through that there's certainty that they will convert.

Certainly that's an option that the.

Sponsor has the.

The way, we've rebased the distribution and the financial framework, we have accommodated for whatever headwinds exist that we can we can foresee.

<unk> will allow us to average a 1.1 times coverage for the foreseeable future.

Okay.

That was helpful. In terms of in terms of answering that and then the Dropdowns that you have done from your parent previously have been quite sizable I guess by and large I'm not sure what the average transaction value Assembly certainly been up there.

Would it be possible to do smaller transactions I mean, clearly with potentially a free cash flow profile, it's improving.

Just wondering from a sizing standpoint, if you'd you'd also be open to doing some smaller transactions not just the bigger 1.

I think it's a good point and a good question and certainly.

The re basing on the distribution and the financial framework. It gives us a menu of options and that includes.

Smaller things and using some of the.

The cash to make the best decision.

Grow accretion for all the unitholders. So thats certainly is in the slate of potential.

And Gabe this is John I think if you look back in history. There are all part of a bigger transaction, but oftentimes we have the ability to take smaller portions right. So we acquired part of R.

Proven sponsors ownership and explore over time right and so.

So we have kind of.

Infinite number of opportunities and ways to make transactions happen.

Got it thanks guys.

Thank you thanks.

Our next question comes from Derek Walker with Bank of America.

Hey, good morning, guys.

Just a follow up on Dave's question.

Just on the.

On the 1.1 coverage.

Are there any other.

I know you talked quite a cash.

Capture sort of the headwinds that you see but.

Is there anything else that we should think about it is kind of baked into that assumption.

It just the preferred converting do you have.

Are you assuming.

No distributions from colonial.

Or just the reduced distribution any other things that we can think about it it's like refined product demand not coming back as quickly.

Other factors are kind of factored into that $1.1 number.

Yes, I think I think what you're looking for is a bit more specificity than I can I can appreciate debt.

We have taken into account our view of many of the headwinds, including the view of the rate case and from all the analysis we've done.

From a negative outcome with reduced distributions.

It may extend longer than 1 quarter.

Again from a conservative perspective, and all the headwinds that we know about and Ken can model.

This rebase puts us in a position to meet the $1.1 to average $1.1 times coverage moving forward.

Got it and then maybe just a quick 1 on the cost.

I know your targets of 30 to 40.

Is that.

What do you guys handle that and I guess do you see any.

Opportunities for further cost reduction.

Yeah great.

Very proud of our business and the team and how we've gone and looked at that.

It's comprised of.

Many different things multi skilling rebase in third party contractor usage logistics on.

Optimization, and rebalancing projects procurement strategy et cetera.

It takes all of that to get done very well to deliver this $30 million to $40 million.

Run rate.

As we exit 'twenty.

2021 and we are on path to do that now having said that we will as part of our base business have a continuous journey to look to optimize and take additional value and costs out of the increased value and take additional cost out of the system.

Got it thank you very much Steve Sean Thank.

Okay.

Thanks.

And there are no further questions at this time I'd like to turn the call back to Jamie partners.

Thank you very much for your interest in shell Midstream partners.

Do you have any additional follow up questions. Following today's presentation. Please feel free to give me a call directly my contact information can be found on the presentation.

Cereals is always on our website shell midstream partners Dot com. Thank you.

Hello, Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Yeah.

Okay.

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