Q3 2021 Genesis Energy LP Earnings Call
[music].
Greetings welcome to the Genesis Energy L. P. Three Q20th anyone earnings conference call.
At this time all participants are in a listen only mode.
He didn't answer session will follow the formal presentation depending.
If anyone should require operators just instead of coffee. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host Duane Morley Vice President Investor Relations. Thank you you may begin.
Good morning, welcome to the 20th 21 third quarter conference call for Genesis Energy.
This this energy has four business segments. The offshore pipeline transportation segment is engaged in providing the critical infrastructure to the oil produced from the long lives World class reservoirs from the deep water Gulf of Mexico, two onshore refunding centers.
Sodium minerals and so for services business <unk>.
Includes trona and trona base exploring mining processing, producing marketing and selling activities as well as the processing of sour gas creams remove sulfur ever finding operations.
The onshore facilities and transportation segment is engaged in the transportation handling blending storage and supply of energy products, including crude oil and refined products.
The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products.
Genesis as operations are primarily located in Wyoming, the Gulf Coast States in the Gulf of Mexico.
During this call management, maybe making forward looking statements with the meanings of the Securities Act of 1933, and the Securities Exchange Act of 1934.
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 directs you to its most recently filed in 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 today is located.
The press release also presents a reconciliation of non-GAAP financial measures to the most most comparable GAAP financial measures at.
At this time I would like to introduce grant Sims C. E O of Genesis Energy L. P. Mister Sims will be joined by Bob Dear Chief Financial Officer, and Ryan Sims, Senior Vice President Finance and corporate development.
The morning.
As we mentioned in this morning journey of Israelis the third quarter was generally in line with our expectations, but more importantly, we continue to make steady progress towards our goal is building long term value for all of our stakeholders. As we look forward. We remain on track to see increasing volumes of the Gulf of Mexico in the first half of 2022 and improving market.
Conditions in our soda ash business.
Driven by the ongoing global economic recovery and the Tailwinds associated with the energy transition.
We're also now less than two years away from first soda ash on the belt from our expanded Granger facility, which is poised to benefit from these ongoing market trends.
The next 24 to 36 months will confirm the longevity and resiliency of our world class leading infrastructure in the Gulf of Mexico, the competitive strengths of our soda ash business of ultimately the earnings power of our market leading businesses.
Our offshore pipeline transportation Saba performed in line with our expectations. Despite a steady level of maintenance via producer customers and longer than anticipated downtime associated with hurricane either.
We did not experience any damage to our assets in order to any of our producer customers, but the path of the storm greatly impact of the number of onshore facilities critical to the receipt and downstream movement of offshore oil and gas production.
As a result, we did experience longer than anticipated downtime during the quarter, primarily on our Poseidon pipeline, which was a direct result of the lack of hours certain third party facilities and gas processing limitations on shore.
Once our chops pipeline resumed service, we were able to divert certain barrels who would otherwise flow on our Poseidon pipeline to our chops Firefly, which allowed certain producers.
Customers to restart our production earlier than they anticipated.
This once again highlights the connectivity in the multi delivery point optionality of our offshore systems that we provide our producer customers in the central Gulf of Mexico.
Because of equity accounting, our third quarter results for Poseidon reflect this financial performance for June July and August Accordingly. This next quarter, we will experience some financial impact from Poseidon being down for the first 11 or 12 days of September as a result of hurricane.
As a distribution we will receive in the fourth quarter covers commercial activities for September October and November.
As such we would reasonably expect the fourth quarter to come in at the lower end of our previous guidance range of $80 million per quarter or even slightly less the.
The Gulf of Mexico continues to demonstrate its resiliency, despite any combination of planned or unplanned downtime associated with producer maintenance or hurricanes.
Tivoli levels remained strong is the vast resources low carbon footprint and highly economic drilling activities allow producers to step out further and further.
To explore around existing bills and exploit the tremendous reserves under their existing invalid leases.
Or lateral strategy is proving very valuable as producers pursue the short cycle, Hi returned businesses Tyne is subsea development wells to existing production.
