Q2 2021 USD Partners LP Earnings Call
And ladies and gentlemen, thank you for standing by and welcome to the USD Partners L. P second quarter 2021 results conference call.
At this time, all participants have been placed in a listen only mode the floor.
And we'll be open for your questions following the prepared remarks.
If you would like to ask the question at that time. Please press star 1 if at any point of your question has been answered you may remove yourself from the queue by pressing the pan from.
When asking your question the extra 2 please pickup your handset to allow optimal sound quality and lastly, if you should require operator assistance. Please press star zero and it is now my pleasure to turn the call over to Jennifer Waller director of financial reporting and Investor Relations for opening remarks. Please go ahead.
Net.
Good morning, and thank you for joining.
Welcome to our second quarter 2021 earnings call with me today are Dan Borgen, Our Chief Executive Officer, Adam Outsourced Chief Financial Officer, Brad Sanders, Our Chief Commercial Officer, Josh Ruple, our Chief operating officer as well the further other members of our senior management team.
Yesterday evening, we issued a press release announcing results for the 3 and 6 months ended June 30 of 2021, if you would like a copy of the press release you can find 1 on our website at USD partners Dot Com before we proceed. Please note that the safe Harbor disclosure statement regarding forward looking statements and last nights press release, the slice of the state.
Once the management on this call also please note information presented on today's call speaks only as of today August 5th 2021, any time sensitive information 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 a reconciliation 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, and thank you for joining us on the call. This morning.
We are pleased to report another strong quarter at the partnership and are excited to provide and update on our dru bit by rail program.
The partnerships business continues to generate I can significant amount of free cash flow and a recommendation to the board to increase our quarterly distribution by approximately 2.2% relative to the first quarter of 'twenty 'twenty..1 was in line with our previously announced distribution guidance of.
Also as intended our liquidity position continues to improve as a result of our efforts to de lever over the last 12 months the partnerships and net leverage was 2.9 times as of June 30th.
Now here's a quick update on the status of our debate by rail program.
Construction of our sponsors D are you was completed in July both on time and within budget and the.
The D. R. U is now and the startup phase, which.
Which we expect to be completed and the facility placed into service during the third quarter of this year and.
In addition, construction of all major items out of our sponsor's destination facility at Port Arthur Texas necessary to receive drew bit by rail and blend and ship product by pipe.
Is complete and startup on the new terminal has begun and.
And we worked to complete the marine loading and unloading terminal.
As a reminder, our drill bit by rail network also benefits the partnership by providing longer term take or pay revenues and it's hardest to terminal, while providing transportation safety and environmental benefits to its customers.
Specifically, the partnership's existing take or pay contract with Conocophillips and its hardest to terminal converted to a 10 year contract effective for August which will account for approximately 32% of Hardisty terminal capacity.
Obviously this enhances the sustainability and predictability of the partnership's cash flows and provides a solid baseline for growth.
USD and our partner Gibson, our and our and meaningful commercial discussions with other potential producer and refiner customers to secure additional long term take or pay agreements to support future expansions of <unk>.
Capacity at the D R U and extend the associated contracted cash flows at the partnership's hardest the terminal.
Additionally, our drill bit by rail network is a critical part of our sustainability and ESG initiative, which remain a key focus of our business as we continue to deliver innovative solutions for our customers.
The dru bit that are customers of tend to transport is considered a nonregulated and non hazardous commodity as it does not fall under the U S. D O T hazardous materials regulation, and Canada transport of dangerous goods regulations.
During the second quarter. The partnership also announced a new Terminalling services agreement at its West Colton terminal that is supported by a minimum throughput commitment to USD clean fuels from an investment grade rated.
Finding customer.
The new Terminalling services agreement has an initial term of 5 years with a target commencement date of December <unk> 'twenty 'twenty 1.
And we are currently and the process of modifying the west coast and terminal. So that it will have the capability to transalta renewable diesel and addition to the ethanol that it is currently handling.
USD clean fuels is a newly created entity formed by our sponsor to focus on providing production and logistics solutions to the growing market for clean energy transportation fuels.
We believe our Terminalling assets are strategically located to address a portion of the expansion needs and the clean fuels transition and we believe our relationships and the industry, including with the railroads uniquely positioned the partnership as well as our sponsor to be a strong player in this sector going forward.
We look for it to keeping the market updated on these developments.
