Q2 2021 Genesis Energy LP Earnings Call
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Freedom.
And for the Genesis Energy Choo, Q2021 earnings conference call.
At this time all participants are in a listen only mode.
And answer 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'll now turn the conference over to your host Duane Morley Vice President of Investor Relations. Thank you you may begin.
Good morning, welcome to the 2020, 1 second quarter conference call for Genesis Energy Genesis.
Genesis has 4 business segments. The offshore pipeline transportation segment is engaged and 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 and producing marketing and selling activities and.
Well as the processing of sour gas streams to remove sulfur at refining operations.
And the onshore facilities and transportation segment is engaged and the transportation and handling blending and storage and supply of energy products and.
And crude oil and refined products and.
The Marine Transportation segment is engaged and the maritime transportation of primarily refined petroleum products.
Genesis has operations are primarily located in Wyoming, and 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 19 and 34.
The law provides safe harbor protection to encourage companies to provide forward looking information.
Genesis intends to avail itself of those safe Harbor provisions and.
And directs you to its most recently filed and future filings with the Securities Exchange Commission.
We also encourage you to visit our website at Genesis energy Dot Com, where a copy of the press release, we issued.
Day is located and the press release also presents a reconciliation.
Non-GAAP financial measures to the most care 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 of Finance and corporate development.
Thanks, Joanne and good morning to everyone.
As we mentioned in this morning's earnings release, the second quarter was in line with our expectations, but more importantly, the longer term Genesis story continues to improve as we move through 2020, 1 and into 2022 and beyond.
Our 2 contracted upstream developments and the Gulf of Mexico remain on track for first oil and the front half of 2020, 2 and are expected to ramp to full run rate sometime in late 2022 early 2020.3.
We also expect a continuing recovery and our soda ash business with longer term growth driven by a combination of a return to pre pandemic economic activity and <unk>.
<unk> and a normalized GDP growth.
And your expected demand growth for soda ash, and giving us critical importance as a fundamental building block for many activities and the unfolding Green energy transition.
As a result.
We believe Genesis is very well positioned to see increased amounts of adjusted consolidated EBITDA free cash flow and improving balance sheet over the coming years.
And now turning to our individual business segments.
Our offshore pipeline transportation segment performed slightly ahead of our expectations during the quarter. Despite the increased level of maintenance and downtime from our producer customers.
While we expect some producer maintenance from the second quarter to cross over into the third quarter and assuming we experienced no worse and a normalized hurricane season, we would reasonably expect our third quarter to come in towards the lower end of our previously announced range of $80 million to $85 million per segment margin per quarter.
As we look forward to 2022, our 2 large contracted upstream developments Argos and King's key continue to move closer and both remain on track and.
<unk> Murphy recently announced the King's Quay floating production platform is scheduled to sell away to the spinal AUM and the Gulf of Mexico sometime this quarter.
And in anticipation of first oil VP and Murphy have both from a number of wells pre drilled and each of their respective fields, which should allow for a rapid ramp and and anticipated production over a 6 to 9 months period.
We continue to expect these fields when fully ramped we will generate in excess of $25 million per quarter over $100 million, a year and additional segment margin and free cash flow.
Additionally, we remain in active dialog and continue to advance our discussions to provide midstream services using our existing footprint along with the potential to deploy new capital and contracted low single digit build multiples.
With 3 new Standalone deepwater developments and various stages of sanctioning and with anticipated first oil and late 2024 to 2025 time frame.
These developments represent up to approximately 200000 barrels per day of incremental production from central Gulf of Mexico, and we would anticipate the producers of each of these projects will make their respective final investment decisions and the second half of this year.
And.
The producer community and the Gulf of Mexico continues to operate business as usual and current activity levels continued to suggest.
Excuse me.
Gulf of Mexico remains 1 of the most economically competitive and lowest greenhouse gas intensive basins in North America.
Even as major upstream companies continue to focus on the energy transition, we expect to see continued development and the Gulf of Mexico.