Each deep water production facility as a practical engineering and economic matter has only one oil export pipeline.
As a result to the extent were directly or indirectly connected to any such hubs.
All of the production from these incremental tieback developments is destined practically to be forever dedicated for transportation service through our assets.
We continue to advance our discussions to provide midstream services using our existing footprint along with the potential to deploy new capital with contracted low single digit build multiples with three new standalone deepwater developments in various stages of sanctioning with anticipated first oil in late 2024 to 2000.
<unk> 25 timeframe.
These developments representing up to approximately 200000 barrels per day of extra mineral production in the central Gulf of Mexico, and we would anticipate the producers of each of these projects will make their respective final investment decisions. No later than the end of this year or early next.
We would also note in late August the Department of Energy announced it would take steps to restart the federal oil and gas leasing program in the Gulf of Mexico in response to a federal judges order on June 15th that blocks of the current administration's pause and oil and gasoline on federal lands and waters at the.
The end of September.
Home or the Bureau of Ocean Energy management announced that it would hold and oil and gas lease cell number 257 for the Gulf of Mexico, and roughly two weeks or honor November 17th.
This will once again allows the producer community to evaluate lease and explore any currently unleashed blocks in the Gulf of Mexico.
These incremental subsea tieback at new production hub hub opportunities combined with the continued leasing.
Of new blocks and subsequent discovery of new prospects in fields should provide genesis with decades, and decades of additional visibility, but pipeline and opportunities for moving the future crude oil production from the central Gulf of Mexico to refining centers on shore.
Now turning to our soda ash business.
During the third quarter, we saw it continued improvement in overall market conditions for soda Ash, we remain very encouraged with the overall supply and demand balance dynamics and we expect the market to do nothing but grind tighter over the coming years as we continue to recover from the pandemic and the demand tow winch from the <unk>.
<unk> Green initiatives and energy transition continue to bill.
As we sit here today spot export prices F O B, a Chinese fort have continued to rise throughout the year is Chinese X borders have chosen to supply the Chinese domestic market over X 40 in soda ash.
As well as responded to government mandates to reduce production for environmental reasons and as a result of power shortage.
But publicly available accounts Chinese exports, a soda ash are down 45% through August of this year compared to the eight months in August of 2020.
This is really quite remarkable given the total demand of 2021 is so much higher than the trough experienced during the height of the pandemic and the depths as economic activity a year ago.
As we have discussed before we generally do not place tons into the spot market given the long lead time and logistical challenges.
Additionally, whether domestically or through amps, we sometimes have to respond to what seems like totally irrational behavior on both price and volume.
Nonetheless, we believe the current market market backdrop positions is very well as we again in earnest both price and volume discussions for 2022.
These increases in price have been driven for the most part by a significant recovery in global demand as.
As well as rising energy input costs and container in bulk shipping rates.
All producers of soda ash or experienced symptoms are experiencing similar cost inflation from their energy inputs, especially synthetic producers, whose chemical process is two to three times more energy intensive than natural producers.
One could reasonably in further synthetic producers are experiencing much greater cost impact from the rise in energy input costs, and thus needs soda ash prices to increase correspondingly to preserve their margins.
The market price will need to rise further for more high cost is bake tons to enter the market to supply the marginal soda ash demand worldwide.
Regarding shipping costs again, all producers face rising costs.
Domestic customers are responsible for all delivery costs, although we offer an accusation for them and arranging the delivery options and.
And Sac, which typically sales on a delivered basis has usage scale as well as a ladder to approach to contracting marine vessels, which is made managing these rising costs substantially easier than those X borders who have less scale and who have chosen to go it alone.
Chinese X border Shitbag containers and face both higher cost and availability issues.
And remember just like taxes ultimately the consumer will pay for all of the rise in costs associated with these escalating shipping rates.
The effective rising energy prices on us is quite manageable.
We would note that only about a third of our thermal energy demand for both our steam and process heating requirements.