Lastly, we continue to grow our presence and the storage and transit industry by working with the railroads and our customers to develop strategic logistic assets and infrastructure at our sponsor.
As well as develop our refined products program out of Texas, deepwater and servicing the demand pool from Mexico.
And some of these assets of potential dropdown candidates for the partnership we look forward to keeping the market updated on our progress.
Adam is going to start us off with an update on the partnerships the latest financial results and our liquidity position and then we'll 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 second quarter earnings release, which included the details of our operating and financial results for the second quarter of 2021 and we.
We plan to issue our second quarter 10-Q, with additional details after close of market today.
The partnership had another strong quarter reported net income of $6.7 million net cash provided by operating activities of $14.1 million adjusted EBITDA of $16.3 million and distributable cash flow of $14.4 million.
Our efforts to enhance our liquidity continued to produce results as we have paid down $45 million on our revolving credit facility since the first quarter of 2020, notably the partnerships net leverage ratio is currently 2.9 times and trending lower.
Management has improved the outlook for our business along with the partnership's enhanced liquidity position supported our recommendation to the board to increase our quarterly distribution by 2.2%.
To the first quarter of 2021, which is in line with our previous guidance.
The second quarter distribution is payable on August 13th to unitholders of record at the close of business on August 4th.
Our take or pay contracts continue to support strong free cash flow generation at the partnership.
Evidenced by our strong DCF coverage of greater than 4 times for the second quarter.
As previously mentioned management expects to continue to have strong distribution coverage for the remainder of the year.
And now I will go into the details from the quarter.
The partnership's operating results for the second quarter of 2021 relative to the same quarter in 2020 for primarily influenced by higher revenue and at Stroud terminal due to higher rates that are based on crude oil index pricing differentials.
Also during the quarter of the partnership recognized revenue that was previously deferred at the Stroud terminal during the first quarter of 2021 associated with the makeup right options that are granted to the partnerships of customers.
Additionally, revenue was the hardest the terminal and the second quarter of 2021 relative to the second quarter of 2020 was higher due to a favorable variance, resulting from the change and the Canadian exchange rate associated with the partnerships Canadian dollar denominated contracts and increased rates on certain of the partnership's hardisty agreements.
The partnership experienced higher operating costs during the second quarter of 2021 as compared to the second quarter of 2020. This.
This increase was primarily attributable to an increase and subcontracted rail service costs and pipeline fees associated with higher throughput, partially offset by lower selling general and administrative costs.
Net income increase and the second quarter of 2021 as compared to the second quarter of 2020, primarily because of the operating factors already discussed coupled with lower interest expense incurred during the 2021 period, resulting from lower interest rates and the lower weighted average balance of debt outstanding at the.
The partnership also recognize the small non cash foreign currency.
<unk> transaction gain and the second quarter of 2021 as compared to the noncash loss recognized in the same quarter of 2020.
Partially offsetting was the higher non cash loss associated with the partnerships interest rate derivatives during the second quarter of 2021.
Net cash provided by operating activities for the core of increased 160% relative to the second 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 28% and 48% respectively for the quarter relative to the second quarter of 2020 the.
The increase and adjusted EBITDA was primarily result of the factors already discussed.
DCF was also positively impacted by a decrease and the cash paid for interest during the quarter, partially offset by an increase in cash paid for income taxes and 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 June 30th the partnership had approximately $3 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $206 million on a $385 million senior secured credit facility.
Subject to of the Partnership's continued compliance with financial covenants.
As of the end of the second quarter of 2021, the partnership had borrowings of $179 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 the 4 times for 5 times its trailing 12 month consolidated EBITDA margin.
And the credit agreement and.
The partnership's available borrowings under the senior secured credit facility, including unrestricted cash and cash equivalents was approximately $100 million as of June 30th.
The partnership with and compliance with its financial covenants as of June 30 of 2021.
Given our successful debt reduction efforts, our new growth project at West Colton, and the updates you'll hear from Dan and the rest of the team regarding our sponsor's growth projects at the <unk> and port Arthur and the associated benefits and the partnership.
We continue to be very excited about our future.
And as always we continue to be focused on enhancing the long term value for our unitholders.
With that I would now like to turn the call back over to Dan.
Thanks, Adam appreciate that a great update on all of that.
And Josh to give us a further update on the dru bit by rail program.
Hi.
Thanks, Dan, let's start first with D. R U.
<unk> with our partner Gibson energy, we have completed construction on schedule and within budget for all of <unk> and related assets.