Evidence of this belief was again on display and just last Monday, when both shell and Chevron and asks are final and invest investment decision per well another multibillion dollar deepwater development and the Gulf of Mexico.
While this development is unlikely to be tied into any of our pipelines, we view the decision and their associated commentary.
Specifically around the lower greenhouse gas intensity of their production and significant cash flow generation capabilities as further evidence of activity and the Gulf of Mexico will be around for decades to come.
And in addition to.
Despite some of the public rhetoric, the regulatory environment continues to be supportive of continued development and the deepwater Gulf of Mexico.
And the Bureau of Ocean Energy management has issued over 375 permits since late January to support activity and the Gulf and then just in June a federal judge and Louisiana granted a preliminary injunction.
And the bite and administration suspension, and the new oil and gas leases on federal lands and waters.
While there is our belief that a substantial amount of the highly prospective acreage and the Gulf of Mexico.
And under current technology, and economics has already been leased and we believe this ruling will ultimately lead to the resumption of federal lease sales and additional exploration and development opportunities of the vast resources and the Gulf of Mexico.
Turning to our second largest segment and the overall macro story and soda ash remains intact with by our estimation all natural producers being sold out and higher cost synthetic production made needed to support rapidly increasing demand as we continue to recover from the shutdown of X.
And if activity, resulting from early measures to deal with COVID-19.
And.
Sure.
Excuse me historically exports of Chinese synthetic soda ash have cleared international markets at the margin and <unk>.
Therefore influenced the price for our export volumes in Asia.
And Latin America, as well as ultimately our domestic price.
Recent Chinese export Statistics show, China, Chinese export volumes of soda ash are at their lowest levels and over 15 years.
This combined with rising energy input costs, and increasing container and shipping rates.
Chinese synthetic producers are facing further support significantly higher prices for the increased tons being demanded abroad and in the U S.
And response to this dynamic and <unk> announced another price increase for soda Ash and early June for the third quarter on all of their non contract sales of soda ash and non contracted sales when contracts allow.
And <unk> is the largest domestic exporter of soda ash uses at scale to manage a ladder portfolio of time charters and certificates of affreightment to hedge against any volatility and dry bulk shipping costs.
And second our 2021 with a full 80% of its 2021 shipping requirements contract and is currently instituting a fuel surcharge moving forward where contract terms permit.
Additionally, and <unk> is looking to manage any future volatility and drybulk shipping cost by including index and provisions that we'll pass on increased cost to its customers.
And as a certain level of assumed base freight expense.
Due to the nature of our contract structures and geographic sales mix, we do not realistically expect to see a material financial impact of these and increasing prices in 2021.
However, there is no question and our mind that this increasingly tight supply and demand dynamics will continue to support prices rising throughout the remainder of the year.
This is very important.
Especially towards the end of this year, when we would otherwise re determined and most of our contract prices for the contract year 2022 for both of our domestic sales representing approximately 50% and our international sales through and Sac included into Latin America, and Asia, representing the balance of our total annual sales.
Accordingly, we expect soda ash prices to be sequentially higher in 2022.
But our weighted average price will not likely fully returned to pre pandemic levels next year, primarily due to our longer term domestic contracts containing caps and collars.
However, we continue to believe the market dynamic exist, where a weighted average price should increase and should move increasingly closer to pre pandemic levels. As we enter 2023 are always supposed 2024 at the absolute latest which would coincide well with our granger expansion coming online and be.
And at or above the price deck, we originally assumed when we sanction the project from the third quarter of 2019.
Our Granger expansion remains on schedule for first production.
And the third quarter of 2023.
And we would expect production to ramp towards design capacity of $1.3 million tons a year over the subsequent 12 to 15 months.
As mentioned on our last earnings call, we continue to evaluate the anticipated cadence and the future spend on the project and the potential to deploy some of our anticipated free cash flow to fund portions over and above the $250 million, which we're obligated to draw under our asset level preferred funding arrangement with <unk>.
Expect to make that decision and the second half of this year.
We continue to see increasing demand for soda ash is a fundamental required and non substitutable commodity for various green initiatives.
In particular lithium battery battery production that will accelerate over the next few years.