Is exposed to fluctuations in the spot prices natural gas, we strive to maintain a balanced portfolio of financial hedges for our natural gas volumes as well as pass through mechanisms in an effort to reduce our exposure to any significant fluctuation energy input costs.
In fact, <unk> is just implemented a per ton surcharge and its contracts as applicable to pass on the cost impact of increases in natural gas prices above $5 per image Btu.
Most of our overall contracted tonnage, including domestic and export sales is already protected by similar provisions.
In addition in the case of an insect that fuel surcharge for increases in bunker fuel related to its customary transportation was implemented earlier this year.
As we look ahead, we continue to believe the energy transition will provide the backdrop for meaningful demand growth of soda ash over and above the projected baseline GDP correlated growth of 2% to 3% per year.
Soda ash remains poised to play an increasing.
Lee important role in the energy transition and we believe this trend only continues as the world's insatiable appetite for solar panels, and new generation lithium iron phosphate batteries increases over time.
Genesis roommates very well positioned to participate in this market growth and our global low cost position, including from an expanded Granger facility will allow us not only to participate but also profit from the energy transition moving forward.
The Grainger expansion remains on scheduled to be the first global expansion of natural soda ash in over four years was the first soda ash scheduled to beyond the built in the third quarter of 2023, if not a little sooner with.
With an expected ramps, who has a design capacity of 1.3 million tonnes per year over the subsequent nine to 12 months.
As we mentioned we locked in substantially all of our construction costs. Prior to this inflationary cycle that is really just accelerated here in the last six months as a result, we are comfortable that granger expansion will come in very close to the 350 million dollar estimate envisions back in September of 2019.
When the project was originally sanction.
We've also preserve the optionality to restart the original Granger facility and it's roughly 500 to 600000 tons of production annual production as early as the first quarter of 2023, or perhaps a little sooner if market conditions persistent specifically if export price and continues to improve through 20.
22.
We believe the opportunities that within our soda ash business as an enviable position by any measure and will ultimately allow genesis to solidify its position as a leading and low cost baseload supplier of soda ash to the world.
Our onshore facilities and transportation segment performed in line with our internal expectations.
Looking forward, we continue to see expect to see an increasing volumes on our onshore facilities in Texas City and Rice Lynn is incremental volumes from our offshore platform come online and need to be routed and further transported by pipeline to the major refining centers along the Gulf Coast.
Our Marine Transportation segment performed in line with our expectations, except for the effects of Hurricane I.
We did experience some relatively minor physical damage to 14 of our inland barges in three of our push boats all of which broke away from usual and customary fleeting arrangements, while riding out to the store.
All of these costs were covered by insurance, except for a single 100000 dollar deductible reflected in the third quarter.
As a result, however, these assets were unable to work for most of September and even more recently.
As of today six bargains are still in the yard being repaired, but I'll push boats have returned to service.
That being said demand for our inland fleet of Black oil heater barges seemed to a bottom and in fact, we have seen a dramatic uptick in the last several weeks.
To the point recent utilization is in the high 90% rate and spot pricing is beginning to move.
We believe this recovery is being driven by increase refinery utilization and importantly, a widening of the light heavy differentials, leading crude slates to return to more historical norms.
We have also seen steady activity levels and our Bluewater fleet, there's a demand to move refined products from the Gulf coast to the East Coast remains strong due to certain refinery closures on the east coast. Additionally.
Insignificant amount of blue water capacity concentrated along the east coast has been practically out of the market due to a financial restructuring bankruptcy situations.
The petroleum Marine sector has seen an accelerating retirement of older tonnage and virtually zero newbuild activity across all classes of marine assets, which most certainly will benefit a relatively young fleet such as ours.
As the demand for Jones tonnage returns to Prepandemic levels in the face of this absolutely shrinking supply we.
We believe we are likely to experience accelerating improvement in the financial results from our marine operations in 2022.
Ah.
I'll switch gears now and quickly touch on our view for the remainder of 2021.
As we look forward Genesis and remains well positioned to benefit from.
For free cash flow over the coming years, and thus we do not foresee a scenario, where we do not comfortably live within our senior secured bank covenants moving forward.