This was a great effort by the team considering the challenges that we faced during COVID-19.
Currently we're in start up phase and are ramping up operational throughput and to date, we are near nameplate capacity of 50000 barrels a day.
As we've shared in the past we expect to be in service fully in Q3 per our plan.
At this point, we're running startup trains to support our customers' commercial needs as well as support final commercial commissioning efforts at Hardesty and Port Arthur.
Now for USD destination, and blending God and port Arthur or as we call. It we.
We have also completed construction of all major terminalling assets on time and within budget and.
Again, a strong showing by the team our.
Our commissioning activity at P E T.
Are nearing completion, and enabling us to receive training scheme and offload those trains blend and ship outbound by pipeline.
Project Closeout will progress the back end of this month.
For on a per plan and.
With some additional marine modifications to further improve the terminals and the marine base capabilities at Port Arthur.
And in closing I'd, just like to thank our customer Conocophillips and our railroad partners C. P and the case, yes for the support that they provided during the project execution phase.
And with that I'll hand, the call back over to you Dan.
Thank you, Josh and I'll ask Brad to give us a more detailed update on the western Canadian select market the impact of recent market events and an update on our commercial activities.
Thank you Dan and thank you, Josh and congratulations to you and your team regarding the great progress you guys of thanks.
That's awesome news.
As we moved into summer demand continues to return to normal and in fact gasoline and diesel are near or at pre COVID-19 levels. Naturally. This provides continued support for prices.
Today prices for West, Texas intermediate.
The intermediate or WTO, and it's approximately $70 a barrel, but has been as high of $75 to $80 a barrel so significant improvement and prices these higher prices naturally drive the effort.
<unk> to restore production and pursue incremental production of investments.
Specific to Canadian producers they have responded and that the cheap both and are currently at pre COVID-19 production levels.
And our expectation is that their production trend higher for the balance of the year and.
Additionally, there are a number of significant events happening in late Q and.
In the fourth quarter, which will materially impact the Canadian supply story the <unk>.
First as Enbridge is efforts on their egress pipe at Hardisty.
Called the expressed by the efforts to improve and increased capacity by adding the drag reducing agent should.
Providing an additional 15000 barrels a day of supply egress and the month of September.
Additionally, in September Suncor, and she and her well upgrade or turnarounds.
It will be over and that's.
And that supply and will return anywhere from $350 of 400000 barrels a day.
Supply through the month of September and finally, the industry given the calendar and the trend to colder weather, we will switch to win of blends which effectively means they have to blend more and.
More deal you went on to a higher percentage of <unk>.
2 of their deal debt.
This alone could increase supply of 525.75000 barrels a day. So on September we expect and certainly going into fourth quarter, we expect the supply picture.
To swell by as much as the.
500000 barrels a day.
Naturally given these market conditions.
Our expectations of where the prices Canadian prices will have to adjust to ensure egress by rail.
A lot of our losses.
And as <unk>.
The goal in late <unk>.
Given these conditions then our expectations are the demand for Terminalling services and activity and all of our assets will grow in late <unk> for Q.
Specific to Strauss.
And which is unique because given the U S producers have been slower to respond to improve prices.
And production has not returned to pre Covid type levels.
<unk> continues to trade at a premium relative to the U S Gulf Coast.
And that's primarily driven by its continued inventory draws and therefore needless to say and this helps our commercial discussions going forward and negotiations with current customers and others to retain and or obtain control of capacity and access to Cushing are ongoing and very positive.
Specific to CCR.
Currently handling 2 to 4 trains per month and that is the function of again the increased <unk>.
Supply on express early days.
We are a application by Enbridge and our expectations that this will grow heading into the fourth quarter, given our market update point of view that I just provided.
And.
And the fact that debt.
The volumes on express will grow and incremental.
7.
<unk> 9000 barrels a day and the month of September. So we're excited about where we are as it relates from the market standpoint, our expectations are that the.
And.
CVR will play and a growing role as we moved into late <unk> and.
The into the fourth quarter.
Given the progress.
The Josh you just provided on the day are you.
And as we work to our startup period for these 2 assets we expect.
Our negotiations with current customers and potential new customers to accelerate and become more purpose.
As a reminder.
These assets provide real value for Canadian producers the railroads the refiners should consume this product and the communities we serve.
And at the high level on the.