As previously discussed lithium producers utilized 2 parts soda ash to 1 part lithium to support their production of lithium carbonate or and certain technologies ultimately lithium hydroxide, both of which are building blocks to lithium iron phosphate batteries.
While there are various configurations for new generation of electric batteries lithium iron phosphate continues to be a cost effective solution and it is not dependent on ultra scarce and price volatile raw materials like cobalt and nickel.
As a result, we have seen and electric vehicle manufacturers state lithium iron phosphate batteries will be and integral part of their strategy going forward.
For example, Elon Musk recently stated test flow was making a long term shift towards lithium iron phosphate battery sales and their energy storage products and entry level of electric vehicles.
Furthermore, Fords CEO, Jim Farley and the company said the company would also use lithium iron phosphate batteries and some of their commercial vehicles.
And Volkswagen and CEO average dis announced that lithium iron phosphate would be used and some of their entry level batteries.
All of these data points from further reinforce our belief that demand from lithium producers and battery manufacturers will continue to be a driving force for incremental soda ash demand on top of the other green initiatives like solar panels, and retrofitting windows with more energy efficient glass products.
I'll switch gears now and quickly touch on our view for the remainder of 2021.
Given our current expectation and no crude by rail activity and the second half of the year.
A slightly slower than previously expected recovery and our marine segment and.
And a non cash increase in G&A expense associated with long term incentive based compensation. We currently expect to come in towards the low end of our previously announced guidance for full year adjusted consolidated EBITDA of $6.30.
$660 million, which includes approximately 30 to 35 million and pro forma adjustments.
Longer term however, the outlook has never been brighter as we have clear line of sight to increasing amounts of adjusted consolidated EBITDA free cash flow and improving balance sheet.
We expect the Gulf of Mexico to see significant near term volume to increase starting in 2022, and we remain optimistic around several new developments reading, reaching their final investment decisions and the back half of this year for first production into 2024 to 2025 timeframe.
As we move past the demand shock from Covid and the global economies continue to reopen the soda ash market continues to balance and tightened as evidenced by significantly ryzen and export prices.
As a leading low cost producer of natural soda ash with hundreds of years of recoverable reserves of Corona.
And we remain well positioned to continue to benefit from the recovery and demand to pre pandemic levels nor.
Normal future demand growth driven by the inexorable and maturation of the world's economy.
And the exciting incremental growth driven by the Green energy transition.
Our team continues to work diligently to position the partnership to fully realize the benefit of the growth in front of us and I remain confident in and the Genesis story and confident that our performance will only improve in the years ahead.
I would like to once again recognize our entire workforce and especially our miners Mariners and offshore personnel, who live and work in close quarters. During this time of social distance and.
I'm extremely proud to say, we are safely operating our assets under our own health and safety protocols and procedures with no impact to our business partners and customers with limited confirmed cases of COVID-19, amongst our sub 2000 employees.
It's an honor to have the opportunity to work alongside such quality folks.
With that I'll turn it back to the moderator for any questions.
Thank you at this time, we'll be conducting a question answer session if you'd like to ask a question. Please press star 1 on your telephone keypad a.
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First question comes from Kyle May with capital 1 Securities. Please proceed with your question.
Hi, good morning, everyone.
Grant you mentioned deploying capital for the offshore develop or potentially deploying capital for the offshore developments in 2020 for 2025 at low single digit multiples.
Can you give us any idea of the potential capital that will be required to support those projects.
We're not at Liberty to disclose that at this point as I said there is we are in active discussions with the 3.
<unk> Standalone and significant.
Deepwater developments and.
They're not we're not.
And yet where they've been and were and are.
<unk> to disclose that.
Okay.
Maybe asking it a different way.
I think you mentioned and that does producers could make and later.
Later this year.
The midstream provider be announced and the same timeframe.
Yes, and in all likelihood that would be.
That would be the catalyst for full disclosure.
Okay got it and then taking into consideration your results for the first half of this year. It suggests that you'll see a meaningful ramp and the back half to reach the lower end of your EBITDA guidance.