As a result of the unplanned unplanned downtime at our offshore Marines segments associated with Hurricane at.
We would expect to come in around $620 million, a adjusted consolidated consolidated EBITDA for all of 2021, which includes approximately $30 million to $35 million, a pro forma adjustments and which is slightly below our previously announced guidance for the full year.
Regardless of 2021, the future remains bright and importantly visible.
We remain steadfast in our commitment and are working hard to build long term value for all of our stakeholders through a combination of leverage reduction a meaningful growth on our free cash flow and adjusted consolidated EBIT.
The decisions, we are making today reflect this commitment.
And our confidence in our core market, leading businesses moving forward.
I would like to once again recognize our entire workforce and especially our miners Mariners on offshore personnel, who live and work in close quarters. During this time of social distancing.
I am extremely proud to say that we have up safely operated our assets under our own health and safety protocols and procedures with no impact to our business partners or customers.
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 will be conducting a question and answer session.
Like to ask a question please press star.
One on your telephone keypad.
Confirmation color indicate your line of questions Yeah.
You May press, two if you'd like to remove your questions on the Q.
Participant you can speak your equipment and may be necessary to pick up your handset before pressing the stocky.
Our first question comes on the line I can I guess journey would you be M. Please proceed with your question.
Hi, Good morning branch.
I was wondering if we can start off with some of the tailwind hopefully for next year.
You sort of talked about the soda ash pricing and so forth.
Also there's PPI flavors out there as well too can can you remind us how many contracts are up for whom do an extra large soda ash on my model I think it's about 60% and then secondly, if you have any P behind flavors with respect to your off shore pipeline.
Well, we're just now kicking off.
And Ernest as we've said the pricing discussions for.
Next year.
Generally speaking.
A portion of our.
Domestic sales will come do every three or four years, which will get.
Which will be what we would call a jump ball in terms of pricing and today's kind of price.
Metrics.
On a prospective basis the rest of our domestic sales are subject to longer term contracts, which are.
Have.
Annual price Redetermination subject generally speaking to the caption callers so those welts.
Be moving up in the vast majority of R X.
Export sales are under less than one year, one year or less contracts.
And so those will be.
Available for discussions, but again.
Repricing in today's market, but again.
Have to be mindful of.
Costs associated with everything in terms of shipping costs and other things but.
Obi prices back to the Green River facility should benefit substantially in 22, as we get through the guitar.
Get through this pricing deal.
Relative to PPI players I mean, there are two major systems all of our laterals.
Are under proprietary proprietary systems so there.
Cole.
They are not first regulated and therefore don't have the typical escalation all the newer generation contracts do oftentimes that's.
Capital negotiation that two and a half to three 5% per year. So we would expect.
Some some buffalo associated with that typically those occur on a on an annual basis, either on January timeframe or July timeframe, and if you are on the cycle of.
Park.
Galatians so we.
We will get some benefit from that but really this story out of the Gulf of Mexico is the incremental volumes that we anticipate coming with.
The development so we've talked about in the past.
If I can just clarify your comments on foot Ashworth snuck in before my second question. So basically you said, 50% it's under contract for less than one year, and then a quarter of the Antioch with roughly a quarter of a dark would come up so that would be about 62.5% should see a replacement throughout 22.
That's a quarter of domestic prices domestic contracts should come up and then basically.
The majority of the 50%.
Of.
<unk> sales or what your vast majority of what you are less from a volume of trick point of view. So those would all come up for.
Redetermination in some cases or the short term is quarterly so.
Perfect.
<unk> you talked about the fact that you've got.
You'll pass throughs and your cost structure.
With certain triggers and so I was just wondering just on the other side of some tea and places in terms of costs that we've been seeing if I recall, but maybe I I don't recall correctly, you do have a subtle union contract and so we should only see.
Previously negotiated wage increases apples go Nash business or.
This whole P. P I soccer going on you know potentially change that.
We are.
And in the second year at this point of the five year collective bargaining agreement with our Union.
Lloyds employees in the soda ash business and.
Believe that has an annual.