D. R. U solution provides the lowest cost egress alternatives from bitumen related basis. It provides secondary or at least significant value to come on condensate and diluent customers as well as refiners given the unique qualities of the bitumen.
The and improved sustainability and ESG egress solution and from the scalability standpoint. It provides our customers the ability to right size and right time, there egress and investments consistent with the unique age and so as we.
<unk> worked through our start up period and the value propositions validate themselves. We're excited about the.
The only discussions with.
Our current customer, but new customers as it relates to the second 50 for the.
Are you and pull it off of them.
Let's talk a little bit quickly on clean fuels.
And as Dan mentioned with our newly created entity USD clean fuels.
We are uniquely poised to pursue production and logistics solutions for clean energy transportation fuels.
Dan mentioned and starting with the recently announced project at our West Colt and Brown terminal facility.
Uniquely we will provide much needed renewable diesel supplied by rail into the southern California market to meet our customers' low carbon fuel standard requirements.
Additionally, given the fragmentation of renewable diesel production and the growing.
Low carbon fuel standard driven demand in California, we continue to work with our current and new customers and the servicing railroads to create origin and destination pairings to meet this growing demand.
So in essence, our west Colton announcement and.
Efforts there as an example of what I would call more to come.
Finally.
As of <unk> type regulations continued to spread to the Pac northwest and Canada to the northeast et cetera, and working with our railroads partners and appropriate customers.
And we expect to identify and provide solutions to these new markets early days and the transition to cleaner fuels. So we have a strong vision for this this space we have working relationships.
With all.
All of the the.
And the necessary Counterparties and most importantly, the railroads to identify not only what the opportunities are today, but what do the opportunities need to be given the changing landscape.
Finally, I'll move on Texas, deepwater and just give a quick update there and also.
Effectively staying with this clean fuels theme.
We are uniquely.
Working.
And on clean fuel solutions to meet <unk>.
Demand and Bob.
<unk> refueling.
The business things like LNG refueling and things like fuel blending opportunities that provide imo's spent fuel alternatives both of these.
And our unique to the Houston area and.
And both of those are uniquely.
The benefit from Texas deepwater location within the Houston ship channel, it's current and potential.
And activity ops options and access to customers and service providers. So we're excited about both of these opportunities the the industrial logic.
Clean fuels is real and we know that and and <unk>.
LNG and email.
Compliant fuel on our 2 growing markets and.
So we're excited too.
Advances until more too and the future on.
On the how these progress.
And finally, Dan mentioned this and.
Additionally, Texas deepwater is position to work with the appropriate customers and railroads and counterparties to meet Mexico's growing demand by creating a build bow and origin solutions that our advantage and sustainable and meeting that growing demand.
And rural Mexico by rail now there are always challenges and this but.
Sure.
The the logic of Houston as the supplier and the logic of rail is the mode of transportation is.
Uh huh.
A significant and logical makes a lot of sense. So.
We are excited about those opportunities and and poised to pursue those when it makes sense.
With that I'll pass.
The call back off to Josh and let him update.
Update us on some of our rail development opportunities Josh.
Thanks, Brad on the commercial rail development front, just acting some of the comments that Dan made earlier, we continue to make good progress with our railroad partners and with regards to project aimed at reducing congestion.
Forward positions optimizing the logistics chain and providing better first and last mile Optionality for our customers as well as providing solutions that have the opportunity to improve transportation logistics from a cost basis.
With with several different the class 1 railroads both in the U S and Canada. We are very close on 3 projects and both the USA and Canada and hope to be able to announce on those projects soon.
And with that Dan and I'll hand, the call back to you.
Thank you Josh.
And with that we'll open up the call for any additional questions.
Ladies and.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by the number 1 on your telephone keypad.
Pause for just a moment took the power of the Q&A roster again Thats star 1 to ask a question.
And your first question is from the line of Paul <unk> with.
And my question is with all of this good news.
And what would be the prospects of increasing your dividend distributions and and.
And even greater percentage, there and you've already indicated.
Thanks, Paul and I appreciate your question on and.
We will have out of my address that out and go ahead.
You bet Hey, Paul This is Adam Thanks for the question, Yes. No. This is something we address every quarter I think for the last 12 months, we've been focused on paying down debt and reducing our leverage as we as we go into every financing period.
But we're very pleased to see that our efforts have been successful and paying down debt and we're happy to see the the low leverage level and the high distribution coverage. So these are definitely topics already discussed on the next board meeting and obviously those are those decisions are subject to the board's approval as well.