Can you walk us through where you expect to see this gross and then maybe preliminary thoughts of how this will carry into next year.
Yes, I think that some of the ramp is because of the <unk>.
Increase and pro forma contribution of getting old.
And to the 30% to 35, which we have disclosed and I think was and as further described and a footnote within and the release, but we do anticipate.
Sequential cadence positivity as we go through the rest of the year.
But I think really our focus is on.
And I think you can tell by the tone of our prepared remarks, our focus really is on 22 and beyond.
Given the exciting developments that we have and the Gulf of Mexico, which are contracted and which are backed by take or pay by the way.
As well as <unk>.
<unk> and significant recovery and the financial contributions from our our soda ash business as same as grant tiger's so.
Think that.
And.
As we said the second quarter met our expectations internally.
And we continue.
And anticipated that we would have a slightly quicker recovery and marine as we cadence through 'twenty 1.
We're still especially on the Brown fleet and.
And fleet, given refinery utilization and apparent.
And most refineries.
Maximizing runs.
Right and so the.
Heavy or not.
Around that we are accustomed to moving.
And we've seen that we anticipate because of some peculiar dynamics.
The real movement of crude by rail out of Canada for the rest of the year and importantly.
<unk> non cash.
Equity based compensation or incentive based compensation that was.
<unk> added 2 throughout the organization earlier.
Those are kind of.
What's leading us towards the lower end for 2021, but again, we're not overly concerned about 2021, we're looking very forward to 'twenty to 2020.2 and beyond.
Got it and that sounds good I appreciate the additional color. Thanks. Thank you.
Thank you.
Your next question comes from Sean <unk> with UBS. Please proceed with your question.
Hi, good morning, everyone.
Maybe if we can start off on that soda ash business.
And in terms of the outlook and so forth.
And I think you've said in prior calls that.
You didn't expect to get to pre pandemic pricing levels until 2023, so yokohama product from pretty consistent.
And just wanted to confirm that you still expect to get towards the top end of your your callers in terms of on the contracting side and.
And then also you were talking about.
The transportation cost and we're pushing to get that to be a pass through just wanted to sort of clarify both of those if that was did I hear that correctly and if I'm thinking about it correctly, yes, I think that certainly we would anticipate pricing at the top and the outer range of the callers domestically.
And as we've said domestically.
Sure.
Contracts typically are 3 to 5 years and duration with annual redetermination subject to caps and collars. So.
And and.
Entering 'twenty, 1 when prices were set and.
2020.
That obviously translates into 20% to third of your.
Domestic contracts are available every year for new contracting purposes and given.
Some of the dynamics, which were occurring late 2000, and some of those contracts under competitive pressures.
Got reset at low things at lower prices, but again with caps and collars. So it takes a while to get through.
Through that but clearly given the current dynamics there is no doubt that we will be it and.
At the top and.
Our callers under our existing portfolio of.
Of contracts.
And Thats.
Sure Great.
Oh, yes right.
Sorry about that yes.
Yes.
And.
Domestic contracting and we typically.
All the freight has already passed on and we just act as agent for a range and the the.
And the freight delivery to our.
To our customers and the U S market.
And so it's a direct pass through of that and.
Basically and <unk>, we typically deliver.
Price things on a delivered ton basis so.
And that's good.
And <unk>, which is the largest.
And as logistical scale.
And and economies of scale.
<unk> entered into.
And there had 80% of its transportation needs kind of fixed for 2021 and as everybody is facing the.
So.
Advantage and 2021, everybody is facing the same kind of dry bulk shipping costs. So we're moving quickly to and us.
Essence pass at VA and are positioned to be able to pass that on for volatility and that.
And pass it onto our customers and 22 and beyond.
Okay and.
Just 1 more clarification on and start outside any volume that are delayed ship towards the end of this year just because of the issues.
And those would just shipped.
Voluntary.
That would just be.
From a revenue or suggestions from from 'twenty, 1 'twenty 2 does that sort of way to think about that.
And that's that's the way to think about it yes.
Okay, great and.