<unk> later at three 5% per annum in that contract. So we have.
Some amount of cost control.
Fair bargain arrangement with the with the workforce.
Alright, perfect. Thank you very much I really appreciate the calling tonight. Thank.
Thank you.
Oh damn I wonder if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Theresa Chan with Barclays. Please proceed with your question.
Good morning, Great I'd love to follow up on.
On your comments about the Granger.
Alrighty, possibly restarting on a little earlier than anticipated just curious if you were to elect and restart that first quarter of 2023 at what point in 2020, T, which you have to make that decision and how quickly can you do with them what would be the cost of that.
The ultimately.
The the cost of starting up is going to be.
Absorbed anyway because.
Costs at the margin is going to be hiring the.
Personnel and training the personnel to operate the expanded.
Or.
The old Granger facility as the case may be so.
It's just a matter of and.
Again.
You don't want to get out.
Two and fries, but I mean, it's.
We have to we have to hire we're going to be very safe and trained in.
Go forward, but it really at the margin.
Just an acceleration of the costs that we're going to incur any way and that's making the decision to hire and train.
The personnel to operate the facility.
And obviously we have.
The ability to move people around from our other facilities because on an expanded basis.
It is is identical to one of our facilities from a technology point of view that.
Really operate VLDL facility on our Westvaco facility.
Waco footprint so.
I think that we could we could probably do it.
Certainly within the.
I would think 90 days plus or minus.
Once we pulled the trigger I made that decision to go forward.
Got it and then in terms of the onshore segment I was hoping if you could provide some clarity around what that true friend Great earnings power is.
Here I'm going for it and clearly quarter over quarter. We saw some calling decline was that a result of hurricane impacts.
Nonetheless.
<unk> margin increase quarter over quarter.
Dripping at the Denver, a payment and I just wanted to understand from your perspective, what is the true run right at this second.
I think that.
Teresa we would rather when we roll out kind of 22 guidance and.
Our fourth quarter call I think that will have a better idea of what the.
Or being able to communicate to the to everyone.
The earnings power is we've had.
We had some.
Some games that we did kind of expect in the third quarter. So I'm not sure that wouldn't necessarily use that as your arithmetic of backing out that did very payment to look for the fourth quarter, but.
I think that we're we're burning through some of the existing credits were build up and we would hope that.
And we're also in the process of.
Of amending and extending the agreements with some of our customers onshore specifically in and around the Baton Rouge area. So I think we'll have a much better idea.
As we get through.
Those discussions and hopefully that's by the end of the year will be able to talk about that on the fourth quarter call.
Okay I hear Ya on the 2022 outlook I guess, maybe just in terms of third quarter results.
Have that I have an idea how much the game work.
One time in nature.
I know.
Off the top of my head that we can work to get that too.
Okay.
Order of magnitude I would say around $3 billion.
Okay. Thank you okay.
Our next question comes from the line of Michael Bloom with Wells Fargo. Please proceed with your question.
Good morning, everyone I, just wanted to understand a little bit better than the shut ash business your exposure to spot natural gas prices and just exactly how that works.
I guess are you, saying that you leave one third of your exposure unhedged or that you do have and then of that third that is unheard of at least as of now are you able to pass all of that cost increase onto your.
Customers just want to better understand how that piece of it all works. Thanks Yeah.
Basically we.
Directly and indirectly get some of our thermal requirements from coal under.
Long term fixed price contracts.
And.
So basically.
Based upon our.
Our approach to managing the overall energy input expense.
One third of it is.
The total requirements is subject to the the fluctuations in the spot price of our current month price of natural gas.
So within that one third that's where we employ other hedging.
Hedging type.
Mechanisms as well as.
Have the mechanics in place to pass on the at the margin being incremental costs associated with those fluctuations directly to the customers.
Okay. Thank you very much I appreciate it.
Thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I went out to Nicole over two grandsons for clothing I like.
Alright, well, thanks, everyone for participating and I appreciate your time, but notes busy during earning season, but.
I will talk in 90 days, if not sooner so thanks again.
Concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.