Okay, great. Thank you very much.
Your next question is from the line of Glenn <unk> with northern system.
Good morning.
I had a question on.
Hi, you're part.
Arthur facilities does the does the sponsor eventually intend to transfer that facility to the partnership is that the.
The long term plan.
Glen Great question and with all of the assets that we build at the sponsor of we look for the opportunity to.
Dropped them and as appropriate and of the MLP.
With all of them the right the right the market can be.
And market conditions and place so.
It's certainly a qualifying assets and and we would we're certainly not ruling that out and that's that's what we are.
And look to do again as the marketing and will strongly consider that as the market.
As the market kind of accepted.
Okay.
And I have 1 other question.
Regarding your customers in Canada, let's take for example, kind.
Nicole.
What are the criteria.
And that the customer you has to evaluate.
Going to the true using the Dru facility.
And is the.
Both of the profitability and safety factor can you explain that a little more.
Certainly I'll, let me, let me address and then I'll ask both Brad and Josh to jump in and and as needed but.
It was I would say to say it wasn't exhaustive.
That would be really being light on the answer to that the <unk>.
Customer as they should be was exhaustive and their.
Analysis of the.
The the entire drew but the technology and capability.
Many of the things that they looked at where certainly will it work to is it.
Does it meet the needs of from them as a producer of standpoint does it meet the needs for the refining customers.
Does it create a better netback and certainly and probably foremost is it how does it how.
The transported because of transport and a safer way and when we when we set out to design. The <unk> that was 1 of our objectives to make it I say for move.
To make it a.
More cost advantaged versus alternative means of transportation.
2 to create a better net back to.
To the producer and or the refining customer and.
And then the 2 b 2 to create just better efficiency and long term controllability around our customers' needs.
The scalable, but I can go to it I think 1 of the things that customers like us they can commit to 50000 barrels a day they pay for 50000 barrels a day as they want to go to more than that we can scale it up quickly.
And they'll pay for that and they run that so it's it's not necessarily like and.
And certain other all alternative transportation means where they have to commit to something and grow into it this scales, along with them ratably, which creates more efficiency and the cost structure as well as planning for as they bring on a different a different production levels from from them from the upstream side.
So I think I think you know many many things went into consideration.
For this this is obviously a sizable I'll call it the investment from a contractual commercial relationship.
With our customers and so it goes in many cases, all way up to the board for approval so to say that.
Again, but it was a very.
<unk> thoroughly looked at to check all of the boxes for our customers.
And the 1 we're proud of that we got through that that was our intent and we are we feel like that we are delivering the product.
And the overall.
True bit rail program that the.
At the customer.
On it.
Brad Josh anything further.
No that was good day and thank you yeah, I think you've covered it alright, Glenn any any other did that help you with that yes.
Ted.
Barry includes of Okay. Thank you I appreciate it thanks for the question it's great 1.
<unk>.
And ladies and gentlemen that concludes our Q&A portion I would like to turn the call back over to Dan Borgen for closing remarks.
Thank you.
And folks for the questions, we appreciate that and and first of all of my site.
Thank you to our USD team a lot of tremendous job they've done and I couldn't be more proud of them. Obviously, we all know the environment that we've been and over the last year and a half 2 years and to be able to to get this up and running.
For a very difficult period, I couldnt be more proud again of the effort and the the outcome that we're experiencing so.
And certainly.
You don't want to say, thank you to our partners at Gibson Canadian Pacific, Kansas City, Southern and and certainly utmost are our great partner Conoco Phillips. So I appreciate all of the efforts from all of them to make this a reality.
As always we appreciate your support and are excited about our future as we enter into the next phase of the partnership's growth story around the D. R U and our clean fuels initiatives.
We're right in the middle of launching our <unk> by rail program and believe our strategically located terminals are well positioned to support safe and sustainable growth story for transporting heavy crude out of Western Canada.
In addition, the steps we have taken to increase our liquidity position and have positioned the partnership well to support the projected increasing and our commercial activity as the market continues to grow and to pre COVID-19 levels.
With that I'll say, thank you again for dialing into the call. This morning, and we will continue the key.
Keep you updated on all of the exciting achievements at your USD partners.
Is it's getting thank you so much.
Thank you ladies and gentlemen. This concludes today's conference call. We now expect to disconnect your lines.
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