And maybe if we can just pivot to the offshore segment per second.
You had some good data points and color about Prague.
Progress.
And you sort of expect to get to an incremental $25 million worth of EBITDA and a quarterly basis to $100 of annualized.
And I believe it's your expectation.
Can you give us a sense on.
The cadence of how that will come into your earnings and 22 and 'twenty 3.
At what point do you hit the full $25 million and when does it start to ramp.
And.
We will see ramp and the starting in the first quarter, which.
Is the initiation of production from Argos, and then and the second quarter, which is the initiation of production from King's key.
As we said and our.
And our remarks.
And a number of wells that have been pre drilled.
And.
And at both locations and so we would otherwise anticipate a fairly rapid rate and.
And could in fact be.
And at that quarterly run rate as early as the fourth quarter.
Of 2022.
Okay, and but you should see some EBITDA throughout the year as you ramp to that 25 passport here that's correct yes.
Perfect.
Thank you very much really appreciate all the color today, okay. Thanks Shneur.
Thank you.
A reminder, if you'd like to ask a question. Please press star 1 on your telephone keypad.
Our next question comes from T. J Schultz with RBC capital markets. Please proceed with your question.
Great. Thanks, Hey, Grant, just a firsthand and Louisiana.
I guess my 2 questions first whats.
You mentioned rate line and your press release.
And moving through there now and kind of your outlook for that to ramp late and then some of the offshore volume and then.
Secondly on scenic station that you upgrade.
And that 4 bedroom.
And when would you expect that to translate into any new activity. Thanks.
Yes, I think that as we continue to see.
Ramps and offshore production.
And the Argos production is all dedicated to Cameron Highway and.
And the King's key is split 50, 50, so half of it goes through beside and half of it goes through.
<unk>.
Cameron Highway so.
And would anticipate everything else the same additional volumes coming onshore and needing further transportation to refining centers onshore. So we could pick up incremental volumes and <unk>.
Onshore, Louisiana through the racial and terminal, which delivers ultra low cap, which basically gets and everybody in the.
And the South Louisiana.
Refining corridor and in Texas.
We have the facilities in place and Texas City too.
Distributed both to local Texas city refineries as well as bring it up to Webster and working on some additional interconnectivity there so.
Not only do we see the incremental.
Throughput.
Yes.
On the offshore systems, but another bite at the Apple so to speak with our onshore facilities, which are increasingly integrated with those offshore facilities. So that's a good thing relative to.
Upgrading.
Scenic station, we and when we originally constructed and we put in and all of the piping and size the hoses and pumps, if you will too.
And be able to handle straight run and vitamin and as I say and Canada.
But we did not improve.
And install the <unk>.
<unk> required to to.
To handle it as a non hazardous material off of the rail rail.
Our railcars so.
And of that.
The timing of that is basically a function of the.
Pace is the development of the diluent recovery units or <unk> and in Canada.
And Theres, a number of them under discussions and.
But we think that Thats, probably at 24.2425 type.
Even at this point and time.
Got it.
And Thats helpful.
Last question and just given where that leverage is right now any thoughts on the.
<unk> here.
And rebates and that to help accelerate from the delevering or given the outlook you have for 'twenty.
22, and 'twenty 3 alright, clearly improving.
Youre comfortable with kind of carrying that bridge.
And I think we're very comfortable given our outlook for 2002 and 23 are extremely comfortable.
The current level of the distribution and the ability to it's a great thing to be and.
Free cash flow mode and to the extent that we have.
Have opportunities to deploy it and high.
And high return long term value.
Projects and we take a look at that book, So we're very comfortable with the current level and really look forward to.
Increasing.
Financial performance from 'twenty, 2 and 'twenty 3.
Okay. Thanks grant thank.
Thank you.
Thank you ladies and gentlemen, we have reached the end of our question and answer session and I will now turn the call over to grant Sims for closing remark.
And well thanks, everyone for participating and I know it was up.
Pretty hectic day, given the schedule of other.
Heather.
Earnings announcements, but we appreciate everybody's attendance and we look forward to talking too. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.